Creditors are secured when they benefit from security or collateral in support of a debt instrument. There is usually a separate Security Agreement that stipulates the exact collateral backing the debt.
Types of Collateral
Financial
Cash/bank accounts – The most liquid form of collateral.
Traded securities – Very liquid if investments are short-term fixed income instruments.
Receivables – Generally liquid because of their self-liquidating nature. Analysts must consider the quality of the receivables.
Physical
Inventories – Less liquid form of collateral. Finished stocks and raw materials should be
differentiated.
Equipment – Less liquid form of collateral. Includes a wide range of assets.
Intangibles Rights and patents – Less liquid for of collateral. Could include copyrights for
print, music, and images and patents for pharmacveuticals, technology, etc.
Contracts and concessions – Less liquid for of collateral. Include business agreements,
contracts, etc.
Intangible assets – Least liquid form of collateral. Include goodwill and brands.
Granting and Perfecting Collateral
Borrowers and creditors need to document by contract that the security interest was created and granted to the secured counterparty, normally a financial institution, or a trustee, collateral agent, depository, or fiduciary.
In the offering circular, the description of the securities should include the word “secured.”
There should be a “granting” clause in the clauses that start with whereas in Recitals.
There should be a separate security agreement in addition to the offering circular and indenture.
Perfection of Collateral
Creditors must verify that the borrower has stated that the beneficiary of the collateral has prior rights to the pledged collateral.
An interest in a real estate property is recorded with the Registrar of Deeds in the US.
Financial assets are perfected by contract, which will confirm the identity of the ultimate beneficiary of such assets. Because contracts remain a private nature, it will be difficult for creditors to be absolutely certain that there will be no competing claims