Trade Alert - May 2014, Issue 5
Jurisdiction Update: Ireland
Spain may still be considered the 2014 darling of distressed investors when it comes to real estate, but Ireland continues to provide investment opportunities, and May saw the announcement of further portfolio sales. The National Asset Management Agency ("NAMA") (Ireland's "bad bank") announced its biggest sale to date of loans of a single developer in the form of Project Tower (which includes prime Dublin development land) to Blackstone Real Estate Partners Europe IV, and the Irish Bank Resolution Corporation ("IBRC") (in Special Liquidation) completed the sales of Project Sand and Project Stone this month, taking IBRC's total sales across five portfolios to €19.8bn.
It's not only Irish banks that are selling. Lloyds is one of the biggest sellers of Irish loan portfolios, including the loans it picked up when it took over HBOS in 2009 as well as some of its own. Lloyds' first Irish disposal was Project Prince in June 2012 and it has since completed three Irish commercial property deals – namely, Projects Pittsburgh and Lane and the single Moran hotel loan (around €2.3bn in aggregate).
NAMA and IBRC generally require the transaction documents to be governed by and construed in accordance with Irish Law and for the Irish Courts to have exclusive jurisdiction. Buyers should not expect to receive a full suite of robust representations and warranties in relation to the assets, particularly where the portfolio is being sold by an entity in liquidation, therefore due diligence is key.
Security: enforcement strategies will depend upon the structure and nature of the borrower (operating co. or property holding vehicle), the nature of security, e.g. mortgages granted by special purpose vehicle borrowers over real estate assets, charges/shares in the borrowers, floating charges over the whole, or substantially all of the borrowers' assets and whether enforcement will be against individual assets or portfolios. Assignments are perfected by notifying the debtor, as under English law and trusts are recognised in Ireland. A security trustee can enforce its rights in the courts in Ireland on behalf of secured lenders in accordance with the terms of the relevant security documents.
Purchasing entity: the purchasers of Irish loan portfolios tend to be Irish SPVs or regulated Irish investment funds (namely and Irish Qualifying Investor Fund ("QIF") or an Irish Qualifying Investor Alternative Investment Fund ("QIAIF")) or, sometimes, a combination of both. SPVs are established as qualifying companies for purposes of Section 110 of the Taxes Consolidation Act 1997. One important point worth noting is that Section 110 companies cannot directly hold physical real estate – while they are used to acquire the loan portfolios, at the point of enforcement a QIF or QIAIF is often used as they do not have the same restrictions on holding real estate.
Tax: The tax analysis of the purchaser will be a crucial structuring point. One issue to consider in this context is withholding tax on returns to investors/lenders of the purchasing entity. Withholding tax applies at the standard rate of 20% on interest payments made by Irish companies. For SPV (Section 110) purchasers it is possible to prevent Irish withholding tax arising including where the SPV is funded by listed debt securities or where the SPV is funded by lenders located in a country with which Ireland has a double taxation treaty. Ireland currently has taxation treaties with 70 countries, 68 of which are in effect. Distributions out of Irish investments funds are not subject to withholding tax.
Banking license considerations: while it is not necessary to have a banking license in Ireland for the purchase of loan receivables or the advancing of funds to corporate borrowers in the ordinary course of business, a license is required under the Irish Consumer Credit Act 1995 for "housing loans", therefore it is important to identify if there are any loans to individuals as part of the portfolio that may require a license and take this into consideration when structuring an acquisition.
Other Portfolio Requirements: borrower consents may be required as well as notices to agents/borrowers and the timing of completion of the transfer of the underlying assets should be considered when addressing closing mechanics. Consider put-back options or alternative settlement mechanics if legal transfer cannot be completed for all assets prior to the closing deadline. Aside from its title to the loans, a seller may want to transfer its hedge exposure as well as any agency function to the buyer and appointment of an asset manager and servicer may be required to administer and manage the underlying assets to maximize value. Fee structures (including tax) to be considered at the outset as well as timing implications for settlement to correspond with transfers of the underlying loans in accordance with the credit agreement terms.
Recent legislation: The Credit Reporting Act 2013 establishes a database of information called the Central Credit Register (the “Register”); and contains new mandatory requirements for credit providers to (i) provide information about people and entities seeking credit; and (ii) carry out searches of the Register before approving a credit application.
This legislation applies to anyone providing credit and anyone who is borrowing or guaranteeing such credit. The Register will be operated and monitored by the Central Bank of Ireland once established, which is unlikely to occur prior to 2015.
