Trade Alert - March 2016, Issue 27
Singapore is a Commonwealth nation and has a common law legal system based upon English law and practice. Founded in 1819 by Sir Stamford Raffles, the island was developed into a British trading post on the shipping route between Europe and the Far East.
Since self-governance in 1959 and independence from Malaysia in 1965, the Republic of Singapore has developed its own legal system, establishing legislation and case law unique to its social and economic circumstances. For more information on Singapore’s legal system click here.
Bloomberg reported (here) on 22 February 2016 that, according to a local law firm, bad loans in Singapore rose to a 6 year high in 2015 and that “rising bond defaults will inflict as much pain on creditors as the financial crises of 2008 and 1998.”
According to Moody's Investors Service, Singapore banks are most exposed to mainland China within Asia-Pacific after Hong Kong. China’s economic slow-down and the ailing oil and gas industry has resulted in a rise in non-performing loans held by local banks. DBS Group Holdings Limited, one of Southeast Asia’s largest banks, reported that non-performing loans rose 8% to SGD2.61 bn in 2015 driven by a 62% increase in bad debts from general commerce (further information can be found in an article by Bloomberg).
Singapore lenders are also generally exposed to the shipping industry. OW Bunker & Trading A/S (“Bunker”) the global marine fuel company and second largest Danish IPO ever, filed for liquidation across multiple jurisdictions in November 2014, led in part by Bunker's Singaporean subsidiary Dynamic Oil Trading Singapore Pte. Ltd (“DOT”). DOT was alleged to have been involved in fraudulent bunker trading activity with certain Singaporean entities outside of the Bunker group (articles from Ship & Bunker here and here). We have advised investors in Bunker loan claims since its insolvency and it continues to be of interest to traders. Please contact David Cottle for further details on Bunker.
According to the Asia Pacific Loan Market Association (“APLMA”) news updates (available here), as at March 2016, Asia Pacific (excluding Japan) syndicated loan volume has reached circa. USD67bn and club loan volume has reached circa. USD17.9bn.
Similarly to the Loan Market Association (“LMA”), one of the APLMA’s primary mandates is to create a set of standardised documentation for syndicated loan transactions (both primary and secondary) to be used in these markets. The APLMA adopted the LMA documentation with certain minor modifications. These documents have become market standard across Asia.
Whilst these documents remain substantially based on the LMA documentation, the APLMA has also produced standard templates to cater to the different jurisdictions, including the APLMA single currency term and revolving facility agreement governed by Singaporean law.
In this month’s Trade Alert, we highlight the key legal issues for debt investors to consider when trading in the Republic of Singapore.
BANKING LICENCE REQUIREMENTS
A loan made to a Singaporean corporation, in and of itself, does not require a banking licence.
Pursuant to the Singaporean Moneylenders Act (Chapter 188 of Singapore, Revised Edition 2010), there is an express exclusion of the requirement to hold a banking licence for any person who lends money solely to corporations.
TRANSFERABILITY OF LOANS AND METHODS OF TRANSFER
In the absence of specific provisions in the loan agreement, the main methods of loan transfer, similarly to transfers pursuant to the laws of England and Wales include: (i) assignment (ii) novation and (iii) participations.
A transfer by novation extinguishes all rights and obligations of an existing lender and substitutes them with new rights and obligations of the new lender. If the documentation permits it, this method of loan transfer may involve a transfer certificate that is signed by the facility agent, the existing lender and the new lender.
A transfer by assignment transfers the rights (but not obligations) of an existing lender (including the right to receive interest and the right to repayment) to the new lender.
A participation occurs where the existing lender remains lender of record. No actual loan transfer takes place. However, the lender (the “lead lender”) procures the participation of other lenders to share in the risks and profits of the loan.
Generally, there are no post-transfer formalities for a loan agreement. However, where secured loans are transferred, and depending on the method of transfer, there may be a need to vary the particulars of any charge created against the property of a Singaporean company that has been registered with the Accounting and Corporate Regulatory Authority (“ACRA”), the companies registry in Singapore, as required under the Singaporean Companies Act. In some cases, for example, where the agent does not hold the security on behalf of the lenders, new security may need to be taken. In such a case, the Singaporean Companies Act generally requires that prescribed particulars of a charge created against the property of a Singaporean company be registered with ACRA within 30 days of its date of creation. Failure to comply with this requirement may render the charge void against the liquidator of the Singaporean company and any creditor of the company.
