Cross-Border Financing Report 2017
Featuring contributions from Chiomenti Jia Yuan Law Offices Loan Syndications & Trading Association Makarim & Taira S Prager Dreifuss Sullivan & Cromwell Talwar Thakore & Associates Udo Udoma & Belo-Osagie Yakubu and Associates Chambers
Lead contributor REPORT PARTICIPANTS
China Hong Kong
India Indonesia
Nigeria Switzerland
Tanzania UK
US
Chiomenti Loan Syndications & Trading Association INTRODUCTION
4 & 8 Bouverie Street, London EC4Y 8AX ePmail: [email protected] Customer service: +44 20 7779 8610
EDITORIAL Commercial projects editor James Wilson A great time to be a [email protected] + 44 Q0R 20 7779 8079 Managing editor Tom Young [email protected] +44 20 7779 8596 borrower Editor Amélie Labbé [email protected] S Neal McKnight and Presley L Warner, +44 207 779 8381 EMEA editor: Elizabeth Meager Sullivan & Cromwell [email protected] +44 207 779 8030 Americas reporter John Crabb [email protected] Financing themes +1 212 224 3402 Staff writer Brian Yap [email protected] +852 2842 6915 Three underlying themes describe the current state of the international financial markets: the constrained supply of new debt; the high investor EDITORIAL ADVISORS David Bernstein, Peter K Brechan, Lee C demand for debt; and an agnosticism among investors between bank Buchheit, Simon J Davies, Robert debt and bond debt, leading to the convergence of pricing and terms DeLaMater, Robert Dilworth, Bruce Duncan, Phillip Fletcher, David Graham, Ed Greene, between bank debt and bonds. Philip McBride Johnson, Michael Kenny, Paul Kruger, James Leavy, Juhani Makinen, These have created an environment of tight pricing and borrower- John D Moore, Enric Picanyol, Graham friendly terms in the international financing markets. Penn, Glen Rae, Gilles Saint Marc, Peter Siembab, Patricia Sindel, Bertil Södermark, Philip Wood, Christian Zschocke Managing director 3 LMG Tim Wakefield Constrained supply of new debt Head of business development for IFLR/IFLR1000 Richard Valmarana Production editor Richard Oliver Sub editor Annette Gray “There hasn’t been much new supply and investors have cash they need to spend.” ADVERTISING Associate publisher: Asia Pacific Tom O’Reilly, head of non-investment-grade credit for Neuberger William Lo Berman Group to the Wall Street Journal on August 8 2017. [email protected] +852 2842 6970 Business developer: EMEA Dafydd Elias Geopolitical uncertainty arising after the Brexit vote and the US [email protected] election has helped to reduce new leveraged acquisitions and associated +44 207 779 8766 Copy manager new debt issuances. Recent new debt issuances have resulted primarily Danielle NgwanaPJoseph [email protected] from refinancing or re-pricing transactions, and those do not create a +44 207 779 8151 net increase in supply. At the same time, historically high valuations in SUBSCRIPTIONS US equity markets have been great for equity investors, but M&A UK/Asia Hotline activity leading to new debt issuances has reduced, as principals wait Tel: +44 20 7779 8999 Fax: +44 20 7246 5200 for uncertainty to resolve and for toppy valuations to be justified. These US Hotline Tel +1 212 224 3570 dynamics are particularly pronounced in Europe. Fax: +1 212 224 3671 Email: [email protected]
CUSTOMER SERVICES Tel: +44 20 7779 8610
Divisional director, Specialist Information Division: Danny Williams “Institutional investors in the International Financial Law Review is published 10 times a year by Euromoney Institutional Investor PLC, London. The credit markets have proliferated” copyright of all editorial matter appearing in this Review is reserved by the publisher. No matter contained herein may be reproduced, duplicated or copied by any means without the prior consent of the holder of the copyright, requests for which should be addressed to the publisher. No legal responsibility can be accepted by Euromoney Institutional Investor, High investor demand for debt International Financial Law Review or individual authors for the articles which appear in this publication. Articles that High demand for debt comes from various sources. appear in IFLR are not intended as legal advice and should not be relied upon as a • Central banks have been buying government securities and leaving substitute for legal or other professional yield-starved fixed-income investors to scramble for what is left. advice. The views expressed by contributing authors do not necessarily reflect the views • Institutional investors in the credit markets have proliferated as fixed of the firm they work for. income investors reach for yield in a continuing low-interest rate Directors: John Botts QChairmanR, Andrew environment, and many new debt issuances are over-subscribed. Rashbass QCEOR, Colin Jones, The Viscount Rothermere, Sir Patrick Sergeant, Paul • The increase of private credit providers willing to ‘lend and hold’ Zwillenberg, David Pritchard, Andrew Ballingal, Tristan Hillgarth has further increased demand for fixed-income paper. In addition to underwriting banks sourcing financings and syndicating debt to Printed in the UK by Buxton Press, Buxton, England. institutional bank loan and bond investors, borrowers can approach
International Financial Law Review 2013 ISSN 0262P6969. CROSSPBORDER FINANCING REPORT 2017 | IFLR.COM | 1 INTRODUCTION
private credit providers who will lend and hold for the long term and save borrowers from syndication and pricing risks. Private credit providers can often offer more leverage than commercial banks or underwritten financings (sometimes in connection with an equity-kicker). • Chinese outbound M&A is often financed S Neal McKnight Presley L Warner by Chinese banks rather than international Partner, Sullivan & Cromwell Partner, Sullivan & Cromwell lenders. In addition, the One Belt One New York, US London, England Road (OBOR) initiative and constraints T: +1 212 558 3316 T: +44 20 7959 8900 on domestic Chinese lending are likely to F: +1 212 558 3588 F: +44 20 7959 8950 increase Chinese banks’ participation in E: [email protected] E: [email protected] the international financing markets, which W: W: will add to the players competing to invest https://sullcrom.com/lawyers/SNeal- https://sullcrom.com/lawyers/PresleyL in debt financing. McKnight -Warner
About the author About the author Investor agnosticism between Neal McKnight is co-head of the firm’s Presley Warner is a member of bank and bond debt finance and restructuring group. He Sullivan & Cromwell’s corporate and advises financial institution, sponsor finance, credit and leveraged finance, Institutional investor agnosticism between and corporate clients on a broad and restructuring and bankruptcy bank loans and bonds, when combined with range of corporate financing practices. Warner advises financial high demand and limited supply, is leading transactions, including capital markets institutions, private equity and towards an increasing convergence of pricing offerings, revolver and term loan corporate clients on a broad range of and terms between bank debt and bond debt facilities, receivables and asset-based cross-border financing. for many credits. facilities, and securitisations. His private equity transactions But this convergence leads investors to get McKnight has particular expertise in include advising sponsors and lenders the worst of both worlds – not the best. acquisition financings, and has acted on leveraged private and public-to- Borrowers get the economic benefits of bank in a number of refinancing and private transactions in the UK and debt (floating rate, limited call protection, recapitalisation transactions in the Europe through first lien, mezzanine, limited disclosure) with the covenant bank and bond markets, as well as PIK and hybrid instruments, leveraged structure of bond debt (incurrence covenants financings in distressed contexts. recapitalisations, bid financings, and related flexibility, which vastly reduces the McKnight’s securities experience Opco/Propco structured financings need for waivers during the life of the includes debt and equity offerings and related intercreditor instrument). Borrowers raising financing in (including high yield debt offerings) arrangements. Warner’s corporate Europe have lately been preferring loans to under Rule 144A and Regulation S, transactions include advising bonds because they get the benefit of loan SEC-registered offerings, exchange corporates and lenders on event- pricing and flexibility with bond-like offers, project and infrastructure driven investment grade financings covenants. bonds and structured financings. He and build-out transactions, and his The erosion of (or in some cases has also acted in a number of M&A restructuring transactions include disappearance of) financial maintenance and joint-venture transactions. advising creditors and corporate and covenants is a good example of the McKnight’s clients have included private equity-owned debtors on consequences of bank/bond convergence. In AT&T, Bayer, Canadian Pension Plan restructurings in the UK, Europe and the bank loan world, historically financial Investment Board, Crescent Capital, the Middle East. maintenance covenants were the key Gartner, Goldman Sachs, Ontario protection for banks. Financial maintenance Teachers’ Pension Plan Board, Rhône covenants gave banks an early warning of Capital and United Rentals. financial difficulty and allowed banks to take Neal was resident in the Firm’s control of a distressed situation before it London office for almost 10 years, deteriorated beyond hope. returning to the New York office in Immediately after the financial crisis in 2008. He has extensive experience in 2008/2009, most borrowers rated below A- cross-border and multi-jurisdictional could expect to give two or (in Europe) three financing and M&A transactions. financial maintenance covenants in bank loans. But under current market conditions, borrowers often only expect to give financial maintenance covenants in bank debt if they
2 | IFLR.COM | CROSSPBORDER FINANCING REPORT 2017 INTRODUCTION
are syndicating to commercial banks and are circumstances. But increasing competition instruments will also drive convergence rated below A-, or if they are leveraged between private credit providers often leads between bank and bond terms. borrowers and must have continuing bank them to forego financial maintenance Will a market shock or a surprise issuer debt in their structure. For example, banks covenants in order to win financing mandates, default see a return to financial covenants for normally provide revolving and other or as part of the negotiations around an bank debt? This will depend on the extent to undrawn facilities at more competitive pricing equity-kicker. which a market shock adjusts the current than institutional investors, and banks will In addition to financial maintenance supply/demand imbalance. In Europe in mid- normally require a maintenance covenant for covenants, bank/bond convergence results in 2007, a handful of covenant-lite deals were that exposure. But in such leveraged deals, the other bank loan covenants looking more like financed (though not syndicated), yet bank maintenance covenant is often set with high bond covenants. Bond covenants are debt went back to including financial headroom and is only triggered after a certain structured on the assumption that the covenants after the financial crisis because level of drawing. Furthermore, in the US the borrower will not be seeking waivers of bond only banks provided liquidity at that time majority of term loans issued to sub- covenants in the same way it would seek (and only some banks at that). Today, unlike investment grade borrowers are now waivers from relationship banks on bank in 2007, the bond market in Europe is firmly covenant-lite and do not contain any financial loans. So, bond covenants start from the established (though a market shock could maintenance covenants. premise that bondholders exert far less control result in the market being shut for a period) One of the idiosyncrasies of the effect of the over the borrower than bank lenders. This is and it is likely that investors with capital to proliferation of institutional investors (as leading to long-term debt capital imposing far deploy will continue to be agnostic between bank and bond debt, provided debt markets are open for business. So, the convergence and relaxation of terms for borrowers is likely here to stay. “This is leading to long-term debt capital Will there be a continued role for imposing far fewer constraints on borrowers underwriting banks long-term? Of course. Only banks will be able to provide capital than bank debt has historically” quickly and provide sizeable underwriting commitments (though direct lending funds are increasing their ability to underwrite financings). But institutional investor demand opposed to traditional bank lenders) and fewer constraints on borrowers than bank for long-term bank debt and bond debt will current market conditions is that investment debt has historically. continue, so financings initially underwritten grade borrowers syndicating bank debt to by banks can be expected to be syndicated or commercial banks may have financial refinanced on very borrower-friendly terms. maintenance covenants while non-investment How borrowers are responding grade borrowers may not – i.e. lenders to the better credit have financial maintenance Borrowers are keenly aware of competitive Other developments to watch covenant protections while lenders to the market dynamics among potential investors poorer credit do not. This is a function of the and they normally seek to arbitrage across all In Europe there is no clarity on what financial investor base for leveraged borrowers products and markets. Where market markets will look like after Brexit. If the effect (institutional investors) as compared to the conditions allow it, European borrowers is to impose additional regulatory and investor base for investment grade borrowers consider accessing the US market, and US administrative burdens on banks and investors (commercial banks). The tighter investment- borrowers consider accessing the European active in the European capital markets, this is grade pricing closes out institutional investors market – both the bond market and bank likely to flow through to increased pricing for and brings in commercial bank lenders, but debt market. Borrowers will work with borrowers seeking to raise finance in London commercial bank lenders often bring financial underwriting banks that can cover all markets and Europe. covenants. Institutional investors rely on and products, and will also often work with Fintech, blockchain and the continuing portfolio diversification and liquidity (and the ‘lend and hold’ direct lenders to ensure full march of direct lending funds into the corresponding ability to trade out of distressed competition across products and markets to financial markets may be expected to increase positions) to manage their exposures and do achieve best execution, pricing and terms. financing options available to borrowers, with not demand financial covenants. Bank lenders corresponding increases in demand for paper have historically not relied on liquidity to and competitive tension between financial trade out of distressed position, hence they Long-term implications products and markets. often have entrenched requirements for For now, it is a great time to be a borrower. financial covenants. So long as the current benign economic Private credit providers generally take a conditions continue, we expect to see greater ‘lend and hold’ approach, which is more convergence between bank and bond debt consistent with a commercial bank approach, and continued pressure on pricing and terms. and accordingly may seek financial Even apart from current economic conditions, maintenance covenants in certain institutional demand for liquidity between
CROSSPBORDER FINANCING REPORT 2017 | IFLR.COM | 3
Who do clients really rate as the top practitioners?
For over 20 years, Legal Media Group’s Expert Guides have identified the world’s leading lawyers in 30 practice areas. If you regularly interact with the legal profession in a specific practice area anywhere in the world, you should obtain a copy of the relevant Expert Guide for just £85
ORDER FORM £85 per copy. Please send me the following Expert Guides. Indicate no. of copies in each box: Aviation 2017 Banking, Finance and Transactional 2017 Best of the Best 2017 Best of the Best USA 2017 Competition and Antitrust 2016 Construction and Real Estate 2017 Energy and Environment 2017 Commercial Arbitration 2017 Insurance and Reinsurance 2017 International Trade and Shipping 2017 Labour and Employment 2014 Litigation and Product Liability 2016 Patent 2017 Rising Stars 2017 Tax 2016 TMT 2015 Trade Mark 2016 Transfer Pricing 2017 White Collar Crime 2016 Women in Business Law 2017 Total £:
YOUR DETAILS METHOD OF PAYMENT Name: Please find enclosed a cheque payable to ‘Euromoney Position: Company: Trading Limited’ Please invoice me/my company (Purchase Order Address: Number: ______)
City/State: Post Code: Signature: ______Date: ____/____/____ Country: Email: Tel: Fax:
3 easy ways Tel: +44 (0) 20 7779 8418 Post to: Tatiana Hlivka, Expert Guides, 8 Bouverie Street, London EC4Y 8AX, UK to order: Email: [email protected] CONTENTS
Expert analysis 6 Great expectations 9 Riding a bull market
Country reports
14 China Liu Yue Jia Yuan Law Offices
18 Hong Kong Jamie Logie and Jonathon Hannah 6 Chiomenti looks at what to expect from new Italian rules tackling NPLs Sullivan & Cromwell
22 India Sonali Mahapatra, Rituparno Bhattacharya and Nidhi Rani Talwar Thakore & Associates
26 Indonesia Maria Sagrado and Hanny Marpaung Makarim & Taira S
30 Nigeria Aniekan Ukpanah and Onyinye Okafor Udo Udoma & Belo-Osagie
35 Switzerland Daniel Hayek and Alexander Flink 9 The LSTA presents its analysis of the bullish loan market Prager Dreifuss
40 Tanzania Saidi Othman Yakubu and Timothy Kyepa Yakubu and Associates Chambers
44 UK Craig Jones Sullivan & Cromwell
49 US Ari Blaut Sullivan & Cromwell
CROSS9BORDER FINANCING REPORT 2017 | IFLR.COM | 5 EXPERT ANALYSIS CHIOMENTI Great expectations Carmelo Raimondo and Alessandra Tubi of law firm Chiomenti examine new Italian rules under Law 130 designed to accelerate the disposal of non- performing loans
n 2016 the Italian government adopted several initiatives and reforms, providing I for, inter alia, the introduction of a state guarantee on the senior tranche of asset- backed securities (ABS) collateralised by Italian non-performing loans (NPLs) via the Garanzia Cartolarizzazione Sofferenze (GACS). The tool openly incentivised the disposal of NPLs from Italian banks through securitisation transactions. The introduction of the GACS was coupled with other measures including (i) the improvement of Italian bankruptcy and enforcement proceedings, aimed at reducing the length of the recovery procedure and at simplifying the auction process; and (ii) the introduction of new forms of security interest to streamline the enforcement process, by bringing it outside the courts (reducing both the court workload and the lengthy timing for the debt recovery). In addition, the legal and regulatory framework has facilitated access to the credit market by European alternative investments funds (now allowed to lend directly to Italian borrowers subject to certain regulatory requirements). Despite all these new changes, the pressure to make the Italian NPL market more investor-friendly has not decreased. While billion ($47.2 billion) (in terms of gross book in place by the Italian government has tried discussions at European-level on the value) have been transferred from Italian to further improve the role and the powers of constitution of bad banks funded with public originators. the Italian securitisation vehicles by enabling resources continue, the momentum of But the stock of NPLs on the books of them to perform certain additional activities reforms at the Italian-level is still high. Italian banks remains high. A key factor with more direct access to the assets backing Investor interest in Italian NPLs is still hindering investment in Italian NPLs is the the ABS. considerable: since the start of 2017, Italian inefficiency of recovery, enforcement and The latest amendments to Law 130, the NPLs with a combined amount of nearly €40 insolvency proceedings. The latest reform put Italian securitisation law, enacted on June 24
6 | IFLR.COM | CROSS.BORDER FINANCING REPORT 2017 EXPERT ANALYSIS CHIOMENTI
2017, are specifically designed to increase the workout schemes would not be subject to the the securitised loan (namely real estate and scope of action of Italian securitisation statutory subordination otherwise applicable registered movable assets) could be purchased, vehicles to facilitate (i) the securitisation of to shareholder loans. managed and developed by a separate Italian vehicle (ie other than the securitisation vehicle) whose core business would be the management of such assets in the exclusive “Despite all these new changes, the pressure interest of the securitisation vehicle. The separate vehicle should also be able to acquire to make the Italian NPL market more the entire contractual position of a lessor under a financial leasing agreement (including investor-friendly has not decreased” the ownership of the leased asset): in such a case, the dedicated vehicle should then be included in the consolidated financial bank debt vis-à-vis borrowers subject to debt The above legal changes should provide an statement of a bank (even if not part of a restructuring schemes, (ii) the securitisation incentive for Italian banks to adopt a forward banking group). It is indeed important to of non-performing financial lease receivables looking approach to tackle in advance loans consider that financial leasing is an activity backed by real estate or other registered assets; which are not non-performing but show clear reserved for banks and financial and (iii) the acquisition of the mortgaged real signs of financial difficulties (the so-called intermediaries, and it was therefore necessary estate in the frame of securitisation of non- unlikely to pay exposures). On the one hand, that the step-in of such a dedicated vehicle in performing mortgage loans. disposing of such exposures in a timely the position of lessor would require the manner would help to keep the level of NPLs dedicated vehicle to be consolidated in the under control. On the other, it would require financial statement of a bank. Securitised loans subject to the disposing banks to put loans in the market In this respect, the recent changes seem to debt restructuring which have not been subject to any substantial reflect the practice of certain investors who, devaluation. In this respect, de-recognition of in the frame of securitisations of NPLs The first set of changes provides Italian such assets might prove to be too expensive. collateralised by real estate assets, have set up securitisation vehicles with a more flexible specific real estate companies (real estate scope of action to better exploit investment operating companies or ReoCos) which opportunities with borrowers in financial Easier access to the underlying would acquire the relevant real estate asset in distress. So far, the activities of Italian assets: non-performing the frame of the enforcement proceedings securitisation vehicles were limited, by law, to financial leasing and ReoCos when the auction value is expected to be the purchase of receivables or debt below the purchase price of the corresponding instruments. Lending is also permitted but The second set of changes was designed to securitised loan. The new provisions of Law subject to certain stringent requirements, give Italian leasing companies access to 130 expressly set out that any amounts arising including the involvement of a bank or a securitisation structures in order for them to from the management and the disposal of financial intermediary as sponsor. This is also dispose of their stock of NPLs. Prior to such such assets at the ReoCo vehicle level will be to address issues of risk retention requirements changes, the securitisation of non-performing treated as collections and will be included in since in the case of direct lending from a receivables arising from leasing agreements the cash flow of the securitisation transaction. securitisation vehicle, no entity could be (predominantly real estate assets leasing) was The above provisions would therefore classified as originator. not appealing to investors since a improve the efficiency of the enforcement According to the new provisions of Law securitisation vehicle was allowed to purchase proceedings rendering the recovery process 130, Italian securitisation vehicles will now be the receivables arising from a leasing more efficient and expedient since the able to grant new finance to the securitised agreement but not the underlying leased asset securitisation vehicle, through the separate NPLs’ debtors to restore their financial itself. Investors often look at the financial asset ReoCo vehicle, could play an active role as soundness. In addition, and more (ie the receivables) to get access to the potential bidder in the frame of an auction importantly, securitisation vehicles are now allowed to purchase and/or subscribe shares, quotas, hybrid and profit participation instruments issued in the context of pre- “Securitisation vehicles will now be able to insolvency or workout schemes. This last aspect is a significant novelty for Italian grant new finance to the securitised NPLs’ securitisation vehicles which will now be capable of participating in debt-for-equity debtors to restore their financial soundness” swap arrangements or of being employed by investors in loan-to-own strategies for the acquisition of distressed borrowers. underlying asset (ie the real estate). According sale of a mortgaged real estate. According to Furthermore, Law 130 expressly provides that to the new provisions of Law 130, it is now the Bank of Italy, nearly three-quarters of any financing granted by a securitisation envisaged that any asset subject to a leasing Italian NPLs are secured by real estate vehicle in the context of pre-insolvency or agreement or to a security granted to secure property, and in most cases, they appear to
