Trade Alert - February 2016
We are currently advising clients regarding the Cayman Islands liquidation proceedings concerning Saad Investments Company Limited (“SICL”), a complex international investment vehicle part of the Saad Group of companies embroiled in disputes with the Saudi conglomerate, Ahmad Hamad Algosaibi & Brothers (“AHAB”) (FT Article). The Algosaibi family claims that Maan Al-Sanea (owner of the Saad Group) misappropriated billions of dollars while managing their financial services business and transferred the proceeds into Cayman Islands companies. AHAB obtained a ruling against Mr Al-Sanea granting an interim award of USD2.5bn in damages.
While the SICL liquidation has been on-going since 2009, litigation is continuing before the Cayman Islands courts (with the substantive hearing due to take place in July 2016). The process of agreeing claims with creditors for the purposes of dividend payments and any distributions of funds to creditors therefore remains on hold until the outcome of the litigation.
Cayman Islands is not often a common target country for distressed investors acquiring secondary loans. However, it is often a jurisdiction for incorporation of the distressed funds themselves.
This month’s Trade Alert sets out some of the key considerations for secondary loan trading in the Cayman Islands and considerations for investors in European loans who are resident in Cayman.
BANKING LICENCE REQUIREMENTS
A foreign lender not carrying on a business in the Cayman Islands is not required to hold a banking license in order to acquire the debt of a domestic borrower.
Trust and agency concepts are recognised in the Cayman Islands. Trusts established in the jurisdiction which are subject to Cayman Islands legislation, such as Trust Law (2001 Revision), are also strongly influenced by the English common law.
Non-Cayman Islands law governed security
Cayman Islands law will look to the governing law of the agreements as well as the lex situs of the assets secured to determine any transfer formalities.
It is advised that:
(a) notice be given to the Cayman Islands borrower (simultaneously with or immediately after the transfer) in relation to each security document and an acknowledgment sought to ensure they are aware of the transfer and agree to be bound by any instructions (in particular payment instructions); and
(b) if the Cayman Islands borrower is a company or, in the case of a Cayman Islands exempted limited partnership, the general partner is a Cayman Islands company, then it is advised that (simultaneously with or immediately after the transfer) the existing entry in the Register of Mortgages and Charges of such company be updated to reflect the identity of the new secured party.
Cayman Islands law governed security
Where the security documents are governed by Cayman Islands law (which would be unusual) the steps and/or formalities required to transfer the benefit of the existing security will depend, in part, on the terms and requirements of the security document and the nature of the assets being secured.
In addition under the Property (Miscellaneous Provisions) Law, (2011 Revision) express notice in writing must be given to the Cayman Islands borrower in order for any absolute assignment (not an assignment by way of charge only) to be effectual.
Where there is a Cayman Islands security agent and that agent is to be placed into insolvency proceedings, provided that the security is held on “trust” for the secured lenders, it should not form part of the agent’s insolvent estate.
TRANSFERABILITY OF LOANS AND METHOD OF TRANSFER
It would be unusual for a loan to a Cayman Islands borrower to be governed by Cayman Islands law (the most likely governing law being England and Wales or New York). From a Cayman Islands law perspective, the transfer of a loan made to a Cayman Islands borrower will be valid and enforceable as long as the relevant governing law and any steps required by the underlying documentation are complied with.
In the unlikely event that the loan is governed by Cayman Islands law, broadly the same considerations will apply as under English law as to whether novation or assignment is the most appropriate method of transfer. In the case of a loan governed by Cayman Islands law, novation may result in the release of any security or guarantee and also the resetting of hardening periods in relation to challenges a liquidator could make in respect of antecedent transactions. Where the loan is not governed by Cayman Islands law, this will be a question for the relevant governing law.
There are no borrower consent requirements under Cayman law other than as may be contractually required.
There are no special requirements under Cayman Islands law requiring that a guarantor be notified of a loan transfer. However it is advisable that notification be given so it is aware of the identity of the purchaser.
