The International Comparative Legal Guide to: Lending & Secured Finance 2019
7th Edition
allenovery.com ICLG The International Comparative Legal Guide to: Lending & Secured Finance 2019 7th Edition
A practical cross-border insight into lending and secured finance
Allen & Overy LLP Haynes and Boone, LLP Norton Rose Fulbright US LLP Anderson Mori & Tomotsune Hogan Lovells International LLP Orrick Herrington & Sutcliffe LLP Asia Pacific Loan Market Association (APLMA) Holland & Knight Pestalozzi Attorneys at Law Ltd Astrea HSBC Pinheiro Neto Advogados Baker & McKenzie LLP IKT Law Firm PLMJ Advogados Bravo da Costa, Saraiva – Sociedade de Jadek & Pensa Ploum Advogados JPM Janković Popović Mitić Proskauer Rose LLP Cadwalader, Wickersham & Taft LLP Kelobang Godisang Attorneys Rodner, Martínez & Asociados Carey King & Wood Mallesons Sardelas Liarikos Petsa Law Firm Carey Olsen Jersey LLP Latham & Watkins LLP Seward & Kissel LLP Cordero & Cordero Abogados Lee and Li, Attorneys-at-Law Shearman & Sterling LLP Criales & Urcullo Lloreda Camacho & Co. Skadden, Arps, Slate, Meagher & Flom LLP Cuatrecasas Loan Market Association Škubla & Partneri s. r. o. Davis Polk & Wardwell LLP Loan Syndications and Trading SZA Schilling, Zutt & Anschütz Debevoise & Plimpton LLP Association Rechtsanwaltsgesellschaft mbH Dechert LLP Loyens & Loeff Luxembourg S.à r.l. Trofin & Asociații Dillon Eustace Macesic & Partners LLC TTA – Sociedade de Advogados Drew & Napier LLC Maples Group Wakefield Quin Limited E & G Economides LLC Marval, O’Farrell & Mairal Walalangi & Partners (in association E. Schaffer & Co. McMillan LLP with Nishimura & Asahi) Fellner Wratzfeld & Partners Milbank LLP Weil, Gotshal & Manges LLP Freshfields Bruckhaus Deringer LLP Morgan, Lewis & Bockius LLP White & Case LLP Fried, Frank, Harris, Shriver & Jacobson LLP Morrison & Foerster LLP Gonzalez Calvillo, S.C. Nielsen Nørager Law Firm LLP The International Comparative Legal Guide to: Lending & Secured Finance 2019
Editorial Chapters: 1 Loan Syndications and Trading: An Overview of the Syndicated Loan Market – Bridget Marsh & Tess Virmani, Loan Syndications and Trading Association 1 2 Loan Market Association – An Overview – Nigel Houghton & Hannah Vanstone, Loan Market Association 6 3 Asia Pacific Loan Market Association – An Overview – Andrew Ferguson, Contributing Editor Asia Pacific Loan Market Association (APLMA) 12 Thomas Mellor, Morgan, Lewis & Bockius LLP General Chapters: Publisher Rory Smith 4 An Introduction to Legal Risk and Structuring Cross-Border Lending Transactions – Sales Director Thomas Mellor & Marcus Marsh, Morgan, Lewis & Bockius LLP 15 Florjan Osmani 5 Global Trends in the Leveraged Loan Market in 2018 – Joshua W. Thompson & Korey Fevzi, Account Director Shearman & Sterling LLP 20 Oliver Smith 6 Developments in Delayed Draw Term Loans – Meyer C. Dworkin & Samantha Hait, Senior Editors Caroline Collingwood Davis Polk & Wardwell LLP 26 Rachel Williams 7 Commercial Lending in a Changing Regulatory Environment, 2019 and Beyond – Editor Bill Satchell & Elizabeth Leckie, Allen & Overy LLP 30 Sam Friend 8 Acquisition Financing in the United