Trade Alert - December 2016, Issue 36



Monte dei Paschi di Siena (“Monte Paschi”) founded in 1472 and said to be the oldest bank in the world is, at the time of publication, in a race against the clock to raise EUR 5 billion in capital by the end of December to avoid either a state bail-out or potentially being wound down by the European Central Bank (“ECB”).

Monte Paschi’s plan (otherwise known as its liability management exercise (“LME”)) essentially consists of three parts: (i) to transfer EUR 28.5 billion of non-performing loans from its balance sheet, (ii) conduct a debt-for-equity swap and (iii) issue new shares.

The share issue received stock market (CONSOB) approval to be offered to retail investors on 16 December 2016 and was launched on Monday 19 December 2016. 35% of the share capital increase is reserved for the Italian general public and 65% for qualified investors.

On Wednesday 21 December 2016, shares were down 17% to EUR 15.47, the lowest since they began trading in 1999 and trading was suspended and it was reported that the bank’s EUR10.6 billion liquidity may run out at a faster pace than previously forecast (by April 2017) if a recapitalisation process does not take place.

Qatar’s sovereign wealth fund, which had considered an investment, has not committed yet to buying shares.

The Italian prime minister, Paolo Gentiloni, has pledged government intervention in the market using Italy’s banking recovery resolution rules, including bail-in mechanics, if necessary. Monte Paschi may be the first to benefit from the extra EUR 20 billion state funds approved by parliament this week if its private re-capitalisation proves unsuccessful.

The Bank of Italy has wide ranging tools available to implement bail-in measures under the EU Bank Recovery and Resolution Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 (“BRRD”). If government funds are used in Monte Paschi’s recapitalisation, it is possible that bondholders may suffer losses. If assets are split between a "good bank" and a "bad bank" as part of a Monte Paschi rescue plan, complex issues may arise as we saw in Banco Espirto Santo and Novo Banco as to what assets are transferable and who is liable to bear losses.

Click here for our memo on Bank Resolutions: “Put your trust in God, but keep your powder dry”.

As reported by the Financial Times, these events are set within the wider context of Italian public debt standing at 130% of GDP and political instability following Matteo Renzi’s resignation on 5 December 2016. Of the EUR 360 billion Italian impaired loans, around EUR 197 billion are non-performing sofferenze (the worst variety of NPL). Other local banks also facing difficulty are Banca Carige Spa, Banca Popolare di Vicenza and Veneto Banca SpA.

For further information on the BRRD or investing in Italian debt or claims please contact:

Steven Baker, Partner, Litigation: advises on all types of finance and business disputes, including complex investment and securitisation arrangements. Currently acting in litigation arising from the collapse of Banco Espirito Santo and the movement of assets to and from Novo Banco’s balance sheet in which the validity and effect under the BRRD of certain measures passed by Banco de Portugal is being considered.

Louisa Watt, Partner, Loan Portfolios and Debt and Claims Trading: advised bondholder claimants in the failed Icelandic banks; Glitnir hf, Kaupthing hf and Landsbanki, creditors of the Lehman Brothers Group, Banco Espirito Santo and Rioforte bondholders, Bank of Cyprus deposit holders, counterparties of HETA Asset Resolution AG and MFGlobal creditors.

Assia Damianova, Special Counsel, Capital Markets: advises counterparties on derivatives, repurchase and other debt trades and derivative claims, including restructuring events and the implications of asset transfers under the BRRD for CDS counterparties. Click here for our memo: Bank Resolutions – Trust the Regulators, but Keep Your Powder Dry

As distressed investors focus on Italy, we set out some of the key legal considerations when trading in Italian originated debt.


Foreign investors are required to hold a banking licence in Italy and this requirement applies equally to the acquisition of term loans, revolving credit facilities and the acquisition of claims.

