Collateral Allocation Mechanism (Banking & Finance Glossary)

Summary

Provision sometimes included in Credit Agreements in cross-border deals that provides that loans held by Lenders in different currencies or jurisdictions are shared for the purposes of recovery upon an Event of Default or insolvency. This provision is included to protect Lenders by equalizing the recovery for various groups of creditors in a bankruptcy of the Borrower or upon Acceleration where there are multiple loan Tranches with varying collateral and guarantee arrangements (typically where the debt of a U.S. Borrower is only secured by U.S. assets and debt of a foreign Borrower is secured by both U.S. and foreign assets).