Introduction
June 30, 2025 - When a typical corporate borrower signs up with a typical corporate lender for a senior secured credit facility to support its "working capital and general corporate purposes," both the borrower and lender bring certain expectations to the table. Among those expectations, both parties expect the facility to be secured by a lien on all of that borrower's personal property assets (typically referred to as a "blanket lien" in that the lien covers all of the borrower's assets). Both parties expect that lien to be first priority, ahead of all other liens on the borrower's assets. And both parties expect that the borrower has the right to grant the lien on its assets without causing the borrower to go into default under its other agreements.
Advertisement · Scroll to continue
However, in many cases, these basic, commonsense expectations are not as simple to satisfy as they would seem. What happens if the borrower already has one or more assets that are already subject to liens? What happens if an asset would lose much or even all of its value simply by the existence of a lien on it? What if granting a lien on an asset could cause the borrower to go into default under one or more of its other loan facilities or other agreements?
Fortunately, there is a commonly used concept, often termed as "Excluded Assets," that can help eliminate many of the problems that can arise from granting a blanket lien on a borrower's assets.
Advertisement · Scroll to continue
Excluded assets — the concept and examples
The grant of a blanket lien on the borrower's personal property assets will generally appear as a provision (the "granting clause") in either the principal loan document (e.g., the loan and security agreement) or in a separate security agreement. To satisfy Section 9-108 of the Uniform Commercial Code's requirement to reasonably describe the assets subject to the lien, that granting clause will list all of the various categories of assets that are subject to the lien. After listing all of those categories, the granting clause may also then include a proviso stating that the lien does not cover any "Excluded Assets."
As a practical matter, the "Excluded Assets" concept in a loan document can be as narrow or as expansive as the borrower and lender choose to make it. One asset class commonly excluded from the blanket lien is assets (typically equipment) that are already subject to another lender's liens.
A borrower may have already financed its purchase of equipment by borrowing from an equipment lender, and as part of financing, the borrower will have already granted the equipment lender a lien on the purchased equipment, and that lender will have also prohibited the borrower from granting any additional lien on the purchased equipment. A lien granted to a subsequent lender in violation of that prohibition could give the original equipment lender the right to accelerate its debt and potentially repossess the equipment.
Similarly, certain of a borrower's contracts may prohibit assignment or the granting of a lien on that contract without the consent of the contract counterparty, and a violation of that prohibition may give the counterparty the right to terminate the contract. If that contract is important to the borrower, the effect of granting that lien could do serious damage to the borrower's business.
Intent-to-use (ITU) trademarks are also typically excluded from a blanket lien. ITU trademarks are trademarks that a borrower has a bona fide intention to use in commerce but which have not been used yet. The Lanham Act prohibits assignments of ITU trademarks, and if the security interest grant is characterized as a transfer, the result could be the borrower's loss of that trademark right.
Why carefully constructed excluded assets clauses benefit borrowers and lenders
The benefits to a borrower of a properly crafted Excluded Assets clause are readily apparent: Borrowers do not want to find themselves in default under their existing secured financings that would prohibit a working capital lender's junior lien; nor do borrowers want to lose important intellectual property or other contractual rights that could or would be forfeited by an improperly granted lien on those assets.
Moreover, given that a working capital lender will typically require the borrower to give some form of the representation and warranty that it will not be in default under its existing debt or other contractual obligations, a borrower will want to make sure that it can accurately make that representation so that it does not enter into its working capital facility with an existing default already hanging over its head on the day it closes.
The Excluded Assets clause also mitigates risk to the working capital lender as well. A working capital lender depends on the continued health of its borrower to support the repayment of its debt. When a working capital lender takes an improperly granted lien on assets, it only increases the odds, however minimal, of future problems in its borrower's operations and performance.
Lenders typically do not want to see their borrowers be subjected to acceleration of other debt, loss of valuable contracts, or loss of important intellectual property rights. Similarly, to the extent that a relationship with its borrower is important, no lender should want to tell a new borrower to simply accept the fact that on the day that it closes its new working capital facility, it will already be in default under that facility as well as under other agreement to which it is a party.
Additionally, the properly crafted Excluded Assets clause should contain provisions that mitigate the apparent loss of assets from the working capital lender's collateral pool. For example, the clause should state that in the case of contracts containing non-assignment provisions, the restrictions on non-assignment clauses found in Article 9 of the UCC should not impair a lien on the cash flows from those contracts.
In the case of equipment already subject to a prior lender's lien or contracts requiring consent of the counterparty in order for a lien to attach, the Excluded Assets clause should contain a "snapback" clause stating that once that pre-existing lien has been terminated or the contract counterparty's consent has been obtained, those assets automatically become subject to the working capital lender's blanket lien.
Conclusion
Although excluding entire classes of personal property assets from a lender's blanket lien may initially appear problematic from a lender's collateral coverage perspective, the use of a properly crafted Excluded Assets clause actually removes risk and uncertainty. In fact, the value of the collateral actually "lost" through an Excluded Assets clause tends to be minimal in that if the lender were to foreclose on those assets, it would often find that the recovery on those assets would approach zero. Both lenders and borrowers are well-served by Excluded Assets clauses.
Originally published by Reuters
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
