Trade Alert - March 2015, Issue 15
The fall in oil prices and US and EU sanctions over the conflict in Ukraine have continued to hit the Russian economy, and have led to speculation that the country could be heading for recession.
Since the start of last year, the Ruble has almost halved in value against the dollar. Russia’s economy shrank 0.7% in the first quarter, according to recent reports from the Russian Central Bank, which has also forecast a GDP contraction of up to 4% this year. This is on top of Russia’s GDP having fallen by 1.5% in January from a year earlier.
Meanwhile the price of oil, Russia’s principal export, has fallen. Brent Crude Oil, which peaked at USD115 in June 2014, is less than USD55 a barrel this month.
The EU has maintained its sanctions pressure on Russia, despite speculation that certain economic sanctions would be left to expire in July.
This month’s trade alert sets out some of the key considerations for loan investors in Russia.
Despite some speculation that the EU would decline to extend its sanctions against Russia, EU leaders decided at an EU summit in Brussels on 19 March 2015 to tie those sanctions to implementation of the Minsk agreements, effectively extending current sanctions through to the end of the year. Also this month, Switzerland announced measures to prevent the circumvention of EU sanctions against Crimea and Sevastopol - as of 6 March 2015 financial intermediaries in Switzerland are prohibited from entering into new business relationships with persons blocked by the EU under its Russian sanctions program and must report existing business relationships with such individuals to the Swiss State Secretariat for Economic Affairs. ("SECO"). U.S. and EU purchasers of loans made to Russian borrowers must carefully analyse all transactions to ensure that they do not breach sanctions implemented after Russia’s annexation of Crimea.
For any Sanctions queries please contact Jodi Avergun.
Russian Law does not expressly recognise contractual/intercreditor subordination of claims and provides for subordination only with respect to the Tier 2 capital loans made to the financial institutions and for certain finance transactions entered into on the organised stock exchange/based on standard documentation (i.e. derivatives transactions). A waiver by any person of its rights generally (such as the right of a creditor to claim payment from its debtor when due) would not prevent their exercise by that person. In practice, the parties would usually seek to enter into English law subordination agreements between offshore entities to secure enforceability of the subordination arrangements where possible.
No licence is required for a non-resident entity (be it a financial institution, trust fund or a non-regulated entity) making or purchasing a loan made to a Russian borrower. There is no requirement on the parties to the loan agreement to register it with any state authority, save for the borrower opening a 'passport of the transaction' with its Russian account bank which is a fairly streamlined procedure (the borrower files a completed passport application, the loan agreement and related documents with the bank which, for a nominal fee, will open the passport within three to ten business days).
As a general rule, 20% withholding tax will apply to payments of Russian source loan interest by the borrower to a foreign lender unless reduced to zero under a tax treaty. Russia (and the USSR as its predecessor) is a party to multiple bilateral tax treaties with foreign countries (including the U.S., UK, Ireland, Luxembourg and most other European jurisdictions) which provide for a zero withholding tax on loan interest originated in Russia.
LOAN TRANSFER MECHANIC: ASSIGNMENT, NOVATION, PARTICIPATION OR OTHERWISE
The majority of cross-border loans made to Russian borrowers are governed by English law, therefore transfers are generally in compliance with the standard English law requirements for assignment or novation. However, as Russia does not recognise the concept of trusts (see below), assignment is recommended. Provided there are no restrictions on transfer under the Russian law security documents and guarantees, these should be automatically assigned together with the debt (though a formal agreement between all parties is recommended). Participations (both primary and secondary) are permitted.
SECURITY: ENFORCEABILITY OF AGENCY/SECURITY TRUST/PARALLEL DEBT STRUCTURES
Russian law does not specifically recognise the concept of a security agent or security trustee which can, however, be based on the general concept of agency as set out in Russian law or an agency or trust arrangement which is subject to a foreign law chosen by the parties.
