Trade Alert - November 2016, Issue 35
The social democratic African National Congress (“ANC”) has been the governing political party in the Republic of South Africa (“RSA”) since Nelson Mandela was elected in 1994, in the first post-apartheid elections. On 29 November 2016, the Financial Times reported that the current President, Jacob Zuma, defeated a vote of no confidence by the ANC’s National Executive Committee following a presidency that has been plagued by scandal and alleged corruption.
RSA has an active term loan market in which major local and foreign banks, insurers, asset managers, pension funds and development finance institutions participate as lenders. Total bank loans and advances to the domestic private sector stood at R2,8 trillion (approximately USD 200 billion) in June 2016. According to analysis published by Thomson Reuters LPC as at October 2016 RSA had accounted for more than half of the loans completed in Africa in 2016, following the completion of a deal for EUR 3 billion-equivalent for Aspen Pharma, a USD 1 billion loan for Standard Bank and a USD 1 billion loan for MTN Group.
The Loan Market Association (“LMA”) is the trade body for the syndicated loan market in Europe, the Middle East and Africa. As such they publish recommended documentation, including South African Law governed investment grade facility documentation.
On 12 July 2016 the LMA held a South African Syndicated Loans conference in Johannesburg. The outcomes of the conference have been summarised in the LMA publication “Growing the syndicated loan market in Sub-Saharan Africa”, available to LMA members here, which concluded that the expected economic downturn will likely have the greater impact on RSA than other Sub-Saharan African regions due to its involvement in the global economy. The LMA notes that 50% of foreign direct investment into RSA comes from the UK. Furthermore, RSA is facing economic challenges, it has retained its investment grade status but with a negative outlook. The Sunday Times reported that Moody’s issued an updated credit opinion on 26 November 2016, warning that the negative outlook remained because of continuing political tensions and weak growth.
In this month’s Trade Alert we highlight some of the key considerations for loan investors in the RSA.
Foreign investors are not required to hold a banking licence to acquire the debt of an RSA borrower (whether fully funded or revolving), provided that no ‘deposits’ are held (as defined in the Banks Act 1990). The act of lending to or investing funds in a South African borrower does not, by itself, bring the lender or investor within the scope of the Banks Act 1990.
- if the foreign investor is a bank and conducts business in RSA on a regular basis, then it must register a representative office in RSA under the Banks Act 1990; and
- if the foreign or domestic lender enters into credit agreements with small corporate entities (that is, an entity with an asset value or annual turnover less than R1 million (c. USD 72,000)), it would have to be licenced as a credit provider in terms of the National Credit Act 2005.
EXCHANGE CONTROL APPROVAL WITH SOUTH AFRICAN RESERVE BANK (“SARB”)
RSA’s Exchange Control Regulations, which are administered by the SARB, control transactions between residents and non-residents.
Prior exchange control approval is required for any loan funding advanced by a non-resident lender to a South African borrower. The rate and terms at which interest may be paid by a South African borrower to a foreign lender must be approved either by the SARB or an authorised dealer at the time of introduction of the loan (an authorised dealer is a commercial bank authorised by the SARB to administer aspects of the Exchange Control Regulations).
Where a loan has been approved for exchange control purposes, any transfer between lenders must be approved by or notified to the SARB.
Additionally, RSA companies are generally not permitted to: (i) export capital from RSA; (ii) hold foreign currency in excess of certain limits; or (iii) incur indebtedness (for example, pursuant to a guarantee or derivative instrument) to a non-resident without the prior approval of the SARB or an authorised dealer.
METHODS OF LOAN TRANSFER
Loans are transferred by way of cession of the contractual rights and claims and delegation of any lender obligations and as such assignment is the preferred method of transfer in RSA.
Borrower consent to the transfer should be obtained:
- for transfers between lenders of a revolving facility; and
- where the transfer increases the number of lenders, because a transfer of a loan should not prejudice the borrower and it is more burdensome for the borrower to deal with and pay multiple lenders.
Such consent may be obtained in general terms as per the terms of the loan agreement.
In all other cases, it is recommended to notify the borrower of the transfer to ensure that the borrower discharges the debt to the correct party and the new lender can enforce directly against the borrower.
Transfers by novation have the effect of extinguishing the original obligations, therefore, (i) accessory obligations such as suretyships and security would be released; (ii) interest would cease to run; and (iii) any default of the debtor would be purged. Novation is therefore not the recommended form of transfer in RSA.
SECURITY AGENTS AND TRUSTS
Trust and agency constructions are not generally used in RSA.
This is due to the fact that trusts and trustees are subject to registration requirements under (i) the Trust Property Control Act 1984 and (ii) the Deeds Registries Act 1937, which prohibit the registration of a mortgage bond or notarial bond in favour of any person acting as the agent of a principal.
