Trade Alert - May 2017, Issue 41


After nearly 25 years avoiding recession, economists are currently revisiting their first-quarter growth forecasts with volatility and underperformance in retail, construction, property and mining causing concern for the future health of the economy.

In the wake of such uncertainty, Australia is seen as an attractive market for distressed investors.


May has been a busy month for the Australian financial sector.

In the budget handed down on 9 May 2017, Treasurer Scott Morrison announced AUD75bn of investment in major infrastructure projects over the next ten years, with the aim of encouraging the economy’s next growth phase following the downturn in the mining industry. Click for Reuters article.

Australian bank stocks reacted negatively however on news of the Turnbull government’s plans to introduce a 0.06% levy from 1 July 2017 on banks with liabilities of AUD100bn (USD73.7bn) or more, impacting the five biggest Australian banks: Commonwealth Bank of Australia (“CBA”), Westpac Banking Corp (“Westpac”), ANZ Banking Group Ltd (“ANZ”), National Australia Bank Ltd (“NAB”) and Macquarie Group Ltd. Click for Reuters article.

The measure would reduce Australia’s largest banks’ funding costs advantages and create competition for the so called “BIG FOUR” (CBA, Westpac, ANZ and NAB) who collectively control 80% of Australia’s lending market. However, the tax has faced criticism from the affected lenders and The Guardian reports that Westpac wants the levy to apply to foreign banks as well. The final details of the levy are still emerging at the time of publication.

On 22 May 2017, S&P Global Ratings downgraded the credit rating of 23 financial institutions operating in Australia (excluding the five largest banks), citing an increased risk of a property market downturn. Click for Bloomberg article.

With traditional local lenders looking to reduce exposure to distressed sectors and facing increased regulatory requirements (including tighter controls from the Australian Prudential Regulation Authority) further opportunities for foreign banks and financial institutions are developing.

Global hedge funds and private-equity firms including Lone Star Funds, Oaktree Capital Management L.P. and Bain Capital Credit L.P. have already opened offices in Australia over the past few years and Värde Partners (which set up an office in Sydney in 2016) recently cited Australia as one of the top markets for distressed debt investment opportunities. Click here for the Bloomberg article.

With Bloomberg reporting that Goldman Sachs is seeking to double its spending on principal investments in Australia to AUD5bn, it looks like the country is set to continue to be a key focus for distressed investors.

This month’s trade alert sets out some of the key issues for investors to consider when acquiring loans made to Australian borrowers.


Australia has a federal system of government comprised of, three arms: the Parliament of Australia which consists of the Senate, the House of Representatives and the Queen of Australia (Elizabeth II) represented by the Governor-General of Australia (the legislative branch), the Australian Government (the executive branch) and the High Court of Australia and Federal Courts (the judicial branch). Each of Australia's six States and two Territories also have their own system of courts and governments. The laws of Australia are largely derived from the English common law system.


Australia is currently in the process of implementing large scale reforms to its personal and corporate insolvency legislation, which will have a significant impact on creditor rights.

The first wave of reforms were implemented on 1 March 2017 when the Insolvency Law Reform Act 2016 (Cth) (“ILRA”) came into force and a second wave of reforms under the ILRA will come into effect on 1 September 2017. The reforms under the ILRA predominantly relate to procedural aspects of the Australian insolvency regimes and are intended to streamline and promote the efficiency of the insolvency regimes as they currently operate.

In addition, more comprehensive amendments are planned for the next 12 months. The most significant of which are as follows:

  1. Company directors will be afforded a "safe harbour" defence from insolvent trading liability in circumstances where they were genuinely pursuing a restructuring (within guidelines) in the lead up to the company’s insolvency. Currently, Australian directors are personally liable for all debts incurred by the company at a time when it is insolvent and the key protection from this liability is to appoint voluntary administrators to the company; and
  2. Contract counterparties will be prohibited from enforcing "ipso facto" clauses in contracts with an insolvent corporate where that company is subject to certain types of formal insolvency processes. Currently, contract counterparties can terminate their contracts with insolvent corporates if the relevant contract contains a right to terminate upon the insolvency of the company.The reforms are intended to encourage a cultural shift around perceptions of insolvency and to encourage directors to engage with restructuring advisers at an early stage to promote a successful turnaround. 


A 10% withholding tax is ordinarily applicable on payments of interest to non-resident investors. This may be reduced in certain circumstances, including where (i) the investor is domiciled in a jurisdiction that has a double taxation treaty with Australia (and that treaty includes a relevant exemption/reduction) or (ii) where the facility was set up as a syndicated facility agreement with two or more lenders, was in excess of AUD100m at the time it was first entered into and the "public offer test" under s128F of the Income Tax Assessment Act 1936 (Cth) (requiring the loan to be offered to ten or more unrelated financiers) was satisfied at the time of the origination of the loan.