CROSS.BORDER FINANCING REPORT 2017 | IFLR.COM | 7 EXPERT ANALYSIS CHIOMENTI
have a market value sufficient to cover the cleared to make such a solution viable. In the type of receivables, the origination period relevant debt exposure. addition it is not clear whether the activities and the website where the assignor and the However, it should be noted that there are of the ReoCo vehicle would be subject to the assignee will make available to the assigned still many aspects that remain unclear in the supervision of the master servicer appointed debtors information on the assigned new provisions with respect to the in the frame of the securitisation transaction receivables and, upon request, confirmation introduction of a ReoCo vehicle in the frame as is the case for all the activities carried out of the transfer of a specific receivable. As for of an Italian securitisation structure. by the securitisation vehicle. any transfer of receivables usually performed For instance, it is unclear whether the It should be finally considered that the according to Law 130, any security and/or ReoCo vehicle can be incorporated and wholly- new provisions added to Law 130 expressly registration on public registers (such as controlled by the securitisation vehicle (ie the provide that, in the case of the securitisation registered transfer deeds of real estate assets vehicle issuing the ABS). The provisions do not of NPLs arising from lease agreements with subject to a lease agreement) will remain valid touch the point and therefore there is no explicit assignment to the securitisation vehicle of the with respect to the assignee without the restriction. This would constitute an exception entire contractual position of the lessor (ie not perfection of any additional formalities but to the exclusive corporate object of an Italian just the receivables arising from the lease those indicated above. securitisation vehicle. agreement), a specific ReoCo vehicle would A more viable route is to have the ReoCo have to be incorporated with respect to each vehicle incorporated and participated in by securitisation transaction. The ReoCo vehicle Key takeaways the same investors subscribing to the asset- must be liquidated once the securitisation is backed notes issued by the securitisation unwound. The recent changes would certainly constitute vehicle. a step forward in creating a more efficient In any event clarifying which entity can set market for investors looking at Italian NPLs. up the ReoCo vehicle (eg the investors rather Simplified transfer formalities There are still many issues which need to be than the securitisation vehicle, or the entities for NPLs clarified and, in this respect, the recent holding the share capital of the latter) would lawmaking exercise shows some deficiency. be key in order to solve two other issues not In addition to the above, as a further incentive It has been confirmed that adopting an addressed by the new provisions: how the to the securitisation of non-performing Italian securitisation structure is still the most ReoCo vehicle is supposed to fund the receivables, a simplified publicity and efficient route to invest in such assets and it is purchase of the assets and how investors in the registration formalities regime (already not by chance that many funds invest in Italian NPLs through Italian securitisation vehicles rather than directly or through foreign securitisation vehicles. The added “Adopting an Italian securitisation structure flexibility provided to Italian securitisation is still the most efficient route to invest in such vehicles should also facilitate the investment in single name distressed loans where investors assets” need to be able to adopt a very broad spectrum of solutions to extract value: profit participation instruments, debt-to-equity ABS can participate in investment decisions provided under Law 130 for certain kinds of swaps, debtor-in-possession finance etc. Real at the ReoCo vehicle level. The new commercial receivables) will apply also in case estate, shipping and renewable energy are the provisions of Italian Law 130 do not provide the assigned non-performing receivables are business industries where more transactions of any guidelines on the contractual relationship not identified as a pool. this kind are expected in the coming months. which needs to be set up between the two Under the previous regime receivables in a vehicles (the securitisation vehicle and the portfolio to be securitised had to be identified Carmelo Raimondo ReoCo vehicle) while it is provided that the by the application of common selection Partner proceeds arising from the activities of the criteria agreed by the originator and the Chiomenti (Milan) ReoCo vehicle must be dedicated to payment securitisation vehicle and not on a list basis. obligations of the securitisation vehicle. According to the new provisions it is now Nothing is said on the link between the possible to transfer a pool of receivables Alessandra Tubi two entities. The solution of having the without adopting selection criteria provided Associate ReoCo vehicle incorporated and controlled by that the transfer is registered with the register Chiomenti (Milan) the securitisation vehicle itself would seem, of enterprises and the transfer notice is from a structural standpoint, the smoothest published in the Italian Official Gazette solution. The above-mentioned legal simply indicating the names of the assignor uncertainties (and some tax issues) need to be and of the assignee, the date of assignment,
8 | IFLR.COM | CROSS.BORDER FINANCING REPORT 2017 EXPERT ANALYSIS LSTA Riding a bull market Theodore Basta , Elliot Ganz and Bridget Marsh speak with IFLR about the US loan market and its current defining trends
heodore Basta, Elliott Ganz and Bridget Marsh of the Loan T Syndications & Trading Association (LSTA) in New York dissect current trends in the US loan market. The panel looks at what the data is telling us about the market, what regulatory developments are uppermost on the agenda and what efforts the LSTA has recently been making in Latin America.
What is the general trajectory of activity in the US loan market this year?
Ted Basta (TB): In 2015, loan returns ran negative for only the second time in history (the other year being 2008, of course) and a lot of that had to do with specific sectors, most notably the oil and gas industry. In 2016, risk assets, including the energy sector, staged a dramatic turnaround as loan returns
“As refinancing has come in at record levels, net new deal
flow has been slower hit double digits while the secondary market began to improve, while strong technicals rallied to multi-year highs (the median trade were supported by robust demand. As a result, than previously price has remained at or above par since monthly loan returns were positive from expected” September 2016). The market really started March 2016 through May 2017 – although to turn around during the end of Q1 2016. returns did go slightly negative in June due to From that point forward, macro conditions a shift in technicals and then again in August
CROSSHBORDER FINANCING REPORT 2017 | IFLR.COM | 9 EXPERT ANALYSIS LSTA
came on line this year. On the flipside, according to our S&P/LSTA Leveraged Loan Index, outstandings have increased by $50 billion this year to a record $930 billion. From a technical perspective, that leaves us with a noteworthy demand overhang of about $40 billion this year. Furthermore, the only major sector in our Theodore Basta Elliot Ganz asset class that has reported negative returns Senior vice president of market data Executive vice president & general is retail, which is down a little over 2% so far, analysis, Loan Syndications & Trading counsel, Loan Syndications & Trading whereas the broader market has returned close Association (LSTA) Association (LSTA) to 3%. I think a lot of those same trends apply New York, US New York, US to the European market. T: +1 (212) 880 3005 T: +1 (212) 8803003 E: [email protected] E: [email protected] W: www.lsta.org W: www.lsta.org Would you characterise the loan market as buoyant in both About the author About the author the US and Europe? Ted Basta is SVP of market analysis Elliot Ganz is executive VP and for the LSTA, where he manages key general counsel of the LSTA. In that TB: Absolutely. In both the US and Europe strategic partnerships and products, capacity, he manages all aspects of we have witnessed massive demand for the including the LSTA’s trade and the LSTA’s legal affairs and co-heads loan product and record-level loan issuance. settlement data initiatives, the its government policy and advocacy But if you dig deeper into this year’s numbers, LSTA/Thomson Reuters LPC Pricing committee. about 70% of global new issue has been in Service and the S&P/LSTA Leveraged Ganz received his JD in 1980 from terms of refinancing. This is because the Loan Index. In addition, Basta is the New York University School of majority of loans across both markets have responsible for the Association’s Law where he served as research been trading at par or higher in the secondary analytical and reporting initiatives; all editor of the Annual Survey of market for some time. As a result, new issue of which enhance market visibility, American Law. spreads have declined in both the US and transparency and liquidity. Those Ganz was the first chairman of the European loan markets. efforts include the continued legal advisory committee of the LSTA The big difference between the two markets development, expansion and and has served as a member of its today is in the base rates. Since year-end 2015, distribution of market analytics and board of directors. He was elected as 3-mo Libor has increased to 132 basis points, secondary trading and settlement a fellow of the American College of following multiple rate hikes, whereas base metrics. Basta also manages the Commercial Finance Lawyers in April rates are still negative in Europe – and the LSTA’s Shift Date Process, the 2011, was admitted to the US European Libor floors are minimal. That said, Association’s website and its social Supreme Court bar in April 2012 and from a borrower’s perspective, the European media initiatives. served as a member of the advisory market certainly looks cheaper today. And just Prior to joining the LSTA, Basta committee on financing Chapter 11 as important, liquidity is very robust in was director of global pricing with for the American Bankruptcy Europe right now, as non-traditional accounts Loan Pricing Corporation (LPC), Institute’s Commission to Study the (outside of CLOs) have looked to invest given where he was instrumental in driving Reform of Chapter 11. the negative rate environment and the high new product development and valuation levels in the bond markets. secondary market content. Basta received an MBA from the Zicklin School of Business at Baruch College should expect for the remainder of this year. What does it mean that so and a BA in accounting from Long In reality, secondary market prices didn’t much of the market is Island University. have much runway left to move higher this refinancing? year, and therefore most managers believed the secondary would trade mostly flat and TB: At the end of the day when you see returns would be right around coupon. And spread reductions from a lending standpoint, as investors looked to shed risk in light of that is exactly what we have seen. Through the markets are generally hot and things are geopolitical concerns. mid-September, collateralised loan obligation going well. And while lenders will in fact That said, when you couple robust demand (CLO) issuance has topped $70 billion, while receive a lower rate of return, the great thing levels with a pretty strong fundamental loan mutual funds reported net inflows of about loans is that they are a floating rate asset backdrop (default rates have trended well about $20 billion. That totals roughly $90 class and loan spreads are pegged off Libor. below their historical averages), it really sets billion of new demand entering the asset class, Right now, Libor is at 132 basis points in the the tone for the type of performance we have and that doesn’t include the countless US; six months ago, it was below 100 basis seen over the last twelve months (+ 6%) and separately managed accounts (SMAs) that points. So, while we are seeing spread
10 | IFLR.COM | CROSSHBORDER FINANCING REPORT 2017 EXPERT ANALYSIS LSTA
reductions in one sense, we are also seeing all their senior loans or half their total debt in increases in Libor, which have offset a portion five to seven years from free cash flow. Plus, of the spread reductions. But as refinancing anything over six times leveraged would be has come in at record levels, net new deal flow suspect and the agencies would take a close has been slower than previously expected. You look. Interestingly, the European leveraged always want to see the asset class growing and lending guidelines are very similar but in while we have added about $50 billion in new certain respects clearer. money loans this year, I would say that one of On risk retention, the European guidelines the trends we have seen over the past year or first came out in 2011 and were quite strict, Bridget Marsh so is lower M&A volume, and that is how you requiring 5% of the value of the securitisation Executive vice president & deputy grow the industry for the most part – through to be retained. After a number of iterations general counsel, Loan Syndications & M&A. and some regulatory scares, the market has Trading Association (LSTA) readjusted, though issuance never really New York, US returned to pre-financial crisis levels. In the T: +1 (212) 880 3004 Have you a sense of how these US, the final guidelines came out in late 2014 E: [email protected] trends are playing out in terms and went into effect late last year. The market W: www.lsta.org of cross-border activity? has adjusted as well, mainly through raising third party capital and financing, which has About the author TB: While I don’t track cross-border activity resulted in fairly robust US issuance this year. Bridget Marsh is executive VP and as closely, I do know that total cross-border deputy general counsel of the LSTA. volumes are up roughly 35% year over year – Marsh heads the LSTA’s primary and that trend was beginning to pick up steam Is the Trump administration market committee and trade practices in September as several larger M&A deals likely to produce significant and forms committee and leads the were in the process of completion. That said, changes regarding leveraged legal projects for the development the big takeaway for me in the cross-border lending guidelines and risk and standardisation of the LSTA’s space this year is that the market share of deals retention rules? documentation. She is responsible for that were syndicated in Europe picked up to responding to and addressing a 33% share from 25% last year. In dollar EG: In a recent report issued by the Treasury secondary loan market trading terms, cross-border deals syndicated in Europe Department, the US administration has disruptions and ensuring that the increased 73% this year compared to an questioned whether leveraged lending LSTA’s primary market and trading increase of just 23% for those syndicated in guidance has gone too far and has suggested documentation reflect current market the US. to the agencies that they open up the practices. guidelines for comments and consider giving Prior to joining the LSTA, Marsh more discretion back to the banks. Nothing practiced as a corporate finance What are the biggest regulatory concrete has yet been done but it is clearly an attorney at Milbank, New York, and as debates in the US? area the administration is following. We also a lawyer in the corporate/M&A understand that Treasury will soon be department of Simmons & Simmons, Elliot Ganz (EG): Two touch points are releasing another report that is likely to London. Marsh received a BA magna worth mentioning. The first is in leveraged contain something about risk retention. cum laude from Georgetown University, a law degree with first class honours from Sydney Law School and a masters in political Science from the University of New “The market share of deals that were South Wales. She is admitted as an attorney in New York, England & syndicated in Europe picked up to a 33% Wales, and New South Wales, share from 25% last year” Australia.
lending guidelines. In 2013 the US regulators In both cases, it is important to note that How has the LSTA’s put out the Leveraged Lending Guidelines, the Treasury Department does not by itself engagement in Latin American which set parameters for what the agencies have the ability to make anything concrete markets been developing? (financial regulators) thought would be happen, but they can set the tone and put prudent underwriting of leveraged loans. some pressure on the agencies to do Bridget Marsh (BM): The LSTA formally They included, for example, the requirement something about it. launched its Latin American Initiative in that lenders needed to show that their 2015, but research and preliminary thinking leveraged borrowers would be able to pay back on the topic had been evolving for several
CROSSHBORDER FINANCING REPORT 2017 | IFLR.COM | 11 EXPERT ANALYSIS LSTA
“LatAm banks are able to make loans entirely on their own without seeking the involvement of the large global banks”
years before that. Our goal is to develop growth is poised to accelerate in different products for both the primary market, where LatAm regions (some positive data from H1 New York law governed loans to Latin 2017 sees syndicated lending improving after American borrowers are originated, and the a couple of rather quiet years), the LSTA secondary market, where those loans are hopes it can play a part in helping to put the traded with a view to helping a liquid market necessary building blocks in place to enable further emerge and grow. Thus far, we have that growth. focused on three jurisdictions — Chile, Colombia and Peru – and have published credit agreement language suited for New What sort of documentation York law governed loans made to borrowers structures are common in Latin in those regions. A few months ago, we America? We note in the US published secondary trading documents and Europe cov-lite structures which can be used to evidence the trading and and proliferating. Has there settling of the sales of those loans. been an evolution in the players Settling loan trades by participation is an involved in the market? approach that may be used more regularly in those jurisdictions than it is here, for many BM: I cannot comment on the specific different reasons and so we also published a documentation terms, but more generally, it form of participation agreement as well. Next, seems that certain regional banks are able to we are looking at Mexico. We hope that this make loans entirely on their own without simplifies the steps and makes trading loans seeking the involvement of the large global easier and quicker. banks; from what I understand, this is a post- Where is the region heading? Like so many global financial crisis development, which industries, the loan market is increasingly may be making it more competitive for US becoming a global market, and there is banks doing business in the region. It will be significant growth potential in LatAm. As that interesting to see how that progresses
12 | IFLR.COM | CROSSHBORDER FINANCING REPORT 2017 China Liu Yue, Jia Yuan Law Offices
SECTION 1: Market overview
1.1 Please provide an overview of the cross-border financing market in your jurisdiction.
Due to its foreign exchange control rules and non-availability of competitive finance products, Mainland China is clearly not a jurisdiction a non-Chinese company would normally look at for raising www.jiayuan-law.com funds. However, it is where most financing for Chinese companies’ overseas construction or project finance projects (the overseas construction financing sector), and Chinese companies’ overseas investment (the overseas investment financing sector) are negotiated and concluded. The overseas construction financing sector is dominated by Chinese banks. There are two basic financing structures. First, buyer’s credit, where a Chinese contractor brings Chinese banks to its overseas employer and the overseas employer borrows from the Chinese banks to pay the Chinese contractor for its work. Second, seller’s credit, where a Chinese contractor borrows from Chinese banks to finance its work, so that the overseas employer may defer its payment for the Chinese contractor’s work for a longer period. Buyer’s credit is more often granted based on an overseas employer’s creditability and financial capacity, while seller’s credit is based more on a Chinese contractor’s creditability and capacity. In both structures, sufficient security needs to be taken from the overseas employer and insurance from Sinosure will be required. By comparison, the financing demands, lenders and financing structures in the overseas investment financing sector are diversified. In addition to local Chinese banks, which are the conventional lenders, international banks, other financial institutions (such as trust and securities houses) and private equity funds actively provide financing. In general, in this sector banks will provide senior debt, such as a normal corporate loan, while other financing institutions and private equity funds are more flexible. In addition to senior debt, banks will also consider subordinated loans and even equity financing. As one can usually expect, the cost of subordinated loans and equity financing is usually high.