A security SPV structure, which is widely used in RSA provides the lenders with access to existing security through guarantees granted to them by the SPV company. However, if the SPV company became insolvent, the security would fall into the insolvent estate of that company. In order for lenders to protect themselves against this risk, it is common for the SPV to be a newly incorporated company which has no other business other than participating in the financing transaction, with applicable limits to its capacity in its constitutional documents.
TAX AND STAMP DUTY
Withholding tax: pursuant to the Income Tax Act 1962 (the “ITA”) interest payable by a South African debtor to a foreign lender is generally subject to a 15% withholding tax (unless the rate is reduced under a double tax treaty). Certain exemptions exist for (i) interest received by a foreign person from a ‘bank’ (as defined in the Banks Act 1990) and (ii) any debt instrument that is listed on a recognised exchange.
Dividends tax: pursuant to section 8F and 8FA of the ITA interest on hybrid debt instruments with equity like features is deemed to be a dividend in specie declared and paid by the company which incurred such interest. As such it may instead be subject to dividends tax at a rate of 15%, subject to certain exemptions and should be reviewed on a case by case basis.
Stamp Duty: no stamp duty is payable in RSA on the transfer of a loan.
Transfer tax: Securities Transfer Tax is only levied on the transfer of a “security” as defined in the Securities Transfer Tax Act 2007, which definition does not include a loan.
In relation to the transfer of any RSA land, transfer duty is levied at a progressive sliding scale under the Transfer Duty Act 1949 on the value of any “property”. The transfer of a loan does not fall within the definition of “property” and should accordingly not be subject to transfer duty.
Foreign lenders should also consider whether the proceeds from loan trading in South Africa will be subject to income or capital gains tax, to be assessed on a case by case basis.
Perfection: mortgage bonds (regarding immovable property) special and general notarial bonds and long-term lease agreements (greater than 10 years) are required to be in a specific format and registered in the relevant deeds office having jurisdiction over the property. Finance documents, such as loan agreements and pledge agreements, are not generally notarised.
KEY POINTS FOR TRADERS
Registration with SARB may be required on any transfer of a loan facility between foreign investors. Loan trades should be by assignment, as novation releases accessory obligations and security. The debtor should be notified of any transfer to ensure that the borrower discharges the debt to the correct party. Withholding tax of 15% or income tax may apply unless a double tax treaty reduces the rate.
Special thanks to Johan Loubser, Magda Snyckers, Olwethu Gusha and Paul Harker from the ENSafrica law firm who assisted with this Trade Alert.
UNDERSTANDING THE ISDA MARGIN PROTOCOL: CHOICES AND TRADE-OFFS FOR BUY-SIDE PARTICIPANTS
Margin regulations for OTC derivatives will start coming into effect for buy-side market participants in March 2017. These regulations have been adopted by regulators in the United States, the European Union, Japan and Canada, with others expected to follow soon. Each set of regulations has its own scope and requirements. Dealers have begun asking counterparties to sign-up compliant documentation, which will have significant legal, operational and economic consequences. Market participants need to start preparing now, and cannot afford to wait and see if the new Trump administration and Republican congress may change things.
On 3 November 2016, Cadwalader attorneys who represented the International Swaps and Derivatives Association, Inc. ("ISDA") in the development of industry-standard documentation, gave a webinar addressing issues of particular interest to buy-side market participants.
IMPACT OF A TRUMP ADMINISTRATION
Participants in the bank loan market, along with the rest of the world, will be closely following continuing guidance from the incoming Trump Administration on a wide variety of fronts.
On the regulatory side, the extent to which President-elect Trump will seek to modify or undo key components of US regulation, including Dodd-Frank, could have a significant impact on the origination and trading activity of banks. Although the general consensus seems to be that the regulatory environment may be more favourable to banks going forward than in the previous eight years, the interplay between Congress and the Republican administration in the context of an election season where Wall Street was condemned by politicians on the right and the left remains to be seen.
The approach of the new administration to the economy generally could have significant impact on the bank loan fundamentals. US stocks have already seen some clear winners (banks, defense, pharma) and losers (REITs, tech), the effects of which may impact bank loan pricing. We have also seen increasing interest rates in anticipation of fiscal stimulus, which should have an impact on bank loan origination and pricing.
The bank loan market is living in a different world than it was in at the beginning of November, and we will all be waiting to see what this new world brings.
For further information, please contact:
Bloomberg has further reported that Donald Trump’s financial policy team is working on crafting measures that would dismantle the Dodd-Frank legislation and replace it with new policies that encourage economic growth and job creation, according to a statement on the transition team’s website. Please click here for further information on the potential impact of the Trump Presidency.
It was disappointing news for certain creditors of Fomento Construcciones y Contratas (“FCC”) challenging the Spanish homologacion and the decision to apply a 15% haircut on the holders of the Term Loan B as part of the Company’s court-supervised restructuring. The Spanish judgment handed down on 29 November 2016 dismissed their claims and ruled that the homologacion will extend the terms of the restructuring agreement to the holdout group. The Spanish ruling is definitive and cannot be appealed. For full Spanish judgment please click here.