States: Will the Boom Continue? – Geoffrey R. Peck & Group Consulting Editor Alan Falach Mark S. Wojciechowski, Morrison & Foerster LLP 34 Published by 9 A Comparative Overview of Transatlantic Intercreditor Agreements – Lauren Hanrahan & Global Legal Group Ltd. Suhrud Mehta, Milbank LLP 39 59 Tanner Street London SE1 3PL, UK 10 A Comparison of Key Provisions in U.S. and European Leveraged Loan Agreements – Tel: +44 20 7367 0720 Sarah M. Ward & Mark L. Darley, Skadden, Arps, Slate, Meagher & Flom LLP 46 Fax: +44 20 7407 5255 Email: [email protected] 11 The Global Subscription Credit Facility and Fund Finance Markets – Key Trends and Forecasts – URL: www.glgroup.co.uk Michael C. Mascia & Wesley A. Misson, Cadwalader, Wickersham & Taft LLP 59 GLG Cover Design F&F Studio Design 12 Recent Developments in U.S. Term Loan B – Denise Ryan & Kyle Lakin, Freshfields Bruckhaus Deringer LLP 63 GLG Cover Image Source iStockphoto 13 The Continued Growth of European Covenant Lite – James Chesterman & Jane Summers, Printed by Latham & Watkins LLP 70 Stephens & George Print Group 14 Cross-Border Loans – What You Need to Know – Judah Frogel & Jonathan Homer, April 2019 Allen & Overy LLP 73
Copyright © 2019 15 Debt Retirement in Leveraged Financings – Scott B. Selinger & Ryan T. Rafferty, Global Legal Group Ltd. Debevoise & Plimpton LLP 82 All rights reserved No photocopying 16 Analysis and Update on the Continuing Evolution of Terms in Private Credit Transactions – Sandra Lee Montgomery & Michelle Lee Iodice, Proskauer Rose LLP 88 ISBN 978-1-912509-65-2 ISSN 2050-9847 17 Secondments as a Periscope into the Client and How to Leverage the Secondment Experience – Alanna Chang, HSBC 95 Strategic Partners 18 Trade Finance on the Blockchain: 2019 Update – Josias Dewey, Holland & Knight 98 19 The Global Private Credit Market: 2019 Update – Jeff Norton & Ben J. Leese, Dechert LLP 104 20 Investment Grade Acquisition Financing Commitments – Julian S.H. Chung & Stewart A. Kagan, Fried, Frank, Harris, Shriver & Jacobson LLP 109 21 Acquisition Financing in Latin America: Navigating Diverse Legal Complexities in the Region – Sabrena Silver & Anna Andreeva, White & Case LLP 114 22 Developments in Midstream Oil and Gas Finance in the United States – Elena Maria Millerman & PEFC Certified John Donaleski, White & Case LLP 121 This product is from sustainably managed forests and controlled sources 23 Margin Loans: The Complexities of Pre-IPO Acquired Shares – Craig Unterberg &
PEFC/16-33-254 www.pefc.org LeAnn Chen, Haynes and Boone, LLP 127 24 Credit Agreement Provisions and Conflicts Between US Sanctions and Blocking Statutes – Roshelle A. Nagar & Ted Posner, Weil, Gotshal & Manges LLP 132 25 SOFR So Good? The Transition Away from LIBOR Begins in the United States –
Kalyan (“Kal”) Das & Y. Daphne Coelho-Adam, Seward & Kissel LLP Continued Overleaf 137 Continued Overleaf
Further copies of this book and others in the series can be ordered from the publisher. Please call +44 20 7367 0720
Disclaimer This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication. This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations.