14 | IFLR.COM | CROSSABORDER FINANCING REPORT 2017 CHINA
1.3 Have there been interesting changes in the structure of the banking sector in your jurisdiction?
As far as cross-border financing is concerned, we have not noticed any interesting changes.
Liu Yue SECTION 2: Financing structures Partner, Jia Yuan Law Offices Beijing, China 2.1 Briefly outline some recent notable transactions T: +86 10 66413377 involving your jurisdiction, highlighting any F: +86 10 66412855 interesting aspects in their structures and what they E: [email protected] might mean for the market. W: www.jiayuan-law.com In the second half of 2016, China Nonferrous Metal Industry’s Foreign About the author Engineering and Construction Co Ltd entered into a seller’s credit Liu Yue is a partner in Jia Yuan Law Offices and leads the financing for its EPC construction project in the Democratic Republic international practice. With more than 16 years of cross-border of the Congo. In the financing structure, the employer’s EPC payment experience, Liu Yue’s practice focuses on advising Chinese obligation was deferred by way of issuing payment orders and these and foreign clients on a broad range of matters including payment orders were assigned to banks for the purpose of obtaining foreign direct investment/M&A, outbound investment, project financing. This is an innovative structure created for overseas finance/infrastructure concession and construction. In the past construction financing and may soon become popular on the market, few years, Liu Yue has advised on numerous cross-border since it is one of the few structures workable for employers, contractors transactions, both from an investment/project perspective and and lenders at the same time as being acceptable to Sinosure. a financing perspective. These include Midea’s acquisition of Kuka and NFC’s EPC and financing for the Congo RTR project. 2.2 Have there been any significant developments in the way cross-border financing transactions are structured or in the way borrowers and/or lenders are participating in the market? Another very important difference between the two sectors is the application of different foreign exchange control rules. The ultimate For a Chinese company’s overseas investment/acquisition, a typical use of the loans in the overseas construction financing sector is mainly financing structure is overseas lending secured by Chinese guarantee, trading payments, which are not restricted under Chinese foreign which means that a Chinese buyer provides satisfactory security to a exchange rules. The ultimate use of financing in the overseas PRC bank, the PRC bank provides bank guarantee to an overseas bank, investment financing sector is overseas investment, which is subject to then the overseas bank extends loans to the overseas subsidiary of the prior regulatory control by Chinese authorities. Consequently, one does Chinese buyer. not need to worry about foreign exchange control issues when Before November 2016, overseas lending secured by Chinese designing an overseas construction financing, while foreign exchange guarantee was only subject to quotas (i.e. an overall amount of bank control is one of the key issues that must be properly dealt with when guarantee that a Chinese bank can provide to overseas banks) assigned designing an overseas investment financing. An overseas investment to banks; this meant a Chinese bank could lend through such a financing can easily fall apart because of foreign exchange control structure as long as it has quotas. constraints. From November 2016, the government tightened its regulatory control regarding Chinese overseas investment. On the one hand, a Chinese company’s overseas investment/acquisition will be subject to 1.2 What have been the key trends or developments stricter and more time-consuming prior review by the relevant in cross-border financing in your jurisdiction over government authorities (outbound investment approval). On the other the past 12 months? hand, if the purpose of the loan is to finance a Chinese company’s overseas investment/acquisition, Chinese banks can no longer extend In the overseas construction financing sector, the seller’s credit structure overseas loans secured by a Chinese guarantee until the outbound has started to become popular. investment approval is obtained. From November 2016, the government tightened its regulatory In overseas acquisitions, sellers usually expect to close a deal in a control regarding Chinese overseas investment. Bank loans cannot be short period, but this schedule can hardly be met by Chinese buyers drawn down until the regulatory approvals for the overseas investment due to the length of time required to obtain outbound investment are granted. Since the timing for obtaining regulatory approvals is approval. As such, the buyer must resort to short-term bridge financing much longer than the deal closing schedule expected by overseas sellers, to close a transaction before the outbound investment approval is this has given rise to fast-increasing demands for bridge financing from obtained and the standard overseas lending secured by Chinese an overseas jurisdiction; these do not require PRC security (if PRC guarantee from banks is in place. Since short-term bridge financing security is required, the same regulatory control will apply). does not have to be secured by Chinese entities and the bridge
CROSSABORDER FINANCING REPORT 2017 | IFLR.COM | 15 CHINA
financing provider requires a certain level of equity contribution to the 4.2 Are there frequently asked questions or often borrower to subordinate the bridge financing, the financing often needs overlooked areas from parties involved in cross- to be accompanied by third party equity investments made with funds border financings in your jurisdiction? readily available outside the PRC. As the risk exposure of the bridge financing is usually not acceptable to commercial banks, bridge In the overseas construction financing sector, the most frequently asked financing is often provided by non-bank financial institutions or private question is whether the debt is insurable by Sinosure. equity funds. In the overseas investment financing sector, the most frequently asked question is whether the overseas investment financing is workable in light of the overseas investment control policies. SECTION 3: Legislation and policy
3.1 Describe the key legislation and regulatory bodies 4.3 Are there any classes of assets over which security that govern cross-border financing in your cannot be taken or regulations specific to your jurisdiction. jurisdiction governing the taking of security over certain classes of assets that lenders should be aware The key regulatory bodies are the China Banking Regulatory of? Commission, which is in charge of banking activities and the State Administration of Foreign Exchange, which is in charge of foreign In the PRC there are certain assets where security cannot be taken over, exchange control. these include the following assets: • ownership of land; • the land-use right to the collectively-owned land owned (subject to 3.2 Have there been any recent changes to regulations a few exceptions); or regulators that may impact the cross-border • educational facilities, medical and health facilities of schools, financing market and what impact do you expect kindergartens, hospitals and other institutions or public them to have? organizations established in the interest of the public and other facilities in the service of public welfare; See the information provided under 2.2 above. • property in relation to which the ownership or the right of use is unknown or disputed; • property sealed up, distrained or placed under surveillance in 3.3 Are there any rules, legislation or policy accordance with law; or frameworks under discussion that may impact • other property that may not be mortgaged as prescribed by law. lenders or borrowers involved in cross-border financing in your jurisdiction? 4.4 What measures should be taken to best prepare We are not aware of any such discussions. for your market idiosyncrasies?
The non-recourse project finance concept is rarely accepted by Chinese SECTION 4: Market idiosyncrasies lenders. Chinese lenders always ask for sufficient security. Change of foreign exchange control policies will significantly impact 4.1 Please describe any common mistakes or on the workability of a cross-border financing deal. Such change needs misconceptions that exist about the financing market to be closely monitored. in your jurisdiction.
In an overseas lending secured by Chinese guarantee structure, the SECTION 5: Practical considerations Chinese company will first provide a security to a Chinese bank (first security), the Chinese bank will then provide a bank guarantee to an 5.1 Briefly explain the downstream, upstream and overseas bank (second security) and finally the overseas bank will extend cross-stream guarantees available in your jurisdiction, the loan to the overseas subsidiary of the Chinese company. The second with reference to any specific restrictions or security provided under this structure is subject to registration with the limitations. PRC foreign exchange authority. Most people often mistakenly assume the first security as the one subject to the registration. A Chinese company can provide cross-border guarantee only for overseas entities in which it has direct or indirect equity investment relation. Security provided by overseas entities works only for local Chinese loans made by financing institutions. In other words, local Chinese loans made by other lenders cannot take security provided by overseas entities.
16 | IFLR.COM | CROSSABORDER FINANCING REPORT 2017 CHINA
5.2 Are there any specific issues creditors should be mindful of regarding a bankruptcy and restructuring situation?
Enforcement of security over assets located in the PRC is lengthy and difficult.
5.3 Do foreign debt quotas apply in your jurisdiction and is offshore financing to domestic entities monitored?
The PRC applies foreign debt quotas and closely monitors offshore financing to domestic entities. As per the latest policy issued in 2017, the total balance of offshore borrowing that a domestic company can raise is limited to two times its net assets.
5.4 Describe your jurisdiction’s relationship with non-performing loans (NPLs), including volume of outstanding NPLs and techniques/challenges in managing them.
In the past, when dealing with NPLs, commercial banks have usually written-off or assigned the NPLs. Write-offs are often difficult to implement on a large scale because of various constraints, such as the state-owned assets management rule, finance and tax regulations. NPLs were also sometimes sold to an asset management company. Without a large-scale equity financing, the asset management companies could not take NPLs on a large scale. To deal with those issues, some commercial banks have started to dispose NPLs through asset securitisation. Recently, commercial banks were encouraged to swap debt for equity.
SECTION 6: Outlook
6.1 What are your predictions for the next 12 months for cross-border financing in your jurisdiction? How do you expect legal practice to respond?
The government’s control on overseas investment/acquisition will continue but will relax to a certain extent. Legal advisors need to closely follow the changes and propose appropriate structures in light of the changes.
CROSSABORDER FINANCING REPORT 2017 | IFLR.COM | 17 Hong Kong Jamie Logie and Jonathon Hannah, Sullivan & Cromwell
SECTION 1: Market overview
1.1 Please provide an overview of the cross-border financing market in your jurisdiction.
As an international financial centre Hong Kong enjoys many advantages, not least its strategic geographical position as a major hub sullcrom.com and gateway to Mainland China and its well-regarded common law legal system and independent judiciary. Its bank and bond markets are among the deepest, most liquid and most mature in the Asia-Pacific region, and operate under effective and transparent regulations which meet international standards. Bank liquidity through 2016/2017 has remained characteristically strong, with interest rates low, keeping syndicated loan volumes in Hong Kong at healthy levels despite turbulence in the global markets and the general slow-down in pan Asia-Pacific cross-border financing activity. While the bank term loan market continues in general to feature lower leverage, higher amortisation and tighter maintenance-based covenants than the US term loan B market, practice in this area is gradually converging. US/European-style leveraged finance has also gained popularity, with market participants making increased use of leveraged finance structures such as covenant-lite loans and bridge to high-yield bonds for acquisitions. We have also seen a number of leveraged transactions incorporate LMA-style ‘certain funds’ (vs. US- style SunGard) terms, even in transactions based in markets more generally familiar with US practice (for example Latin America). Hong Kong’s largest banks in terms of total assets are HSBC and Bank of China (Hong Kong). Bank of China also led the 1H2017 mandated lead arranger tables for Asia (excluding Japan and Australia), with HSBC and DBS Bank taking joint second place.
1.2 What have been the key trends or developments in cross-border financing in your jurisdiction over the past 12 months?
Syndicated loan volumes across Asia-Pacific (excluding Japan) fell to a five-year low of $184 billion in 1H2017, weighed down by the
18 | IFLR.COM | CROSSJBORDER FINANCING REPORT 2017 HONG KONG
Jamieson J Logie Jonathon G Hannah Partner, Sullivan & Cromwell Special counsel, Sullivan & Cromwell Hong Kong, China Hong Kong, China T: +852 2826 8688 T: +852 2826 8688 F: +852 2522 2280 F: +852 2522 2280 E: [email protected] E: [email protected] W: https://sullcrom.com/lawyers/JamiesonJ-Logie W: https://sullcrom.com/lawyers/JonathonG-Hannah
About the author About the author Jamie Logie is head of Sullivan & Cromwell’s Asia-Pacific Jonathon Hannah is special counsel at Sullivan & Cromwell, projects and English law finance practices, and has significant practicing in the Hong Kong office. Hannah covers the full experience acting for developers, borrowers and lenders in breadth of finance work, including project financing, various industries. Logie has more than 30 years of experience restructuring, corporate lending and acquisition finance. His in international legal practice, all focused on project, asset and experience includes financings in the mining, energy, other finance and development work, including acquisition petrochemicals and telecoms sectors in a wide variety of finance and restructurings. Logie’s outstanding experience jurisdictions, including Australasia, Africa, the CIS and the includes advising on the recent TCO $16 billion project Middle East. Hannah has represented developers, sponsors, financing for the expansion of its upstream operations at the banks and ECA in relation to some of the most complex and Tengiz supergiant oilfield in Kazakhstan; the 2016 restructuring high-profile projects globally. of Kenmare Resources’ project and corporate financings for its He is recommended in the 2016 and 2017 editions of Moma titanium project in Mozambique; the refinancing of the IFLR1000 and the 2014 edition of The Legal 500 UK for his Dolphin Energy Project in Qatar/UAE; Australia Pacific LNG’s project finance expertise in the natural resources sector. $8.5 billion financing for its LNG facility in Queensland; the BTC pipeline project financing in Azerbaijan/Georgia/Turkey; a number of mining projects in Africa and Asia; several of the first wave of independent power projects (IPPs) in Southeast Asia; China will continue to have a significant impact on Hong Kong’s credit and various cross-border corporate financings and profile. restructurings, including LG Philips’ $2 billion joint-venture financing in Asia. Logie has been recognised by numerous legal outlets and is 1.3 Have there been interesting changes in the described as “first rate, an excellent all-around advisor” structure of the banking sector in your jurisdiction? (IFLR1000, UK, 2017). While traditional banks remain the main providers of loan financings, the investor base is becoming increasingly diverse, particularly in the mezzanine/junior debt market where Chinese private equity sponsors slowdown in Chinese outbound M&A (which was the biggest driver and hedge funds have become regular participants. behind the acquisition finance boom in 2016). Although M&A On the regulatory side, the Hong Kong Monetary Authority financing activity in Hong Kong was also constrained, an increase in (HKMA) has been designated the ‘resolution authority’ for Hong the number of refinancing transactions helped ensure that loan volumes Kong’s banking sector under the Financial Institutions (Resolution) in the territory remained at healthy levels. We expect this trend to Ordinance (Firo), which came into force in July 2017. Firo provides continue given estimates which point to high volumes of offshore PRC for a special resolution regime for systemically important financial debt maturing in 2017. institutions and gives the HKMA power to take a range of resolution The ever-closer ties between the Hong Kong and Mainland China actions in the event that an institution becomes non-viable. financial systems and economies was another significant theme, with Hong Kong banks’ Mainland China exposure rising to 29.3% of system-wide assets in March 2017 (up from 27.3% in December SECTION 2: Financing structures 2016). Fitch Ratings expects a further increase in lending to the Mainland in 2017 as tightening onshore liquidity conditions add 2.1 Briefly outline some recent notable transactions incentives for Chinese companies to borrow offshore. Notably, Moody’s involving your jurisdiction, highlighting any Investor Services downgraded Hong Kong’s credit rating from Aa1 to interesting aspects in their structures and what they Aa2, following Moody’s earlier downgrade of Mainland China’s rating might mean for the market. from A1 to Aa3, reflecting Moody’s view that credit trends in Mainland Stand-out examples from 2016/2017 include China National
CROSSJBORDER FINANCING REPORT 2017 | IFLR.COM | 19 HONG KONG
Chemical Corp’s $12.7 billion bridge loan for the acquisition of Swiss the People’s Bank of China in May 2016, the rules introduce a new agribusiness Syngenta AG and Tencent’s $3.5 billion term loan and method for capping foreign debt incurred by PRC entities which is revolver for the acquisition of mobile gaming company Supercell Oy. based on an assessment of their net value/capital and outstanding The Syngenta transaction was the largest ever foreign acquisition by borrowings on a risk-weighted basis, rather than by reference to an a Chinese company to date. The Tencent transaction attracted annual quota issued by China’s National Development and Reform oversubscription from a diverse group of lenders, signalling increased Commission. The new regime is generally viewed as a liberalising move, market interest in lending to support emerging market companies (for which we expect will contribute to the increasing number of PRC example in the tech sector) which are perceived to be growth entities accessing debt offshore, particularly in Hong Kong. companies.
3.3 Are there any rules, legislation or policy 2.2 Have there been any significant developments in frameworks under discussion that may impact the way cross-border financing transactions are lenders or borrowers involved in cross-border structured or in the way borrowers and/or lenders are financing in your jurisdiction? participating in the market? The Hong Kong Financial Services and the Treasury Bureau is We have seen a number of banks add mezzanine debt tranches to preparing draft instructions for an amendment bill introducing a transactions where leverage for a senior portion exceeds 6x (up from statutory corporate rescue procedure and insolvent trading provisions 4x, the average limit a year ago). This is consistent with an observable into Hong Kong law. The Bureau has indicated that it will introduce increase in Hong Kong banks’ willingness to accommodate loans at the bill to the Legislative Council in late 2017/2018, though the higher leverage and bullet repayments with minimal amortisation. timetable for implementation remains unclear. In the bond markets, the Hong Kong-China Bond Connect programme launched in July 2017, kicking off a new cross-border regime giving international investors streamlined access to the PRC’s SECTION 4: Market idiosyncrasies $9 trillion inter-bank bond market. Earlier in 2017, the Hong Kong government issued the first 10-year sukuk (Islamic bond) launched by 4.1 Please describe any common mistakes or an AAA-rated government, attracting $1.72 billion in orders. Long- misconceptions that exist about the financing market term sukuk with a high credit rating is unusual in the international in your jurisdiction. markets and by extending the yield curve to 10 years, Hong Kong set a new pricing benchmark for sukuk bonds (3.132%, or 68 basis points Since its return to Chinese sovereignty in 1997, Hong Kong has over 10-year US treasuries). maintained its own independent legal system, protected under the Hong Kong SAR Basic Law, based on English common law and rules of equity. Participants unfamiliar with Hong Kong’s One Country, Two SECTION 3: Legislation and policy Systems constitutional framework are sometimes surprised by the number of differences between Hong Kong and PRC law and practice 3.1 Describe the key legislation and regulatory bodies and the level of independence of Hong Kong’s judiciary. One example that govern cross-border financing in your is in relation to the choice of governing law. Under Hong Kong law, jurisdiction. parties to a contract are free to choose the law that governs that agreement (as long as the choice of law is legal, unambiguous, bona- An entity which carries on a banking or deposit-taking business in fide and not contrary to public policy) and the Hong Kong courts will Hong Kong must obtain a licence and become an authorised generally give effect to and enforce such agreements. Facility documents institution under the Banking Ordinance. Authorised institutions are governed by New York or English law are therefore commonplace in regulated by the HKMA. Hong Kong. Any person other than an authorised institution that carries on business as a money lender (or who holds himself out as operating a lending business) must apply to a licensing court for a licence. Several 4.2 Are there frequently asked questions or often exemptions are available in relation to this requirement, including loans overlooked areas from parties involved in cross- to a company with a paid-up share capital of HKD1 million border financings in your jurisdiction? ($128,000) or more. We are frequently asked to advise on matters relating to the granting and enforcement of security. Common questions include: how security 3.2 Have there been any recent changes to regulations is taken over Hong Kong-incorporated/listed entities (generally by or regulators that may impact the cross-border mortgage or charge, though this depends on the type of shares in financing market and what impact do you expect question and whether they are publicly listed); and whether Mainland them to have? Chinese entities can provide security in respect of offshore financings made available to offshore debtors (generally yes, subject to PRC See 1.3 regarding the implementation of Firo in Hong Kong. registration/reporting requirements and other restrictions on maximum In Mainland China, a new nationwide macro-prudential leverage and use and repatriation of proceeds). management system for cross-border financings applies. Introduced by
20 | IFLR.COM | CROSSJBORDER FINANCING REPORT 2017 HONG KONG
4.3 Are there any classes of assets over which security and Miscellaneous Provisions) Ordinance, which applies to solvent, cannot be taken or regulations specific to your insolvent, members’ and creditors’ voluntary winding up processes. While jurisdiction governing the taking of security over certain restructurings implemented by way of scheme of arrangement under classes of assets that lenders should be aware of? section 669 of the Companies Ordinance are common, creditors should be aware that, in common with other jurisdictions such as the UK, this In general, security can be taken over any class of asset in Hong Kong. procedure lacks a moratorium on creditor actions and so is vulnerable to There are a limited number of statutory restrictions (for example in relation potential challenge from dissenting minorities. to assets of registered occupational retirement schemes). Creditors should also note that a lender may not be able to enforce security for a loan against a defaulting debtor if it is found that the security constitutes a transaction at an undervalue or an unfair preference under 4.4 What measures should be taken to best prepare for the C(WUMP)O. Certain floating charges may also be invalidated under your market idiosyncrasies? the C(WUMP)O, except to the extent that valuable consideration has been provided. Other restrictions on enforcement of security also apply under Hong Kong is a mature and highly sophisticated financing market. the C(WUMP)O and other Hong Kong legislation, including the Participants familiar with UK/European practice should not find the Bankruptcy Ordinance. market particularly surprising, though it is still important to obtain local advice, particularly where a transaction involves a PRC nexus. It is also useful to have some knowledge of market conditions and recent 5.3 Do foreign debt quotas apply in your jurisdiction and comparable transactions in order to secure the best pricing terms (which is offshore financing to domestic entities monitored? can vary by institution) and covenant package and to determine the optimal financing structure. Most bank loan documents negotiated in No. Hong Kong will be based on the standard forms recommended by the Asia Pacific Loan Market Association and/or the UK Loan Market Association, so familiarity with those documents is also beneficial. 5.4 Describe your jurisdiction’s relationship with non- performing loans (NPLs), including volume of outstanding NPLs and techniques/challenges in SECTION 5: Practical considerations managing them.