In cross-border financings, Russian security assets are usually held under security agency or security trustee or parallel debt structures created under foreign law in favour of the security agent or security trustee and sometimes under joint and several creditors (where one particular lender is declared a creditor for the whole amount of the loan jointly and severally with all lenders and solely holds the security on behalf of the lenders) and pledge manager (where one entity acts on behalf of several lender pledgees) structures created under Russian law. Foreign law structures are not widely tested in Russian courts but the general view is that they should be enforceable provided the relevant creditor’s claim is validly created under foreign law. Security created in connection with joint and several creditor and/or pledge manager structures created under Russian law should be enforceable in light of the recent developments in the Russian law syndicated lending regulation.
Notifications of loan transfers: generally, a borrower notification is necessary so that payments by the borrower to the original lender do not discharge the borrower. Practically, notification may not be needed provided the original facility agent continues to coordinate the repayments.
Registrations: certain Russian law security instruments may (and must) be registered with the appropriate registries as follows:
(a) pledge of movable assets may be registered with the notary public to create priority for the initial pledgee against subsequent pledgees;
(b) pledge of shares in a joint-stock company should be registered with an independent registrar maintaining the company's share registry;
(c) pledge of participatory interest in a Russian LLC must be notarised with the public notary who will file it with the state register;
(d) pledge of immovable assets (land and buildings) must be registered with the state register; and
(e) pledge of quasi-immovable assets (aircraft, satellites etc.) must be registered with the relevant industry state register.
Care should be taken (including where there is a security agency or security trustee or joint and several creditor or pledge manager structure in place) to update appropriate registers upon a loan transfer, where relevant, to perfect the transfer of security rights (e.g. for mortgage over real estate or share pledge).
Fees: generally, no fees are payable for loan or security transfers save for specific cases (e.g., where parties to a pledge agreement want to provide for an out-of-court enforcement procedure by way of a notary public writ, such agreement needs to be notarised).
GOVERNING LAW AND JURISDICTION
Russian courts will generally recognise a choice of foreign law made by the parties to a contract provided there is a foreign element (i.e. a non-resident lender).
Russian courts will also recognise and enforce foreign arbitral awards pursuant to the 1958 New York Convention to which Russia is a party.
Russian courts will recognise foreign court judgments provided there is a bilateral international treaty in place to this effect (generally applies to Eastern European countries).
Special thanks to Alexander Rymko and Oleg Gritsenko at Hogan Lovells in Russia, who assisted us with this Trade Alert.
+44 (0) 20 7170 8526
Jonathon Hamill is an associate in the Financial Restructuring Group in Cadwalader's London office.
Jonathon represents investment funds, hedge funds and other financial institutions in connection with the acquisition and sale of syndicated bank loans, debt instruments, bond claims and distressed assets. His Corporate experience includes having acted on both company-side and bank-side on a range of ECM and DCM transactions and on national and cross-border M&A transactions.
OIL AND GAS UPDATE
- 1. O.W. BUNKER & TRADING A/S: The global marine fuel company, and second largest Danish IPO ever, filed for bankruptcy in Denmark on 7 November 2014 (the trustees being John Sommer Schmidt and Pernille Bigaard) following senior employee fraud in the company's Singapore subsidiary Dynamic Oil Trading. The US subsidiaries filed for Chapter 11 protection on 13 November 2014. Trading is active in the company's USD700m revolving facility - for which there are obligors in Belgium, Denmark, England, Germany, Hong Kong, Malta, Netherlands, Norway, Panama, Singapore, Switzerland, UAE and USA.
The Borrowers in the U.S. proceedings are challenging the validity of security over certain receivables in relation to the USD700m 2013 Facility as a preference. For further information relating to the Chapter 11 proceedings please see the following court documents:
O.W. Bunker US debtors’ Chapter 11 declaration and first day pleadings (dated 13 November 2014)
O.W. Bunker US debtors' motion (dated 14 November 2014) seeking a court order directing that all customer payments be made into a segregated DIP account.
ING N.V.’s objection (dated 18 November 2014) to the O.W. Bunker US debtors' motion dated 14 November 2014.
O.W. Bunker US debtors' complaint dated 25 November 2014 seeking inter alia to avoid as preferences ING Bank N.V.’s liens related to the 2013 credit facility.
Notice of deadlines (dated 14 November 2014) for filing claims against O.W. Bunker Holding North America Inc. (the deadline being 16 March 2015).
