status: draft

Security and pledge agreements

Security agreements grant the capital provider a security interest in the collateral (the receivables and related assets). Pledge agreements cover equity interests, often the equity of the SPV itself. Together, these documents establish the capital provider’s rights in the collateral and the mechanisms for perfection and enforcement.

status: draft

Grant of security interest

The operative language transfers a security interest to the secured party.

Standard grant language

“Pledgor hereby grants to Secured Party a first-priority security interest in all of Pledgor’s right, title, and interest in and to the Collateral described herein.”

Key elements

Element	What It Establishes
”First-priority”	The security interest ranks ahead of other interests
”All right, title, and interest”	The entire ownership interest, not a partial interest
”In and to the Collateral”	Must tie to a collateral description

SPV-level vs. originator-level

In a typical ABF structure, there are two potential security grants:

Sale Agreement grant: The originator transfers assets to the SPV (this is the true sale; not a security interest if properly structured)
SPV Security Agreement: The SPV grants a security interest in the assets to the capital provider

The SPV Security Agreement is the pledge backing the credit facility. This is distinct from the transfer from originator to SPV, which should be characterized as a sale, not a security interest.

status: draft

Collateral description

The collateral description must be specific enough to identify what is pledged but broad enough to cover future assets.

Present vs. future collateral

Collateral Type	Language Required
Existing receivables	”All Receivables owned by Grantor as of the date hereof”
Future receivables	”All Receivables hereafter acquired by Grantor”
Proceeds	”All collections, proceeds, and payments received with respect to the Receivables”
Supporting obligations	”All guarantees, letters of credit, and other credit support related to the Receivables”
Related contracts	”All loan agreements, notes, and other contracts evidencing the Receivables”
Records	”All books, records, and files related to the Receivables”

Specificity requirements

Under UCC Article 9, a collateral description is sufficient if it “reasonably identifies” the collateral. However, for ABF purposes, more specificity is better:

Too vague: “All assets of Grantor” - may be challenged as insufficiently identifying the intended collateral

Appropriate: “All Receivables (as defined herein), together with all collections, proceeds, and records related thereto” - ties to a defined term with specific criteria

Tying to eligibility criteria

For receivables facilities, the security interest typically covers all receivables, not just eligible receivables. This ensures the capital provider has a security interest even in assets that do not count toward the borrowing base.

Rationale: If the security interest only covered eligible receivables, an ineligible asset (which may still have value) would be unencumbered and potentially available to other creditors.

status: draft

Perfection by collateral type

Security interests must be perfected to have priority over other creditors. The perfection method varies by collateral type.

Perfection methods

Collateral Type	Perfection Method	Where/How
General receivables	UCC-1 filing	Secretary of State in debtor’s state of organization
Deposit accounts	Control (ACA)	Account control agreement with bank
Investment property	Control or UCC-1	Securities account control agreement or UCC-1
Certificated securities	Possession or control	Physical possession of certificates or control agreement
Uncertificated securities	Control or registration	Control agreement or registration on books of issuer
Real property	Mortgage recording	County recorder in property location
Titled vehicles	Certificate of title	Lien noted on certificate
Goods	UCC-1 or possession	Filing or physical possession
Instruments	Possession or filing	Physical possession preferred
Chattel paper	Possession, control, or filing	Physical or electronic possession/control preferred

UCC-1 filing requirements

Most ABF facilities rely heavily on UCC-1 filings for receivables perfection.

Filing jurisdiction: File in the state where the debtor is “located” for UCC purposes:

Registered organizations (corporations, LLCs): State of formation
Individuals: State of principal residence
General partnerships: State of chief executive office

Debtor name: The filing must use the debtor’s exact legal name as shown on public organic documents. Even minor variations can make a filing ineffective.

Filing Defect	Consequence
Wrong state	Filing is ineffective
Wrong debtor name	Filing is ineffective if name is “seriously misleading”
Collateral description too vague	May not cover intended collateral
Lapse (failure to continue)	Filing becomes ineffective; security interest becomes unperfected

Continuation and amendment

UCC-1 filings are effective for 5 years. A continuation statement must be filed in the 6-month window before expiration. Track filing dates and calendar continuations.

If the debtor changes its name or jurisdiction, an amendment may be required within 4 months to maintain perfection of after-acquired collateral.

status: draft

Release mechanics

When are assets released from the security interest?

Automatic release events

Event	Release Occurs
Payoff of receivable	Asset paid in full releases automatically
Repurchase by originator	Upon payment of repurchase price, asset releases
Sale in ordinary course	If permitted, sold assets release
Substitution	Replaced asset releases upon contribution of substitute

Release procedures

Who can authorize release: Typically, the secured party (or trustee) must authorize releases. However, for routine releases (payoffs, permitted sales), the documents should provide for automatic release without requiring specific approval.