The proceeds of a claim under a guarantee or from enforcing security may be subject to 10% withholding tax on interest, to the extent that the proceeds are in the nature of interest or in substitution for interest.


Stamp duty laws in Australia vary between each State and Territory. Such laws may apply to an assignment or novation of a debt or interest in secured property where such debt is located in the relevant State or Territory. Therefore, the transfer of an unsecured loan may be subject to duty depending on the location of the debt. The transfer of a loan secured by real estate may also be subject to duty depending on the location of the debt and the real estate, but most jurisdictions offer an exemption or concession on the transfer of that interest.

In certain circumstances, depending on which State or territorial laws apply, structuring a transaction as a novation rather than an assignment may result in a more efficient tax treatment.  


Income tax may also apply in certain circumstances, including where the transferor has a "permanent establishment" in Australia.

Local counsel can advise on the direct and indirect taxation implications of a debt trade.


Certain types of entities, including authorised deposit-taking institutions in Australia such as banks, investment banks, branches of certain foreign banks, building societies and credit unions are required to hold an Australian Financial Services Licence (“AFSL”). These licence requirements typically do not apply to fund investors (domestic or otherwise).

Buying and selling loans in the secondary market is generally not regulated and investors are not typically required to hold an AFSL (subject to some limited exceptions, including where the relevant facility is structured as an issue of debentures).

However, investors may need to be registered with the Australian Prudential Regulation Authority, depending on the nature of their assets in Australia (as required under the Financial Sector (Collection of Data) Act 2001). Such registration is straightforward and would require an investor to provide certain details about its business and structure.

Notwithstanding the above, Australian facility agreements may require incoming financiers to be a "bank or financial institution" or to have a specified credit rating. Transfer restrictions such as these are a matter of interpretation under Australian law and local counsel can advise on transfer mechanics, including whether a fund investor should enter into a funded participation arrangement.


Assignment and novation are the common methods for transfer in Australia. These are equivalent concepts to those under English law. An assignment effects a transfer of rights only, and is ordinarily accompanied by an assumption of obligations. Whereas a novation effects a transfer of both rights and obligations.

A prescribed form of substitution certificate will typically be included in a syndicated facility agreement. It will usually contain provisions to effect a novation, including the releasing of the outgoing financier and the borrower of their obligations to each other under and in respect of the facility from the date of transfer. Notification to the borrower and any other obligor may also be required.

Where security is not held by a Security Trustee for the benefit of the lenders in the syndicate from time to time (e.g. in a bilateral loan arrangement) a novation may result in a release of any applicable guarantee and security. Accordingly, the new lender will need to ensure that it takes all necessary steps to ensure it obtains the benefit of any guarantee and security. A re-registration of any security following a novation (as opposed to a transfer of the existing registration) could reset applicable hardening periods, so it is imperative that steps are taken to ensure the new lender obtains the benefit of any guarantees and security.

Transfer by way of funded participation using either the LMA and LSTA standard forms is common in Australia. Lenders are rarely required to obtain borrower consent to enter into a sub-participation arrangement. However, occasionally the facility agreement will require the consent of, or notice to, the borrower before a sub-participation agreement can be entered into.


Australian law recognises the concept of a trust.

In syndicated facilities, generally a Facility Agent will act as agent for the syndicate and a Security Trustee will hold the securities granted by the borrower on behalf of and for the benefit of the lenders in the syndicate from time to time. Accordingly, in order to take the benefit of existing security an incoming lender should comply with the covenants in the finance documents, which typically include an accession to the security trust deed and any applicable intercreditor arrangements. No additional steps need to be taken to perfect the new lender’s rights to the security (other than a check of the Personal Property Securities Register (established under the Personal Property Securities Act 2009) (“PPSR”) to satisfy itself that the securities were duly registered at the time of creation).

In bilateral facilities, the security is ordinarily granted directly in favour of the lender. Accordingly any security must be transferred to the new lender by novation. The new lender would also need to ensure that all necessary steps are taken to perfect the security interest, including registration of its interest as secured party on the PPSR by either (i) transferring the registration from the existing financier into its name, or (ii) effecting a new registration in its name in respect of the securities, within 20 business days of the novation (section 588FL of the Corporations Act 2001 (Cth)).