Pursuant to Legislative Decree no. 385 of 15 September 1993 (as amended, the “Italian Banking Act”) extending credit (including making loans, purchasing receivables and issuing guarantees) in Italy is a restricted activity which can only be carried out by:

  • domestic Italian financial institutions;
  • foreign financial institutions licensed by the Bank of Italy or pursuant to EU legislation (i.e. those with an EU passport); or
  • financial intermediaries licensed under article 106 of the Italian Banking Act.

Historically, lending by non-bank entities was by way of "non-transparent Italian Bank Lender of Record" structures under which an Italian bank lends directly to the Italian borrower and unlicensed participants provide cash-collateralised guarantees to the bank or, alternatively, by way of "transparent Italian Bank Lender of Record" structures under which participants are generally subject to withholding tax, unless grossed-up by the Borrower.

In addition, non-bank investors have historically entered into indirect arrangements or participations to achieve exposure to Italian borrowers without the need to obtain a banking licence in Italy.  However, an LMA Participation is not a panacea, and risk remains of regulatory and tax authority “look-through”.

More recently, Italian legislation has been making Italy’s credit market more accessible. Legislative Decree no. 18 of 14 February 2016 made clear that EU Alternative Investment Funds (“EU AIFs”) are able to lend directly to businesses where the EU AIF is authorised to lend by its home member state and is a closed-ended fund with similar operating rules to Italian AIFs.

Such EU AIFs are subject to the same provisions of the Italian Banking Act relating to transparency and administrative sanctions. Legislative Decree No. 18 is expected to be implemented by regulations from the Bank of Italy in the coming months which should clarify the equivalence assessment between EU and Italian AIFs and set out the required authorisation procedure. EU AIFs cannot act as direct lenders until these regulations are in place.


Withholding tax: Interest paid by an Italian resident corporate borrower to a non-resident lender is subject to 26% withholding tax, unless it is reduced under an applicable double taxation treaty.

Interest paid by Italian borrowers qualifying as commercial entities (imprese) are exempt from withholding tax, when paid in connection with mid to long term loans (i.e. exceeding 18 months) granted by entities authorised to pursue lending activities in Italy, such as banks established in an EU Member State or institutional investors set up in a “white listed” country.

No Italian withholding applies to the repatriation of capital under a guarantee or the enforcement of a security.

Stamp Duty: A registration tax may arise at a rate of 0.5% of the transferred receivable when the transfer is entered into in Italy.

Substitute Tax: Mid to long term loans (i.e. exceeding 18 months) may be subject to a substitute tax at a rate of 0.25%.  Application of the substitute tax replaces all other indirect taxes (such as registration, mortgage, stamp duty or cadastral taxes) where parties to the transaction elect to do so. However, there are certain conditions which must be fulfilled before the parties can elect to apply the substitute tax, such as the loan is signed and executed in Italy and the lender is an Italian resident bank, an Italian permanent establishment of a non-resident bank or a bank established in another EU Member State.

If no substitute tax applies, the transfer of a mortgage would trigger mortgage tax at a rate of 0.5% rate of the secured amount.


Assignment is the preferred method of loan transfer in Italy.

Generally, if the loan agreement being transferred is governed by Italian law:

  • in case of a revolving credit facility or transfer of a term loan not disbursed in full, the borrower should provide consent to an assignment (assignment of contract). The consent may already be granted by a specific provision of the credit agreement but the position should be reviewed on a case by case basis; and
  • in case of a transfer of a fully funded term loan, no consent is required but the borrower and guarantor (if applicable) should be notified of the transfer (assignment of receivables).

Participation agreements are used in Italy and are often governed by English law, but as noted above they may be considered a “look through” for regulatory and tax purposes.

Transfer of Security: Pursuant to article 1263 of the Italian Civil Code, the assignment of contract or the assignment of receivables automatically entails the transfer to the assignee of the security and guarantees originally granted with respect to the assigned claim. Therefore, in the case of a syndicated facility, the new lender would automatically benefit from the Italian law security package granted to the original lenders.

