Trade Alert - June 2016, Issue 30
Poland is currently embroiled in a constitutional crisis which has been on-going since late 2015, following the election of Law and Justice. Foreign governments, including the U.S. and the European Commission, have expressed concerns about Poland’s on-going political instability. The European Commission stated that actions taken by Law and Justice are incompatible with the requirements of the rule of law and after months of dialogue with no resolution, on 1 June 2016 issued an unprecedented Rule of Law Opinion officially requesting that the government take steps to resolve these issues.
The deterioration of Poland's relationship with its key economic and financial partners has impacted the country’s investment outlook. In January 2016, Standard and Poor's cut Poland's foreign currency rating to BBB+ with a negative outlook, this was followed by Moody’s changing the outlook from stable to negative (ratings affirmed at (P)A2) in May 2016. The Financial Times reports that this has resulted in investors scaling back their exposure to Poland.
In order to fund certain social spending commitments made during its election campaign in February 2016, Law and Justice introduced a levy on the assets of certain banks and insurance companies at a rate of 0.44 per cent annually. A move which the European Central Bank warned may have negative consequences for financial stability and the provision of credit.
EFFECT OF BREXIT ON POLAND
Bloomberg reports that, while the United Kingdom’s (UK) referendum result caused Poland to cancel a debt auction for the first time in a year due to bond yields soaring, the nation’s borrowing costs have since fallen to the lowest levels in more than a month.
Whilst investors remain cautious due to concern over possible disruptions in EU aid, demand for higher-yielding assets has increased.
BANKING LICENCE REQUIREMENTS
A banking license is required to lend to a Polish borrower where there is an on-going obligation to lend (e.g. a revolving credit facility). The acquisition of a loan without assuming any obligations towards the borrower (e.g. a fully funded term loan) is not subject to any banking licence requirements.
Interest paid on loans to a non-resident entity is subject to withholding tax of 20%, unless this is reduced pursuant to a relevant double tax treaty.
Under Polish law the purchase of receivables is generally subject to a stamp duty (podatek od czynności cywilnoprawnych) in the amount of 1% of the market value of the transferred receivables.
TRUSTS, SECURITY AND SECURITY TRUSTEE
Polish law does not recognise the concept of a trust.
The following options are commonly used in relation to securing syndicated loans in Poland:
(i) a Polish law mortgage or registered pledge may be granted in favour of a mortgage administrator (administrator hipoteki) or pledge administrator (administrator zastawu), respectively, to secure claims of all lenders;
(ii) the lenders and the borrower may agree to a joint creditorship (solidarność wierzycieli) whereby the borrowers obligations to all lenders can be discharged by payment to one lender on behalf of all lenders; or
(iii) it has become common practice to use a foreign law governed parallel debt structure in cross-border financing transactions involving Polish obligors.
TRANSFERABILITY OF LOANS AND METHODS OF TRANSFER
Assignment is the recommended method of transfer of a loan in Poland.
(i) Subject to the requirements of the credit agreement, Assignment of rights (without obligations) should not require borrower consent. However, notification is recommended to ensure that the borrower cannot validly discharge its obligations by payment to the assignor; or
(ii) Assignment of rights and assumption of obligations must be effected by way of written agreement. Borrower consent is required in respect of an assignment and assumption.
It is not market practice to effect a transfer of a loan by way of novation (odnowienie) in Poland, as this would extinguish any security or guarantee relating to the transferred amount.
If the underlying loan being transferred is secured by Polish law governed mortgages over real estate, the assignment agreement must be notarized.
In addition, if the security package includes Polish law governed mortgages over real estate or registered pledges, the transfer should be registered with the relevant public registries.
Notarization is also recommended where any insolvency proceedings have been initiated against an obligor.
DISCLOSURE OF INFORMATION
Under the Polish Banking Law of 29 August 1997, information contained in the credit agreement is subject to banking secrecy. A Polish bank must obtain the prior written consent of the debtor in relation to the disclosure of any data protected by the banking secrecy rules in order to effect the transfer of a loan. Certain exceptions may apply, in particular in relation to the transfer of non-performing loans
Special thanks to Dr. Sławomir Morawski and Klaudyna Lichnowska at Noerr in Poland who assisted us with this Trade Alert.
On 29 June 2016, Glitnir ehf effected an Optional Redemption of the Notes (in part) by payment in cash in an amount of EUR 26,930,784. The aggregate principal amount of the Notes outstanding (following the Optional Redemption Payment) is EUR 870,318,019. Noteholders who wish to confirm the principal amount outstanding in respect of their holding of Notes can do so through the secured website.