The approval of the Foreign Investments Review Board may also be required in both syndicated or bilateral arrangements if an offshore lender will hold security over real estate and does not fall within the so-called "moneylenders exemption" under the Foreign Acquisitions and Takeovers Act 1975 (Cth).

Local counsel should be instructed to advise on the steps to effect a transfer of security.


Consideration may need to be given as to whether the loan being transferred constitutes a loan under a "debenture" for the purposes of the Corporations Act 2001 (Cth). If this is the case, the incoming financier should make an assessment as to whether the insider dealing provisions under the Corporations Act are applicable to it, having regard to its relationship with the borrower.

Special Note

With special thanks to Timothy Sackar and Ashleigh Kable from Clayton Utz in Sydney, Australia, who assisted us with this Trade Alert.



On 17 May 2017, the UK Supreme Court handed down a judgment regarding the Lehman “Waterfall I” application. The case concerned the distribution of a surplus of approximately GBP8bn currently held by the administrators of Lehman Brothers International (Europe) (“LBIE”). The Court held as follows:

    • the subordinated debt of Lehman’s immediate holding company, LB Holdings Intermediate 2 Ltd (“LBHI2”), should rank behind statutory interest and non-provable liabilities;
    • foreign currency creditors’ debts are to be converted into Sterling at the official rate on the administration date and creditors will not be entitled to recover any shortfall where sterling has depreciated in value between the administration date and the date on which the debt is paid;
    • a creditor who is entitled to statutory interest in the administration, but has not been paid, will not be entitled to claim such interest in a subsequent liquidation;
    • where a shareholder in an unlimited liability company has obligations to contribute sufficient funds to pay that company’s “debts and liabilities” in liquidation, non-provable debts will fall within the scope of such liabilities. However, such shareholders will not be required to make such a contributions in respect of statutory interest;
    • LBIE’s administrators were not able to prove for the prospective (contributory) liability of the shareholders of LBIE. This was on the basis that only a liquidator is entitled to call on contributories and that the nature of such liabilities (to contribute) is such that it should not be capable of being the subject matter of a proof unless the company concerned is in liquidation; and
    • whilst LBIE’s administrators are unable to prove for shareholders’ potential liability, they are able to invoke the “contributory rule” to prevent such shareholders from making any recovery from LBIE until they have discharged their contingent liability, as unlimited shareholders, to make a contribution.

The full decision is available here.



Optional Cash Redemption Notice – 1 June 2017 and Temporary halt of transfers from 17 May 2017 to 1 June 2017

Glitnir will effect an optional redemption by redeeming the Notes (in part) in cash on 1 June 2017. The estimated final amount used to redeem the Notes will be EUR20,822,430 The aggregate principal amount of the Notes immediately following the payment on will be EUR263,741,728.

Due to the optional redemption date, Glitnir has informed Noteholders that they may not require transfers from 17 May 2017 until, and including, 1 June 2017.

Noteholders who wish to confirm the outstanding principal balance in respect of their holding of the Notes can do so by logging in to the secured website.

Consolidated Interim Financial Statements Q1 2017

On 26 May 2017 the Board of Glitnir Holdco ehf. announced that is has published the Consolidated Interim Financial Statements for 1 January to 31 March 2017 on the secured website.

LBI ehf.

LBI loses its rescission case against LGT Bank Ltd.

On 11 May 2017, the Supreme Court of Iceland found against LBI in the rescission case against LGT Bank Ltd. The Court found that the payment appeared ordinary under the circumstances as the terms of the bonds stated that LBI could buy back securities without limitation, that LBI actually did so to a substantial degree between 2006 and 2008.

LBI has confirmed that it is reviewing the effects of Supreme‘ s Court ruling on remaining 18 voiding/bond buy-back cases.

LBI has settled outstanding disputes with Glitnir

On 12 May 2017 LBI announced that Glitnir HoldCo ehf. and LBI have signed a settlement agreement concerning a disputed guarantee granted by Glitnir to LBI in relation to a loan which LBI made to a company called Stytta ehf.

Pursuant to the settlement, Glitnir will accept LBI’s claim, as an unsecured claim pursuant to Article 113 of the Bankruptcy Act No. 21/1991, for the total amount of ISK13.5bn. Glitnir will also withdraw the claim lodged by Glitnir in the Winding-up procedure of LBI.


Cadwalader is a patron sponsor of this year’s 21st Annual Global ABS conference, which takes place from 6-8 June 2017, in Barcelona, Spain. Further information is provided below.



    ASX listed Australian law firm (ASX:SGH), with offices in the United Kingdom.