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General Chapters:
26 Developments in the Syndicated Term Loan Market: Will Historical Distinctions from the High-Yield Bond Market Be Restored? – Joseph F. Giannini & Adrienne Sebring, Norton Rose Fulbright US LLP 141 27 Green Finance – Alex Harrison & Andrew Carey, Hogan Lovells International LLP 144 28 U.S. Tax Reform and Effects on Cross-Border Financing – Patrick M. Cox, Baker & McKenzie LLP 149
Country Question and Answer Chapters:
29 Angola Bravo da Costa, Saraiva – Sociedade de Advogados / PLMJ: Bruno Xavier de Pina & Joana Marques dos Reis 159 30 Argentina Marval, O’Farrell & Mairal: Juan M. Diehl Moreno & Diego A. Chighizola 165 31 Australia King & Wood Mallesons: Yuen-Yee Cho & Elizabeth Hundt Russell 174 32 Austria Fellner Wratzfeld & Partners: Markus Fellner & Florian Kranebitter 183 33 Belgium Astrea: Dieter Veestraeten 193 34 Bermuda Wakefield Quin Limited: Erik L Gotfredsen & Jemima Fearnside 199 35 Bolivia Criales & Urcullo: Andrea Mariah Urcullo Pereira & Daniel Mariaca Alvarez 207 36 Botswana Kelobang Godisang Attorneys: Wandipa T. Kelobang & Laone Queen Moreki 214 37 Brazil Pinheiro Neto Advogados: Ricardo Simões Russo & Leonardo Baptista Rodrigues Cruz 221 38 British Virgin Islands Maples Group: Michael Gagie & Matthew Gilbert 230 39 Canada McMillan LLP: Jeff Rogers & Don Waters 237 40 Cayman Islands Maples Group: Tina Meigh 247 41 Chile Carey: Diego Peralta 255 42 China King & Wood Mallesons: Stanley Zhou & Jack Wang 262 43 Colombia Lloreda Camacho & Co.: Santiago Gutiérrez & Juan Sebastián Peredo 269 44 Costa Rica Cordero & Cordero Abogados: Hernán Cordero Maduro & Ricardo Cordero B. 276 45 Croatia Macesic & Partners LLC: Ivana Manovelo 284 46 Cyprus E & G Economides LLC: Marinella Kilikitas & George Economides 292 47 Denmark Nielsen Nørager Law Firm LLP: Thomas Melchior Fischer & Peter Lyck 300 48 England Allen & Overy LLP: David Campbell & Oleg Khomenko 307 49 Finland White & Case LLP: Tanja Törnkvist & Krista Rekola 316 50 France Orrick Herrington & Sutcliffe LLP: Emmanuel Ringeval & Cristina Radu 324 51 Germany SZA Schilling, Zutt & Anschütz Rechtsanwaltsgesellschaft mbH: Dr. Dietrich F. R. Stiller & Dr. Andreas Herr 335 52 Greece Sardelas Liarikos Petsa Law Firm: Panagiotis (Notis) Sardelas & Konstantina (Nantia) Kalogiannidi 344 53 Hong Kong King & Wood Mallesons: Richard Mazzochi & Khin Voong 352 54 Indonesia Walalangi & Partners (in association with Nishimura & Asahi): Luky I. Walalangi & Siti Kemala Nuraida 360 55 Ireland Dillon Eustace: Conor Keaveny & Richard Lacken 366 56 Israel E. Schaffer & Co.: Ehud (Udi) Schaffer & Shiri Ish Shalom 375 57 Italy Allen & Overy Studio Legale Associato: Stefano Sennhauser & Alessandra Pirozzolo 381 58 Ivory Coast IKT Law Firm: Annick Imboua-Niava & Osther Tella 390 59 Japan Anderson Mori & Tomotsune: Taro Awataguchi & Yuki Kohmaru 396 60 Jersey Carey Olsen Jersey LLP: Robin Smith & Laura McConnell 404 61 Luxembourg Loyens & Loeff Luxembourg S.à r.l.: Antoine Fortier-Grethen 414 62 Mexico Gonzalez Calvillo, S.C.: José Ignacio Rivero Andere & Jacinto Avalos Capin 422 63 Mozambique TTA – Sociedade de Advogados / PLMJ: Gonçalo dos Reis Martins & Nuno Morgado Pereira 430
Continued Overleaf The International Comparative Legal Guide to: Lending & Secured Finance 2019
Country Question and Answer Chapters:
64 Netherlands Ploum: Tom Ensink & Alette Brehm 437 65 Portugal PLMJ Advogados: Gonçalo dos Reis Martins 445 66 Romania Trofin & Asociații: Valentin Trofin & Mihaela Atanasiu 452 67 Russia Morgan, Lewis & Bockius LLP: Grigory Marinichev & Alexey Chertov 462 68 Serbia JPM Janković Popović Mitić: Nenad Popović & Nikola Poznanović 470 69 Singapore Drew & Napier LLC: Pauline Chong & Renu Menon 477 70 Slovakia Škubla & Partneri s. r. o.: Marián Šulík & Zuzana Moravčíková Kolenová 487 71 Slovenia Jadek & Pensa: Andraž Jadek & Žiga Urankar 494 72 South Africa Allen & Overy LLP: Lionel Shawe & Lisa Botha 504 73 Spain Cuatrecasas: Manuel Follía & Iñigo Várez 514 74 Sweden White & Case LLP: Carl Hugo Parment & Tobias Johansson 525 75 Switzerland Pestalozzi Attorneys at Law Ltd: Oliver Widmer & Urs Klöti 532 76 Taiwan Lee and Li, Attorneys-at-Law: Hsin-Lan Hsu & Odin Hsu 541 77 UAE Morgan, Lewis & Bockius LLP: Victoria Mesquita Wlazlo & Amanjit K. Fagura 549 78 USA Morgan, Lewis & Bockius LLP: Thomas Mellor & Rick Eisenbiegler 564 79 Venezuela Rodner, Martínez & Asociados: Jaime Martínez Estévez 576
EDITORIAL