Special Note: Thanks to Garry Ferguson, Partner at Walkers for assistance with the Irish Jurisdiction Update
NOTABLE TRANSACTIONS / PIPELINE
BORROWER CONSENT REQUESTS DECLINED: A number of proposed new lenders in various European facilities have recently been declined Lender of Record status by Borrowers where consent is required for a transfer. For queries regarding whether or not consent has been unreasonably withheld, please contact Louisa Watt.
CYPRUS: The Central Bank of Cyprus released Monetary Financial Institutions Deposits and Loans Statistics on 28 May 2014 (click link for details). Deposits and shares continue to trade in Bank of Cyprus. KYC requirements with BoC are extensive for Buyers and impact settlement times. To view the Cyprus capital controls decree which came into force on 5 May 2014, please click here.
TORM A.S.: The company’s USD1.6bn debt pile was restructured in November 2012. Efforts to raise new money in order to recapitalise the business were reported as ongoing including a new money restructuring proposal by the company to the lender syndicate on 15 May 2014. Cadwalader is advising market participants in relation to the existing restructured debt and Danish, Norwegian and Singaporean security local law issues.
EIRCOM: It was reported that Eircom is poised to hire a local corporate advisor on strategic options, including a possible London and/or Dublin flotation. Buyers should confirm consent and tax requirements before trading debt or shares.
MODACIN FRANCE SAS (CAMAÏEU): the EUR700m Senior Secured Facility debt extended to the French womens’ fashion retailer traded in May following the conclusion of the restructuring in February 2014. Financial news sources reported that the company’s management presented a positive view of the company’s recent performance at a meeting with lenders on 23 May 2014. New Lenders are required to notify assignments to the Borrower by French bailiff (huissier) to perfect transfers under French law.
Energy Future Holdings Corp. ( formerly TXU Corp ), the largest power producer in Texas and its direct and indirect subsidiaries (including Energy Future Competitive Holdings ("EFCH"), Texas Competitive Electric Holdings Company LLC ("TCEH"), Energy Future Intermediate Holding Company LLC ("EFIH") (with the exception of Oncor ) ) was granted Chapter 11 Bankruptcy Protection on 29 April 2014 in United States Bankruptcy Court for the District of Delaware (Energy Future Holdings Corp., jointly administered under Case No. 14-10979). The Company entered into a Restructuring Support and Lock-Up Agreement agreed with certain of its key financial stakeholders to reduce its debt and has since received court approval to access $2.3bn TCEH DIP Financing support.
As of 31 December 2013 , the group had total assets of $36.4bn and total liabilities of $49.7bn including a $22.635bn Credit Facility advanced to TCEH and EFCH (maturing October 2014 and October 2017) consisting of $19.519bn initial term loan facilities, a $2.054bn revolver and a $1.06bn letter of credit facility, as well as numerous series of secured and unsecured notes issued at various levels of the group structure ( click here to view chart ).
TXU CREDIT DEFAULT SWAPS: LCDS Auction results were published on 21 May 2014 for The Texas Competitive Electric Holdings Company LLC, and CDS Auction results were published on the same date for The Texas Competitive Electric Holdings Company LLC, Energy Future Holdings Corp. and Energy Future Intermediate Holding Company LLC/EFIH Finance Inc ( link to auction results ). For LCDS and CDS settlement queries please contact Ivan Loncar.
WHAT'S NEXT? on 7 May 2014, the Energy Future Intermediate Holding Company LLC (" EFIH ") and EFIH Finance Inc. commenced an offer to holders of the EFIH First Lien Notes (early participation date expired on 19 May 2014, offer period expires on 6 June 2014 ) in exchange for EFIH First Lien DIP Loans ( link to First Lien offer ) and on 27 May, the Company announced that the cash tender offer period for the EFIH Second Lien Notes has been extended to 3 July 2014 and the early participation date now expires on 11 June 2014 ( link to Second Lien offer ).
CREDITORS' MEETING: to be held on June 4 2014 at 1.00 p.m. (EDT) at the Double Tree Hotel, Salon C, 700 North King Street, Wilmington, Delaware 19801.
CLAIM FILINGS: The deadline for the filing of proofs of claims against the debtors is yet to be established. For assistance with proof of claim filings, please contact: John H. Thompson or Nicole Stephansen.
For further information: EFH's restructuring information is available at: http://www.energyfutureholdings.com/restructuring/
Court filings, chapter 11 petitions, and claims information is available at the website maintained by the Company’s Noticing Agent, Epiq Bankruptcy Solutions: http://www.efhcaseinfo.com/.