In respect to revolving credit facilities any additional considerations for the loan being transferred will depend on the relevant governing law.
Security documents are not required to be notarised unless there is a requirement under the relevant governing law.
Hedge fund “master funds” typically are organised in the Cayman Islands, which does not impose an income tax. In addition, hedge funds with U.S. investment management personnel typically endeavour to satisfy a safe harbour to ensure that they are not “engaged in a U.S. trade or business,” so that they (or their non-U.S. investors) are not subject to U.S. income tax.
If a hedge fund has non-U.S. investors or U.S. tax-exempt investors, then the hedge fund may be organized as a “master-feeder” structure. In this structure, the master fund is organized as a limited partnership, or otherwise as a corporation that elects to be treated as a partnership for U.S. tax purposes. U.S. taxable investors invest in the master fund through a U.S. limited partnership or limited liability company. Non-U.S. investors and U.S. tax-exempt investors invest in the master fund through a corporation that is typically organised in the Cayman Islands. The master-feeder structure is efficient because it permits hedge fund managers to pool the assets of investors with varied tax objectives, thereby reducing administrative expenses, and generally minimises the investors’ U.S. tax risks. Please click here to view a typical master feeder structure diagram.
Withholding Tax and Stamp Duty
There are no requirements to deduct or withhold tax on interest payable on loans made to a domestic or foreign lender. In addition the Cayman Islands currently has no form of income, capital gains or corporation tax.
Stamp Duty is payable on the transfer of Cayman Islands real estate and is applied on the greater of the purchase price or the fair market value at the time of transfer at a rate of 7.5%.
Stamp Duty may also be levied where a security document is physically executed in the Cayman Islands or brought within the territory of the Cayman Islands (for example for the purpose of enforcement). The amount payable will vary depending on the type of security document being executed and what assets are subject to the security interest. It is therefore preferable for documents to be executed outside of the Cayman Islands in order to avoid incurring stamp duty fees.
Other than stamp duty, the Cayman Islands does not impose any transfer tax on a foreign lender acquiring the debt of a domestic borrower and there are no continuing tax considerations that creditors should be aware of when trading in the Cayman Islands.
CLAIMS IN CAYMAN LIQUIDATIONS
The legal requirements for purchasing a claim in Cayman Islands proceedings are similar to those applicable to claims of a company in English liquidation proceedings, however in Cayman, contractual set-off and netting provisions remain effective and are not automatically displaced by mandatory insolvency set-off, (which only applies if there are no contractual set-off or netting provisions).
A foreign investor should seek Cayman Islands law advice if the debt trade concerns real estate, as there are strict rules as to the type of company that is able to hold title in Cayman Islands real estate.
Investors trading the proceeds of the old Icelandic bank claims which were exchanged for cash, notes and shares under the Composition Arrangements are required to comply with the relevant stapling provisions (i.e. transfer notes together with shares) in order to avoid losing voting rights to shares or the transfer potentially being invalidated.
- Glitnir Holdco ehf
Glitnir announced to Noteholders on 16 February 2016 that it will effect a further optional redemption by partially redeeming the Notes in cash on 7 March 2016.
The Central Bank of Iceland has agreed to an Optional Cash Redemption of ISK 75.4 billion converted to EUR using the conversion rate on 18 January 2016 with the conventional adjustments to reflect interest rate differentials. The EUR equivalent redemption amount to be distributed is EUR 528,936,600, bringing the total to be distributed to EUR 650,436,600.
- Kaupthing ehf
Kaupthing issued New Notes and New Ordinary Shares to all eligible creditors who had submitted valid Entitlement Letters on or around 5 February 2016.
Subject to compliance with the transfer restrictions set out in the Composition Arrangements, the New Notes and New Ordinary Shares may be traded in the secondary market (the Notes via Euroclear/Clearstream with the shares transfer being administered by Epiq).