- NOVO BANCO
Novo Banco announced that it has launched and priced Lusitano SME No. 3, it is Novo Banco’s third securitisation transaction of credit rights in relation to SME Receivables. Deutsche Bank AG, London Branch and J.P. Morgan Securities plc acted as Joint Arrangers and Joint Lead Managers. NOVO BANCO, S.A. successfully placed the entire amount of EUR 385.6 million of the Class A Notes with institutional investors. The transaction was approved by the Portuguese Securities Market Commission and settlement was due to occur as of 22 November 2016. Please click here for the official Novo Banco announcement.
Shareholders of Spain's indebted energy giant Abengoa on Tuesday 22 November 2016 approved a rescue plan designed to save the renewables specialist from bankruptcy.
The deal, agreed in August 2016, has already received the backing of a majority of Abengoa's creditors and of the commercial court in Seville where the company is based. The official announcement of the shareholder approval can be found here. Abengoa is still however, working towards fulfilling the numerous pre-conditions for its workout plan to be implemented.
The world player in solar and wind power, biofuels and water management announced last year that it was filing for preliminary protection from creditors following years of unsustainable expansion worldwide. In addition to the debt deal, it launched a recovery plan that includes the sale of biofuels assets and other non-strategic holdings, as well as job cuts, the Business Standard reports that it has already shed at least 11,000 jobs since the end of last year. Abengoa’s activity continued to be strongly conditioned by restrictions on liquidity, which caused a general slowdown in business development. Reuters reported that the company has recorded negative EUR 90 million EBITDA with a gross debt of above EUR 9 billion in the first nine months of the year.
- SOUTH AFRICAN AIRLINES
Reuters reported on 22 November 2016 that the South African government has engaged Bain & Co as professional advisers in respect of the country’s three loss-making state-run airlines, South African Airways, South African Express and Mango Airlines. The state is exploring options to minimise losses, including a potential merger or a sale of a minority stake in the airline companies. To date, South African Airlines has been supported by state debt guarantees worth approximately R20bn (USD 1.4 bn), with the company reporting a R1.5bn loss for the 2015/2016 financial year.
Ratings Agencies, including Moody’s, Fitch and S&P have expressed concerns that the state-backed airlines are a drain on already limited public finances which could ultimately have an impact on the overall sovereign credit rating for the country. S&P Global Ratings is due to deliver a revised assessment on South Africa’s rating on 2 December 2016 and is the final ratings agency to provide the revised assessment, with Moody’s and Fitch retaining Baa2 negative and BBB- negative in 2016, respectively.
- KAUPTHING EHF
Kaupthing held a Shareholders’ Meeting on 23 November 2016 in which Mr. Piergiorgio Lo Greco and Mr. Benedikt Gíslason were elected to the board of directors. The Board of Directors of Kaupthing ehf now has the following members: Mr. Alan J. Carr who is the chairman, Mr. Paul Copley who is also the Chief Executive Officer, Mr. Benedikt Gíslason, Mr. Piergiorgio Lo Greco and Mr. Óttar Pálsson.
In addition, Kaupthing published its Management Accounts for Q3 2016 which are available for review here.
- LBI EHF
The Board of Directors held an extraordinary general meeting on 28 November 2016 to discuss various matters including the indemnification of advisory service providers to the company.
In addition, a meeting of the Bondholders was held to discuss and vote on a proposed Extraordinary Resolution relating to amendments to be made to the Terms and Conditions of the Bonds, in order to facilitate certain payments to Bondholders. The proposed amendments include changes to the definition of “Payment Date” in Condition 2.1 of the Bonds and would permit the Issuer to make payments of principal on the Bonds to the Bondholders on 15 June and 15 December of each year until the final maturity date. Other proposed amendments relate to (i) the Currency Conversion Date for unscheduled payments to be six Business Days prior to payment and (ii) changes of the date upon which the Issuer is to notify Bondholders of the cash available to make the payment of principal to nine Business Days before the unscheduled payment of the Bonds.
LBI’s Management Accounts have been published for Q3 2016 and are available for review here.
LSTA – REVISED DOCUMENTATION
On 7 November 2016, the LSTA published its new form of Par Trade Confirmation as a result of the recent changes to the Standard Terms and Conditions for Par/Near Par trades in relation to delayed settlement compensation.
Other LSTA precedents have been updated simply to reflect the republishing date and no other substantive changes have been made to the LSTA suite of secondary trading documents.
The revised documents are available for LSTA members to view here.
For more information on the revised delayed compensation regime, please click here for the series of FAQs written in response to a number of questions received from members. The LSTA also hosted a webinar on 20th October 2016 explaining the new regime in detail and a replay of that webinar is available by clicking here. The slides are available by clicking here.