If you have any queries in relation to the Chapter 11 proceedings, please contact Christopher Updike.
- AFREN PLC ("Afren"): In January 2015, Afren announced that it would defer for the 30-day grace period the USD15m interest payment of its 2016 bonds due on 1 February 2016. Following the announcement of the default, the shares of the oil and gas exploration and distribution company dropped to circa £0.03 (30 March 2015) from £1.66 (October 2013). In March 2015 Afren reached an agreement with its 2016, 2019, and 2020 bondholders and the majority of its USD300m facility lenders regarding its proposed interim funding and recapitalisation.
UK SUPREME COURT DECISION IN TAEL ONE PARTNERS v. MORGAN STANLEY & CO. INTERNATIONAL PLC 
PREMIUM – IN WHOSE INTEREST?
Click here for Judgment dated 11 March 2015.
On 18 March 2015 the Minister of Finance and Economic Affairs published a report on the progress of the plan for removal of capital controls. A translation of the report is available here.
- GLITNIR hf.: The next creditors' meeting is scheduled for Tuesday 8 September 2015, at 10:00 am at Hilton Reykjavík Nordica Hotel, Suðurlandsbraut 2, Reykjavik, Iceland. Creditors in the winding-up process of Glitnir hf. are entitled to attend the meeting.
- KAUPTHING hf.: The next creditors' meeting is scheduled for Wednesday 22 April 2015. Creditors in the winding-up process of Kaupthing hf. are entitled to attend the meeting.
On 3 March 2015 Refresco Gerber announced its intention to launch an Initial Public Offering and listing on Euronext Amsterdam. On 17 March 2015 the prospectus was published. Kaupthing hf. is one of Refresco Gerber‘s main shareholders. Click here for more information.
- LBI hf.: Following the creditors meeting held on 12 March 2015 LBI hf. published a news announcement highlighting the meeting’s key points.
- SPB hf. (formerly Icebank): The Winding-up Board of SPB has prepared a letter to all of the creditors of SPB regarding the forthcoming Creditors meeting and the latest update with regard to the AHC‘s reconciliation proposal. Creditors can access the letter on the creditors website.
- 1. ANGLO IRISH BANK UNSECURED CLAIM FILING DEADLINE: 31 MARCH 2015
Unsecured creditors of Anglo Irish Bank, now trading as IBRC (in Special Liquidation) (“IBRC”), are required to file their claims with Mr. Kieran Wallace and Mr. Eamonn Richardson, the Joint Special Liquidators for and on behalf of IBRC, on or before 10.30 am on 31 March 2015.
Following the successful sale of IBRC’s remaining residential mortgage portfolio, the Joint Special Liquidators have concluded that there will be a dividend payment to unsecured creditors. IBRC Hondholders who have not yet filed a claim must do so by 10.30 am on 31 March 2015 in order to participate in the dividend payable to unsecured creditors. Please click here for the relevant notice published by the Joint Special Liquidators. We are working, in conjunction with Irish counsel, on behalf of various creditors of IBRC. Should you have exposure to the above and require any assistance with filings please contact David Cottle or Jonathon Hamill.
- RIO FORTE INVESTMENTS S.A. (“Rio Forte”)
Following the declaration of Rio Forte’s bankruptcy on 3 December 2014, the current claim filing deadline of 31 March 2015 has been extended to 1 June 2015 (please click here for the official announcement). Although this remains a soft deadline, creditors are encouraged to file their claims by the date specified. If you have any query or require further assistance with filing claims, please contact Caroline Friederichs.
- CHASSIX HOLDINGS, INC. (“Chassix”)
On 12 March 2015, the privately held automotive supplier filed for Chapter 11 bankruptcy. Chassix announced its agreement with circa 80% of its unsecured bondholders and circa 71.5% of its secured bondholders, its existing sponsor, and its largest customers regarding the terms of its restructuring and recapitalisation, which includes a USD533m debt-for-equity swap. Chassix listed assets of USD833m and liabilities of USD784m. Chassix will receive USD100m in financing from existing bondholders and USD150m from PNC Bank. Chassix employs over 3,500 staff members across 26 locations.