Welcome to the seventh edition of The International Comparative Legal Guide to: Lending & Secured Finance. This guide provides corporate counsel and international practitioners with a comprehensive worldwide legal analysis of the laws and regulations of lending and secured finance. It is divided into three main sections: Three editorial chapters. These are overview chapters and have been contributed by the LSTA, the LMA and the APLMA. Twenty-five general chapters. These chapters are designed to provide readers with an overview of key issues affecting lending and secured finance, particularly from the perspective of a multi- jurisdictional transaction. Country question and answer chapters. These provide a broad overview of common issues in lending and secured finance laws and regulations in 51 jurisdictions. All chapters are written by leading lending and secured finance lawyers and industry specialists and we are extremely grateful for their excellent contributions. Special thanks are reserved for the contributing editor Thomas Mellor of Morgan, Lewis & Bockius LLP for his invaluable assistance. Global Legal Group hopes that you find this guide practical and interesting. The International Comparative Legal Guide series is also available online at www.iclg.com.
Alan Falach LL.M. Group Consulting Editor Global Legal Group [email protected] Chapter 14
Cross-Border Loans – What You Need to Know Judah Frogel
Allen & Overy LLP Jonathan Homer
For many borrowers in Asia, the arbitrage on covenant and terms Part I – Trends in Cross-Border Loans flexibility offered by the international institutional term loan markets has not been enough to overcome this pricing differential in most What do we mean by cross-border loan? local markets. This is exacerbated by the fact that, increasingly, international financial sponsors have been able to negotiate many of the “bells and whistles” on covenant packages and terms flexibility In this article, the term “cross-border loan” refers to two broad that would be available in the US or European term loan B markets categories of syndicated loans. The first category covers loans issued in certain local transactions. by non-US borrowers in the US institutional term loan B market and the second category covers loans issued by US borrowers in In contrast to the position in Asia, Australian borrowers, initially the European institutional term loan B market. Cross-border loans in 2014/5 and again more recently in 2018, have been attracted by emerged as far back as the early 2010s and were for a long time the US institutional term loan B market. In addition, it is in this limited to US-dollar denominated term loans extended to non-US market where we have seen unitranche and domestic TLB facilities, borrowers that were syndicated in, and included terms typical for, which follow US and European unitranche and TLB terms, gaining the US term loan B market. Until late 2016, these loans were based popularity, with local offices of international credit funds and predominantly on New York law-governed credit documentation international investment banks being the most active providers of and were dubbed “Yankee loans”. As the European term loan B financing under these structures. market experienced strong growth in 2017 and 2018, however, some of these US-dollar loans were based on English law-governed Cross-border loan trends in 2017 and 2018 credit documentation and syndicated in either the European or US institutional term loan markets. (For a detailed history of Yankee Cross-border loans globally experienced a significant uptick in 2017 loans and the gradual adoption of US-style loan terms in the European over 2016 from around $70 billion to a volume around $110 billion, market, see our previous articles on this topic in The International setting a record high. In the US market alone, cross-border loans set Comparative Legal Guide to Lending and Secured Finance for 2018 a record high of $68 billion and European market cross-border loan and 2017.) issuance jumped from $22 billion in 2016 to $42 billion in 2017.i As a result of the growth of the European institutional term loan B While this increase in cross-border activity was commensurate with market, institutional investors in this market have gradually become the increase in overall lending volumes in 2017, nonetheless the more accustomed to US-style loan covenant packages and terms prevalence of these cross-border loan issuances during that period (which themselves have become much more closely aligned with underscores the relative persistence of this type of loan product. unsecured high yield bond incurrence-based covenant packages In 2018, cross-border loans in the US market experienced a small and terms) that were previously only seen in the US market. The decrease to $61 billion but the European market held steady at $43 ii increasing convergence of terms between the US and European billion. These trends indicate that global companies issuing term markets has led to a hybrid approach of market terms that are now loan B debt continue to be comfortable syndicating in both markets common in both US and English law credit documentation. Given and that this phenomenon is here to stay. this shift, more US borrowers with foreign operations have migrated Many of the more flexible terms that are prevalent in current