5.1 Briefly explain the downstream, upstream and cross- Despite a slight increase in NPL volumes in 2015/2016, the volume of stream guarantees available in your jurisdiction, with loans overdue by three months or more end-March 2017 remained low at reference to any specific restrictions or limitations. 0.66% of total gross loans according to HKMA statistics. Volumes are not expected to increase significantly in 2017, though a further slowdown in A Hong Kong-incorporated company may give upstream, downstream or Chinese outbound activity could have implications on Hong Kong banks’ cross-stream guarantees, provided that it is not restricted by its articles of asset quality risk, particularly given high average credit-to-GDP ratio and association from doing so. In addition, it must demonstrate that it has corporate sector leverage on the Mainland. requisite corporate capacity to enter into and derives sufficient corporate Credit risk is tightly managed by Hong Kong’s banking institutions, benefit from the transaction. For upstream guarantees and other who maintain stringent underwriting practices and operate under the close transactions where the benefit to the guarantor is less obvious, it is prudent supervision of the HKMA in relation to both their Hong Kong and to obtain both board and shareholder resolutions of the guarantor Mainland lending activities. approving the transaction. Under the Companies Ordinance, a prohibition on financial assistance applies where a Hong Kong-incorporated company (or its subsidiary) gives SECTION 6: Outlook financial assistance for the acquisition of its own shares (or those of its Hong Kong-incorporated parent). Part 5 of the Ordinance provides for 6.1 What are your predictions for the next 12 months three principal “whitewash” procedures which apply to both listed and for cross-border financing in your jurisdiction? How do unlisted companies, including one where the giving of financial assistance you expect legal practice to respond? is approved by written resolution of all members of the company and supported by a solvency statement and resolution of its directors in favour Consistent with developments over the last 12 months, we expect further of giving the assistance. a steady growth in lending by Hong Kong’s financing sector to Chinese Additional restrictions may also apply to Hong Kong-listed companies state-owned enterprises, corporates and non-bank borrowers, which should under the “connected transactions” provisions of the Hong Kong Listing Rules. lead to interesting opportunities for the legal profession. In particular, as Beijing’s ambitious Belt and Road initiative gains momentum, we predict increased opportunities in 2017/2018 for Hong Kong as a hub for 5.2 Are there any specific issues creditors should be outbound Chinese financing activity in infrastructure and other mindful of regarding a bankruptcy and restructuring investments across the Belt and Road regions. Practitioners who are able situation? to provide creative and flexible advice across the full spectrum of financing options are likely to be in high demand, particularly in the infrastructure There is no US Chapter 11-equivalent under Hong Kong law. The main investment space, where cutting-edge project finance expertise will be of collective winding up process is regulated by the Companies (Winding Up particular relevance.
CROSSJBORDER FINANCING REPORT 2017 | IFLR.COM | 21 India Sonali Mahapatra, Rituparno Bhattacharya and Nidhi Rani, Talwar Thakore & Associates
SECTION 1: Market overview
1.1 Please provide an overview of the cross-border financing market in your jurisdiction.
Cross-border financing in India can broadly be divided into four categories: • Borrowings under the external commercial borrowings (ECB) route from eligible foreign lenders; • Issuance of non-convertible debentures (NCDs) to foreign portfolio investors (FPIs) registered with the Securities and Exchange Board of India (Sebi); • Offshore financing to subsidiaries and joint-ventures of Indian parties, guaranteed or secured by the Indian party or its group entities (ODI financing) and; • Offshore financing to offshore shareholders of Indian companies secured by the shares of the Indian company (FDI financing). Each of these is subject to regulations prescribed by the Reserve Bank of India (RBI) and also, in the case of NCDs and any financing secured by listed shares, Sebi. International banks have been active in the ECB and offshore financing markets for a number of years. These have traditionally included European and American banks as well as (especially for ECBs) Japanese, Taiwanese, Australian and, more recently, Chinese banks. A number of them also have FPI entities which subscribe to NCDs.
1.2 What have been the key trends or developments in cross-border financing in your jurisdiction over the past 12 months?
As Indian banks are not permitted to provide acquisition financing, a number of acquisitions have been financed by NCDs subscribed to by FPIs and other domestic investors. Similarly, since foreign-owned and controlled Indian companies are not permitted to access the Indian rupee (INR) debt market for
22 | IFLR.COM | CROSS Sonali Mahapatra Rituparno Bhattacharya Partner, Talwar Thakore & Associates Partner, Talwar Thakore & Associates Mumbai, India Mumbai, India T: +91 226 613 6988 T: +91 226 613 6936 F: +91 226 613 6901 F: +91 226 613 6901 E: [email protected] E: [email protected] About the author About the author Sonali Mahapatra is a partner in the firm and a specialist in Rituparno Bhattacharya is a partner in the firm and an banking and finance with wide experience in Indian and experienced practitioner in banking and finance. He has international financings. She also advises a number of investors worked for international and domestic institutions on several for their infrastructure investments in India. Her experience structured finance, acquisition finance, asset finance and trade includes advising on acquisition finance, project and asset finance transactions. finance and structured finance. She has advised on a number of leading financing transactions. domestic acquisitions, they have started to explore the NCD route for debt component was financed by mutual funds and other alternative financing downstream acquisitions. credit providers through NCDs. In another interesting transaction, various subsidiaries of ReNew Power Ventures Private Limited (ReNew Power) issued INR 1.3 Have there been interesting changes in the denominated bonds overseas (commonly referred to as Masala bonds). structure of the banking sector in your jurisdiction? Each issuance was secured by Indian assets and guaranteed by ReNew Power and each other issuer. The Masala bonds were subscribed to by The market has witnessed the entry of various alternative credit an offshore special purpose vehicle (SPV), which raised funds for the providers such as mutual funds, distressed asset funds and credit desks subscription by issuing US dollar bonds to global investors, which were of private equity houses. in turn secured by the Masala bonds. This unique structure addressed In the banking sector, the RBI has amended its policy on universal the foreign investors’ concerns relating to taking a pure INR risk, while banking licences by adopting an ‘on tap’ policy for eligible applicants, enabling the Indian issuers to raise INR funding. under which resident professionals with experience in banking are eligible to promote banks. Large industrial houses are not permitted to promote banks but may invest up to a prescribed threshold. 2.2 Have there been any significant developments in The RBI has also introduced the licensing of new categories of Small the way cross-border financing transactions are Finance Banks and Payments Banks with the object of furthering structured or in the way borrowers and/or lenders are financial inclusion. Payments Banks are not permitted to lend, but can participating in the market? accept demand deposits up to prescribed limits and provide payment and remittance services. Small Finance Banks can undertake the basic A few key trends have included an increase in financings being banking activities of acceptance of deposits and lending to underserved structured through NCDs as opposed to ECBs; the issuance of Masala sectors, including micro and small industries and the unorganised bonds (but see paragraph 3.2 below); and widely syndicated deals being sector. replaced by bilateral or club deals. SECTION 2: Financing structures SECTION 3: Legislation and policy 2.1 Briefly outline some recent notable transactions 3.1 Describe the key legislation and regulatory bodies involving your jurisdiction, highlighting any that govern cross-border financing in your interesting aspects in their structures and what they jurisdiction. might mean for the market. The Foreign Exchange (Management) Act 1999, is the umbrella In one of the largest acquisition transactions in the Indian market, the legislation governing foreign exchange control, with the RBI as the Nirma group acquired the Indian cement assets of LafargeHolcim. main regulator governing, among other things, cross-border financings. Given the restriction on acquisition financing by Indian banks, the The Securities and Exchange Board of India Act 1992, is the umbrella CROSS legislation for the securities market, with Sebi as the main regulator governing, among other things, the issuance of listed debt securities, the registration and regulation of FPIs and takeovers of listed entities. 3.2 Have there been any recent changes to regulations or regulators that may impact the cross-border financing market and what impact do you expect Nidhi Rani them to have? Managing associate, Talwar Thakore & Associates Mumbai, India The market has seen some lender/investor friendly changes in the T: +91 226 613 6947 regulations, for example: F: +91 226 613 6901 • Eligible start-ups are now permitted to avail ECBs up to a specified E: [email protected] limit without an ‘all-in-cost’ cap, which otherwise applies to ECBs. • FPIs are now permitted to invest in unlisted NCDs, subject to some About the author end-use restrictions (previously they could invest only in listed Nidhi Rani is a managing associate with the firm specialising in NCDs except in the infrastructure sector). the banking and finance space and has advised several • The benefit of certain special legislation for debt recovery and international as well as domestic lenders. security enforcement, previously available only to Indian banks and certain financial institutions, is now extended to debenture trustees for listed debentures (and through them, FPI investors). There have also been some instances of tightening regulatory norms, 4.2 Are there frequently asked questions or often for example: overlooked areas from parties involved in cross- • FPIs can now only subscribe to NCDs with a remaining average border financings in your jurisdiction? maturity of three years at the time of investment, thus excluding them from the market for shorter tenor instruments. Other than exchange control restrictions, another critical point is the • The issuance of Masala bonds now requires the approval of the RBI impact of stamp duty. Stamp duty is payable on any agreement and has been made subject to additional conditions. executed in India or brought to India after execution. The rate varies from state to state and in certain cases, such as the assignment of contractual rights, it can be prohibitively high. This can have a 3.3 Are there any rules, legislation or policy significant impact on transaction and security structuring. frameworks under discussion that may impact lenders or borrowers involved in cross-border financing in your jurisdiction? 4.3 Are there any classes of assets over which security cannot be taken or regulations specific to your Amendments to the Companies Act 2013, (including in relation to the jurisdiction governing the taking of security over provision of guarantee and security) are currently being discussed in certain classes of assets that lenders should be aware of? the Indian parliament. The Indian government is also expected to review the working of Prior approval of the RBI is required for cross-border security except the new Insolvency and Bankruptcy Code, 2016 (IBC), with a view to for security for ECBs, ODI financing and in some cases, FDI strengthening processes and timelines based on interpretational issues financing. Even in these cases (except for NCDs) security creation is that have arisen. subject to approval from authorised dealer banks and prescribed The RBI has proposed draft regulations governing cross-border conditions. mergers, which will impact the structuring of acquisition finance deals Enforcement may be subject to restrictions as well. For example, involving debt pushdown through mergers. immovable assets can only be sold to an Indian resident and pledged shares must be sold in compliance with relevant regulations (including foreign investment regulations and, for listed shares, takeover SECTION 4: Market idiosyncrasies regulations). Finally, any remittance pursuant to a judgment of a court requires 4.1 Please describe any common mistakes or prior RBI approval. misconceptions that exist about the financing market in your jurisdiction. 4.4 What measures should be taken to best prepare The INR is not fully convertible and RBI imposes several restrictions for your market idiosyncrasies? on cross-border transactions, often prohibiting or regulating transactions that would be considered standard in developed markets. Given the highly regulated nature of the Indian cross-border financing New foreign entrants to the Indian market are often not aware of the market, it would be advisable for lenders to analyse the Indian significant impact this can have on the structuring of cross-border regulatory impact on their structures at an early stage to avoid any last financings. minute road blocks that may stall the transaction. 24 | IFLR.COM | CROSS SECTION 5: Practical considerations creditors, they may have limited control given that the debt profile of Indian borrowers is typically skewed in favour of domestic debt; 5.1 Briefly explain the downstream, upstream and • as with other jurisdictions, the IBC provides for avoidance of certain cross-stream guarantees available in your jurisdiction, preferential transactions, transactions at an undervalue, extortionate with reference to any specific restrictions or credit transactions and certain floating charges, in each case, within limitations. specified hardening periods. The key restrictions (most of which apply to security creation as well) are: 5.3 Do foreign debt quotas apply in your jurisdiction • if the guarantor is a public company, financial assistance restrictions and is offshore financing to domestic entities apply; monitored? • subject to certain exceptions, no guarantee can be provided by a company to or on behalf of: a private company in which a director Foreign investments in corporate debt instruments (which include of the guarantor (Director) is a director or a member; any firm in NCDs and Masala bonds) is capped at an aggregate of $51 billion. which a Director or its relative is a partner; a body corporate in In addition, there are limits on raising of ECBs by a borrower which at least 25% of the voting rights is exercised by one or more (ranging between $100 million to $750 million, depending on the Directors; or a body corporate, whose board or manager acts in industry sector the borrower is in) and any ECB in excess of such limit accordance with the instructions of any Director. requires approval of the RBI. These limits are monitored through • The guarantees must be within the limits prescribed under the mechanisms prescribed by the RBI and Sebi. Companies Act 2013, unless increased through a special resolution of the shareholders; and • the guarantee will require prior approval of a public financial 5.4 Describe your jurisdiction’s relationship with institution if the guarantor has taken any loans from it and either non-performing loans (NPLs), including volume of the amount of the guarantee exceeds the limits under Companies outstanding NPLs and techniques/challenges in Act 2013 or the guarantor has defaulted under such loan. managing them. • For cross-border guarantees, where: (a) guarantees for offshore joint-ventures/wholly-owned subsidiaries Indian banks are burdened with high levels of non-performing debt, are permitted subject to financial caps, equity holding and other with estimates varying between 7.5% to over 9% of total gross loans. specified requirements; While macroeconomic factors and questionable credit assessment have (b) guarantees for overseas holding companies require RBI approval; been major causes, debtor-friendly courts, long resolution periods and (c) guarantees for any ECBs by an Indian company are subject to low recovery rates and have only compounded the problem. specified requirements and must be approved by an authorised dealer Domestic lenders have in the past typically contractually restructured bank – ECBs cannot be guaranteed by banks or non-bank finance their debt under the RBI’s schemes mentioned in paragraph 5.2 above, companies; as these provide them provisioning benefits. Another method has been (d) NCDs can be guaranteed by parent/group companies/promoters to sell NPLs to asset reconstruction companies at a discount under of the issuer without regulatory approvals but not by banks; and special legislation. However, these methods have shown limited success (e) necessary filings must be made. in the revival of stressed assets or in providing a broader solution to systemic issues. The IBC is a new legislation with its own share of teething problems, but is clearly a step in the right direction to 5.2 Are there any specific issues creditors should be addressing this issue. mindful of regarding a bankruptcy and restructuring situation? SECTION 6: Outlook The RBI prescribes various contractual mechanisms for restructuring of debts, which are available to and mandatory for Indian lenders. 6.1 What are your predictions for the next 12 months Overseas lenders and bondholders are not bound by such restructurings for cross-border financing in your jurisdiction? How but neither do they have any role to play and, as a result, may find do you expect legal practice to respond? themselves excluded from the restructuring of a significant part of the borrower’s debt. Acquisition finance (primarily led by private equity houses) through The IBC provides a more unified approach. Any creditor (including both offshore financing and NCDs is expected to continue and increase foreign creditors) whose debt is under default can make an application in volume. With the increased level of non-performing assets in the to the National Company Law Tribunal (NCLT) to initiate an Indian banking system, more activity can be expected in the distressed insolvency resolution process. debt space as well. Lastly, alternative credit providers such as stressed A few key considerations to note here are: asset funds and the credit desks of private equity houses are expected • if the petition is admitted, an automatic moratorium (of 180 days, to play a prominent role in the financing market. Legal practitioners extendable to 270 days) is imposed on any suits or claims against will need to be aware of the issues and considerations that are relevant the company; to these new financiers, which may often be different from the • while foreign creditors may initiate a resolution process, given that traditional players in the market. decision making is by a 75% vote (by value) of all financial CROSS SECTION 1: Market overview 1.1 Please provide an overview of the cross-border financing market in your jurisdiction. The Indonesian banking sector is dominated by state-owned banks and some private banks, such as BCA and CIMB Niaga. Among the state- owned banks, Bank Rakyat Indonesia has the most assets, followed by www.makarim.com Bank Mandiri. Many foreign banks provide cross-border loans to Indonesian companies. Financing can be either bilateral or syndicated and can be used for a specific project in Indonesia, for the purchase of machinery (ECA) by an Indonesian borrower or as the working capital of the Indonesian borrower. Currently, our jurisdiction’s role is still dominated by borrowing rather than lending. 1.2 What have been the key trends or developments in cross-border financing in your jurisdiction over the past 12 months? As there are many infrastructure projects currently in process, much recent cross-border financing is related to these projects. This includes financing toll roads, power plants, smelters and a high-speed train. In 2016, the Financial Services Authority ( Otoritas Jasa Keuangan – OJK), as the regulator of the banking and financial sector, started to regulate so fintech activities under regulations on peer-to-peer lending activities. 