However, it is advisable, and market practice in Italy, to enter into deeds of acknowledgement (bearing the certified date at law) to confirm the security interest following the syndication.  There may also be further perfection formalities in respect of a transfer of a participation under the facility, to be assessed on a case by case basis.


Trusts are not expressly recognised under Italian law. However a trust constituted under the laws of a foreign jurisdiction are recognised in Italy in accordance with the HCCH Convention on the Law Applicable to Trusts and on their Recognition 1985.

The agency concept is recognised under Italian law. 

Italian law governed loans commonly use a collateral agent as mandatario con rappresentanza (a special attorney) who exercises the rights on behalf of the lenders under the loan and security documents. A separate security agent can enforce the rights on behalf of the lenders, although the security itself is granted directly to the lenders.

Enforcement of security may be subject to possible additional formalities (for example, a notarised and apostilled power of attorney) depending on the collateral supplied.

Insolvency of a security agent should not affect access to any security package, as the security in granted in favour of the lenders directly.


Where loan documentation is governed by Italian law, the notice of transfer to the borrower must bear a certified date. This can be obtained by way of notice through a court bailiff or through a certified email. In addition, certain security documents must be notarised, to be assessed on a case by case basis depending on the relevant collateral to the security.


A banking licence is required for any lending and financing activity in Italy. Transfers should be by assignment and interest payments to a non-resident lender may be subject to 26% withholding tax rate. LMA Participations may be viewed as a “look-through” by the Italian authorities for tax and regulatory purposes. In addition to the above, there may be equitable subordination risk which should be assessed on a case-by-case basis.


ICELAND - Click here for Issue 25

CAYMAN ISLANDS - Click here for Issue 26

SINGAPORE - Click here for Issue 27

UKRAINE - Click here for Issue 28

CZECH REPUBLIC - Click here for Issue 29

POLAND - Click here for Issue 30

REPUBLIC OF AUSTRIA - Click here for Issue 31

PORTUGAL - Click here for Issue 32

REPUBLIC OF INDIA - Click here for Issue 33

BRAZIL - Click here for Issue 34

SOUTH AFRICA - Click here for Issue 35


Trading Transactions













On 21 December 2016, the European Court of Justice (“ECJ”) handed down its judgment on “mortgage floors” in favour of Spanish mortgage customers against several Spanish credit institutions,  including Banco Popular Espanol SA and Banco Bilbao Vizcaya Agentaria SA whose shares fell as much at 10.5%.

The ECJ ruled that borrowers who paid too much interest on their home loans are entitled to full refunds from their banks.  The ruling, which has full retroactive effect, confirmed that applying a time limit to the right to repayment unfairly deprives Spanish customers of the right to seek repayment of what was overpaid to the consortium of banks, due to unfair mortgage terms which prevented borrowing costs from falling in line with EURIBOR benchmark rates.

Banco Bilbao Vizcaya Agentaria SA previously estimated that the maximum impact from a negative ruling could be around EUR 1.2 billion with CaixaBank SA estimating around EUR 1.25 billion in repayments to homeowners.

Please click here to review the Judgment of the Court (Grand Chamber).


The UAE government has laid down a new restructuring and insolvency framework under the recently drafted Federal Decree Law No. 9 of 2016 on Bankruptcy (the “New Law”) which is due to come into force and effect on 29 December 2016.

The New Law, repealing the current regime under the Commercial Code (Federal Law No. 18 of 1993), applies more widely than the Commercial Code and should provide investors with greater comfort to operate in a historically challenging region compared to other developed jurisdictions.  The New Law, amongst other things: (i) applies to a wider range of companies, not just “commercial traders”; (ii) establishes a “Financial Restructuring Committee” under the authority of the Minister of Finance; (iii) provides for a new balance sheet insolvency test, in addition to the current “cash flow test”, in the event that the debtor’s assets are insufficient to cover its current liabilities and; (iv) introduces a requirement that creditors must hold debts of at least AED 100,000 and notify the debtor in writing to discharge the debts within 30 business days before filing for insolvency proceedings.