term their loan issuance over the past two years to European markets. As loan B facilities originated in the US unsecured high yield bond we enter 2019, the result is a cross-border loan market where issuers market. Originally, this began in the US as a practice of aligning tap markets across the Atlantic, in both directions. the covenant packages of term loan B facilities with simultaneously As a general matter, cross-border loans have still not become issued unsecured high yield bonds of the same issuer. However, the trend has continued to the point that investors accept such terms in prevalent with borrowers from Asia (i.e., Asian borrowers seeking deals where the capital structure does not include high yield bonds. financing in the US or Europe). For these borrowers, a combination The US leveraged loan market was quicker to adopt this approach, of continued high levels of liquidity available from local lenders but now, it is relatively common for both US and European leveraged (mainly strong domestic banks in each of the key markets in the loan B deals to include high yield style incurrence-based covenant region and regional asset management companies as well as the packages even when these facilities are being issued independent of local branches of major international commercial and investment a side-by-side unsecured high yield bond issuance. banks) and challenging legal and regulatory regimes in many of the local markets, makes local pricing too competitive and structures The rapid evolution in terms was driven in large part by an imbalance too challenging for the international institutional term loan markets. across markets between supply and demand, giving rise to some of
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the most borrower-friendly terms that have been seen in international should be measured based on margin or the more lender-protective debt capital markets since the LBO boom that preceded the financial all-in-yield standard. Though with only some success, some strong crisis of 2007 and 2008. sponsors in the US market have started pushing for the more liberal As part of the change in European deal terms in 2017, there was a margin standard since the beginning of 2017. With respect to substantial increase in the volume of covenant-lite European term equity cure rights, while EBITDA-based cures that originated in the loan B issuance. Continuing through 2018, although there was a US market have now become embedded in the European market, small decrease in covenant lite deals done in Europe, such deals European trends such as deemed cures when non-compliance is have maintained pace with the amount of covenant lite deals that are remedied in subsequent quarters or the ability to cure a default by done in the US as a percentage basis of overall deals in each relevant reducing revolving facility borrowings below the “springing” trigger market (around 85% in each market).iii Prior to the broad emergence level, have seeped into some US deals. of covenant lite deals in Europe, European leveraged loans were Not all convergence has moved in favour of Borrowers, though. structured with a suite of four maintenance financial covenants testing For example, the European market did not historically require call leverage, interest cover, cashflow cover and capex spend, followed protection on first-lien term loan B facilities but have, in recent years, in more recent times by a trend towards more “covenant-loose” adopted the US market convention for call protection, typically set deals (which include only leverage and interest cover protection). at 101% for six months. Though this trend may have begun before Considering the fact that there were hardly any European covenant- the more significant convergence of market terms that has occurred lite deals between 2008 and 2011, the increase has been substantial since 2017, European deals with this type of call protection jumped over time and is arguably one of the most significant changes to deal from 60% in 2016 to 90% in 2018. structures in the last decade. Overall, the fact that the European market has broadly adopted more In a covenant-lite deal, term loans do not benefit from any borrower-friendly terms from the US market indicates that – barring maintenance financial covenant. Only the revolving facility benefits any significant liquidity crunches in either market – terms between from a single maintenance financial covenant, normally a leverage- the two markets may eventually reach a general equilibrium and based ratio test (and this only applies on a “springing” basis – at the consistency. Although standardisation of documentation in the end of a fiscal quarter, only if revolving utilisation exceeds a certain leveraged loan markets has always been, and remains, an elusive percentage of revolving capacity on such date, typically ranging reality, substantive convergence of terms does