This article considers a common structural problem in financing Iraqi businesses: the borrower, the owner of the key assets and the entity that receives the revenue are often different. In many Iraqi groups, an operating company signs customer contracts, a separate company or an individual shareholder owns the land and buildings, and a third company holds the licence or employs the staff. A lender that lends to one of these entities without addressing the others may find that its borrower has neither the assets nor the cash flow to repay.
Aligning these elements is fundamental to credit analysis and to the security package. The lender needs recourse to the assets and revenues that will repay the loan. The borrower’s group needs a structure that it can implement without disrupting its operations or triggering unexpected consequences. Identifying the misalignment early allows both parties to address it through structure, guarantees and security.
The Companies Law No. 21 of 1997, as amended, recognises each company as a separate legal person and governs corporate approvals for borrowing, guarantees and security. The Iraqi Civil Code No. 40 of 1951 governs loans, guarantees, mortgages, pledges and assignments. The Real Estate Registration Law No. 43 of 1971 governs mortgages over real property. The Banking Law No. 94 of 2004 and Central Bank of Iraq instructions govern bank lending, including limits on exposure to connected borrowers. The Income Tax Law No. 113 of 1982, as amended, affects intra-group arrangements.
Mapping the structure
The lender should map the borrower’s group, identifying for each entity:
- Revenue. Which entity signs customer contracts and receives payment.
- Assets. Which entity, or individual, holds title to real estate, equipment, vehicles and intellectual property.
- Licences. Which entity holds operating licences and permits.
- Employees. Which entity employs the staff who run the business.
- Debt. Which entities already have borrowings and security in place.
This map shows where value sits and where the loan proceeds will be used. A loan to a holding company with no assets, funding an operating subsidiary that holds the revenue, is structurally subordinated to the subsidiary’s own creditors unless the subsidiary guarantees or secures the loan.
Choosing the borrower
Ideally, the borrower should be the entity that receives the revenue and owns the assets, so that the lender has direct recourse to both. Where this is not practical, the lender should consider which entity is best placed to borrow and how the other entities will support the loan. Considerations include regulatory restrictions on borrowing, existing debt covenants, tax efficiency and the ability of each entity to grant guarantees and security.
Obtaining guarantees and security from other entities
Where the borrower does not own the assets or receive the revenue, the other entities can provide support:
- Guarantees. Group companies or shareholders guarantee the borrower’s obligations.
- Third-party security. The asset owner grants a mortgage or pledge to secure the borrower’s debt.
- Receivables arrangements. The revenue-receiving entity agrees to direct customer payments to an account controlled by the lender.
Each supporting entity must have capacity and authority to give the support, and it should be approved by its own corporate bodies. A company granting a guarantee or security for another company’s debt should consider whether doing so is consistent with its objects and its own interest, particularly where it has minority shareholders or creditors. Corporate advice in Iraq can confirm the corporate approvals required.
Addressing individual asset owners
In family-owned businesses, key real estate is often held by individual shareholders. A mortgage over an individual’s property requires the individual’s consent and registration. The lender should consider the individual’s marital status, any co-owners and any restrictions on the property. Personal guarantees from shareholders provide additional recourse but raise their own enforcement questions. Real estate advice in Iraq can verify ownership and registration requirements.
Documenting intra-group arrangements
Where assets owned by one entity are used by another, the arrangement should be documented through a lease or licence. Where loan proceeds are on-lent within the group, an intra-group loan agreement should be prepared. These documents clarify the relationships, support the security package and help address tax and transfer pricing questions. The lender may require assignment of intra-group receivables as additional security.
Considering connected lending limits
Banks lending to several companies within the same group may be subject to limits on exposure to connected borrowers under the Banking Law and Central Bank instructions. The lender should identify all group companies and their existing borrowings from the bank to ensure compliance with these limits.
Planning for restructuring and change
The structure may change during the life of the loan. Assets may be transferred, new companies formed or shareholders changed. The facility should include covenants restricting asset transfers, requiring new group companies to accede as guarantors where appropriate and requiring notice of changes in ownership. Commercial contract advice in Iraq can help draft covenants that preserve alignment over time.
Reviewing existing debt across the group
Before lending, the lender should review existing borrowings and security across the whole group, not only the borrower. Assets that appear available may already be mortgaged to another bank. A guarantor may have given guarantees for other group debt that would compete with the new lender’s claim. Negative pledge clauses in existing facilities may prohibit the security the new lender wants.
The review should cover:
- Existing facilities. Lenders, amounts, maturity and covenants for each group company.
- Existing security and guarantees. Registered mortgages, pledges and guarantees, including cross-guarantees.
- Restrictive covenants. Negative pledges, restrictions on additional borrowing and change of control provisions.
- Intra-group debt. Amounts owed between group companies and whether they will be subordinated.
Where existing lenders’ consent is needed, it should be obtained before the new facility is signed. An intercreditor or subordination arrangement may be required to establish the new lender’s ranking.
Illustrative example. A bank lends to an Iraqi hospital operating company. The building is owned personally by the founder, and the hospital’s major insurance contracts are signed by a separate management company owned by the founder’s family. When the operating company defaults, the bank finds it has no security over the building and no claim to the insurance payments. A structure that required a mortgage over the building from the founder, a guarantee from the management company and a collection account for insurance receipts would have aligned the bank’s recourse with the sources of value.
Conclusion & how Etihad Law Firm can help
Financing Iraqi businesses requires aligning the borrower with the assets and revenues that will repay the loan. Where these sit in different entities or with individuals, guarantees, third-party security, receivables arrangements and covenants can bridge the gap.
Etihad Law Firm advises lenders and borrowers on structuring financing for Iraqi businesses, including group guarantees, security packages and intra-group arrangements. We help clients build structures that reflect where value actually sits.