Certain of Glitnir ehf’s Noteholders are incurring banking cost for each payment under the Notes, which is higher than the actual payment. Therefore, on 20 June 2016 Glitnir ehf announced that Noteholders will have the option of deferring any receipt of payments under the Notes until a later date, using the Form provided on the website.
LBI ehf has issued a Final Payment Notice in respect of a partial redemption payment of the Bonds which will be made on 30 June 2016. The Euro Equivalent Available Cash Payment of EUR 43,555,738 will be made to the Euro account of the Bondholders noted on the Register as at 30 June 2016.
A breakdown of the currencies included assets from which the Euro Equivalent Available Cash will derive can be found here. The aggregate principal amount of the Bonds which will be outstanding immediately following the Payment is EUR 1,981,326,462.
The Day After Brexit? - Presentation
On 23 June 2016, the United Kingdom voted to leave the European Union (EU) by a majority of 51.9% to 48.1% (“Brexit”). This was a referendum vote without immediate legal effect, although of obvious political significance.
Following the announcement of the referendum results David Cameron said he would resign as Prime Minister. He stated that there will be a period of transition and a new Conservative Party leader (and therefore Prime Minister) should be in office by the Conservative Party Conference in October 2016.
ARTICLE 50 OF THE TREATY ON EUROPEAN UNION
The next step will be for the United Kingdom to issue notice to the EU under Article 50 of the Treaty on European Union (also known as the “Lisbon Treaty”), that the UK has decided to withdraw from the EU. It is currently under debate whether the government requires a Parliamentary vote supporting Brexit, before such a notice could be issued.
There would then be a period of two years from the service of notice for the UK to negotiate its withdrawal from the EU. If no agreement is concluded within the two year period the UK’s membership would end automatically, unless the European Council, in agreement with the UK, unanimously decides to extend this period.
Withdrawal from the EU should be distinguished from the issue of negotiating a new alternative relationship: the one does not pre-suppose the other. Both EU and UK leaders have spoken in support of the general idea of a continuing relationship, but its content will be controversial.
NO IMMEDIATE EFFECT
There will be no immediate change to the legal framework in the UK.
As noted above, there is a formal two year negotiation process and EU law will remain in force in the UK until that has been concluded. Further, the time period does not commence until notice has been served, and there is a likelihood of delay in the service of a formal notice by the UK. It is not only the identification of a new Prime Minister which may delay that service, but also the possible need for Parliamentary consent, and the wish to make progress as to the basic terms of a future replacement relationship, before notice is served. For the moment EU leaders have expressed themselves unwilling to open informal discussions on that matter before notice is served. The situation remains therefore fluid.
For further enquiries regarding Brexit please contact:
+32 (0)2 891 81 81
EUROPEAN SECONDARY LOAN MARKET CONSIDERATIONS
Please see below for an overview of some of the issue that may arise following Brexit.
- ‘A trade is a trade’ – Pursuant to the Standard Terms and Conditions for Par and Distressed Trade Transactions (the “Standard Terms”) published by the Loan Market Association (“LMA”) a binding contract comes into effect upon the oral, or in the absence of such oral agreement, written agreement on the terms of the trade. There is no conditionality within the Standard Terms which would allow a party to an LMA trade to terminate as a result of Brexit.
- The Single Market Passporting Regime - Where an entity is authorised by the Prudential Regulatory Authority ("PRA") in the UK, and it is able to lend into other EEA member states on a cross border basis in reliance on the passporting regime afforded by the Capital Requirements Directive ("CRD IV"), that entity is potentially impacted by Brexit. UK authorised firms with a CRD IV branch passport, which are able to establish a branch in another EEA state without separate authorisation in that state, may also be impacted by Brexit as regards to these passport rights.
Where an entity is passporting from another EEA member state into other member states, it should not be impacted by Brexit, as regards its non-UK activities. Since it is authorised in another EEA state, it will be able to continue to rely on CRD IV passport rights when conducting lending activity in other EEA member states, whether or not the UK remains in the EU/EEA.
- Withholding Tax – The UK has negotiated applicable Double Taxation Treaties directly with counterparty territories and Brexit is unlikely to affect the validity of these treaties.
INDUSTRY RESPONSES TO BREXIT
Both the LMA and the International Swaps and Derivatives Association, Inc. (“ISDA”) have published statements on the UK vote to leave the European Union. ISDA have stated that it is “working with members to ensure the derivatives market is able to continue functioning safely and efficiently” and both industry bodies have stressed that the vote to leave the EU will not have an immediate impact on the legal certainty of contracts.
For further enquiries regarding the impact of Brexit on Secondary Loan Trading please contact:
+44 207 170 8678