Trade Alert - December 2015
2015 has been a difficult year for many investors following a decline in stressed and distressed credit opportunities and illiquidity and volatility in part due to Dodd-Frank and Basel III regulatory pressures biting on trading desk activity. However, against a back-drop of fund liquidations and redemptions, Howard Marks of Oaktree Capital Group LLC is bullish “For the credit investor we have our first opportunities in several years,” Marks said on 8 December 2015 at a Goldman Sachs Group Inc. conference in New York, “It’s been a long, long time.” Please click here for the full report by Bloomberg.
During the first half of 2015, Reuters published data showing US syndicated lending accounted for 50.8% of global lending activity, totalling USD 1.1 trillion. EMEA syndicated lending accounted for 25.5% of global volumes, a 7.3% decrease as compared to the same period of 2014.
As a result of decreasing oil prices (trading at the lowest level in 7 years this month), investors who have historically looked towards the European par and distressed loan markets are starting to focus back on U.S. credit opportunities particularly in energy and oil & gas (e.g. TXU Energy) and we have seen an increase in trading activity of other U.S. debtors such as Caesars Entertainment Corp (click here for article on Caesars minority bondholders’ rights under the Trust Indenture Act 1939).
This month’s trade alert summarises some of the key considerations for loan traders investing in the United States.
The Loan Syndications & Trading Association (“LSTA”) is the industry body for the U.S. syndicated loan market and publishes standard form trading documentation, as well as loan market data and analysis and it harmonises market practice for the primary and secondary markets in the United States (www.lsta.org). The key documents for distressed U.S. transfers comprise a Trade Confirmation, Purchase and Sale Agreement (“PSA”) and Assignment Agreement (as prescribed by the Credit Documentation).
While the LSTA market standard representations are given on a similar basis to those under the LMA documentation, there are differences in trading norms. For example, par trade settlement times are prescribed as T+7 in the U.S. (as opposed to T+10 in LMA) and representations under the PSA are given on an assignment basis (where the Buyer receives recourse against prior holders of the debt in the chain), whereas the LMA operates on a “step-up” basis, where representations are made by a Seller on behalf of itself and its predecessor-in-title, and a Buyer only faces its direct counterparty rather than stepping into the shoes of the Seller in the event of any breach. Click here for more information on differences between LMA and LSTA.
REGULATION – BANKING LICENCE
A handful of States license commercial lenders, depending on the size and nature of the loans in question. U.S. banks are almost universally exempt from these State commercial loan licensing requirements. However, foreign banks and non-bank entities (including corporations and bank affiliates) are not exempt.
Whether a license is required depends on whether the loan has a nexus to the State in question, and whether the loan is of the type and amount that requires licensing. As a result, it is unclear whether a foreign investor would be required to hold a banking licence to acquire secondary debt in a U.S. borrower. Therefore, it is advisable that any banking license requirements are confirmed by legal counsel on a case-by-case basis.
It is common practice for an administrative or collateral agent to hold the security for a credit facility on trust on behalf of all secured lenders. When the assignment of a loan by an assignor to an assignee occurs, the assignment document would likely be drafted for the assignee to assume the assignor’s rights to the security.
In addition, if the collateral agent was to enter into insolvency proceedings, the collateral generally should not become part of its insolvent estate because such collateral was held on trust for the lenders.
Guarantees often form part of a security package in the United States and are created by a contract signed by the guarantor and guarantee beneficiary, typically the lender or an agent acting on behalf of a group of lenders.
TRANSFERABILITY OF LOANS AND METHOD OF TRANSFER
Assignment is the key method of loan transfer in the United States for par and distressed loan sales and Participation Agreements are also used in situations where the assignee is not able to become a lender of record. The LSTA has a standard form of Participation Agreement for distressed and par trades.
The form of assignment agreement used for transfer is typically provided by the applicable credit agreement and for syndicated loans, submitted to the administrative agent for such credit facility. In addition, the LSTA has a form of Purchase and Sale Agreement which together with the assignment agreement is used for distressed trades. The Purchase and Sale Agreement provides more comprehensive representations and provisions, including a chain of title of loan holders, a "bad acts" representation and an indemnity than are included in the assignment agreement.