1.3 Have there been interesting changes in the structure of the banking sector in your jurisdiction? There has been no significant interesting change in the structure of the banking sector in Indonesia. However, offshores financing provided by banks from Asian countries seems to be increasing. From a regulatory point of view, there has been increased focus on bank ownership, 26 | IFLR.COM | CROSSABORDER FINANCING REPORT 2017 INDONESIA Maria H Sagrado Hanny Marpaung Partner, Makarim & Taira S Senior associate, Makarim & Taira S Jakarta, Indonesia Jakarta, Indonesia T: +62 21 2521272 T: +62 21 2521272 F: +62 21 2522750 F: +62 21 2522750 E: [email protected] E: [email protected] W: www.makarim.com W: www.makarim.com About the author About the author Maria Sagrado has extensive high-level experience in Hanny Marpaung works on a broad range of capital markets structuring foreign investment and financial transactions. She matters. She has extensive experience in structuring represents the interests of numerous foreign clients investing in transactions; conducting legal research and due diligence; Indonesia, including companies and investors from the China, preparing legal opinions; drafting and reviewing transaction the US, the UK, Singapore and the European Union across a documents; and other matters related to initial public offerings, wide range of sectors, including power plants, rights issues, bond issuances, tender offers, acquisition and pharmaceuticals, plantations, distribution, department stores, corporate actions conducted by public as well as private mining and other business areas. Combining her European and companies. Marpaung has an extensive experience in the Indonesian exposure, Sagrado’s well-rounded experience in corporate and commercial and financial services area and has relevant corporate and commercial practices enables her to been involved in a wide range of significant transactions comprehensively advise and guide foreign clients on local involving both domestic and international corporations. She is investments or transactions in Indonesia, with due also experienced in mergers and acquisitions, joint-ventures consideration of the various aspects involved. and advising clients ranging from business start-ups to Sagrado’s ability to forge a rapport between disparate seasoned companies. parties and drive solutions is also showcased by her successful track record executing prominent finance transactions involving leading foreign banks, in particular banks from China, Germany, Malaysia and other European countries, as well as offshore export credit agencies (such as Sinosure, Euler Hermes, SACE, OeKB) in the financing of Indonesian borrowers including state-owned enterprises (SOEs), power plants, major mining related industries and manufacturing companies. governance and compliance as well as on foreign workers in the the development of two 1,000MW coal-fired power plants located in banking industry. Central Java Province, Indonesia. Upon its completion, the project will be one of the largest independent power producers (IPP) in Asia. Also, in the pipeline, there will be another syndication of offshore banks SECTION 2: Financing structures which will provide $1.74 billion of loan facilities to a project company for the development of a 1,000MW coal-fired power plant. These 2.1 Briefly outline some recent notable transactions projects are very important to support the government’s 3.5GW power involving your jurisdiction, highlighting any project plan. These projects involve so many corporate and finance interesting aspects in their structures and what they aspects, including the development of a complex ‘self-help’ remedy might mean for the market. mechanism for the lenders that could set a precedent for similar projects in the future. In the first quarter of 2017, a syndication of Japan Bank for In March 2017, the Republic of Indonesia issued a global five-year International Corporation, Mizuho Bank, Sumitono Mitsui Banking sukuk worth $1 billion and a 10-year sukuk of $2 billion under Reg Corporation, The Bank of Tokyo-Mitsubishi UFJ, Sumitomo Mitsui S/144A Trust Certificates due in 2022 and 2027, respectively (the Trust Bank, Mitsubishi UFJ Trust and Banking Corporation, The Wakala Sukuk). The Wakala Sukuk are the largest ever non-GCC (Gulf Norinchukin Bank and Singapore’s Oversea-Chinese Banking Cooperation Council) US dollar sukuk transactions, and the largest Corporation extended a $4.3 billion loan to PT Bhumi Jati Power for US dollar sukuk issued by Indonesia. CROSSABORDER FINANCING REPORT 2017 | IFLR.COM | 27 INDONESIA 2.2 Have there been any significant developments in SECTION 4: Market idiosyncrasies the way cross-border financing transactions are structured or in the way borrowers and/or lenders are 4.1 Please describe any common mistakes or participating in the market? misconceptions that exist about the financing market in your jurisdiction. There has been no significant development in the structuring of cross- border financing. As the Indonesia Stock Exchange composite index Regardless of a court case over this requirement, we see in the market has been growing steadily, Indonesia’s bond market has also grown over that foreign lenders are still using the English language only as the the past year, including Islamic finance. Indonesia’s financing market language of most loan documentation. Since the enactment of the can now be seen as a balanced combination of conventional financing National Flag, Language, Emblem and Anthem Law (the Language and more diversified debt instruments. Law) in 2009, many foreign lenders have signed their loan agreements in at least a bilingual English and Indonesian version. This trend became more pronounced in 2013 after the West Jakarta District Court SECTION 3: Legislation and policy declared a loan agreement signed in the English language only null and void. This decision was upheld by both the High and the Supreme 3.1 Describe the key legislation and regulatory bodies Court. It is expected that this situation will not change until the that govern cross-border financing in your implementing regulation of the Language Law, which may regulate any jurisdiction. sanctions for failure to comply is issued. Reporting obligations to Bank Indonesia and others must also be The OJK is the regulatory agency that governs financing activities in complied with because some courts have ruled that failure to report Indonesia and Bank Indonesia, as the central bank, regulates payment affects the validity of a loan agreement. Even if Indonesian law does systems and overseas macro-prudential aspects of the banking sector. not require judges to follow precedent, these rulings may be taken as There is no specific regulation on cross-border financing, except that an indication of Indonesian judges’ view of certain matters. Indonesian borrowers must comply with certain reporting requirements (and in some cases, obtain prior approval). These reporting requirements include reporting by Indonesian companies of 4.2 Are there frequently asked questions or often their offshore plans and their implementation to Bank Indonesia. These overlooked areas from parties involved in cross- companies must also comply with the prudential principle by applying border financings in your jurisdiction? the required hedging ratio, liquidity ratio and credit rating, unless they are eligible for a certain exemption. Certain reports must also be Depending on their line of business, some companies in Indonesia may submitted to the Minister of Finance and the Offshore Commercial be required to obtain additional approval for their proposed offshore Loan Coordinating Team (PKLN Team). loan. For instance, for a power plant, if the project owner enters into a sale and purchase of power agreement (a PPA) with PT PLN (Persero) and wants to obtain an offshore loan, it must, regardless of the amount 3.2 Have there been any recent changes to regulations of the loan, obtain prior approval from the PKLN Team. Also, it is or regulators that may impact the cross-border important to check the business licences of Indonesian borrowers, such financing market and what impact do you expect as their Investment Coordinating Board (BKPM) approvals that state them to have? their loans as part of their investments, against the amount of the loan that they will obtain from the lenders. The obligation to apply the prudential principle to offshore loans in Indonesia does not yet have a centralised data system that is foreign currencies came fully into effect in 2017, the latest development accessible to the public regarding any dispute or case (including being the requirement that all hedging transactions be conducted with bankruptcy) involving a company. A manual search by submitting an Indonesian banks, effective January 1 2017. Regulations on security application to each relevant court, under a power of attorney from the interests and guarantees remain the same. relevant company, is required for court searches. 3.3 Are there any rules, legislation or policy 4.3 Are there any classes of assets over which security frameworks under discussion that may impact cannot be taken or regulations specific to your lenders or borrowers involved in cross-border jurisdiction governing the taking of security over financing in your jurisdiction? certain classes of assets that lenders should be aware of? In 2017, the OJK plans to issue regulations on the management of In Indonesia, bank accounts cannot be secured by way of fiduciary conglomerate liquidity risks, conglomerate capital management and security. In some cases, they are secured under a pledge, and it remains intragroup transactions. The OJK also plans to issue regulations on unclear whether this is an appropriate security interest for bank liquidity management and the prevention and management of a accounts. The establishment of security over aircraft is not clear either financial system crisis. Some regulations on Sharia banking and because there is, as yet, no formal and clear type of security recognised financing as well as fintech activities are expected to be issued as well. by the authorities that can be placed over an aircraft. In practice, the However, there is no certainty that these new regulations will in fact security interests are established over the machinery and equipment of be issued this year. the aircraft. 28 | IFLR.COM | CROSSABORDER FINANCING REPORT 2017 INDONESIA 4.4 What measures should be taken to best prepare 5.2 Are there any specific issues creditors should be for your market idiosyncrasies? mindful of regarding a bankruptcy and restructuring situation? As it is now possible to access the Ministry of Law and Human Rights online system to check certain corporate information, such as listed Under the Indonesia Bankruptcy Law, two types of proceedings may be shareholders, the members of the board of directors and the board of commenced: bankruptcy proceedings, whereby the borrower will lose its commissioners and the latest company deed etc., it is advisable to power to manage and dispose of its assets; and a legal debt moratorium conduct a search to obtain preliminary information about an or suspension of payment proceedings, whereby the borrower, at the Indonesian borrower. Based on the information, lenders can then ask request of the lender or the borrower itself, is given temporary relief to for the complete set of the Articles of Association of a company to find restructure its debts and continue doing business, and ultimately to satisfy out if there is any limitation on the board of directors’ authority to its obligation to its creditors. obtain loans or establish security over the company’s assets. All the procedures for these types of proceedings must be completed For taking security over plots of land, the lender should consider within a certain timeline and cannot be avoided and the lenders should checking the status of the land at the relevant Land Office. This be careful about the timing issues. A petition for bankruptcy also has two requires a power of attorney from the borrower or the landowner. requirements: the borrower must have more than one lender and must Lenders should also check the borrower’s business licences and have failed to settle in full one of its debts, which must be due and payable. approvals, such as its BKPM approvals, to check the permitted loan In addition, the bankruptcy/suspension of payment petition can be amount. If the permitted loan amount does not correspond to the loan granted if there are facts and circumstances that can be simply proven. amount to be obtained by the company, the company should amend Since the proceedings will involve other creditors, it is important that the relevant approval to change the loan amount. all the creditors communicate and remain on good terms and cooperate with each other. SECTION 5: Practical considerations 5.3 Do foreign debt quotas apply in your jurisdiction 5.1 Briefly explain the downstream, upstream and and is offshore financing to domestic entities cross-stream guarantees available in your jurisdiction, monitored? with reference to any specific restrictions or limitations. No foreign debt quotas apply. However, the licences and permits of a foreign investment company, such as its BKPM approval and the In Indonesia, the types of security usually used for financing are the approval from the PKLN team, may set out the total amount of loans following: the company may have. BKPM has been imposing a policy that a) fiduciary security: usually established over receivables, insurance requires foreign investment companies to limit their debt-to-equity proceeds, inventory, machinery and equipment and/or immovable ratio to the ratio stated in their BKPM approval. The debt-to-equity assets that cannot be secured by security rights; (paid up capital) ratio imposed by BKPM depends on the company’s b) security rights over land ( Hak Tanggungan ): which can be line of business, but is usually 3:1. Certain lines of business, such as established over plots of land and assets attached to the land; power companies, may obtain a higher ratio, such as 10:1 or 15:1. c) pledges; usually established over shares; d) corporate guarantees and/or personal guarantees. Contracts cannot be an object of security. Most commonly, they are 5.4 Describe your jurisdiction’s relationship with ‘secured’ under a conditional assignment agreement by the lender and non-performing loans (NPLs), including volume of the borrower and acknowledged by the counterparty. outstanding NPLs and techniques/challenges in Shares can be secured by either a pledge or a fiduciary security. managing them. However, since fiduciary security must be registered with the Fiduciary Registration Office where the grantor is domiciled, fiduciary security According to the Indonesia Banking Statistics issued by the OJK in March over shares owned by foreign parties cannot be registered and therefore, 2017, the NPL ratio has increased since 2014. According to the report, established. In this situation, the shares can be secured under a pledge. the gross NPL in 2014 was 2.16%, while as of March 2017, the gross If the security granted to the creditors involves assets that constitute NPL was 3.04%. NPLs are usually managed by restructuring the loans. more than 50% of the net assets of the company in one or more transactions (whether related or unrelated transactions which cumulatively constitute more than 50% of net assets), then that action SECTION 6: Outlook requires approval from a general meeting of shareholders of the company. 6.1 What are your predictions for the next 12 months In Indonesia, to provide guarantees or security for another party’s for cross-border financing in your jurisdiction? How debt, a corporate benefit should exist. Actions which do not clearly do you expect legal practice to respond? show a corporate benefit for the company may be difficult to enforce. Indonesia still requires significant further infrastructure investment. Therefore, the trend in financing will likely remain in infrastructure projects. Asian banks from China, Japan and Korea will be increasingly active in cross-border financing activities in Indonesia. CROSSABORDER FINANCING REPORT 2017 | IFLR.COM | 29 Nigeria Aniekan Ukpanah and Onyinye Okafor, Udo Udoma & Belo-Osagie SECTION 1: Market overview 1.1 Please provide an overview of the cross-border financing market in your jurisdiction. In Nigeria, most cross-border financing transactions involve foreign lenders providing loans to Nigerian banks and other corporates. The parties may, in order to gain certain tax benefits, either structure the www.uubo.org loan to have, among other things, a tenor of between five to seven years for the interest payments to be partly or wholly exempt from the withholding of tax, or structure the transaction such that the lender would be an entity incorporated in a country that has an effective double tax treaty with Nigeria. For such cross-border financing transactions, the Nigerian party is most likely to be the borrower, as it is not common for Nigerian parties to lend money to foreign entities. Some of the dominant lenders we have seen in the Nigerian market in recent times include international financial institutions, development finance institutions, multi-national banks, export credit agencies and private equity investors and funds. In order for a foreign lender to remit its interests and principal through the official foreign exchange market, it must provide evidence (in the form of a certificate of capital importation (CCI)) that foreign capital was brought into Nigeria and converted into naira. Other than this foreign exchange requirement, there are no particular requirements that must be met by a foreign lender in order to engage in cross-border financing transactions in Nigeria. 1.2 What have been the key trends or developments in cross-border financing in your jurisdiction over the past 12 months? The decline in oil prices from 2014 caused a shortage in foreign currency inflow into Nigeria. The country also witnessed a significant reduction in foreign lending to Nigerian institutions. The situation was exacerbated by the challenges encountered by Nigerian borrowers in 30 | IFLR.COM | CROSS=BORDER FINANCING REPORT 2017 NIGERIA Aniekan Ukpanah Onyinye Okafor Partner , Udo Udoma & Belo-Osagie Managing associate , Udo Udoma & Belo-Osagie Lagos, Nigeria Lagos, Nigeria T: + 234 1 462 2307-12 T: + 234 1 462 2307-12 E: [email protected] E: [email protected] W: www.uubo.org W: www.uubo.org About the author About the author Aniekan Ukpanah heads the firm’s banking and finance practice Onyinye Okafor is a managing associate in the firm’s banking as well as the projects and infrastructure practice. His and finance team. She is familiar with the documentation specialisations include banking, capital markets, corporate and requirements for the implementation of financing arrangements. project finance, syndicated lending, debt restructuring, Her specialisations include corporate and project finance, securitisation and infrastructure projects including public derivatives and structured finance, debt restructuring, private partnerships. Ukpanah also has particular expertise in syndicated lending, on-lending transactions, secured multi-sourced financings. He has advised clients extensively on transactions, capital market and insolvency. She has been project development and infrastructure financing transactions. involved in the structuring and financing of various projects and A good number of his transactions have been recognised as advises clients on a day to day basis on a range of corporate award winning deals in Nigeria. advisory matters and issues concerning the creation and perfection of security. sourcing foreign exchange to settle their maturing foreign debt in the Stamp Duties Act, unsecured loan agreements (as a category obligations to foreign lenders due to the unavailability of foreign of agreements under hand) were subject to stamp duty at a nominal currency. This led to parties restructuring some of their foreign loans amount of NGN500.00 but the notice specifies that the stamp duty either by re-denominating the loans, where possible, in local currency payable on unsecured loan agreements will be assessable at an ad or transferring the debt obligations to an offshore related party. Some valorem rate of 0.125% of the loan sum. Expectedly, the notice has foreign lenders who took a more optimistic view of the market generated much debate as it has had a significant impact on lending extended the tenor of their loans. costs in Nigeria. Arguably, the notice by the FIRS cannot amend Responding to the liquidity challenges in the foreign exchange the provisions of the Stamp Duties Act and, therefore, is illegal. market, the Central Bank of Nigeria (CBN) introduced certain However, until it is set aside by a court of competent jurisdiction, measures, which were aimed at managing the available foreign currency it is certain that, in order to meet its revenue targets, the stamp and ensuring timely settlement of transactions eligible for foreign duties commissioner in assessing stamp duty payable on unsecured exchange. One of the notable measures was the introduction of a special loan agreements will do so in accordance with the notice. investors’ and exporters’ FX window called the Nigerian Autonomous Foreign Exchange Fixing (Nafex Window) on April 24 2017. This enables parties with foreign currency to buy and sell foreign exchange 1.3 Have there been interesting changes in the at a market-determined rate. Participants in the Nafex Window can structure of the banking sector in your jurisdiction? buy and sell foreign exchange at rates mutually agreed between them. In relation to lending, foreign lenders are now able to obtain foreign In 2016, Providus Bank was granted a commercial banking licence by currency in the Nafex Window at a market-determined rate in order the CBN to operate as a regional bank. to repatriate interest and principal on loans provided to Nigerian borrowers. Other notable developments in the Nigerian market are: SECTION 2: Financing structures • the CBN has replaced physical CCIs with electronic certificates. All investors with physical CCIs that have not been fully utilised or 2.1 Briefly outline some recent notable transactions cancelled are required to have such certificates dematerialised and involving your jurisdiction, highlighting any converted into e-CCIs. Going forward, CCIs will be issued through interesting aspects in their structures and what they the e-CCI electronic platform; might mean for the market. • the Federal Inland Revenue Service (FIRS) issued a notice in December 2016 which seems to revise the rate of stamp duty There are some notable transactions in Nigeria, which we are unable payable on loan agreements. Prior to the notice and as prescribed to disclose for confidential reasons. Some of these transactions have CROSS=BORDER FINANCING REPORT 2017 | IFLR.COM | 31 NIGERIA some interesting elements. For instance, in one of such transactions, SECTION 4: Market idiosyncrasies which involves lending by related parties, the related-party lenders agreed to convert their outstanding loans to equity. This restructuring 4.1 Please describe any common mistakes or is aimed at managing the debt portfolio of the Nigerian borrower. misconceptions that exist about the financing market In another cross-border finance transaction, the parties structured in your jurisdiction. the transaction such that an offshore affiliate of the Nigerian entity became the borrower of record even though the purpose of the loan A misconception which exists in relation to financing transactions in was to finance the project of the Nigerian entity. The loan provided to Nigeria is that foreign lenders often believe that they are able to remit the offshore affiliate was pushed to the Nigerian entity as an advance interest and loan repayments made by a borrower, through the official payment for products to be exported by the Nigerian entity to third foreign exchange market without a CCI. Even where the lenders party purchasers. Due to exchange regulations in Nigeria restricting understand that a CCI is necessary for repatriation, they believe that the use of export proceeds, payment for the export by third party once the funds are remitted to a borrower in Nigeria, a CCI will be purchasers were paid directly to the lender through the offshore issued without having to take any further steps. This is largely untrue borrower. as the foreign exchange regulations, require that the foreign capital Another notable transaction that completed recently, is the financing (where it is in the form of cash) being brought into Nigeria has to be of the Azura Independent Power Plant IPP. In that transaction, the converted into naira before a CCI can be issued. Federal Government of Nigeria nominated the Azura IPP for the world Another common mistake is where parties structure a transaction bank partial risk guarantee (WB PRG). Although a number of other such that fees (such as agency fees, arrangement fees etc.) payable to greenfield IPPs have been nominated for the WB PRG, the issuance of the finance parties in respect of the transaction, are deducted at source the WB PRG had a positive influence in the bankability of the Azura prior to an inflow of the loan into Nigeria. As we indicated above, a IPP and made it possible for the parties to achieve financial close. CCI evidences that foreign capital was inflowed into Nigeria and is required to reflect the actual amount of foreign capital brought into Nigeria. Where fees are deducted at source, the CCI will only reflect 2.2 Have there been any significant developments in the amount that was actually brought into Nigeria, which is the loan the way cross-border financing transactions are sum less the fees that was deducted offshore. What this means is that structured or in the way borrowers and/or lenders are at the time of repayment, the lender can only repatriate the amount participating in the market? indicated on the CCI and interest thereon from the official foreign exchange market (i.e. the loan amount less the fees). No. 4.2 Are there frequently asked questions or often SECTION 3: Legislation and policy overlooked areas from parties involved in cross- border financings in your jurisdiction? 