have its benefits to between 30 and 40% of revolving capacity). both issuers and institutional investor lenders, alike. To the extent More importantly, the negative covenant package for “covenant-lite” that, substantively, covenant packages in the US and European loan facilities is either fully or partially incurrence-based in nature, markets remain closely linked, loan investors may have an easier similar to what would historically be found in a US unsecured high time with investment decisions and issuers can more readily take yield bond covenant package. advantage of structural or pricing considerations to shift between the two markets. In addition to the European market’s adoption of some greater covenant flexibility historically more common in US deals, new trends relating to the convergence of the two markets have emerged Outlook for 2019 recently. In some instances, European deals have retained New York as the governing law for, or the law used to interpret, covenants, Whether the volume of cross-border loans will hold steady in 2019 defaults and certain related definitional constructs that have been or fluctuate is hard to predict. On the one hand, US borrowers, incorporated from the US market. Some specific covenant exceptions especially those with significant overseas operations, will continue that became further embedded in the European market in 2018 include to be attracted to the European market if it continues to demonstrate an exception for contribution debt (i.e., ability to incur debt up to the a willingness to provide covenant flexibility that was previously only amount of equity contributed to the borrower after the closing date, found in the US market and better pricing as compared to the US and sometimes a 2× multiple of that amount), an increased ability market. Changes to the US tax code introduced by the 2018 Tax Cuts to use an EBITDA-based grower basket for the fixed or “freebie” and Jobs Act may also drive some multinational companies to utilise component of the “available amount” basket, more flexibility to more non-US borrowing capacity to mitigate the effect of the new cap conduct permitted acquisitions, and an uncapped ability to sell assets on interest deductibility introduced by these reforms. (subject to the US-style 75% cash consideration requirement). About On the flip side, political uncertainties, including the looming half of all European deals in 2018 also adopted the US approach to conclusion of the Brexit saga, may impact the European markets majority voting requiring only 50.1% of lenders to consent to an in ways that are still unclear and which may deter US borrowers action instead of a 66⅔% super majority which was the historical from crossing the Atlantic. In the run up to Brexit, many English iv norm. In contrast, only 17% of European deals accepted the simple law-governed credit agreements included a carveout from gross-up/ majority approach in 2017. European lenders are also being further increased cost provisions for costs and/or losses related to Brexit. restricted in their ability to assign loans without borrower consent, as We can expect these provisions to continue to be prevalent in these some English law-governed credit agreements in 2018 incorporated facilities and to become more precise once a definitive path with the US-style disqualified lender concept in addition to the already respect to Brexit is finalised. stringent “white list” concept that has been the longstanding market As US and European debt capital markets continue to evolve and standard in European deals. mature, it can be expected that credit documentation in different loan When it comes to European terms migrating to the US market, some markets will continue to be impacted and that further convergence notable instances include the expansion of the MFN pricing cushion of terms between the US and European term loan B markets in for incremental debt and some of the more borrower-friendly equity particular, and between the bank and bond markets more generally, cure provisions. Historically, the MFN cushion in the US market was is likely to occur. The continuing globalisation of the private equity set at 50 basis points. The European market began to expand this and leveraged finance markets in 2019 and beyond will increasingly to 75 or even 100 basis points beginning in 2016 and this year the result in pressure for terms that become customary in one region to US market saw an increasing number of deals with a 75 basis point be adopted quickly in other regions. Lenders will need to consider differential. European deals have also been split as to whether MFN carefully whether it is appropriate in all cases to import terms