On 12 December 2016, the Financial Times reported that Unicredit confirmed the sale of Pioneer Investments to Amundi for EUR 3.54 billion, contributing to its plans for capital consolidation.


An Extraordinary General Meeting of SoLocal Group’s (“SoLocal”) shareholders met on 15 December 2016 and approved the resolutions required for the updated restructuring plan, as put forward by the Company. Creditors of SoLocal had approved the restructuring plan on 30 November 2016.

As the final approval for the restructuring was granted, SoLocal made submissions before the Commercial Court of Nanterre on 16 December 2016 with regard to an amendment for the plan de sauvegarde financière accélérée in which the Company is engaged. The ad hoc group of creditors (including Amber Capital UK Holdings Ltd, Monarch Alternative Capital (Europe) Ltd and Paulson & Co, Inc) have signalled that they have obtained a derogation from the French to launch a takeover bid where there is acquisition of control of 30% of SoLocal’s capital after the planned rights issue (which is scheduled to complete in Q1 2017).


On 14 December 2016, Judge Carey of the US Bankruptcy for the District of Delaware issued his opinion approving the Chapter 11 plan put forward by Abeinsa Holdings, the lead debtor.


In the on-going auction for Novo Banco, Lone Star has noted that they shall withdraw from the process if no decision is made by the Portuguese authorities on the sale by 4 January 2017. Lone Star’s offer currently values Novo Banco at EUR 750 million.


The financial restructuring agreement for Camaieu group’s EUR 1 billion of debt, which received unanimous backing from creditors under the conciliation process and was homologated by the Commercial Court in Lille in November, was completed on 20 December 2016. It was reported that the bulk of the group’s loans would be equitised, with the exception of the first lien debt, which will remain in place as reinstated debt and no new money was injected into the Company.  Private equity house Cinven, which purchased a 64.5% stake in Camaieu in 2007, retains a majority equity stake in the business following the restructuring. 


On 14 December 2016, the Monetary Policy Committee (the “MPC”) decided to lower the interest rates of the Central Bank of Iceland by 0.25%. The MPC’s decision to lower interest rates is due to the country’s strong year in terms of economic stability, the appreciation of the Króna and GDP growth, which was higher than expected following the Central Bank’s forecasts last year.

However, uncertainty remains in Iceland about the fiscal stance of the government following recent election results in October in which the “Pirate Party” tripled its seats in the 63-seat Parliament. The president of Iceland, Guðni Th. Jóhannesson, subsequently invited the Pirate Party to enter into talks to find a working majority government in the Alþingi, Iceland's Parliament, after negotiations with other parties had failed.

  1. LBI EHF

Following the meeting of 81.12% of LBI’s Bondholders, held on 28 November 2016 in Iceland, the proposal to change the semi-annual scheduled principal payment dates to 15 June and 15 December was approved.

Accordingly on 15 December 2016, LBI ehf made a Scheduled Payment of EUR 238,538,233 to Bondholders noted on the Global Register pursuant to Condition 9(c) of the Terms and Conditions of the Notes.

Following the payment, the aggregate principal amount of Convertible Bonds outstanding is now EUR 1,322,272,575. Further information can be found on LBI’s website.


Glitnir held an Extraordinary General Meeting on 19 December 2016 in Iceland where 99.63% of Shareholders who attended the meeting voted in favour of and passed a resolution regarding the settlement with the former Winding-up Board of Glitnir Holdco ehf. in relation to an Indemnity Fund which was established in September 2015. The meeting was attended by creditors representing 67.32% of Glitnir’s share capital.

In addition, new Articles of Association were presented to Shareholders following the approval of the changes made to Articles 25.1, 25.5, 27 and 48 in the Extraordinary General Meeting held in August this year.

Copies of the various documents in relation to the above can be found on Glitnir’s secured website in the Post Composition section.

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ACI Summit on Controlled Substances: Regulation, Litigation and Enforcement

Jodi Avergun is speaking at this ACI event on January 30 in Washington, DC.

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