Pursuant to the Singaporean Income Tax Act (Chapter 134 of Singapore, Revised Edition 2014), withholding tax at 15% applies to interest paid to a non-resident. However the rate may be reduced if (i) there is a double taxation agreement between Singapore and the relevant country or (ii) a relevant exemption applies.
There is usually no stamp duty payable on loan transfers (except where certain security is taken over assets in Singapore). Furthermore, no capital gains tax/stamp duty will be payable on the transfer or amendment of a loan.
TRUSTS, SECURITY AND SECURITY TRUSTEE
Singapore recognises the role of an agent and trustee as long as the trust complies with the relevant creation formalities. A security agent or trustee will therefore be able to hold the security on trust on behalf of lenders.
CLAIMS IN SINGAPORE LIQUIDATIONS
Where a Singaporean company is wound up, subject to certain exceptions, secured creditors may realise their security to obtain satisfaction of their debt. If the amount recovered from the realisation of the security is inadequate, these creditors may prove as unsecured creditors for the balance. If the company has any assets following the enforcement of security held by secured creditors, the remainder assets will generally be distributed in the statutory order of priority.
For transfers of secured loans, where it is necessary for security to be created afresh or new security to be taken, the relevant registration requirements under the Singaporean Companies Act must be complied with (see “Post-Transfer Formalities” above). In addition, other registration requirements may also apply to security created over specific asset classes (e.g. land in Singapore and vessels registered with the Singapore Registry of Ships).
ICELANDIC BANK UPDATE
Glitnir Holdco ehf.
On 16 March 2016 Glitnir Holdco ehf. (“Glitnir”) announced that it will effect a second optional redemption of notes in cash on 12 April 2016. Glitnir estimate that the Euro Equivalent Redemption Funds to be distributed will be EUR35,500,000. Glitnir will provide a further notification on 8 April 2016 at which point it will confirm the amount of Euro Equivalent Available Optional Redemption Funds which will be used to redeem the notes in cash and the aggregate principal amount of the notes that will be outstanding immediately following 12 April 2016.
Temporary Halt on Transfers
Due to the Optional Redemption on 12 April 2016, a temporary halt on transfers of notes has been put in place from 28 March 2016 until, and including, 12 April 2016.
Financial Statements for 2015
The Board of Glitnir have published the audited Financial Statements for the year 2015, which can be accessed here.
On 16 March 2016 Kaupthing ehf. (“Kaupthing”) held a shareholders meeting. Only shareholders, their proxies, and advisors were allowed to attend the shareholders meeting. Further details of the meeting are available to shareholders on the Kaupthing secure website accessible here.
Annual General Meeting
The Annual General Meeting of LBI hf. (“LBI”) will be held at Hilton Reykjavík Nordica, Suðurlandsbraut 2, Reykjavík on 14 April 2016. Further details on the meeting agenda can be found here.
Bond Issuance and Delivery of Shares
On 23 March 2016 LBI issued bonds and delivered shares in accordance with its composition agreement. The aggregate amount of bonds issued was EUR2,041,382,201 and each creditor’s entitlement is determined by the composition agreement. A full list of the respective entitlement of each creditor can be found on the LBI secured website accessible here.
Claim Transfer Closed
The Winding-Up Board of LBI ceased to recognise the transfer of claims from 14 March 2016. The Transfer Register will not be updated for any claim transfer that has not received a Notice of Successful Transfer by 14 March 2016.
Spanish Trading Risk
1. Abengoa S.A. (“Abengoa”)
On 28 March 2016, Abengoa and 71 subsidiaries (the “Subsidiaries”) filed an application with the Mercantile Court of Seville (no. 2) in Spain (the “Court”) for the approval of a seven month standstill agreement with financial creditors (the “Standstill Agreement”).
Under Spanish insolvency law, any workout with a stay not exceeding five years requires 60% of unsecured financial claims to agree to its terms. Once it has received the approval of the Court, the terms of the Standstill Agreement will then extend by law to all of Abengoa’s unsecured financial creditors.