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accepted in one region into deals featuring borrowers and guarantors applicable, the guarantor and collateral package (subject to the in different regions (as a “one size fits all” approach may well not limitations noted below) could broadly cover all of the jurisdictions be appropriate in all circumstances). Even if arrangers find that in which the borrowing company operates. Often, borrowers and progressive terms in one market may be accepted in the other market their advisors conduct an analysis to identify the jurisdictions where as an initial matter, careful consideration should be given whether it is legally feasible to provide credit support and where there is those terms may result in blind spots that only become noticeable the most value (as a percentage of total assets, total revenues and/ when the markets contract. or EBITDA) to devise an agreed set of covered jurisdictions. The deal documentation will then provide for a guarantor coverage test that usually seeks to ensure that at all times a certain percentage of Part II – Structuring Cross-Border Loans – the total assets/EBITDA of the credit group provides direct credit Considering the Location of the Borrower support via guarantees and collateral pledges (typically this is set at and Guarantors 80% in European deals, but the percentage can be lower in some top- tier sponsor deals). So, without the “deemed dividend” limitations, Notwithstanding the ongoing convergence of terms between the lenders in European deals have historically been able to achieve US and European markets, there remain numerous and varying greater levels of direct credit support from companies with global considerations that must be explored when dealing with cross-border operations. loans. That is to say, while key covenant and even some payment When the US congress passed the Tax Cuts and Jobs Act in late terms may have become generally consistent in both markets, and 2017, it left Section 956 intact, but it separately provided a deduction may continue to do so, cross-border loan issuers and investors still for actual dividends received by a US shareholder from its non-US must undertake an important exercise in terms of analysing the capital subsidiary, effectively making such income exempt from US taxes. structure, covenant package and form of documentation depending on The result was an odd disconnect between treatment of actual where the relevant credit support and value sits. And, while obvious dividends (exempt from taxes) and deemed dividends (subject to factors such as pricing, currency needs and tax implications will most tax liability) from non-US subsidiaries. certainly play a key factor in the decision-making process of whether To remedy this inconsistency, the IRS proposed regulations on a syndication will be conducted in the US or European loan markets October 31, 2018v that would reduce the tax liability associated with and the choice of governing law and style of the loan documentation deemed dividends as if it had been an actual dividend, effectively (i.e., US style vs. UK/LMA style), set forth below are numerous removing the negative tax consequences of such deemed dividends. additional considerations, including some that have only recently Once the regulations are adopted by the Treasury Department (and become relevant, that should impact underwriters’, issuers’ and loan even before that, as the regulation permits taxpayers to rely on the investors’ views with respect to structuring these loans. new rules prior to their finalisation), borrowers will have more flexibility to provide greater guarantee and collateral support from Comparing guarantees and security in different jurisdictions non-US subsidiaries. While this new tax treatment of CFCs has been available for some US and Canadian credit parties time, the US loan market has not seen an increase in the number of The value of security and guarantees from borrowers and guarantors deals where CFCs provide guarantees and collateral. Indeed, in many located in the US in secured loan transactions is generally not a source sponsor-backed deals, guarantees and collateral of all non-US entities of material concern for senior secured lenders. The UCC provides continue to be excluded via broad carveouts from the credit support for a relatively simple and inexpensive means of taking security over package. In many instances, this is true even when the relative substantially all of the personal property of a US entity and taking value (based on a total assets and EBITDA generation) of foreign security over real estate assets is, generally, relatively straightforward operations is meaningful. Time will tell whether the emergence of and inexpensive. Furthermore, save for well understood fraudulent this change permits further convergence of US and European deals conveyance risks, upstream, cross-stream and downstream guarantees such that US deals can also now incorporate a guarantor coverage test from US entities do not give rise to material value leakage concerns and capture value of significant overseas