Trade Alert - August 2017, Issue 44



Online shopping and an evolving consumer basepresent significant challenges for the retail sector of the US economy, which has typically boasted strong returns and has been perceived as a safe investment. Established companies may not be able to continue in their present form, as brick-and-mortar stores like Pacific Sun, Payless, Rue 21, Gymboree, Aeropostale, Radio Shack and The Limited struggle to compete with newer rivals.

On 23 August 2017, Reuters reported that PetSmart and The Container Store (a storage supplies shop) have been added to the growing list of distressed retailers, joining nearly one-third of loans to US retailers that are now trading at distressed levels. Moody’s reports that the number of US retailers on the lowest and distressed tier of its rating spectrum has tripled and the percentage has not been so high since the 2008-09 financial crisis.

The US Federal Reserve’s policy on interest rates going "lower for longer" has (arguably) artificially extended the life of some companies with high cash flow needs by enabling them to borrow at low rates (so called ‘zombie’ companies). A number of these debt obligations are coming to maturity in the next few years; the Moody’s report tells us that USD 5 billion in debt is owed by 19 companies through 2021, with 40% of this number due by the end of 2018.

These problems can be juxtaposed with the continued growth of monsters in online shopping like Amazon, and the so called " fast-fashion" outlets like Primark, Zara and H&M.


The US update would not be complete without commentary on the administration of President Donald Trump. While President Trump’s now-infamous tweets related to public companies likely have little to no effect on their value, the President’s attitude towards sanctions will be of interest to secondary debt traders.

New US economic sanctions on dealings in Venezuelan debt have now been imposed by the White House. According to the Executive Order issued on 24 August 2017, the new restrictions are intended to "prevent U.S. persons from contributing to the Government of Venezuela's corrupt and shortsighted financing schemes while mitigating market disruptions and harm to investors". Among other things, the new sanctions ban dealings in certain types of new debt and equity, as well as bonds issued by the Government of Venezuela before the effective date of the sanctions. However, the Office of Foreign Assets Control, which administers and enforces U.S. economic sanctions, also issued a General License which permits dealings in certain specified Government of Venezuela bonds that might otherwise be prohibited. This year the Trump administration has also significantly increased sanctions against North Korea – including by targeting certain Chinese and Russian entities that do business with the regime in Pyongyang. In addition, President Trump has increased sanctions against Iran and Syria, while the US Congress has tightened restrictions on Russia. (These moves are in addition to broad restrictions on dealings with Crimea, Cuba, Iran, North Korea, Sudan and Syria, which were put in place by President Trump’s predecessors.)

Any buyer or seller, but particularly those in the US, should be actively diligencing their loan transfers and taking US sanctions rules into consideration. The onus to comply falls on the market participant; a US person must ensure any of its trades in the secondary market do not fall afoul of sanctions rules. All parties should be aware that transactions concluded after a sanctions effective date may be prohibited and could subject them to civil and criminal penalty.

President Trump’s ‘ unpredictable’ foreign policy requires structured finance market participants to keep a close watch on these updates. LSTA members can access guidelines titled "US Sanctions Issues in Lending Transactions" and "Anti-Corruption Issues in Lending Transactions" published 6 February 2017 on the LSTA website.


The Loan Syndications & Trading Association ("LSTA") provides the basis for secondary debt trading in the US, offering a full suite of standard documents and practice standards, much like the Loan Market Association in Europe. Members of the LSTA have access to all key documents, the most important of which include the Trade Confirmation and the Purchase and Sale Agreement in the distressed context. Traders will also use the Assignment Agreement which is generally pre-agreed in a form set out in the primary loan document.

The LSTA updated the suite of trading documents which apply to par and distressed secondary loan trading with effect from 9 June 2017. All transactions entered into on or after that date are subject to the updates. Key changes include the following:

  • Paid on Settlement Date – The previous convention of Paid on Settlement Date provided that any interest paid by the Borrower until the Settlement Date was for the benefit of the Seller, and any accrued but unpaid interest was paid from the Buyer to the Seller at the Settlement Date, with no right of clawback should the Borrower subsequently fail to pay at the next interest payment date. The Standard Terms and Conditions now set out that if the Borrower fails to pay, the Buyer can clawback any amount it paid to the Seller as the "Seller shall be required to promptly reimburse Buyer".
  • Non-Recurring Fees – The definition of "Non-Recurring Fees" in Trade Confirmations has been amended to also account for Non-Recurring Fees that are "payable" (rather than merely "paid") on or after the Trade Date.
  • Adequate Protection Payments – Under the Standard Terms and Conditions for Par transactions, the concept of Adequate Protection Payments is included with "Interest and Accruing Fees" (if applicable). An Adequate Protection Payment relates to a payment in connection with an Adequate Protection Order, which is defined as "any order of the relevant bankruptcy court authorizing or ordering Borrower or any Obligor(s) to make adequate protection payments to the Lenders". Under the LSTA documentation, the Seller is entitled to Adequate Protection Payments from the borrower in addition to the normal interest payments and fees until T+7 (with the possibility of extension to the Settlement Date under the Par trade Delayed Compensation rules).
  • Credit Documents - All previous references to "Credit Agreement" and "Credit Documents" have now been replaced with "Credit Documents" for consistency.
  • Federal Funds Rate - The definition of "Federal Funds Rate" has changed to reflect the modification to the Federal Reserve Bank of New York’s calculation process.
  • ERISA – The new US Department of Labor’s ERISA Fiduciary Regulation came into effect on 9 June 2017 which expands the definition of "fiduciary". This may have implications in the secondary market; according to the LSTA, "the new language is intended to cover an exception to the fiduciary rule known as the "transactions with independent fiduciaries with financial expertise" exception. Under this exception, entities that are one of the five listed in the new representations and that also meet the other requirements listed therein are not treated as providing "investment advice" and thus are outside this rule." 


A handful of States license commercial lenders, depending on the size and nature of the loans in question. U.S. banks are almost universally exempt from these State commercial loan licensing requirements. However, foreign banks and non-bank entities (including corporations and bank affiliates) are not exempt.

Whether a license is required depends on whether the loan has a nexus to the State in question, and whether the loan is of the type and amount that requires licensing. As a result, it is unclear whether a foreign investor would be required to hold a banking licence to acquire secondary debt in a U.S. borrower. Therefore, it is advisable that any banking license requirements are confirmed by legal counsel on a case-by-case basis.


Assignment is the key method of loan transfer in the United States for par and distressed loan sales and Participation Agreements are also used in situations where the assignee is not able to become a lender of record. The LSTA has a standard form of Participation Agreement for distressed and par trades.

The form of assignment agreement used for transfer is typically provided by the applicable credit agreement and for syndicated loans, submitted to the administrative agent for such credit facility. In addition, the LSTA has a form of Purchase and Sale Agreement which together with the assignment agreement is used for distressed trades. The Purchase and Sale Agreement provides more comprehensive representations and provisions, including a chain of title of loan holders, a "bad acts" representation and an indemnity than are included in the assignment agreement.

There are no legal requirements for borrower consent in a transfer other than as contractually agreed. Therefore, it is necessary to look to the terms of the applicable Credit Agreement to determine if the borrower/guarantors have to be notified and/or provide consent to transfer the loan in question. Typically if this right exists, it is only in favour of the borrower and not the guarantors and would be inapplicable after the occurrence of certain events of default.


The borrower may have consent rights if the loan is a revolving facility since the borrower is likely to be concerned with credit quality of the new lender who will acquire a continuing obligation to fund. In addition, agents and fronting banks often have consenting rights. Note that credit agreements are now including disqualified lists (i.e., lists of entities that cannot become assignees or participants) more frequently. 


It is common practice for an administrative or collateral agent to hold the security for a credit facility on trust on behalf of all secured lenders. When the assignment of a loan by an assignor to an assignee occurs, the assignment document would likely be drafted for the assignee to assume the assignor’s rights to the security. In addition, if the collateral agent was to enter into insolvency proceedings, the collateral generally should not become part of its insolvent estate because such collateral was held on trust for the lenders.

Guarantees often form part of a security package in the United States and are created by a contract signed by the guarantor and guarantee beneficiary, typically the lender or an agent acting on behalf of a group of lenders.


In the absence of a double tax treaty between the United States and the country of the foreign lender, the United States imposes a 30% withholding tax on U.S.-source interest paid to a non-U.S. holder if (1) the non-U.S. holder is a bank receiving interest on an extension of credit pursuant to a loan agreement entered into in the ordinary course of its trade or business, (2) the debt is bearer debt (i.e., debt that is not "registered" for tax purposes, in book entry form, or "immobilized"), (3) the interest is "contingent interest" (e.g., it is determined by reference to receipts, sales, income, profits, or other cash-flows of the issuer or a related person, any change in value of any property of the issuer or a related person, or any dividends, partnership distributions, or similar payments made by the issuer or a related person), or (4) the non-U.S. holder owns 10% or more of the issuer’s voting power or capital or profits interests (applying certain attribution rules). Withholding of the interest would be required by the issuer or a U.S. (or U.S. branch of a foreign) agent bank.