3.1 Describe the key legislation and regulatory bodies that govern cross-border financing in your Some of the frequently asked questions in cross-border financings jurisdiction. include tax and foreign exchange restrictions, corporate benefit rules, whether there are any advantages in having the security documents There is no singular legislation or regulatory body that governs cross- governed by local law, and enforcement of security. We have discussed border financing in Nigeria. Where the relevant Nigerian entity is a the foreign exchange restrictions above. In relation to tax, foreign bank, the bank would be required to comply with the regulations and lenders often seek to understand the rate at which tax would be directives issued by the CBN from time to time. withheld on payments in lending transactions and the available structuring options. It is possible to structure foreign loans in a manner such that no tax is payable on interest. Some partial tax exemptions 3.2 Have there been any recent changes to regulations can be achieved where the lender is incorporated in a country with or regulators that may impact the cross-border which Nigeria has signed a double taxation agreement. financing market and what impact do you expect them to have? 4.3 Are there any classes of assets over which security No. cannot be taken or regulations specific to your jurisdiction governing the taking of security over certain classes of assets that lenders should be aware 3.3 Are there any rules, legislation or policy of? frameworks under discussion that may impact lenders or borrowers involved in cross-border Generally, security can be created over all classes of assets. However, financing in your jurisdiction? there are regulatory or contractual restrictions to the creation of valid and enforceable security over certain classes of assets. For example, There is none to the best of our knowledge. under Nigeria’s Land Use Act, an assignment, mortgage, transfer, sublease or other disposal of an interest in land requires the consent of the Governor of the state where the land is situated in order to be valid 32 | IFLR.COM | CROSS=BORDER FINANCING REPORT 2017 NIGERIA and enforceable. In relation to rights arising under authorisations and regulations require that the foreign guarantor must be a first-class bank licences, since these are considered personal to the beneficiary or licence or any other bank that is acceptable to the CBN. Where the guarantee holder, an assignment or transfer of the beneficiary’s or licence holder’s is in the form of foreign currency deposits, the funds must be held in rights to a third party as security requires the issuing authority’s consent. an account that is acceptable to the CBN. The CBN prohibits assigning Nigerian residents’ (whether a corporate or a natural person) annuities and insurance policies to non- residents. If a non-resident lender intends to take security over residents’ 5.2 Are there any specific issues creditors should be insurance policies, that lender would either: (i) appoint a local security mindful of regarding a bankruptcy and restructuring agent to which the insurance proceeds are assigned on the lender’s situation? behalf, or (ii) require the borrower to establish an insurance proceeds account into which all insurance proceeds are paid, and then take One issue that creditors should be mindful of in restructuring security over that account. The insurance industry prudential guidelines transactions relates to fraudulent preference. By virtue of section 495 prohibit the assignment of reinsurance policies. of Cama, section 498 of Cama (specifically applicable to floating charges created during the ‘hardening period’), and of section 46 of the Bankruptcy Act 2004, any payment, conveyance, security, etc. or 4.4 What measures should be taken to best prepare other act relating to property made or done by or against a company for your market idiosyncrasies? within the three month period prior to the commencement of winding up proceedings against the company, or of when the company’s Other than in relation to foreign exchange requirements and corporate shareholders pass a resolution for the voluntary winding up of the authorisations, there are no mandatory or specific requirements that company, shall be deemed a fraudulent preference of the company’s parties are required to meet in order enter into cross-border financing creditors and be invalid accordingly. In this event, the liquidator will transactions in Nigeria. In entering such transactions, however, parties have the right to claw back any payment made during this period. A should seek legal advice at an early stage of the transaction in order to lender may however challenge the liquidator’s right to claw back such avoid mistakes in structuring the transaction and also to ensure that security or guarantee if it can establish that the borrower or the they do not breach any regulatory requirements. guarantor was in fact not insolvent at the time of the conveyance, payment or creation of security. SECTION 5: Practical considerations 5.3 Do foreign debt quotas apply in your jurisdiction 5.1 Briefly explain the downstream, upstream and and is offshore financing to domestic entities cross-stream guarantees available in your jurisdiction, monitored? with reference to any specific restrictions or limitations. Foreign debt quotas, generally, do not apply in Nigeria. However, where the borrower is a Nigerian bank, such bank must comply with Under Nigerian law, a company incorporated in Nigeria can provide the foreign currency exposure limits stipulated by the CBN. third party security or guarantee if its constitutional documents permit the company to do so, and if its directors, acting in good faith and in the best interests of the company, approve the arrangement. If the 5.4 Describe your jurisdiction’s relationship with commercial benefit of such arrangement is unclear, it would be prudent non-performing loans (NPLs), including volume of for the lenders to obtain the company shareholders’ approval outstanding NPLs and techniques/challenges in confirming that the arrangement is for the benefit of the company. managing them. In relation to upstream guarantees, however, the issue to be considered is whether the subsidiary providing such guarantee to the The issue of non-performing loans (NPLs) is relevant in respect of parent company will breach the financial assistance restriction under financing transactions where the lender is a Nigerian bank. The total Nigeria’s companies’ law by providing the guarantee. NPLs which a Nigerian bank is allowed to hold cannot be more than Section 159 of Companies and Allied Matters Act 2004 (Cama) 5% of the bank’s total loan portfolio. Banks are required to make prohibits Nigerian companies or their subsidiaries from giving financial provisions ranging from 25% to 100% of the outstanding amount assistance, directly or indirectly, to any person for the purpose of depending on the number days for which the loan is delinquent. acquiring the shares of that company or reducing or discharging any According to the Financial Stability Report of the CBN in 2016, the liability incurred in relation to such acquisition. This means that where ratio of NPL to gross loans was 14% as at December 2016. the guarantee is provided by the subsidiary to support a loan which would be used by the parent to acquire shares of the subsidiary, this would amount to a breach of the financial assistance and would be unlawful. Nigerian banks are restricted from accepting foreign guarantees on naira loans. The only foreign guarantees allowed on naira loans are limited to bank guarantees and foreign currency deposits irrespective of whether the foreign currency is in a foreign bank or in a domiciliary account with a bank in Nigeria. In relation the bank guarantee, CBN CROSS=BORDER FINANCING REPORT 2017 | IFLR.COM | 33 NIGERIA SECTION 6: Outlook 6.1 What are your predictions for the next 12 months for cross-border financing in your jurisdiction? How do you expect legal practice to respond? Following the introduction of the Nafex Window, which has enhanced liquidity in the foreign exchange market, we are seeing an increase in foreign investment into Nigeria. Barring any significant shock in the market, we expect, therefore, that there will be an increase in cross- border financing over the next 12 months. Agriculture and export related funding seem to be on the increase and we expect to see more cross-border funding for this sector. We also believe that export credit agencies and investment funds will become a significant provider of cross border funding in the next 12 months. The Nigerian government intends to launch a Power Sector Recovery Programme (PSRP) in partnership with the World Bank Group (including the International Finance Corporation (IFC), the Multilateral Investment Guaranty Agency (Miga) and the African Development Bank (AfDB)) to restructure the sector. As part of the PSRP, the World Bank Group will directly invest $2.5 billion once certain conditions are met, the AfDB will invest $1billion and the IFC and Miga have, in principle, offered to mobilise additional $2.7 billion of private capital to the sector. A key obligation of the FGN under the PSRP is to publish and implement a cost-reflective tariff structure. Ahead of the PSRP and to address the liquidity challenges in the power sector, the FGN approved a NGN701 billion ($2 billion) payment assurance guarantee (PAG) for the power sector, which is provided by the CBN. The PAG is to ensure that undisputed invoices issued by the power generating companies within 24 months from January 2017 are paid in full by the Nigerian Bulk Electricity Trading. With these measures, we expect to see more cross-border funding in the electric power and gas sectors. In addition to demonstrating competence and experience in delivering legal work of a very high standard, we expect that law firms will be very competitive in pricing in order to win deals. 34 | IFLR.COM | CROSS=BORDER FINANCING REPORT 2017 Switzerland Daniel Hayek and Alexander Flink, Prager Dreifuss SECTION 1: Market overview 1.1 Please provide an overview of the cross-border financing market in your jurisdiction. Switzerland is home to more than 260 banks, with an aggregate balance sheet total of approximately CHF3.1 trillion. Consequently, the Swiss cross-border market is mature and well-developed. Major local banks www.prager-dreifuss.com such as Credit Suisse, UBS and Zurich Cantonal Bank (ZKB) are the dominant lenders when it comes to cross-border financing but international banks are quite active in the Swiss market as well. This is because headquarters of large international groups are located in Switzerland and also because borrowers frequently have Swiss affiliates which grant security. The Swiss jurisdiction provides the necessary legal certainty for large scale financial transactions to resolve resulting disputes. However, borrowers and lenders usually tend to find an amicable solution in disputes, rather than resorting to litigation. 1.2 What have been the key trends or developments in cross-border financing in your jurisdiction over the past 12 months? The ongoing Brexit negotiations may have had a slightly negative impact on cross-border financing, but the market has been rather steady over the last twelve months. 1.3 Have there been interesting changes in the structure of the banking sector in your jurisdiction? It appears that Chinese banks are increasingly active as lenders in the Swiss market in connection with the acquisition of Swiss targets. CROSSABORDER FINANCING REPORT 2017 | IFLR.COM | 35 SWITZERLAND Daniel Hayek Alexander Flink Partner, Prager Dreifuss Associate, Prager Dreifuss Zurich, Switzerland Zurich, Switzerland T: +41 44 254 55 55 T: +41 44 254 55 55 F: +41 44 254 55 99 F: +41 44 254 55 99 E: [email protected] E: [email protected] W: www.prager-dreifuss.com W: www.prager-dreifuss.com About the author About the author Daniel Hayek is a member of the management committee and Alexander Flink is a member of the corporate and M&A and head of Prager Dreifuss’ corporate and M&A team. He banking & finance teams of Prager Dreifuss. He focuses mainly specialises in mergers and acquisitions (mainly strategic on restructuring transactions and financing. He has also buyers), corporate finance, takeovers, banking and finance and significant experience in presenting lenders as well as corporate matters. He advises business clients in all types of borrowers in the negotiation of credit facilities regarding domestic and cross-border transactions, including finance and leveraged finance and project finance, as well as in acquisition real estate transactions. He has also advised major US and finance for private equity companies and providers of senior German banks in acquisition finance transactions and in the and mezzanine debt. His recent practice has involved the recovery of distressed debt. In these fields he is also representation of major banks in domestic and cross-border representing clients in court and before arbitration tribunals. transactions, including corporate finance, real estate and IP Lately, his practice has involved acquisitions of Swiss targets transactions. He further advises clients in connection with for major strategic buyers from a variety of industries (chemical, insolvency laws and the recovery of distressed debt. automotive, transport), as well as debt restructuring and insolvency law. SECTION 2: Financing structures 2.2 Have there been any significant developments in the way cross-border financing transactions are 2.1 Briefly outline some recent notable transactions structured or in the way borrowers and/or lenders are involving your jurisdiction, highlighting any participating in the market? interesting aspects in their structures and what they might mean for the market. Syndicated secured loan facilities are probably the most frequent type of cross-border financing transactions and it appears that this will not We have seen a multi-billion euro transaction in order to finance a change in the near future. large-scale infrastructure project. The most interesting aspect of the transaction was that the current lenders are European energy companies that do not have a banking licence. At present, there are no bank SECTION 3: Legislation and policy lenders involved, even though they may provide financing at a later stage of the project. This raised some difficult questions in relation to 3.1 Describe the key legislation and regulatory bodies the so-called 10/20 Non-Bank Rule, which limits the number of that govern cross-border financing in your potential non-bank lenders (for further details see section 3.3 below). jurisdiction. Consequently, finding a solution for the allocation of “slots” for lenders without a banking licence providing mezzanine, bridge or funding gap There is no specific legislation or regulatory body that exclusively or capital, as well as the transfer of loan shares to non-banks, proved to predominantly governs cross-border financing in Switzerland. be challenging. The composition of the lenders made this transaction However, it goes without saying that the Swiss Financial Market quite unique. Therefore, we do not expect that its structure will Supervisory Authority (Finma) is relevant when it comes to the influence the Swiss market standard. regulation of domestic (bank) lenders and that the Swiss Federal Tax Administration is relevant in relation to ancillary tax issues. 36 | IFLR.COM | CROSSABORDER FINANCING REPORT 2017 SWITZERLAND 3.2 Have there been any recent changes to regulations all foreign lenders are aware of the significance of these issues. To a or regulators that may impact the cross-border lesser extent, lenders want also to know which asset classes can be taken financing market and what impact do you expect as security and what documentation or formalities are required to them to have? create, perfect and maintain such security. There have been no changes to regulations or regulators which would have had a significant impact on the cross-border market. 4.3 Are there any classes of assets over which security cannot be taken or regulations specific to your jurisdiction governing the taking of security over 3.3 Are there any rules, legislation or policy certain classes of assets that lenders should be aware frameworks under discussion that may impact of? lenders or borrowers involved in cross-border financing in your jurisdiction? Security can be taken over all classes of assets a lender would usually expect, such as shares, bank accounts, receivables, insurance policies, The abolition of the 10/20 Non-Bank Rule has been widely discussed, real property and intellectual property. because it could considerably improve the appeal of lending directly to In order to perfect and maintain a pledge over shares (or other Swiss borrowers. In a nutshell, this rule states that interest payments movable objects), the security trustee needs to be in physical possession are subject to the 35% Swiss Withholding Tax, if the number of lenders of the pledged movable objects during the security period without a banking licence exceeds 10 (under a single debt instrument) (Faustpfandprinzip ). As a consequence of this requirement, security or 20 (under all debt instruments of the Swiss borrower taken together), over plants, machinery, equipment or inventory is possible, but is respectively. Under certain circumstances, interest payments guaranteed usually not taken. by a Swiss guarantor may be subject to the Swiss Withholding Tax as There are some limitations to security taken over real estate that well. The limitation of syndication to non-bank lenders due to the serves primarily as living accommodation and there are certain 10/20 Non-Bank Rule is a viable solution to avoid or mitigate the formalities which must be observed. However, the quality and value of consequences of this rule. the security is usually worth the extra effort. However, such an approach may not be satisfying to larger In principle, floating charges are not available in Switzerland. syndicated finance transactions or if the involvement of lenders without However, there is the option to grant security over a value quota of an a banking licence is a necessity. In this case, the funds are often raised intermediated securities account. Therefore, it is possible to create a by a foreign parent company and the Swiss entity solely acts as Swiss security over intermediated securities that is, to a certain extent, guarantor and security provider. If this structure is properly planned similar to a floating charge. It should be noted that there are several and implemented, the applicable upstream and cross-stream limitations ways to create security interest over intermediated securities. (see section 5.1) can be reduced to a minimum, but it would be preferable if the lenders had unlimited claims against the Swiss entity and the transfer of loan shares to non-banks was not restricted. 4.4 What measures should be taken to best prepare Therefore, the abolition of the 10/20 Non-Bank Rule would be most for your market idiosyncrasies? welcome to borrowers and lenders. As a positive side effect, the volume of loans made available to Swiss borrowers could increase substantially. Solutions exist for most of the Swiss market idiosyncrasies to avoid or at least mitigate the resulting impact for the lenders and the borrowers. The best approach for a lender that is not familiar with the Swiss SECTION 4: Market idiosyncrasies market is to contact a specialised Swiss law firm before the parties have agreed to a financing structure that is difficult or impossible to 4.1 Please describe any common mistakes or implement in Switzerland. misconceptions that exist about the financing market in your jurisdiction. SECTION 5: Practical considerations The 10/20 Non-Bank Rule (see section 3.3) and the applicable up- and cross-stream limitations on guarantees (see section 5.1) may have 5.1 Briefly explain the downstream, upstream and a significant impact on the structuring of a deal. This is frequently cross-stream guarantees available in your jurisdiction, underestimated by foreign lenders who are not familiar with the Swiss with reference to any specific restrictions or market. limitations. Downstream guarantees are not subject to restrictions or limitations, 4.2 Are there frequently asked questions or often but upstream and cross-stream guarantee payments are considered overlooked areas from parties involved in cross- constructive dividends and are, hence, limited to the profits and border financings in your jurisdiction? reserves freely available for distribution in the guarantor’s balance sheet. Consequently, the respective rules for distribution of dividends must Most questions concern the potential structure of a transaction in the be observed. This includes the preparation of an up-to-date balance light of the 10/20 Non-Bank Rule, the applicable up- and cross-stream sheet by the guarantor and the approval of the resulting distribution limitations (see section 5.1) and the resulting tax consequences. Not by the shareholders’ meeting. In order to maximise the available assets CROSSABORDER FINANCING REPORT 2017 | IFLR.COM | 37 SWITZERLAND for distribution, the finance documents should contain Swiss guarantor 5.3 Do foreign debt quotas apply in your jurisdiction limitation language to that effect and it is standard to combine a and is offshore financing to domestic entities guarantee with a pledge over the shares in the Swiss guarantor. monitored? It should also be noted that the proceeds from upstream and cross- stream guarantees are subject to 35% withholding tax and, in recent In connection with cross-border financing there are no foreign debt years, it has become common for the Swiss Federal Tax Authority to quotas which would have to be observed. In addition, there are no rules request that the Swiss company providing a guarantee to its parent which would require to specifically monitor offshore financing to company receives an appropriate remuneration for the guarantee domestic entities, subject to the applicable money laundering (guarantee fee). legislation and sanction regimes. 