There are no legal requirements for borrower consent in a transfer other than as contractually agreed. Therefore, it is necessary to look to the terms of the applicable Credit Agreement to determine if the borrower/guarantors have to be notified and/or provide consent to transfer the loan in question. Typically if this right exists, it is only in favour of the borrower and not the guarantors and would be inapplicable after the occurrence of certain events of default.
The borrower may have consent rights if the loan is a revolving facility since the borrower is likely to be concerned with credit quality of the new lender who will acquire a continuing obligation to fund.
In addition, agents and fronting banks often have consenting rights.
Note that credit agreements are now including disqualified lists (i.e., lists of entities that cannot become assignees or participants) more frequently.
WITHHOLDING TAX AND STAMP DUTY
In the absence of a double tax treaty between the United States and the country of the foreign lender, the United States imposes a 30% withholding tax on U.S.-source interest paid to a non-U.S. holder if (1) the non-U.S. holder is a bank receiving interest on an extension of credit pursuant to a loan agreement entered into in the ordinary course of its trade or business, (2) the debt is bearer debt (i.e., debt that is not “registered” for tax purposes, in book entry form, or “immobilized”), (3) the interest is “contingent interest” (e.g., it is determined by reference to receipts, sales, income, profits, or other cash-flows of the issuer or a related person, any change in value of any property of the issuer or a related person, or any dividends, partnership distributions, or similar payments made by the issuer or a related person), or (4) the non-U.S. holder owns 10% or more of the issuer’s voting power or capital or profits interests (applying certain attribution rules). Withholding of the interest would be required by the issuer or a U.S. (or U.S. branch of a foreign) agent bank.
In addition, under FATCA, a 30% U.S. withholding tax is imposed on (1) U.S.-source interest paid to a “foreign financial institution” that does not enter into and comply with an information-sharing agreement with the Internal Revenue Service or comply with local law implemented pursuant to a FATCA-related “intergovernmental agreement” between the foreign financial institution’s jurisdiction and the United States, (2) U.S.-source interest paid to an entity that is not a foreign financial institution, unless the entity discloses its 10% U.S. owners (or represents that it does not have any 10% U.S. owners), and (3) beginning in 2019, gross proceeds paid on an obligation that gives rise to U.S.-source interest to a non-U.S. holder described in (1) or (2). FATCA withholding would be required by the issuer or a U.S. (or U.S. branch of a foreign) agent bank.
The United States has signed over 60 double tax treaties with various other countries and territories, and most of the agreements are based on the OECD model treaty. For example, the United Kingdom has concluded tax a treaty with the U.S. which provides that no withholding tax is currently levied on interest payable to UK lenders.
Stamp duty is not payable in the United States.
OTHER TAX CONSIDERATIONS
The United States does not impose any transfer tax on a foreign lender acquiring the debt of a domestic borrower. In addition, there is no U.S. federal registration or licence taxes which may be imposed on the transfer of real estate. However, transfer, withholding and income taxes would apply upon the foreclosure, ownership and sale of U.S. real estate.
POST COMPLETION FORMALITIES
For syndicated facilities, a transfer of a loan is made valid and effective by the acceptance and recordation of the assignment by the administrative agent. The administrative agency typically keeps a record of all loan positions in a syndicated facility.
Guarantees would usually be drafted such that the guarantee was in favour of the administrative agent for the benefit of all Lenders, consequently specific notice of a transfer of a loan would not need to be given to a guarantor absent any unusual circumstances.
Notarisation requirements would depend on the document and applicable State law. Normally notarisation is not required for a security agreement that is not filed in a governmental office; however, security documents that are filed (e.g. mortgages/deeds) would likely need to be notarised.
CADWALADER ADVISES ON
JANUARY – DECEMBER 2015
GLITNIR: Following the District Court of Reykjavik’s confirmation of the composition proposal submitted by Glitnir hf on the 7 December 2015, the Court has issued a further ruling on 14 December, 2015 confirming that the proposals became binding and effective under Icelandic law as at this date.
