Trade Alert - June 2014, Issue 6



This month, Cyprus returned to the international markets and raised EUR 750 million in a sale of five-year notes.

In March 2013, the European Commission,European Central Bank and the International Monetary Fund agreed a EUR10bn bail-out deal with Cyprus, and the Cyprus government introduced temporary administrative and capital controls to contain the risk of deposit outflows.

Under the Resolution of Credit and Other Institutions Law, Cyprus Popular Bank Public Co Ltd (also known as Laiki Bank) and the Bank of Cyprus plc ("BoC") (the country's largest bank) entered resolution proceedings. Laiki Bank's EUR9.2bn Emergency Liquidity Assistance was transferred to BoC, deposits below EUR100k were insured and therefore transferred to BoC, and deposit holders with uninsured deposits over EUR100k suffered severe losses. BoC’s uninsured deposits over EUR100k were partly converted into equity and partly into fixed term deposits at the BoC.

BoC emerged from its recapitalization process on 30 July 2013 and at the end of last month, it reported its first quarterly profit for nearly two years1. In addition, the BoC is reportedly planning to sell its Russian operations as part of a restructuring launched by its CEO, John Hourican(ex-investment banking head of RBS) to refocus on its domestic market2 and considering a potential capital increase of up to EUR1bn which would support its capital adequacy ratio ahead of stress tests in October3.



Distressed investors can get exposure to BoC by purchasing deposit accounts (subject to capital controls) and/or shares which were allocated to deposit holders pursuant to BoC's resolution process.

Uninsured deposits above EUR 100,000 were converted as follows:

  • 47.5% into new shares (which remain suspended from trading on the Cyprus Stock Exchange);
  • 15.1% released to current accounts (subject to capital controls); and
  • 37.4% into three fixed term deposits of 6, 9 and 12 months’ duration. BoC has discretion to roll these deposits for an additional term but the 6 and 9 months’ deposits which have expired were released (on 31 January 2014 and 30 April 2014 respectively), remaining subject to Cyprus capital controls.


The Enforcement of Restrictive Measures on Transactions in case of Emergency Law of 2013

Capital controls are issued by the Central Bank of Cyprus under Decree of the Ministry of Finance, and have to date, generally been issued on a monthly basis. The latest capital control decree was issued on 2 June 2014 and will remain in force for 91 days. provides further relaxation of restrictions originally put in place, including abolishing restrictions on opening new bank accounts.


  1. AML/KYC: A buyer must ensure that the purchased assets are not in breach of anti-money laundering requirements, particularly given the potential lack of clarity regarding the source of funds in deposit accounts.

  2. In addition to carrying out diligence on the accountholders/shareholders, it is advisable to obtain representations that the seller (and its predecessors-in-title) are not in breach of AML, anti-corruption and sanctions requirements, and that none of the purchased assets constitute funds obtained from transactions in violation of AML laws.

  3. KYC with BoC: If purchasing accounts, buyers will first need to provide extensive “Know Your Client” information to BoC in order to become accountholders. This will not be necessary if the buyer is only purchasing shares.Buyers should start this process as soon as possible to avoid delays.

  4. Payment of purchase price/risk of broken trade: Ideally, buyers should seek to confirm prior to trading that the purchase price will be tied to either (i) receipt of confirmation from Bank of Cyprus that the seller’s account balances have been transferred to the buyer’s accountsor (ii) registration of the buyer as holder of the shares (as relevant).

  5. Escrow: Sellers may insist on the purchase price being paid using an escrow arrangement, given the potential delay between documentation being signed and the Bank processing the transfers.This can be costly (due to escrow agent’s fees and increased lawyers’ fees due to negotiation) and time consuming (the escrow agent will also need to diligence both the seller and buyer). If the seller insists on this, it should be agreed beforehand how fees are to be split.

  6. Ancillary Rights and Claims: Holders of accounts and shares may have rights to claim against third parties including the BoC, Laiki Bank, the special administrator, and/or any relevant Cypriot government entity. Some trades seek to reserve such rights to the Seller. If the ancillary rights and claims are to be included, this should be specified.


Special Note:

Thanks to Nancy Erotocritou, Partner at Harneys for assistance with the Cyprus Jurisdiction Update


Ryan Williams is an associate in Cadwalader's Financial Restructuring Department and specialises in distressed debt and claims trading. He frequently represents investment funds, hedge funds and other financial institutions in connection with the acquisition and sale of syndicated bank loans, debt instruments, bond claims, deposit related trades and distressed assets, including in Cyprus. Prior to joining Cadwalader, Ryan worked as an associate in the English law practice of a leading Singapore law firm.