In addition, under FATCA, a 30% U.S. withholding tax is imposed on (1) U.S.-source interest paid to a "foreign financial institution" that does not enter into and comply with an information-sharing agreement with the Internal Revenue Service or comply with local law implemented pursuant to a FATCA-related "intergovernmental agreement" between the foreign financial institution’s jurisdiction and the United States, (2) U.S.-source interest paid to an entity that is not a foreign financial institution, unless the entity discloses its 10% U.S. owners (or represents that it does not have any 10% U.S. owners), and (3) beginning in 2019, gross proceeds paid on an obligation that gives rise to U.S.-source interest to a non-U.S. holder described in (1) or (2). FATCA withholding would be required by the issuer or a U.S. (or U.S. branch of a foreign) agent bank.

The United States has signed over 60 double tax treaties with various other countries and territories, and most of the agreements are based on the OECD model treaty. For example, the United Kingdom has concluded a tax treaty with the U.S. which provides that no withholding tax is currently levied on interest payable to UK lenders.

Stamp duty is not payable in the United States. 


The United States does not impose any transfer tax on a foreign lender acquiring the debt of a domestic borrower. In addition, there is no U.S. federal registration or licence taxes which may be imposed on the transfer of real estate. However, transfer, withholding and income taxes would apply upon the foreclosure, ownership and sale of U.S. real estate.


For syndicated facilities, a transfer of a loan is made valid and effective by the acceptance and recordation of the assignment by the administrative agent. The administrative agency typically keeps a record of all loan positions in a syndicated facility. Guarantees would usually be drafted such that the guarantee was in favour of the administrative agent for the benefit of all Lenders, consequently specific notice of a transfer of a loan would not need to be given to a guarantor absent any unusual circumstances.

Notarisation requirements would depend on the document and applicable State law. Normally notarisation is not required for a security agreement that is not filed in a governmental office; however, security documents that are filed (e.g. mortgages/deeds) would likely need to be notarised.


The controversy surrounding Banco Santander’s purchase of Banco Popular Español SA has continued through the summer as disgruntled investors move ahead with lawsuits against the authorities who oversaw Banco Popular’s sale.

Reports indicate that 51 lawsuits have been filed with the EU General Court against the EU’s Single Resolution Board ("SRB"), challenging different aspects of the decision by the SRB which led to the acquisition of Banco Popular by Santander, and the writing down of various investors’ investments. Amongst other things, the SRB must now defend itself against litigation being brought by a group of Mexican investors with a 4% equity stake (prior to the sale) in Banco Popular. The investors allege that the SRB perpetuated the bank’s crisis, and question the methodology behind the decision to implement write-downs on Banco Popular bondholders.

A separate action is being brought against the SRB by international investors, including Anchorage Capital, Algebris and Ronit Capital. Their claims are reportedly multi-faceted and include (i) allegations that the SRB breached professional secrecy rules, undermining investor confidence and causing a run on Banco Popular; and (ii) alleged flaws in the information relied on, process followed and evaluation which led to the SRB’s decision. They are asking the European Court of Justice to reverse the SRB’s decision and to restore the value of their bondholdings.

Despite the ongoing legal wrangles, the European Commission approved Santander’s purchase of Banco Popular, under the EU Merger Regulation, on 8 August 2017. The Commission concluded that the transaction would not cause competition concerns as the two banks’ combined market shares remain below 25% and strong competitors remain in all affected markets.


While the deadline for filing claims at EU level against the SRB has now passed, it is still possible for investors to bring claims in Spain against the FROB (the Spanish Regulator responsible for implementing the SRB’s decision). The deadline for such claims is 7 September 2017, and investors who are interested in this option will need to move quickly, in order to be able to complete the necessary formalities in advance of filing a claim. In addition, there may be further potential claims available to investors under Spanish law, against individual members of Banco Popular.


Santander reported on 8 August 2017 that Blackstone Real Estate Partners Europe V ("Blackstone") has been successful in its bid to acquire Banco Popular’s property portfolio from Banco Santander. Blackstone will take a 51% stake in the loans valued at approximately EUR 10 billion, a discount to their gross book value of EUR 30 billion.


The Cadwalader debt trading team are attending the LMA Syndicated Loans Conference on 19 September 2017. This event is open to LMA members only.


  • AIR BERLIN - On 15 August 2017, Air Berlin PLC filed a petition for the opening of debtor-in-possession insolvency proceedings with the district court of Berlin-Charlottenburg. In a statement released by the embattled airline, it was announced that the board of directors had determined that the company no longer had "a positive continuation prognosis". The rapid deterioration of the airline’s finances follows announcements by Etihad Airways PJSC, Air Berlin’s main shareholder, that it would not provide any further financial support to the Air Berlin group. The German federal government is now reportedly supporting Air Berlin with a EUR 150 million bridging loan, secured by a federal guarantee, to maintain flight operations. Air Berlin’s bondholders have seen the value of their debt plummet; Debtwire reports that, with an estimated EUR 170 million of prior-ranking claims, bondholders’ chances of recovery are remote. Bondholders are reportedly now considering taking legal action against Etihad in connection with a letter of comfort ("LoC") it provided to Air Berlin. The LoC has not yet been made public but is referenced in the German airline’s accounts for FY16. According to Debtwire, the rival German airline Deutsche Lufthansa AG is now planning to buy about 12 long haul-aircraft and related transatlantic routes from Air Berlin.
  • AGROKOR UPDATE - According to a recent filing by Ledo d.d. on the Zagreb bourse, on 22 August 2017, the company, part of Agrokor’s ice-cream business, was formally served with a temporary injunction resolution, which prevents it from encumbering or otherwise disposing of its 100% shareholding in Frikom. Sberbank is reported to have security over Ledo’s stake in Frikom in connection with a guarantee arising under a credit facility dated February 2017. According to a report in Debtwire, Ledo is in the process of appealing the decision. Ledo’s statement also confirmed that Sberbank has now commenced arbitration proceedings against Agrokor and its 11 guarantors before the London Court of International Arbitration. Sberbank’s claims relate to the EUR 450 million loan made to Agrokor, which the Russian bank argues should be repaid as part of the extraordinary administration proceedings. 


On 3 August 2017, Mr. Justice Hildyard handed down his Judgment permitting Lehman Brothers International (Europe) (in administration) ("LBIE") and various other entities within the former Lehman Brothers group to enter into a settlement with respect to a number of substantial inter-company claims, including those claims at issue in the proceedings known as "Waterfall III". This judgment followed a hearing on 24 July 2017. According to PWC, the settlement documents have now been finalised and executed.

As Mr. Justice Hildyard made clear in his Judgment, the Waterfall III proceedings involved "a complex web of substantial claims and cross-claims between various companies in the Lehman Group". Of particular significance were the two GBP 10 billion claims submitted by LBIE in respect of the contingent liabilities of Lehman Brothers Limited ("LBL") and LB Holdings Intermediate 2 Ltd ("LBHI2") as contributories under section 74 of the Insolvency Act 1986 (the "Act").

The outcome of the proceedings known as "Waterfall I" have had a significant impact on LBIE’s ability to successfully bring these contributory claims against its shareholders. In May 2017 the Supreme Court ruled that (i) LBIE’s administrators were not entitled to prove for a potential contribution claim which might arise in the event of LBIE going into liquidation; and (ii) a contributory’s liability under section 74 of the Act did not extend to creating a surplus for the payment of statutory interest but did extend to non-provable liabilities.

As Mr. Justice Hildyard noted in his Judgment, the Supreme Court’s judgment in the Waterfall I proceedings "made it considerably less likely that LBIE could bring a contribution claim against LBL or LBHI2" and this had been a "powerful impetus" for negotiating a settlement.

Completion of the settlement is expected to take approximately four weeks, primarily for various administrative steps relating to distributions by the other UK affiliates. In the meantime the substantive hearing of the second part of Waterfall III planned for September 2017 has been vacated. Assuming the steps required for the settlement to become unconditional take place, the Waterfall III proceedings will be brought to an end. 

The Order giving the Joint Administrators permission to enter into the settlement is available here.

  • IRISH HIGH COURT CONFIRMS "TRUE SALE" - Under English law there is a clear line of legal authority establishing whether a transaction amounts to a ‘true sale’. The English courts generally consider that, absent a sham transaction, they will not re-characterise a transaction described as a sale as an assignment by way of security. Until now, an element of legal uncertainty existed as to whether this principle is reflected in Irish law. To date, parties involved in certain finance transactions had to rely on a legal opinion advising that a transaction would only be deemed a ‘true sale’ if the Irish courts follow the established English precedent, whereas the recent decision formally clarifies the position under Irish law. For further information see The Governor and Company of the Bank of Ireland v Eteams (International) Limited (in voluntary liquidation) [2017] IEHC 393
  • THE VIEW FROM BRUSSELS – CONSULTATION ON SECONDARY MARKETS - With a view to exploring possible initiatives to facilitate the development of secondary markets for non-performing loans ("NPLs"), on 10 July 2017 the European Commission ("EC") published a public consultation on the development of secondary markets for non-performing loans and distressed assets and protection of secured creditors from borrowers’ default. The purpose of the consultation is to enable the EC to evaluate practical problems currently impeding the development of the secondary markets for NPLs, and loan contracts more generally, with a view to finding potential solutions. The consultation is split into two separate sections. The first section covers aspects related to secondary markets for loans. The second section deals with aspects related to the protection of secured creditors from borrowers’ default and aims to gather information that can inform the design of a new type of loan security, labelled  "accelerated loan security". The consultation is addressed to all stakeholders including, public authorities, citizens, legal professionals, market participants and borrowers. Respondents are invited to provide evidence-based feedback and specific suggestions by 20 October 2017 via the online questionnaire.

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