The Winding-Up Board formally announced Glitnir’s exemption from the capital controls on 17 December 2015 and as such, the bank will begin to make de minimis payments to the respective creditors from 17 December 2015 and the initial cash distributions to composition creditors will follow on 18 December 2015.
Composition creditors will receive new notes and new ordinary shares beginning 11 January 2015 and shareholders are due to meet to appoint a new board.
The company commented that the entitlements of each creditor will be disclosed on the secured section of Glitnir 's website from 17 December 2015.
Kaupthing hf.: The Composition Proposal of Kaupthing hf. which was approved at the Composition Voting Meeting on 24 November 2015 was confirmed by the District Court of Reykjavik on the 15 December 2015.
LBI hf.: The LBI hf decision of the District Court is awaited.
The final approvals by the District Court means that the failed banks can now begin to implement their approved Composition Proposals before the 31 December 2015 deadline.
16 DECEMBER 2015
The new LMA Terms and Conditions (as well as some of the accompanying trading documentation) for Par & Distressed Trade Transactions in the secondary market went live on 16 December 2015.
EU BAIL-IN PROVISIONS
1 January, 2016 is the deadline for EU member states to implement Article 55 of the EU Bank Recovery and Resolution Directive (2014/59/EU) (the “BRRD”) into their national law.
Article 55 of the BRRD is designed to ensure that the powers granted to regulators in the wake of the financial crisis which allow them to cancel, convert into equity and/or write down certain liabilities of affected institutions (the “Bail-in Provisions”) will be recognised in cross-border transactions. As a result, European banks and some other qualifying financial institutions (‘in-scope’ entities) will be obliged to incorporate a contractual recognition from their counterparty into certain contracts which are not governed by the law of an EU country. Simply, the counterpart providing the recognition should acknowledge and accept that the Bail-in Provisions may be applicable to the liabilities of the ‘in-scope’ entity. The LSTA have already published proposed wording on their website to be included in both primary and secondary documentation.
Click here for an article recently published by Cadwalader, Wickersham and Taft LLP on Contractual Recognition of Bail-In.
ABENGOA: The ISDA EMEA Determinations Committee ruled on the 9 December 2015 that the three month grace period granted to negotiate with its creditors by virtue of its Article 5 BIS filing (preconcurso) in Spain did not constitute a Bankruptcy Credit Event under the 2014 ISDA definitions (but did constitute a Bankruptcy Credit Event under the 2003 ISDA definitions).
Furthermore, it appears Abengoa may have defaulted on its obligations to repay some of its commercial paper which has since been delisted from the Irish stock exchange. After a period of silence on this point, Abengoa filed a stock market notice on 10 December 2015 confirming that it has not repaid some of the notes issued under its EUR 750m commercial paper programme. The ISDA Committee are due to meet to determine whether a credit event has now occurred.
CAESARS: Following the decision of the U.S. District Court for the Southern District of New York earlier this year regarding minority bondholders’ rights under the Trust Indenture Act of 1939 (the “TIA”), an amendment was introduced in separate federal transportation and omnibus appropriations bills to retroactively limit and narrow the scope of section 316(b) of the TIA.
The amendment was ultimately excluded from the respective bills, in part, because legislators, scholars, and investors objected to including such an amendment without thorough legislative deliberation. The proposed amendment would have effectively foreclosed the ability of minority bondholders to sue under section 316(b) unless the principal and interest payments were directly impaired by a majority action, and would have almost certainly been fatal to the plaintiffs’ claims in Caesars.
RIO FORTE: The deadline for creditors to file their claims against Rio Forte Investments SA has been extended to 31 January 2016.
O.W. BUNKER: On 15 December 2015, the modified debtors’ liquidation plans submitted by O.W. Bunker’s US entities were confirmed by Judge Julie Manning of the United States Bankruptcy Court for the District of Connecticut. The plan was approved with only minor revisions, despite the US Trustee’s objection to the release and exculpation provisions. Please click here for a copy of the Order.
Furthermore, a settlement between ING Bank, the debtors and the unsecured creditors committee was also approved by Judge Manning. Please click here for a copy of the Order.