+44 (0) 20 7170 8524


  1. Interim Condensed Consolidated Financial Statements to 31 March 2014

  2. Bank of Cyprus to offload lossmaking Russian lender (FT, 3rd June 2014)


Louisa Watt is speaking at theCyprus International Investment Conference 2014being held from 22 to 24 October 2014. Click here for further details and to register.



Is the Borrower unreasonably withholding its consent to transfers?

Borrowers across Europe are increasingly refusing consent to assignments and transfers by Lenders. The reasons cited are various, including that the Borrower is not familiar with the proposed new lender, or for a concern that the new lender is a distressed debt fund and its interests are not compatible with those of the Borrower.

There is currently no English case law which is directly on point regarding the meaning of “reasonableness” in the context of loan transfers, so what constitutes “unreasonably withholding consent” is generally considered in light of landlord and tenant authorities or in other commercial contexts. Ultimately, whether or not a Borrower is being "reasonable" will turn on the facts of each case, including consideration of the nature of the other Lenders within the syndicate and the Borrower's reasons provided for refusal.

Under English law, the burden is on the party seeking consent to prove that the Borrower is being unreasonable where consent is withheld.

Please note, if the Borrower is located outside of the UK, local law may apply to the consent request and the position can differ from jurisdiction to jurisdiction. Click on the following links for key English judgments: Porton Capital Technology Funds and Others v 3M UK Holdings Ltd and another [2011] EWHC 2895 (Comm) (7 November 2011); British Gas Trading Ltd. v Eastern Electricity plc & others [1996] EWCA Civ 1239) and Barclays Bank Plc v Unicredit Bank AG (formerly Bayersche Hypo-und Vereinsbank AG) [2014] EWCA Civ 302.



It is prohibited under German law (section 248 and 289 s. 1 German Civil Code) for Borrowers to agree to pay "interest on interest", or in other words, agree in advance to paid-in-kind interest which is automatically deferred or capitalized. If the capitalization of the interest is at the election of the German borrower, this is generally not prohibited, therefore the use of "PIK Toggle" facilities is not uncommon for such loans. Other ways of addressing this include the provision for "premium" which is often drafted as a one-off fee due to the Lenders on payment or repayment of the loan. Premium is therefore akin to a "Non-Recurring Fee" under the LMA standard terms and conditions and is different to interest or PIK. Non-Recurring Fees are for the account of the Buyer when paid and are deducted under the calculation of the Settlement Amount (so are for free) under Conditions 14.2(c) and 15.9(c) in accordance with market convention. That said,"premium" is not expressly provided for under the LMA standard terms, as it is not a common feature of English law governed loans agreement. To avoid any misunderstanding, if you are trading a loan with premium, better to be explicit regarding the parties' expectations at the time of trade.



  1. Autobar: the UK food and drink vending machine group is working out a restructuring plan with its lenders in relation to around GBP1bn of the debt.
  2. Selecta: the Swiss vending machines operator refinanced its roughly EUR 730mm senior and EUR 87.5 mm mezzanine LBO debt in June 2014, issuing a EUR 550 mm equivalent (EUR/CHF) senior secured bond and with KKR providing a EUR 220 mm PIK loan.
  3. Vinnolit: Houston-based Westlake Chemical Corporation announced on 28 May that it would acquire the German PVC resin manufacturer from private equity house Advent International for EUR 490 mm.
  4. Kaupthing: held an informal creditors' meeting on 19 June. It was announced that the Central Bank of Iceland and Minister of Finance and Economic Affairs have until September 2014 to consider whether to make claims distributions exempt from currency controls. The next creditors' meeting will be on 19 November 2014 in Reykjavik.
  5. Telediffusion de France (TDF): exclusive talks with Dering Capital for the EUR 3.7 bn sale of the French arm of TDF expired in May 2014, opening up the sale of the Franch arm to other bidders.
  6. For assistance with consent requests, premium related queries or any other matters referred to in this Trade Alert, please

DISCLAIMER - the information in this update is based upon Cadwalader transactions and is not to be relied upon as a true or accurate reflection of the secondary debt or claims market. For further information, please

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