    The Financial Times reported in March that Westpac, NAB, RBS and Barclays took 70 – 80% losses on loans to the law firm, and the company's share price has consistently fallen since April 2015 following its acquisition of the legal division of UK insurance claim business Quindell. Over the past 6 months, a number of distressed debt investors acquired loans and are working with Moelis & Company to formalise a refinancing and recapitalisation plan for the group.

    Levered mining site trucking business with operations in Australia and Indonesia.

    Mining Monthly reported on 11 May 2017 that The Carlyle Group has acquired more debt of BIS Industries, that is owned by KKR & Co ahead of a potential debt-for-equity swap. The debt is reported to have changed hands from predominantly Australian domestic banks to international hedge funds over the past 6 months and the lender syndicate is working with advisers and stakeholders to agree the terms of a restructuring. 

    ASX listed provider of drilling services, drilling equipment and performance tooling (ASX:BLY).

    On 30 May 2017, following the decision of the NSW Court of Appeal to dismiss an action aimed at derailing the proceedings, the company agreed creditors' schemes of arrangement with over 75% of its secured creditors and its unsecured creditors. The broad effect of the schemes will be to extend the maturity dates for the group's debt arrangements, to amend the interest provisions across various debt arrangements in exchange for the issue of ordinary shares in Boart Longyear Limited to certain entities, and to swap a substantial portion (USD196mm) of the group's unsecured notes for ordinary shares in Boart Longyear Limited. 4-Traders reports key creditors under the scheme include Ares Management LP, Ascribe II Investments, LLC  and affiliates of Centerbridge Partners L.P..

    ASX listed mining equipment rental business (ASX:EHL).

    EMECO completed a significant recapitalisation and merger with Orionstone and Andy's Earthmovers on 31 March 2017. Emeco noteholders and creditors of Orionstone and Andy's exchanged a total of AUD586mm in claims for (i) new senior secured notes expiring in FY22 with a face value of AUD465mm and (ii) 967,000,000 Emeco shares representing 44% of Emeco's issued capital. The transaction also involved a AUD20mm rights issue and the replacement of Emeco's asset backed loan facility with a new AUD65mm revolving credit facility maturing March 2020.
    As the first real consolidation of its kind in the equipment leasing sector in recent years, there has been a lot of interest in the restructuring and the future of the business. There has also been some trading in the newly issued notes.

    Australian coal export terminal located in the Port of Gladstone in Queensland.

    The project is owned by 8 shippers, all of whom have signed up to various "take or pay" arrangements which broadly require them to pay for a specified amount of coal to be exported through the terminal (regardless of the amount that is actually processed). Three of the shippers have already been placed into voluntary administration (Bandanna Energy, Cockatoo Coal and Caledon Coal).

    Therefore, the market is now focused on the trading position of the terminal and its long term viability. With an estimated USD3.9bn in secured debt, the market is keen to understand how a restructuring might be implemented.



On 2 May 2017 Alitalia was placed into “amministrazione straordinaria” (extraordinary administration) in accordance with Decree Law 347 of 23 December 2003.

The Company’s state appointed receivers issued an official notice on 17 May 2017, calling for “expressions of interest” from prospective investors and potential bidders for the company. Eligible parties are invited to present proposals by 5 June 2017.


On 31 May 2017, Alitalia announced, as a consequence of its insolvency declared on 11 May 2017, that a “Relevant Event” has occurred in relation to its USD131,922,000 6.31% Notes due 28 September 2020 and the USD99,500,000 6.31% Notes due 1 June 2021, and an “Event of Default” has occurred in relation to the EUR375,000,000 5.20% Notes due 30 July 2020. Click for announcement.



Third party financing for litigation and arbitration is increasingly being recognised a valid method of funding cases across different jurisdictions. However, funding agreements may be rendered unenforceable in circumstances where the arrangements fall foul of local laws on maintenance and champerty and funders can in some circumstances be found jointly and severally liable for costs of the claim (see the UK Court of Appeal decision in Excalibur Ventures v. Texas Keystone and others [2016]). Some recent developments in this area include:

  • In a resolution of 21 February 2017, the Paris Bar Council (Conseil de l’Ordre) in France indicated that French law does not prohibit third-party funding of arbitration and confirmed that third-party funding is in the interests of both clients and counsel.
  • On 14 March 2017, the Dubai International Financial Centre Courts (“DIFC”) published Practice Direction No. 2 of 2017 setting out the requirements to be observed by “Funded Parties” in respect of their relationships with “Funders” concerning legal proceedings in the DIFC Courts.
  • In Singapore, under Section 5A of the Civil Law (Amendment) Act 2017, the tort of maintenance and champerty has been abolished altogether from 1 March 2017. The Amendment Act provides that third-party funding may only be provided by an entity which meets the criteria set out in The Civil Law (Third-Party Funding) Regulations 2017.
  • On 23 May 2017 the Irish Supreme Court found in Persona Digital Telephony Limited & Sigma Wireless Networks Limited v. The Minister for Public Enterprise, Ireland and the Attorney General [2017] that certain third party funding arrangements were contrary of the rules restricting maintenance and champerty. The full decision is available here.