UCC-3 amendment: When significant collateral is released (e.g., bulk sale of portfolio), file a UCC-3 amendment to narrow the collateral description or terminate the filing.

Partial release: For real property mortgages or titled vehicles, specific release documents are required. Build release mechanics into the deal documents so the secured party is obligated to execute releases upon proper conditions.

Negotiation points

Automatic release language: “Upon payment in full of any Receivable, the security interest in such Receivable and all related Collateral shall automatically terminate without further action by any party, and Secured Party shall, upon Grantor’s request, execute and deliver such documents as Grantor may reasonably request to evidence such release.”

Timely release: Specify that the secured party must execute release documents within a defined period (10-15 business days) after request. Failure to release timely can impair your ability to sell assets.

status: draft

Equity pledge

In addition to receivables, capital providers typically require a pledge of the SPV equity.

Purpose

The equity pledge gives the capital provider control over the SPV itself if necessary. In a default scenario, the capital provider can foreclose on the equity and become the owner of the SPV (and thereby the assets).

Structure

Pledgor	Pledged Interest	Secured Party
Parent/Sponsor	100% of SPV membership interests	Capital provider or trustee

Key provisions

Springing governance rights: Upon an Event of Default, the secured party may have the right to exercise governance rights over the SPV, including:

Voting membership interests
Electing managers/directors
Approving extraordinary transactions

Limitations on transfer: The SPV’s operating agreement typically prohibits transfer of equity without secured party consent (reinforced by the pledge agreement).

Perfection: Perfection of equity interests depends on the entity type:

LLC interests: File UCC-1 in pledgor’s jurisdiction; may also need control agreement if interests are securities
Corporate stock: File UCC-1; for certificated stock, physical possession of certificates plus signed stock powers

status: draft

Common pitfalls

After-acquired property gaps

The security interest should automatically attach to future receivables. If the grant language is limited to present assets, you must execute new security agreements (and file new UCC-1s) as you acquire new assets.

Fix: Ensure the grant covers “all Receivables now owned or hereafter acquired” and the UCC-1 filing covers future collateral.

Jurisdiction mistakes

If your SPV is a Delaware LLC but you file your UCC-1 in New York (where it operates), the filing is ineffective. This happens more often than expected, especially when:

SPV is formed in one state, operates in another
Debtor redomiciles to a new state
Related entities have different formation states

Fix: Confirm the SPV’s formation state. File in that state. Re-file if the SPV redomiciles.

Debtor name errors

The UCC-1 must use the debtor’s exact legal name. Common errors:

Using trade name instead of legal name
Omitting “LLC” or “Inc.”
Misspelling
Using old name after name change

Fix: Verify debtor name against organic documents (certificate of formation, articles of incorporation). Use exact name on filing.

Missing control over deposit accounts

A UCC-1 filing alone does not perfect a security interest in deposit accounts. You need control (via ACA) in addition to or instead of filing.

Fix: Identify all SPV deposit accounts. Execute ACAs for each account. Do not rely solely on UCC-1 for deposit account perfection.

Lapsed filings

UCC-1 filings expire after 5 years. If no continuation is filed, the security interest becomes unperfected.

Fix: Calendar continuation filing deadlines. File continuations in the 6-month window before expiration.

Mixed collateral perfection

Different collateral types require different perfection methods. A single UCC-1 filing may not perfect interests in all collateral.

Collateral	UCC-1 Sufficient?
General receivables	Yes
Deposit accounts	No - need control
Certificated securities	No - need possession or control
Real property	No - need mortgage
Titled vehicles	No - need certificate notation

Fix: Collateral coverage memorandum from counsel confirming perfection method for each collateral type.

status: draft

Intercreditor considerations

In deals with multiple secured parties (senior/subordinate tranches, warehouse with back-leverage), security agreement provisions must address priority.

Senior/subordinate arrangements

Issue	Resolution
Who files UCC-1?	Usually senior party files; subordinate gets no separate filing
Who holds collateral?	Senior party or collateral agent
Who can enforce?	Senior party until paid in full; standstill for subordinate
Release authority	Senior party controls until paid

Collateral agent structure

For deals with multiple lenders, a collateral agent holds the security interest for the benefit of all lenders.

Advantages: Single point of control; avoids conflicting instructions; simplifies perfection and enforcement.

Documentation: Collateral agency agreement specifies agent’s authority, instruction mechanics, liability limitations.

status: draft

Review checklist

Before signing, verify: