Trade Alert - February 2017, Issue 38



Ireland finished as the number one EU country for distressed loan sales for a fourth year running in 2016 according to the European Distressed Debt Real Estate Market Report compiled by advisory firm Evercore and as cited by 4-traders. For the third year in a row, Cerberus was the most prolific purchaser, snapping up assets from NAMA (Ireland’s asset management agency), Ulster Bank and Permanent TSB. It is estimated that around EUR 12.1 billion Irish loans were sold over the course of 2016, which accounts for approximately a quarter of the European total of EUR 49.9 billion of distressed debt sales. Loan sales by Dutch-based lenders amounted to EUR 10.4 billion last year, with Italy in third position, at EUR 9.9 billion, followed by Spain, at EUR 9.2 billion. Cerberus’s EUR 9.35 billion of European loan purchases included its EUR 2.9 billion acquisition of Permanent TSB’s remaining UK mortgage book, and a NAMA portfolio referred to as Project Gem, which was reported to have a par value of about EUR 2.7 billion.


As the EU member state with the closest cultural, social and economic ties to the UK, Ireland is consistently referenced as one of the lead potential jurisdictions for UK firms seeking to retain a footprint in the EU post-Brexit. Dublin can stress the similarities to English law and regulation as a key selling point, particularly in the financial services and foreign direct investment sectors.

This month’s trade alert considers some of the key legal issues for loan investors in Ireland.


Credit servicing is now a regulated activity in Ireland. Purchasers of loan portfolios may have to appoint a regulated 'credit servicing firm' to undertake credit servicing activities on their behalf. A new Central Credit Register (the “Register”) will be operational in Ireland on a phased basis from mid-2017 onwards as described here. The reporting obligations of the Register relating to loan performance will also extend to those entities that purchase loan books from Irish financial institutions.

A banking license is not required in Ireland for lending to corporates unless the lender accept deposits or other repayable funds from the public. Commercial lending (i.e. lending to corporates) is generally an unregulated activity in Ireland, although lending to natural person 'consumers' may trigger a financial services authorization requirement (for example, as a retail credit firm).


The normal method of transferring loans is contractual assignment or novation. Participation agreements can also be used in Ireland.

Notification to the borrower is necessary to perfect the assignment of the legal interest in a loan and notification will be required in any enforcement proceedings against the borrower taken directly by the assignee. In practice, it is normally prudent to notify borrowers and guarantors and may be a regulatory requirement under the Central Bank of Ireland's (the "CBI") codes of practice when the loan was originated by a regulated financial service provider.

A loan originated by a regulated financial service provider and secured by a mortgage of residential property may require written borrower consent (normally this is provided for in the lender’s standard loan documents). Loans originated by unregulated entities may be transferred without consent if the loan agreement so permits.

Generally liabilities under a contract (i.e. the obligation to provide future credit in a revolving credit facility) should be transferred by novation. If a revolving credit facility will involve the on-going provision of credit to a consumer, there may be a requirement to be authorised as a regulated financial service provider (e.g. a retail credit firm).


Trusts and agency concepts are recognised in Ireland. Where a new lender wants to take the benefit of existing security, e.g. under a bilateral loan, and assuming the assignment (or novation) is correctly structured, the security should transfer on assignment and the new lender will be assigned the benefit of the relevant security documents. Certain formalities should be completed to ensure that public records (for example companies registration office or Land Registry register of charges) are updated – it is important that these formalities are completed prior to any enforcement action. In order to mitigate risk in an insolvency situation of a security agent, it would be normal to hold the security on trust so that any security held by the security agent will not form part of the agent's estate in the event of their insolvency.


Irish withholding tax applies at the standard rate of tax (currently 20%) on payments of Irish source yearly interest (e.g. payable by an Irish resident borrower) which are made by a company to Irish resident persons, and by any person to non-Irish resident persons. Domestic Irish legislation does however provide for a very broad range of exemptions from the withholding tax including: (a) interest paid by an Irish company to an Irish authorized credit institution/EEA authorized credit institution providing its commitment through an Irish branch, (b) interest paid to a company which is resident for tax purposes in an EU member state / jurisdiction with which Ireland has a double tax treaty, (c) interest which is paid by an Irish securitization vehicle (a "Section 110 company") to a person who is resident for tax purposes in an EU member state / jurisdiction with which Ireland has a double tax treaty, provided the interest is not payable in connection with an Irish branch or agency of the lender, (d) interest which is paid by an Irish company to a US incorporated company that is subject to US tax on its worldwide income provided that interest is not payable in connection with an Irish branch or agency of the US lender, and (e) interest which is paid to a Section 110 company.

Withholding tax of 15% must be deducted by a purchaser from sale proceeds arising on the sale of certain assets (Irish land, Irish mineral or certain exploration rights, or shares which derive the greater part of their value from land / Irish minerals or certain exploration rights). No withholding is required where the consideration is EUR 500,000 or less, or EUR 1 million in the case of a residential house or apartment, or where the vendor/receiver produces a tax clearance certificate.


In general loans are novated rather than assigned. No charge to Irish stamp duty arises on a novation as it does not constitute a conveyance or transfer, and so does not fall within the charge to Irish stamp duty. Where a novation is not possible, the transfer of a debt of a corporate borrower will be exempt from Irish stamp duty under the "loan capital" exemption where the loan:

  1. is not convertible into stocks or marketable securities (other than loan capital) of an Irish registered company or into loan capital having such a right;
  2. does not carry rights that generally attach to shares (for example, voting rights, rights to distributions of profits);
  3. is issued for not less than 90% of its nominal value; and
  4. is not linked to any share or marketable security indices.In addition, the transfer of a loan should also be exempt from Irish stamp duty under the "debt factoring" exemption where the debt is transferred in the ordinary course of business of the vendor or the purchaser and the transfer does not relate to Irish land or stocks or marketable securities of an Irish registered company (other than an Irish Section 110 company or an Irish authorized fund) (e.g. the transfer is not made in return for shares).
  5. The transfer of a loan secured on Irish real estate should also be exempt from stamp duty (in respect of agreements executed on or after 7 December 2006).


Notwithstanding the preference for novations of loans, where assignments are used to effect the transfer of a loan they are perfected by notifying the debtor in writing.

Where there is a guarantee in place it is prudent to notify guarantors and there may be a regulatory requirement when the loan was originated by a regulated financial service provider.

Special Note

With special thanks to Garry Ferguson, Eoin O’Connor and Jonathan Sheehan from the Dublin office of the Walkers law firm, who assisted us with this Trade Alert.



The Financial Times reported on 20 February 2017 that Lone Star is in concluding rounds of negotiations to acquire approximately 65% of Novo Banco, the “good bank” salvaged from the downfall of  Banco Espirito Santo (“BES”). Lone Star is understood to be proposing to invest EUR 1 billion into Novo Banco via a capital increase. The agreement is expected to require EU approval however, in order for the Portuguese bank resolution fund to retain an approximately 25% stake, and local investors to hold the remaining 10%.


Abengoa S.A. on 14 February 2017 issued a notice to holders of notes whereby along with some of its main creditors and investors, it has developed a proposal for the adjustment of the drawdown mechanism of new money financing. This drawdown proposal will require certain amendments to the Term Sheet, the Restructuring Steps Plan, the Restructuring Agreement and the New Money Financing Commitment Letter. This proposal will need to be passed by the majority participating creditors in order to approve such amendments. The notice can be accessed in full on the website of the London Stock Exchange.


Hellenic Shipping News reported on 21 February 2017 that bondholders of Hanjin Shipping Co., that was declared bankrupt last week, are feared to face up to USD 1.05 billion in losses. According to the report, the state-run Korea Development Bank, other state-run debt guarantee agencies, and retail investors are feared to shoulder up to 1.2 trillion won worth of losses, they said. Hanjin Shipping was pronounced dead by a Seoul court Friday 17 February 2017, ending its 40-year run. Earlier this month, the court said that it decided to end the debt rehabilitation scheme for the shipping line as most of Hanjin’s key assets had been sold. Hanjin Shipping, previously the nation’s largest shipping firm and the world’s seventh largest, was put under court receivership in September last year, as its creditors, led by the KDB, rejected its self-rescue plan.


On 1 March 2016 the Supreme Judicial Council in Saudi Arabia issued an order establishing a three-judge Tribunal called the Joint Directorate of Enforcement at the General Court in Al-Khobar ("JDEK"). The JDEK comprises the two enforcement judges and the head of the General Court in Al-Khobar and is the authority addressing the claims of financial institutions against AHAB.

Judgments have recently been made by JDEK that suggest that creditors must obtain and file an acceptable judgment in support of their claim. The nuanced requirements creditors must meet to ensure that their claims will be admitted by JDEK are still evolving, but investors should carefully due diligence any claim and negotiate specific representations with respect to its validity.

For further information on the process, trading AHAB claims or the review of clams documentation, please contact Shelley Kay or Janaki Tampi.


Rory O’Connor Associate +44 207 170 8563



The Financial Times reported on 16 February 2017 that there will be record sales of non-performing loans Europe during 2017 with a greater sense of urgency amongst policymakers driving the increased activity. The FT, citing analysis carried out by Deloitte, estimates that as much as EUR 200 billion of debt could be sold during 2017, a figure that is almost double last year’s total figure of just over EUR 100 billion of sales.

The article points out that Europe’s banking sector is weighed down by more than EUR 1 trillion of toxic loans, which it has been unable to shrug off since the eurozone crisis. Last year the issue came into focus as the European Central Bank said it was stepping up measures that would encourage banks to resolve their NPL issues. Italy is expected to play a big role in loan sales. Of deals that were on-going at the end of 2016, EUR 40 billion were in Italy. Banks have NPL and non-performing exposure targets in Italy, Greece and other countries, and are determined to hit them.


The Italian Chamber of Deputies has approved a EUR 20 billion fund to safeguard the country’s ailing banks. The government unveiled the project in December and the parliamentary approval means that funds can now be released to a sector weighed down by 350 billion euros of bad loans, a third of the euro zone's total. The first bank likely to benefit will be Monte dei Paschi.

Fabrizio Viola, the CEO of Popolare di Vicenza, was quoted by Reuters as saying the state is also expected to step in to help both his own lender and the neighbouring Veneto Banca. The two Veneto-based regional banks are planning to merge.


Reuters reported on 14 February 2017 that troubled Italian bank Italian bank Monte dei Paschi di Siena (“MPS”), which is currently being bailed out by the Italian government, has booked a net loss of EUR 3.38 billion for 2016. The bank had the worst performance in Europe in stress tests of last summer. The bank said its CET 1 ratio, a barometer of financial strength, stood at a low 8% at the end of December after it was unable to raise money from private investors to plug a capital shortfall. Highlighting the funding challenges faced by the bank, it said direct funding had fallen by EUR 14.7 billion at the end of December from a year earlier. The government is expected to take a 70% stake in the bank, pumping in EUR 6.6 billion to address an EUR 8.8 billion capital deficit. The remainder of the money will come from the forced conversion of subordinated bonds into shares. The above described state aid scheme still needs to be approved by the European Commission however, which must also approve the bank's yet-to-be-presented restructuring plan. Sources say this process is likely to take until May at the earliest. MPS shares meanwhile, owned by around 150,000 people, have been suspended from trading until more clarity emerges over the state rescue plan.


On 15 February 2017 Reuters reported that investors are increasingly assessing the volatile secondary loan prices of companies in sectors that are subject to increasing technological disruption such as textbook publishers, specialty retailers and oil and gas companies, i.e. sectors that face long-term change and challenges. By way of example, secondary prices of textbook retailers, such as Cengage Learning, fell to 92-95% of par value in early 2017 as their industry faces increased competition from non-traditional sources such as ebooks, rental and used markets.

Furthermore there has been a steep fall in prices associated with specialty retailers such as department chain Neiman Marcus (80% of face value) and women’s wear retailer Ascena Retail, which are both competing against the increasingly popular internet shopping model.

Such fluctuations in secondary pricing show no sign of abating for companies readjusting in line with advances in technology. A number of oil and gas companies are still trading at stressed and distressed levels after the sector was impacted by increased supply from fracking technology and low oil prices two years ago.

Valuations of technologically challenged companies are playing out in the secondary market as companies with covenant light loans are generally unable to increase pricing on existing primary loans or refinance. Potential buyers and sellers are haggling over secondary market valuations as investors consider whether to ride out the volatility or to reduce positions while hedge funds and asset managers circle.

Retail remains the most depressed sector in credit, according to S&P constituting 18.6% of distressed companies.

Oil and gas companies have had longer to adapt to their new reality and are not suffering to the same degree as the retail sector. The sector has a distress ratio of 12.2%, according to S&P, and 22 impaired companies. Few sectors have to adapt to the degree that traditional media outlets have had to change their strategy. Tribune Media refinanced USD 1.76 billion of term loans in January and paid down USD 400 million of the roughly USD 500 million non-extended term loans in February.


The Cadwalader debt trading team are attending the LMA & LSTA Secondary Market Seminar on 9 March 2017. Items on the agenda include an LSTA update on Delayed Settlement Compensation; Promoting Efficient Practices and the US and European Secondary Markets in 2017. This event is open to LMA & LSTA members only. Click here if you would like to meet with us.



Redemption of Notes (in part) in cash on 9 March 2017 and Moratorium on Transfers

Glitnir will make payments to registered Noteholders on the Optional Redemption Date (9 March 2017) in accordance with Condition 4.1 (b) of the terms and conditions of the Amortising Zero-Coupon Convertible Notes of Glitnir HoldCo ehf. Further information about the Optional Redemption can be found here.

No transfers may be requested from 22 February 2917 until and including 9 March 2017 due to the optional redemption.


LBI requested a permission from the Central Bank of Iceland to move all ISK belonging to individuals to an unrestricted cash account in the name of LBI for the benefit of such individuals. This request has been approved and the respective balances have hence been moved to this account. LBI furthermore intends to carry out FX conversions based on recently adopted amendments to the Act No. 87/1992 on Currency Matters which came into effect on 1 January 2017, and thus sell ISK and buy EUR for and on behalf of all relevant individuals.


On 14 February 2017 Kaupthing published its Management Accounts for the year 2016 (updated valuations not included).

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

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