5.2 Are there any specific issues creditors should be 5.4 Describe your jurisdiction’s relationship with mindful of regarding a bankruptcy and restructuring non-performing loans (NPLs), including volume of situation? outstanding NPLs and techniques/challenges in managing them. The enforceability of any contract may be limited under the rules of the Swiss Debt Enforcement and Bankruptcy Act. In particular, the Over the last decade, the ratio of Swiss bank nonperforming loans to following transactions may be fully or partially voidable: total gross loans has continuously fallen from 1.3% in 2005 to 0.755% • transactions carried out during the year prior to the bankruptcy or in 2015, which is low in comparison to other jurisdictions. insolvency decree, in which the Swiss security grantor accepted to Consequently, NPLs are not as relevant in Switzerland as in other receive no consideration at all or a consideration out of proportion jurisdictions. A reason for this low ratio may be that non-performing to its own performance; loans suggest that the obligor is facing liquidity problems. This is a • certain financially inadequate transactions, if carried out during the major issue for Swiss directors. The board of a Swiss obligor will have year prior to the bankruptcy or insolvency decree and if the Swiss to convene an extraordinary shareholder’s meeting and to propose security grantor was at the time of the transaction already over- restructuring measures if half of the company’s share capital and legal indebted; however, the transaction is not voided if the recipient reserves are no longer covered by its assets. In the event that the balance proves to have been unaware of the security grantor’s over- sheet of a Swiss obligor shows negative equity, the board of directors indebtedness; and, must notify the court. This usually leads to bankruptcy. If the board • all transactions which the Swiss security grantor carried out during fails to observe its obligations, the individual directors may incur the five years prior to the bankruptcy or insolvency decree with the personal liability. It goes without saying that the board will try to find apparent intention of disadvantaging its creditors or of favouring a commercial solution with the existing lenders or try to raise additional certain creditors to the disadvantage of others. capital from alternative sources to avoid such a situation. Another major insolvency related issue that should be addressed in the finance documents is the allocation of proceeds between the different classes of lenders. Frequently, there is a UK or US law SECTION 6: Outlook governed intercreditor agreement that provides for a certain waterfall that does not necessarily take into account Swiss insolvency law. In 6.1 What are your predictions for the next 12 months particular, the subordination of claims can lead to issues and delays in for cross-border financing in your jurisdiction? How relation to the enforcement of security in Swiss insolvency proceedings do you expect legal practice to respond? if not properly addressed in the intercreditor agreement, the security documents and other ancillary documentation. The so called 10/20 Non-Bank Rule has been identified as an obstacle for cross-border financing connected to Switzerland and it has been debated to abolish this rule or at least to replace it with a more market friendly rule. However, this will take more than 12 months. 38 | IFLR.COM | CROSSABORDER FINANCING REPORT 2017 Tanzania Saidi Othman Yakubu and Timothy Kyepa, Yakubu and Associates Chambers SECTION 1 Market overview 1.1 Please provide an overview of the cross-border financing market in your jurisdiction. The Bank of Tanzania’s (BOT) Monthly Economic Review Report June 2017 is indicative of a vibrant cross-border financing market. Generally, cross-border financing is biased towards government projects. That www.yakubuchambers.com said, cross-border financing for the private sector is growing. As of May 2017, external debt stock for both the public and private sectors was $17.9 billion. Dominant lenders in the market include: World Bank organisations such as the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA) and International Finance Corporation (IFC); the African Development Bank (AfDB); the OPEC Fund for International Development; foreign banks; and other institutional lenders. Common financing structures include debt financing, equity financing and hybrid financing structures, such as loans and bonds and mezzanine financing. There is also an increasing interest in public private partnerships (PPP). Crowd funding and venture capital for start-ups is also on the increase. Due to the country’s political stability and its geographic location, cross-border financing plays an important role in the market. For example, the Tanzania route was selected over other routes for the East African Crude Oil Pipeline Project running from Hoima, Uganda, to Tanga, Tanzania. The oil pipeline project is expected to attract substantial cross-border financing for both the pipeline project and related projects. Also, Tanzania’s Dar es Salaam port is the port of choice for several countries in the African hinterland. These include Rwanda, Burundi, the Democratic Republic of the Congo, Uganda, Zambia and Malawi. It follows that cross-border financing for trade in the above countries depends on the efficient handling of goods at the Dar es Salaam port. 40 | IFLR.COM | CROSS>BORDER FINANCING REPORT 2017 TANZANIA Saidi Othman Yakubu Timothy Kyepa Managing counsel, Yakubu and Associates Chambers Deputy managing counsel, Yakubu and Associates Chambers Dar es Salaam, Tanzania Dar es Salaam, Tanzania T: +255 762 089 225 T: +255 718 160 095 E: [email protected] E: [email protected] W: www.yakubuchambers.com W: www.yakubuchambers.com About the author About the author Advocate Saidi Othman Yakubu is a leading authority on cross- Dr Timothy Kyepa has advised clients on cross-border border finance in Tanzania and has published widely on the financings in East Africa. He has acted for clients in various subject. He has acted for both lenders and borrowers on financing transactions involving various sectors such as: various finance transactions in various sectors in Tanzania, energy, transport, oil and gas and financial institutions. including: oil and gas, financial institutions and transport. He is a fellow of the Chartered Institute of Company Secretaries and Administrators (ICSA) and a founding partner of the ICSA Tanzania branch. He is also a member of the Association of International Petroleum Negotiators. He is an advocate of the High Court of Tanzania. 1.2 What have been the key trends or developments BOT has recently taken over a local bank that failed to meet capital in cross-border financing in your jurisdiction over adequacy requirements. Also, BOT revoked the licence of a bank on the past 12 months? the grounds of money laundering. BOT also recently issued new rules requiring banks and financial The East African Crude Oil Pipeline Project and related projects will institutions to maintain a capital conservation buffer of 2.5% of risk- attract substantial cross-border financing in the next 12 months. weighted assets and off-balance sheet exposure. Tanzania is also in the penultimate stages of commencing construction of the Standard Gauge Railway. The first phase of construction, covering approximately 207 kilometres and linking Dar SECTION 2: Financing structures es Salaam to Morogoro and the second phase, covering 336 kilometres and linking Morogoro to Dodoma, will attract cross-border finance. 2.1 Briefly outline some recent notable transactions The recent amendments to legislation regulating the mining sector involving your jurisdiction, highlighting any have also created potential for cross-border financing opportunities due interesting aspects in their structures and what they to anticipated associated M&A transactions. might mean for the market. We have also witnessed an increased interest in loan transactions between local financial institutions and foreign institutional lenders We recently advised on a cross-border financing transaction involving during the last 12 months. an impact investment fund and a financial institution in Tanzania. The Additionally, the recently concluded initial public offering by investment decision and financing structure of this transaction hinged Vodacom Tanzania attracted cross-border finance. We anticipate that on the social impact of the borrower’s business, as opposed to the subsequent IPOs issued by other telecommunication companies will borrower’s business performance and collateral provided by the attract cross-border finance. business. This was the most important consideration of the lender. The increased participation of impact investment funds in Tanzania will require investors and existing companies to review their social 1.3 Have there been interesting changes in the impact. structure of the banking sector in your jurisdiction? We have also witnessed increasing cross-border financing through term loans. These are usually supported by cross-corporate guarantees. Yes, there are new entrants such as Guaranty Trust Bank. There have Transactions in the mining sector are largely structured through also been a number of new foreign lenders, including impact equity and debt financing. investment funds that have lent money to financial institutions. CROSS>BORDER FINANCING REPORT 2017 | IFLR.COM | 41 TANZANIA 2.2 Have there been any significant developments in 3.2 Have there been any recent changes to regulations the way cross-border financing transactions are or regulators that may impact the cross-border structured or in the way borrowers and/or lenders are financing market and what impact do you expect participating in the market? them to have? Increasingly, lenders prefer to transact directly with local subsidiaries The recent amendment (Finance Act 2017) to the Bank of Tanzania as principals and not third-party beneficiaries of loan agreements Act, which requires all government and public authorities to open executed with foreign holding companies. This may be attributed to accounts with BOT and to deposit all their monies on these accounts, averting the risk of failed enforcement of the loan agreement or decrees may increase cross-border financing between foreign lenders and local and orders arising from dispute resolution proceedings against local financial institutions as they will require funds to boost their lending subsidiaries, as well as BOT regulations that require the registration of capacities and to fill the void left by government deposits. This foreign loans. amendment was enacted to control the amount of public funds in Initially, the recent Vodacom Tanzania IPO had been ring-fenced commercial banks. for local investors. However, IPO rules were revised to permit foreign The Natural Wealth and Resources Contracts (Review and Re- firms and citizens to participate. We believe subsequent IPOs in the negotiation of Unconscionable Terms) Act 2017, the Natural Wealth telecommunications sector will be opened to both local and foreign and Resources (Permanent Sovereignty) Act 2017 and the Written Laws investors. (Miscellaneous Amendments) Act 2017 may have an impact on the number of cross-border financing transactions in the mining sector. The conditions in the new laws may encourage new entrants to invest SECTION 3: Legislation and policy in the market and also lead to some companies exiting the market. This may increase M&A activity in the mining sector in Tanzania. 3.1 Describe the key legislation and regulatory bodies that govern cross-border financing in your jurisdiction. 3.3 Are there any rules, legislation or policy frameworks under discussion that may impact The pre-eminent piece of legislation that regulates cross-border lenders or borrowers involved in cross-border financing in Tanzania is the Banking and Financial Institutions Act financing in your jurisdiction? Cap 342. This Act regulates banking and financial activities in Tanzania. The Bank of Tanzania Act 2006 regulates BOT and BOT is We are not aware of any rules, legislation or policy framework under the regulatory body charged with the supervision of banks and financial discussion that may impact lenders or borrowers involved in cross- institutions in Tanzania. Although BOT does not regulate foreign border financing. financial institutions, local borrowers are required to register all foreign loans with BOT. The Anti-Money Laundering Act Cap 423 is also relevant in SECTION 4: Market idiosyncrasies regulating cross-border financing in Tanzania. The Act prohibits money laundering. As such, cross-border financing transactions must comply 4.1 Please describe any common mistakes or with provisions of this Act. The Act also underpins a regulatory body: misconceptions that exist about the financing market the Financial Intelligence Unit. in your jurisdiction. The Capital Markets Authority (CMA) is another important regulatory authority in cross-border financing in Tanzania. It is Foreign lenders often assume that they require local licences to lend established under the Capital Markets and Securities Act, Cap 79. The in Tanzania. This is not true. Licensing under the Banking and authority regulates all trade in securities in Tanzania. Financial Institutions Act 2006 and the Banking and Financial Other relevant pieces of legislation include the Electronic and Postal Institutions (licensing) Regulations 2008 is only required where the Communications Act, 2010 as amended by the Finance Act 2017. foreign lenders intend to establish local presence in Tanzania. These Acts require all licensed firms operating network facilities and Foreign lenders assume that foreign judgements and arbitration services, among others, to offer shares to the public and list on the stock awards are not enforceable in Tanzania. This is also not true. Under exchange. The Tanzania Communications Regulatory Authority the Reciprocal Enforcement of Foreign Judgments Act 2002, the (TCRA) is charged with regulating electronic communication in procedure for the enforcement of foreign judgements is provided. Also, Tanzania. under the Arbitration Act Cap 15, the High Court will recognise and Pursuant to the Mining Act 2010, the Minister for Mining is charged enforce foreign arbitral awards without re-examining the merits of the with enacting appropriate regulations for minimum shareholding and decision. share sales to Tanzanians. The Mining (Minimum Shareholding and Public Offering) Regulations 2016 were enacted to implement provisions in the Mining Act. The Ministry responsible for mining and the Capital Markets Authority regulate minimum shareholding and public offering. The Companies Act No 12 of 2002 and its attendant regulatory body, the Business Registration and Licensing Authority and the Land Act Cap 113, are relevant in the registration of securities. 42 | IFLR.COM | CROSS>BORDER FINANCING REPORT 2017 TANZANIA 4.2 Are there frequently asked questions or often 5.2 Are there any specific issues creditors should be overlooked areas from parties involved in cross- mindful of regarding a bankruptcy and restructuring border financings in your jurisdiction? situation? We have received various inquiries as to whether licences are required It is important that debts are secured as generally in bankruptcy for investment advisers in securities trade. The law requires all matters, the secured debts rank above unsecured debts. investment advisers to obtain appropriate licenses from the Capital Markets Authority. Foreign lenders also often assume that the debt record number will 5.3 Do foreign debt quotas apply in your jurisdiction be obtained by the borrower/borrower’s bank in less than two weeks. and is offshore financing to domestic entities This process in our experience takes about 30 days. monitored? Tanzania does not operate foreign debt quotas. However, offshore 4.3 Are there any classes of assets over which security financing to domestic entities is monitored as all foreign loans have to cannot be taken or regulations specific to your be registered and debt record numbers acquired. jurisdiction governing the taking of security over certain classes of assets that lenders should be aware of? 5.4 Describe your jurisdiction’s relationship with non-performing loans (NPLs), including volume of Security can be taken over all classes of assets. These include: shares; outstanding NPLs and techniques/challenges in bank accounts; receivables; contractual rights; insurance policies; real managing them. property; plant and machinery; intellectual property; debt securities; future/after acquired property; and floating charges over all assets. The acceptable threshold of NPLs in Tanzania is 5%. All banks with NPLs above 5% are required to submit NPL regularisation plans with clear timelines to Bank of Tanzania. 4.4 What measures should be taken to best prepare for your market idiosyncrasies? SECTION 6: Outlook It is important that both lenders and local borrowers appoint good legal counsel to advise on the financing agreements and local laws. It is also 6.1 What are your predictions for the next 12 months important that lenders and local borrowers consider all licences and for cross-border financing in your jurisdiction? How registrations that may be required in structuring financing transactions. do you expect legal practice to respond? We expect an increase in the volume of cross-border financing for SECTION 5: Practical considerations financial institution businesses, telecommunications firms and the mining sector in Tanzania. 5.1 Briefly explain the downstream, upstream and We expect that the law firms will advise local and foreign investors cross-stream guarantees available in your jurisdiction, and financial institutions, telecommunications firms and mining with reference to any specific restrictions or companies on the requirements for issuing IPOs and listings on the limitations. stock exchange. Downstream guarantees are usually granted by the parent company to assist a subsidiary to obtain financing or guarantee the performance of an obligation. These guarantees are common in Tanzania. Parties should ensure that there is consideration for the guarantee. Upstream guarantees are usually provided by the subsidiary to guarantee the obligations of the parent company. These are less common. Similarly, the parties should ensure that there is consideration for the guarantee. Cross-stream guarantees are often provided by related entities to guarantee enforcement of their respective obligations. Similarly, the parties should ensure that there is consideration for the guarantees. CROSS>BORDER FINANCING REPORT 2017 | IFLR.COM | 43 UK Craig Jones, Sullivan & Cromwell SECTION 1: Market overview 1.1 Please provide an overview of the cross-border financing market in your jurisdiction. Despite the British public voting to leave the European Union in June 2016 and the resulting climate of political uncertainty, London remains a global financial centre and thus far the loan and bond markets have sullcrom.com remained resilient. Liquidity in the loan market in particular has been strong, with interest rates low, and there has been a supply/demand imbalance creating a strong environment for borrowers/issuers. Indeed, the first half of 2017 was dominated by opportunistic repricing and refinancing transactions, in many cases on substantially enhanced terms for borrowers. The market is becoming increasingly accepting of covenant and terms flexibility. This is in part driven by the changing investor base. Lending is no longer dominated by banks; institutional investors and direct lenders are also key players, have different credit concerns and are often agnostic between bank debt and bond debt. Senior-only financing predominates, however in-built flexibility to raise additional financing at any level of the capital structure is common place. 1.2 What have been the key trends or developments in cross-border financing in your jurisdiction over the past 12 months? Convergence between the European covenant-lite (cov-lite) market and the US term loan B (TLB) market is a trend that has been observed for some time now as a result of institutional investor agnosticism between bank debt and bond debt, and the past 12 months have been no different. There has though, been little consistency in the manner in which US terms have been incorporated into English law documentation. Some deals, often labelled “high yield in disguise”, have adopted wholesale New York-law governed high yield (HY) style 44 | IFLR.COM | CROSSDBORDER FINANCING REPORT 2017 UK 1.3 Have there been interesting changes in the structure of the banking sector in your jurisdiction? The investor base is diversifying. Direct lending is no longer confined to the mid-market space; some of the larger funds are competing against banks for mandates and winning deals at the top end of the market. Also, banks and direct lenders are collaborating, with direct Craig D Jones lenders helping to arrange loans that banks would be unable to Partner, Sullivan & Cromwell underwrite alone. London, England Brexit is of course a wild card and no one knows yet what the T: +44 20 7959 8900 ultimate impact of the expected withdrawal from the single market and F: +44 20 7959 8950 potential loss of passporting rights will be. E: [email protected] W: https://sullcrom.com/lawyers/CraigD-Jones SECTION 2: Financing structures About the author Craig Jones is a partner based in the firm’s London office. He is 2.1 Briefly outline some recent notable transactions admitted to the bar in England and Wales and in New York. involving your jurisdiction, highlighting any Jones pursues a broad-based finance and corporate practice, interesting aspects in their structures and what they and has acted for financial institutions, private equity sponsors might mean for the market. and corporate clients across a range of industries. His work has included new money financings, refinancing transactions Examples of direct lender activity in the big ticket space are the and restructurings. His transactions include investment grade unitranche facilities provided to Soho House, Zenith and Consolis, borrowing, leveraged financing and project financing. and the second lien facilities for Diaverum, Parkdean Resorts and Jones’s most recent experience includes: advising Philips on Corialis. the financing for its Spectranetics acquisition; Swisscom on The Eircom refinancing of late 2016 was a good example of a infrastructure financing arrangements with the European borrower using an opportunistic refinancing to substantially amend its Investment Bank (EIB); GLAS in connection with the terms. reorganisation and recapitalisation of the Hibu Group; the coordinating committee of bank creditors to Abengoa during its restructuring; Coca-Cola HBC on the replacement of its 2.2 Have there been any significant developments in revolving credit facility (RCF) – having advised on the original the way cross-border financing transactions are financing arrangements in connection with the client’s re- structured or in the way borrowers and/or lenders are domiciliation; and Reykjavik Geothermal on a convertible loan participating in the market? facility. In addition to his financing work, Jones has advised on a The European Central Bank (ECB) published its final guidance on number of corporate acquisitions and divestitures, usually leveraged transactions on May 16 2016. The guidance provides that involving private equity. He has significant experience of equity underwritten transactions with a total debt-to-EBITDA ratio of more co-investment and fund structures. than 6x should remain the exception rather than the rule, and must be justifiable. The impact on the market remains to be seen, but given that most affected institutions were already subject to the Leveraged Lending Guidelines in the US which impose similar requirements, it incurrence packages (often plus a springing financial covenant for the may well be minimal. benefit of the revolving facility or other undrawn facilities) without The increased flexibility afforded by cov-lite loans and the continued material modification to reflect a secured bank loan. Others import convergence with the US TLB market has caused many sponsors to provisions substantially equivalent to those in US TLB documents, opt for loan financing rather than bond, or to refinance existing bond while another subset features a combination of these approaches debt with loans. Investors are attracted not only by the flexibility of peppered with other terms, which while not common in the US TLB the product, but also lack of call protection and public disclosure or HY markets, have cleared the market in other European deals. requirements. As noted above, the market is becoming increasingly accepting of covenant and terms flexibility. In particular, cov-lite deals are now becoming the norm, no longer attracting a significant pricing SECTION 3: Legislation and policy premium. EBITDA add-backs to financial covenants are common, and the ability to raise additional indebtedness and make distributions is 3.1 Describe the key legislation and regulatory bodies no longer as tightly controlled. that govern cross-border financing in your jurisdiction. The Financial Services and Markets Act 2000 (FSMA) establishes the framework for financial services legislation in the UK. The Financial CROSSDBORDER FINANCING REPORT 2017 | IFLR.COM | 45 UK Conduct Authority (FCA) and the Prudential Regulation Authority being constrained by caps on unsecured or junior debt, unless the (PRA) are the two UK financial services regulators. The FCA is relevant creditor signs up to the intercreditor agreement, and ‘evergreen’ responsible for the conduct of all firms authorised under FSMA. It is intercreditor agreements, which contemplate at the outset flexibility to also responsible for the regulation of conduct in retail and wholesale incur future indebtedness at various levels. financial markets, supervision of trading infrastructure that supports those markets, and the prudential regulation of firms not regulated by the PRA. The PRA is responsible for the micro-prudential regulation 4.2 Are there frequently asked questions or often of systemically important firms, including banks and insurers. The loan overlooked areas from parties involved in cross- market itself, however, is not a regulated market in the strict sense – border financings in your jurisdiction? loan agreements are not regulated products under FSMA. The City Code on Takeovers and Mergers is relevant to the extent Despite convergence and importation of US style terms there still that financing relates to the acquisition of a public company. remain areas of difference in market practice and documentation. At ECB guidance as noted above is relevant. the time of press, these included Libor floors, flex provisions, most favoured nation provisions, ticking fees and transfer restrictions. 