A statement released on Abengoa’s website (found here) on 28 March 2016, declared that currently 75.04% of its financial creditors are supporting the Standstill Agreement. Abengoa would then have a seven month period in which to implement its restructuring plan via a new homologacion proceeding, which has been likened to an English law scheme of arrangement. However, it should be noted that the Standstill Agreement does not prevent suppliers of Abengoa or its Subsidiaries from filing for involuntary insolvency.
In parallel with the homologacion proceedings in Spain, a number of Abengoa’s US affiliates have filed for Chapter 11 bankruptcy protection in the United States. At the time of writing, no deadlines have currently been set for filing claims against such entities. Acquirers should consider the status of all relevant Abengoa obligor entities under the loan or bond documentation to ensure they receive all rights in connection with the applicable proceedings.
Please contact Adam Colman for further details on Abengoa.
2. Spanish Trading Risks
The current interest by investors in Spanish credits such as Abengoa S.A., Fomento de Construcciones y Contratas, S.A. and Marme Inversiones 2007 S.L. highlights the need for participants in the secondary market to protect their position when purchasing loans involving Spanish obligors. The general representations which are made under the LMA standard terms for secondary debt trading are drafted from an English law perspective. Traders may wish to agree additional representations to mitigate against the specific risks under Spanish law of:
- equitable subordination – where, amongst other things, debt may be subordinated in insolvency if a holder (or a previous holder) of that debt is deemed to be an ‘especially related party’ to the borrower. Especially related persons being shareholders exceeding the relevant thresholds (5% in respect of issuers of listed securities and 10% in respect of non-listed issuers of securities) and persons especially related to those shareholders when such shareholders are individuals;
- credits in litigation – where debt of a ‘contentious’ nature (e.g. if the existence of such debt is the subject of a declaratory proceeding between a holder (or a previous holder) and the borrower) gives rise to the right of the borrower to interpose itself as purchaser and acquire such debt at the price paid in the secondary market transaction between the holder and the original purchaser; and
- losing the vote in an insolvency scenario – an important amendment to Spanish insolvency law was enacted in September 2014. Prior to this date, purchasers of insolvency claims that were not subject to financial supervision would not be entitled to the benefit of voting rights in the insolvency proceedings.
Provided the transferee acquires a claim of an entity that filed post the reform, any investor in insolvency claims will be able to exercise voting rights as if it was a pre-insolvency transferee (provided it is not subordinated or a specially related person). However, care should be taken when acquiring claims in insolvencies which pre-date the 2014 enactment, as the requirement to be subject to financial supervision when voting may still apply.
- The Argentine Republic Debt Restructuring
The Argentine president agreed to a circa. USD 3bn cash payment to creditors who, following Argentina’s 2001 default, did not agree to restructure the debt. The payout will be funded by the issuance of circa. USD 12.5bn of new bonds (with further issuances to be expected).
- Novo Banco S.A. (“Novo Banco”)
On 2 March 2016, the International Swaps and Derivatives Association’s (“ISDA”) Credit Derivatives Determinations Committee decided, following the awaited release of Novo Banco's unaudited year-end financial information for 2015, 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 to Banco Espirito Santo S.A. on 29 December 2015 does not amount to a “Succession Event” - because the portion of “Relevant Obligations” transferred was less than 25% of the “Relevant Obligations” of Novo Banco.
This follows the ISDA external review panel decision on 15 February 2016 that the action by Bank of Portugal did not amount to a “Governmental Intervention” Credit Event.
ITALY: NPL Transactions
As reported last month, following the publication of Law Decree No 18 of 14 February 2016 (the “Law Decree”), Alternative Investment Funds established in the EU (other than Italy) (“EU AIFs”) investing in credit (including loans) will be able to lend directly to Italian borrowers (excluding consumers) once the decree is enacted. EU AIFs will be required to give 60 days’ notice to the Bank of Italy of their intention to commence lending activities. Provided that no communication is received from the Bank of Italy to the contrary, EU AIFs will be allowed to commence lending activities in Italy.
Implementing regulations are required from the Bank of Italy to enact the decree (the timing of which is unclear).
Banco Popolare di Bari (“BPB”)
It has been reported by Debtwire that Italian Bank BPB will be selling a circa. EUR800m portfolio of non-performing loans (“NPLs”). BPB intends to use the state guarantee mechanism, which was introduced following the implementation of the Law Decree.