Trading is still at early stages and the market is yet to determine whether sellers will are willing to wait for payment post valid title transfer of both notes and shares to buyer, or whether buyer will bear the risk of the delay or refusal of share transfer. Share transfer forms are available through the secure area of the Kaupthing creditor’s portal.
- LBI ehf
LBI continues to process claims by the valid submission of a Claims Transfer Request Form despite the Composition Agreement being confirmed. LBI has notified Composition Creditors that the delivery of the Shares and issuance of Bonds (together the “Securities”) shall be postponed due to delays in obtaining necessary authorisations for the issuance of the Securities in certain foreign jurisdictions.
ITALIAN LENDING MARKET
Italy implemented new legislation on 15 February 2016 (Law Decree No. 18) allowing Alternative Investment Funds (“AIF’s”) established in the EU (other than Italy) to directly lend to Italian borrowers (other than consumers), subject to certain conditions. AIF’s will be required to give 60 days’ notice of their intention to commence lending activities to the Bank of Italy. Provided that no communication is received from the Bank of Italy, the AIF’s will be able to start direct lending activities in Italy following the notice period.
- NOVO BANCO S.A. & BANCO ESPIRITO SANTO S.A. – An ISDA external review panel has now decided that the move by the Bank of Portugal to re-transfer five Portuguese law governed bonds with a nominal amount of some EUR 1.95bn from Novo Banco S.A. to Banco Espirito Santo S.A. on 29 December 2015 does not amount to a “Governmental Intervention” Credit Event.
The issue of whether a Succession Event has occurred remains to be considered by an ISDA Determinations Committee; a decision has not yet been reached.
- ABENGOA S.A. – Following publication of Alvarez and Marsal’s ‘industrial viability plan’, it has emerged that Abengoa needs additional funds of EUR 826m for 2016 and EUR 304m in 2017. These figures are exclusive of any proceeds realised from the sale of non-core assets. In addition to the combined sum of EUR 1130m, the plan also states that Abengoa will need an additional EUR 525m in technical guarantees in 2016 in order to promptly resume trading. The plan maintains that a restructured and streamlined Abengoa will be worth seven times more than would be realised in a liquidation scenario. Talks with creditors remain on-going.
Abengoa Bioenergy, a U.S. based unit, filed for bankruptcy under Chapter 11 in St. Louis on 24 February 2016. The division is reported to owe USD4bn to unsecured bondholders and about USD1.7bn to various other lenders under different facilities. Please click here for a recent Bloomberg article.
- AHMAD HAMAD ALGOSAIBI & BROTHERS (AHAB) – The Saudi Arabian hospitality, food and real estate conglomerate which collapsed in 2009 proposed a revised restructuring plan at a creditors meeting on 28 January 2016 (updating the previous proposal of 2 June 2015) and also invited creditors to submit information relating to their claims (potentially allowing the claims of a majority of creditors by value to be presented at the Saudi enforcement court in Khobar).
- CORTEFIEL S.A. – Cortefiel announced on 24 February 2016 that it is seeking a 12 month extension period across its debt facilities in order to accommodate its sale plans. The company’s Revolving Credit and Term Loan facilities are due to be repaid on 1 March 2017.
CODERE S.A. “GAMBLING WITH UNFUNDED COMMITMENTS” - The first judgment handed down on the Financial List, GSO Credit – A Partners & Others v Barclays Bank PLC v HCC International Company PLC  EWHC 146 (Comm) relates to an LMA trade of Spanish gaming company, Codere S.A.’s, senior facility and gives clarity to loan investors and traders as to the treatment of drawn but unfunded surety bond facilities traded under the Loan Market Association (“LMA”) standard documentation.
Click here for the full Judgment.
NEW LMA Administrative Details Form
The Loan Market Association has recently launched its standard Administrative Details Form (“ADF”) which has been developed as part of an on-going commitment to support the trading process and streamline the operational efficiency across the market. The initial draft version is available to view on the member’s area of the LMA website.