For further information, please contact Louisa Watt.


Under Article 85(1) of the European Market Infrastructure Regulation No. 648/2012 (“EMIR”), the European Commission (the “Commission”) was mandated to review EMIR and to prepare a general report on its application.

On 4 May 2017, the Commission proposed a regulation amending EMIR. Key elements of the proposal include, among others:

  • definition of “financial counterparty” expanded to include all alternative investment funds, securitisation special purpose entities and EU-authorised central securities depositaries;
  • clearing thresholds for financial counterparties, designed to exclude small market players from the clearing obligation;
  • non-financial counterparties are only required to calculate the clearing threshold for the months March, April and May of a certain year;
  • removal of the frontloading requirement; and
  • amendment of the responsibility and liability for reporting to be less administratively burdensome on small market participants.

The Proposal is intended to recalibrate some of the EMIR obligations, most notably the clearing and the reporting obligations, for the benefit of smaller market participants. However, the Proposal treats unregulated funds and securitisation special purpose entities as financial counterparties which imposes significant additional burdens. The proposal is now subject to the European legislative process including approval by the Council and the European Parliament.

For further information please contact Assia Damianova.


Creditors of Agrokor d.d. are required to file claims before the deadline of 9 June 2017. The company recently published additional instructions on the claims filing requirements, which are available on the company’s website.

Individual and corporate Creditors (other than individuals or companies based in Croatia) wishing to file claims independently should be aware that the following information and documentation is required:

  • Croatian personal identification number (“Croatian PIN”) from the Croatian Tax Authority. The Croatian PIN will need to be cited in the claim form and the Power of Attorney (see below);
  • a completed Claim Form (in prescribed Claim Form 18);
  • a duly notarised and apostilled Power of Attorney granting a local law firm in Croatia the power to file the claim on behalf of the Creditor; and
  • all required evidential information necessary to support the claim (e.g. proof of holdings and evidence of ownership from the ultimate beneficial holder to the custodian, if applicable).

It should be noted that this list is not exhaustive and further documents may be required in order to file a valid claim in the proceedings.

Creditors wishing to file claims should be aware that the claim form will need to be filed in Croatian. In addition, many of the supporting documents listed above may need to be translated by an official court translator.

In view of the impending deadline, companies wishing to file independently should avoid any further delay in processing their claims.

On 30 May 2017, Agrokor delivered its monthly report on the Extraordinary Administration’s first month’s work. A copy of the report is available here.

If you require additional information in relation to Agrokor and the claims filing process in Croatia, or if you would like a copy of our Claims filing Q&A, please contact George Pelling.


The LMA has produced a confidentiality agreement and associated riders under South African law, for use in primary syndication. These documents are based on the English law "LMA Confidentiality and Front Running Letter for Primary Syndication". The South African User Guide has also been updated to provide further guidance on this document.

On the 25 May 2017, the LSTA issued “Exposure Drafts” of the (i) Par Confirm; (ii) Distressed Confirm; (iii) Purchase and Sale Agreement; (iv) Par Participation Agreement; (v) Distressed Participation Agreement; (vi) Proceeds Letter; (vii) Short Form Proceeds Letter; (viii) Collateral Annexes; and (ix) Alternative ERISA Representation. The documents have been updated so as to include new ERISA representations by both Seller and Buyer. The documents are due to be published in final form on 9 June 2017.


This year’s conference will dedicate a full day’s coverage to Europe’s non-performing loan sector. The ‘NPLs Fast Track’ takes place on 8 June 2017 and will feature a panel of expert speakers - including Cadwalader partner Louisa Watt - who will be discussing developments and investment opportunities within the European NPL market.

For further information, please email Michelle Da Costa.


Shelley Kay
Associate, London
+44 207 170 8664

Shelley Kay is an associate in the Financial Restructuring Group in Cadwalader's London office.

Shelley specialises in distressed debt and claims trading. She represents investment funds, brokerage firms, hedge funds and other financial institutions in connection with the acquisition and sale of syndicated bank loans, debt instruments, bond claims and distressed assets, in particular insolvency claims within Europe, the United States and Asia.

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