3.2 Have there been any recent changes to regulations or regulators that may impact the cross-border 4.3 Are there any classes of assets over which security financing market and what impact do you expect cannot be taken or regulations specific to your them to have? jurisdiction governing the taking of security over certain classes of assets that lenders should be aware See above regarding ECB guidance and above and below for Brexit. of? No, security can be taken over any asset or class of assets. However, 3.3 Are there any rules, legislation or policy asset-backed revolving lending arrangements similar to US ABL- frameworks under discussion that may impact facilities are not common in the UK market. lenders or borrowers involved in cross-border financing in your jurisdiction? 4.4 What measures should be taken to best prepare Brexit will of course impact the market in a myriad of ways, but in the for your market idiosyncrasies? absence of clarity as to the final shape Brexit will take, in exactly what ways it will impact is still difficult to say. One area of concern for non- The UK market is well developed and relatively straightforward to EU lenders licensed in the UK is the potential loss of passporting rights navigate when properly advised. It is useful to be familiar with the and consequent access to the single market. To maintain access, such differences between loan and bond products on offer as well as general lenders will likely seek to become licensed in another EU jurisdiction, market terms. As choice of financing product is often driven by market but the extent to which a substantive physical presence in the new demand and pricing, flexibility and adaptability in terms of product jurisdiction is required (for example whether there will be a need to set choice can be useful. up a fully-fledged subsidiary and locate decision-makers there) is still unknown. SECTION 5: Practical considerations SECTION 4: Market idiosyncrasies 5.1 Briefly explain the downstream, upstream and cross-stream guarantees available in your jurisdiction, 4.1 Please describe any common mistakes or with reference to any specific restrictions or misconceptions that exist about the financing market limitations. in your jurisdiction. A company incorporated in England and Wales can grant downstream, There is no Chapter 11 equivalent in the UK. In the UK investors upstream and cross-stream guarantees. To do so, it must demonstrate assume contractual rights through an intercreditor agreement (ICA). that it has requisite corporate capacity and derive sufficient corporate The relationship between them is not governed by statute. It is benefit from the transaction. Demonstrating corporate benefit is important to be cognizant of this when structuring a transaction and straight forward for downstream guarantees (and is generally dealt with importing US HY and TLB concepts into English law governed in board resolutions). For upstream or cross-stream guarantees, in documents, because some concepts when imported wholesale will have addition to a specific reference to corporate benefit in board resolutions, unintended results. Take for example the debt incurrence covenant. In it is also prudent to obtain a shareholders resolution. If a company is the US debt incurrence flexibility is accepted in part because if all in financial difficulties, the director’s duty to act in the best interests of debtors are American, there is generally no concern about being able the company shifts from being shareholder focused to creditor focused, to deal with unsecured creditors or junior secured creditors in a and so particular care is required. Guarantees may be capable of being bankruptcy or restructuring process as it is regulated by statute. This is set aside if the company is, or as a result of the guarantee becomes different in England where the intercreditor relationship is governed insolvent and subsequently goes into liquidation or administration by the ICA. This has led to the debt incurrence covenant in Europe during the relevant hardening period. 46 | IFLR.COM | CROSSDBORDER FINANCING REPORT 2017 UK Under the Companies Act 2006, a prohibition on financial assistance 5.4 Describe your jurisdiction’s relationship with (which includes the provision of guarantees) applies where a public non-performing loans (NPLs), including volume of company gives financial assistance for the acquisition of its own shares outstanding NPLs and techniques/challenges in or those of a parent company; or a private company gives financial managing them. assistance for the acquisition of shares in its public parent company. N/A. 5.2 Are there any specific issues creditors should be mindful of regarding a bankruptcy and restructuring SECTION 6: Outlook situation? 6.1 What are your predictions for the next 12 months English common law upholds the principle established in the Gibbs for cross-border financing in your jurisdiction? How case ( Gibbs & Sons v Société Industrielle et Commerciale de Métaux do you expect legal practice to respond? 1890 ) that English courts will only recognise a discharge or release of an English law governed right or obligation if the discharge/release is A continuation of the trends seen over the last 12 months. Flexibility also governed by or effective in accordance with, English law. The court in covenant terms and no financial covenants are likely to remain will not recognise a variation of English law rights / obligations arising constant given institutional investors’ agnosticism between bank and as a result of an overseas proceeding if the creditor party has not bond terms. Practitioners who can advise on a multitude of structures submitted to and is not present in the overseas jurisdiction. and products are likely to be sought out. Creativity and flexibility on the part of the legal community as the market responds to Brexit in real time will also be required. 5.3 Do foreign debt quotas apply in your jurisdiction and is offshore financing to domestic entities monitored? No. CROSSDBORDER FINANCING REPORT 2017 | IFLR.COM | 47 US Ari Blaut, Sullivan & Cromwell SECTION 1: Market overview 1.1 Please provide an overview of the cross-border financing market in your jurisdiction. The US loan and debt capital markets represent one of the deepest sources of capital for cross-border financings. Liquidity has remained strong in both markets, given historically low interest rates, low default sullcrom.com rates, investor appetite for yields and a technical imbalance between supply and demand, which has created a strong environment for borrowers and issuers. Financial institutions continue to be the primary arrangers and underwriters of loan and debt capital market financings in the US. However, over the past five years, private credit providers have played an increasing and significant role in both arranging and providing bank debt financing for acquisitions (including cross-border financings). The growth of these private credit providers has been one of the most significant changes in the acquisition financing market over the past couple years. The type of debt financing depends on the credit rating of the borrower. For investment grade acquirers, unsecured bridge loans coupled with a bond take-out and potentially a permanent term loan tend to be the most common financing structure. For sub-investment grade acquirers, first lien/second lien bank financings have been more common, although a first lien bank financing with an unsecured bond is also another common financing structure. 1.2 What have been the key trends or developments in cross-border financing in your jurisdiction over the past 12 months? The US loan and debt capital markets have remained buoyant and continue to offer attractive terms to foreign and domestic borrowers and issuers. Recent transactions have generally been characterised by low interest rates and borrower-friendly covenant packages. In the CROSSBBORDER FINANCING REPORT 2017 | IFLR.COM | 49 US SECTION 2: Financing structures 2.1 Briefly outline some recent notable transactions involving your jurisdiction, highlighting any interesting aspects in their structures and what they might mean for the market. Ari B Blaut The $40 billion bank acquisition financing for the AT&T/Time Partner, Sullivan & Cromwell Warner merger was documented with a credit agreement rather than New York, USA traditional commitments. For large investment grade buyouts, there T: +1 212 558 1656 have been a couple of recent examples of going to credit agreements F: +1 212 558 3588 directly. E: [email protected] As noted above, the growth of private credit providers is increasingly W: https://sullcrom.com/lawyers/AriB-Blaut causing disruptions in the banks’ traditional dominance of the large leveraged buy-out market. For instance, Ares Capital, a private credit About the author provider, provided a $1.1 billion unitranche loan to Thorma Bravo for Ari Blaut is a partner in Sullivan & Cromwell’s finance and its acquisition of Qlik Technologies. Historically, a deal of this size restructuring group. Blaut maintains a broad corporate practice would have been underwritten by traditional financial institutions. advising clients on a wide range of financing transactions, including bank financings, high yield bond issuances, PIPE transactions, debt restructurings, liability management and 2.2 Have there been any significant developments in creditor representations. He has particular expertise in the way cross-border financing transactions are leveraged finance, acquisition finance and private credit structured or in the way borrowers and/or lenders are transactions, with recent clients including AT&T, Andeavor, participating in the market? Ares Management, Oaktree, Eastman Kodak, CyrusOne, Forest City and Canada Pension Plan Investment Board (CPPIB), The increased flexibility afforded by cov-lite loans and continued among numerous others. convergence between the term loan B and high yield bond markets Blaut has published a number of articles for several legal have caused many corporates and sponsors to opt for loan financing, outlets, including M&A Lawyer, Law360, Lexology and Deal rather than bond financing, or refinancing existing bonds with loans, Lawyers. He is also a member of the New York City Bar due to the covenant flexibility afforded in loans (previously confined Association Committee on Commercial Law and Uniform State to the bond market) and the lack of call protection and disclosure Laws. requirements. SECTION 3: Legislation and policy leveraged loan market, covenant-lite (cov-lite) term loans remain common in the US. 3.1 Describe the key legislation and regulatory bodies In addition, borrowers and issuers, particularly sponsors in that govern cross-border financing in your acquisition financings, have been successful in pushing aggressive jurisdiction. terms, including: increases in maximum first lien leverage ratio above 6x; unlimited restricted payments subject to a specified leverage ratio; The Securities Act of 1933 and the Securities Exchange Act of 1934, springing financial maintenance covenants (limited to revolving credit together with the rules and regulations promulgated thereunder by the facilities only); increases in or elimination of caps on EBITDA Securities and Exchange Commission (SEC), govern, among others, addbacks; deterioration in most favoured nation (MFN) protection; the issuance of debt securities in the US. use of EBITDA as the gauge for incremental facilities; and grower With respect to syndicated loans, in 2013, the Office of the baskets or starter amounts in builder baskets. Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance company released the Interagency Guidance on Leveraged Lending to assist financial 1.3 Have there been interesting changes in the institutions in providing leveraged lending to creditworthy borrowers structure of the banking sector in your jurisdiction? in a “safe-and-sound” manner. The Guidance provided items for banks to consider in terms of establishing an internal risk management There has been a significant increase over the past five years in private framework around highly leveraged loans, such as underwriting credit providers directly participating in the debt financing markets. standards, valuation standards, reporting and analytic practices and These providers compete directly against banks for lending mandates other similar items. The Guidance provided a significant hurdle to for all loan sizes or collaborate with banks to arrange loans which banks investment banks’ abilities to underwrite transactions, particularly those would be unable to underwrite alone. with high leverage and aggressive EBITDA adjustments. A number of institutions regulate financial institutions in the US at the federal level, including the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of 50 | IFLR.COM | CROSSBBORDER FINANCING REPORT 2017 US the Currency, the National Credit Union Administration, and the 4.3 Are there any classes of assets over which security Office of Thrift Supervision. There are also regulators at the state level. cannot be taken or regulations specific to your jurisdiction governing the taking of security over certain classes of assets that lenders should be aware 3.2 Have there been any recent changes to regulations of? or regulators that may impact the cross-border financing market and what impact do you expect The assets of regulated entities are typically subject to regulatory them to have? regimes which limit their ability to provide collateral or require regulatory approval to grant security over their assets. Examples include See above for the 2013 Interagency Guidance on Leveraged Lending. telecommunications providers, broker-dealers and casino-gaming companies. In addition, there may be potential tax issues in instances where the 3.3 Are there any rules, legislation or policy borrower’s corporate structure includes non-US corporate entities. frameworks under discussion that may impact Section 956 of the US Internal Revenue Code could result in lenders or borrowers involved in cross-border undesirable US federal tax implications if the transaction is not financing in your jurisdiction? structured appropriately. The Trump administration has signalled an intention to undertake a substantial overhaul of the Dodd-Frank Wall Street Reform and 4.4 What measures should be taken to best prepare Consumer Protection Act. Any changes which pulls back securities and for your market idiosyncrasies? banking regulation is also likely to impact the behaviour and participation of regulated financial institutions involved in cross-border It is important to understand that, despite the convergence between financing, which could result in greater competition for loan and bond the two markets, there are significant differences between the products and in turn lead to more borrower/issuer-favourable terms. syndicated loan market and the debt capital market, particularly around disclosure requirements, liability standards and market standard terms. The US debt markets are well developed and experienced when dealing SECTION 4: Market idiosyncrasies with debt offerings by foreign borrowers. Both lenders and local borrowers/issuers should be advised by competent and experienced 4.1 Please describe any common mistakes or advisers and counsel when undertaking cross-border financing. misconceptions that exist about the financing market in your jurisdiction. SECTION 5: Practical considerations In secured transactions involving assets located in the US, it is important for borrowers and lenders to understand that the creation 5.1 Briefly explain the downstream, upstream and and perfection of security interests in the US is not governed by a cross-stream guarantees available in your jurisdiction, uniform system but depends on the type of asset and the relevant state. with reference to any specific restrictions or While the attachment and perfection of security interests in most types limitations. of personal property are governed by Article 9 of the Uniform Commercial Code, a model statute that has been largely enacted in Restrictions on guarantees are generally governed by state corporate each state, there are important variations among states. In addition, law, federal bankruptcy law and the organisational documents of the security interests in real estate are governed by state real estate laws guarantor. For guarantors incorporated in the US, it is important to which are non-uniform across state and the perfection of security review the applicable state law of the relevant guarantor, as jurisdictions interests in other assets is specifically excluded from the Uniform differ on the permissibility of certain types of guarantees and whether Commercial Code and is governed by other federal or state laws. board or shareholder approval is required. For example, in Delaware (a popular jurisdiction for incorporating corporations), the Delaware General Corporation Law (which governs corporations) expressly 4.2 Are there frequently asked questions or often permits a Delaware corporation to provide downstream, upstream and overlooked areas from parties involved in cross- cross-stream guarantees to the extent such guarantee is “necessary or border financings in your jurisdiction? convenient to the conduct of the corporation’s business”. Upstream and cross-stream guarantees may be subject to potential vulnerabilities In the bond market, the US federal securities laws provide extensive including the possibility that the guarantee may be set aside by US disclosure requirements in connection with an issuer’s business and courts as fraudulent conveyances on the grounds that it may be more operations, which often goes significantly beyond what issuers in capital difficult to demonstrate that the guarantor has received reasonably markets transactions are required to disclose under financial regulatory equivalent value for its guarantee. regimes in their own jurisdictions. In addition to implications this may have on timing for the capital markets transaction, substantial resources would also be required to ensure that the information included in any offering document or to the market generally meet the applicable disclosure standards. CROSSBBORDER FINANCING REPORT 2017 | IFLR.COM | 51 US 5.2 Are there any specific issues creditors should be 5.4 Describe your jurisdiction’s relationship with mindful of regarding a bankruptcy and restructuring non-performing loans (NPLs), including volume of situation? outstanding NPLs and techniques/challenges in managing them. The filing by a debtor for bankruptcy under the US Bankruptcy Code triggers an automatic stay, automatically stopping substantially all acts N/A and proceedings against the debtor and its property. The automatic stay has a broad scope and applies to all creditors, whether secured or unsecured, and to all of the debtor’s property, wherever located. It SECTION 6: Outlook prohibits creditors from pursuing both formal and informal actions and remedies against the debtor and its properties, including filing 6.1 What are your predictions for the next 12 months proceedings against the debtor to collect a prepetition claim, for cross-border financing in your jurisdiction? How enforcement a prepetition judgment against the debtor or property of do you expect legal practice to respond? the estate, obtaining possession or control over the estate property, creating, perfecting or enforcing a lien against the property, collecting, The current environment of historically low interest rates and investor recovering or assessing a prepetition claim against the debtor and demand for yield is likely to continue to drive repricing and refinancing setting off mutual prepetition debtors arising from different transactions, particularly in the leveraged finance market, until transactions. There are a number of judicial and statutory exceptions borrowers and issuers no longer perceive interest rates as at all-time to the automatic stay. lows. Combined with the demand/supply imbalance and barring any Creditors should be aware a debtor-in-possession or bankruptcy significant market disruptions, borrower and issuers – particularly well- trustee has broad powers to set aside or avoid certain pre-bankruptcy known active borrowers such as large private equity sponsors – are likely transfers of the debtor’s assets to third parties. The most important of to be able to push for even more favourable terms and pricing and these are fraudulent transfers and voidable preferences. greater flexibility in their covenant packages. Legal practitioners will continue to be called upon by sponsors to provide creative solutions that provide borrowers and issuers with 5.3 Do foreign debt quotas apply in your jurisdiction increased flexibility. Those with sophistication and familiarity with and is offshore financing to domestic entities different types of financing at all levels of the capital structure will be monitored? favoured. No. Foreign lenders (other than lenders in jurisdictions that are the target of broad US economic sanctions) may generally make loans in the same manner as US based lenders. 52 | IFLR.COM | CROSSBBORDER FINANCING REPORT 2017 Sullivan & Cromwell LLP is a proud sponsor of the IFLR Cross-Border Financing Report 2017 We aim to provide the highest-quality legal advice and representation to clients around the world through a network of 13 offices, in financial centers in Asia, Australia, Europe and the United States. www.sullcrom.com new york . washington, d.c. . los angeles . palo alto london . paris . frankfurt . brussels tokyo . hong kong . beijing . melbourne . sydney