operations in the guarantee for senior secured lenders. A similar position applies in Canada. and collateral package. US-style vs. European Style Guarantee and Collateral Provisions Though these changes to the US tax regime present lenders with a Historically, US borrowers have been limited in their ability to obtain new opportunity for additional credit support, in structuring non- guarantee and collateral support from certain non-US subsidiaries US credit support lenders must still consider other factors that may that are “controlled foreign corporations” (commonly referred to as limit a non-US subsidiary’s ability to provide support. Specifically, “CFCs”) due to the operation of Section 956 of the Internal Revenue local regulations may prevent the non-US subsidiary from providing Code. The tax code treats support provided by CFCs as a “deemed financial assistance in an acquisition financing context or place dividend” which, absent actual distribution of cash from such CFCs liability on the directors approving such credit support. Upstream would trigger unwanted US tax liabilities for the credit group. To credit support can also be impacted by varying corporate benefit avoid triggering the deemed dividend, US deals have historically regimes in non-US jurisdictions so caution must be used in structuring been structured to exclude any guarantees by CFCs and collateral credit support from non-US subsidiaries. Finally, local tax specialists was limited to a 66% pledge of the CFC’s voting stock (a safe harbor in each non-US jurisdiction should always be consulted to confirm under the tax code). The result was that in most US deals, usually the impact of guarantees and collateral provided by entities in those involving a US borrower or US parent company subject to these jurisdictions. “deemed dividend” rules, the direct credit support was limited to US domestic subsidiaries and their assets while the value of foreign Considering the applicable insolvency regime operations was excluded from the credit package (save for the 66% equity pledge of the stock of first-tier foreign subsidiaries). When structuring cross-border loans, an essential element that must In contrast, in most European deals, where usually the US tax be considered is the insolvency regime that is likely to apply in an code and the negative consequence of a “deemed dividend” is not enforcement scenario. Whereas the US benefits from Chapter 11 and
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the UK has developed the court-approved scheme of arrangement holding company of the credit group and effect a sale of the business to deal with restructurings, the applicable restructuring regimes as a going concern. in other jurisdictions are considerably less uniform, codified and One of the key reasons for this is that placing a company into local comprehensive. It remains to be seen whether changes introduced in insolvency proceedings in many European and Asian jurisdictions is other jurisdictions over the past few years will significantly improve viewed very negatively – quite often only as the option of last resort. the position of senior secured lenders to credit groups with borrowers Suppliers and customers typically conceive of local proceedings as or guarantors organised, or with significant assets located, in those a precursor to the corporate collapse of the business since often jurisdictions. there is no Chapter 11-equivalent restructuring process available in Thoughtful consideration of the applicable insolvency rules is the applicable European or Asian jurisdiction that would allow for especially important given the prevalence of US-style covenant terms re-emergence as a going concern. The result is that entering into that are now incorporated in non-US credit agreements with loan local insolvency proceedings can be value-destructive (in particular parties that are predominantly located in non-US jurisdictions. US- because of the lack of an automatic stay that binds trade creditors and style incurrence-based covenant terms were developed, and gained suppliers and, in some cases, because of a lack of clear procedures acceptance, in a market where the issuers of the debt benefiting from for cramming down junior creditors). those terms would likely be subject to a US law-governed Chapter 11 Europe and Asia – an alternative – the English court-based scheme restructuring, which meant lenders could rely on a presumption that of arrangement US Chapter 11 principles, protections and processes would dictate the outcome of any restructuring. With less uncertainty about what As an alternative to an out-of-court process, creditors in Europe and would happen in a restructuring, US institutional lenders were early Asia who document their transactions under English law may be adopters of terms that gave borrowers greater covenant flexibility. able to take advantage of a scheme of arrangement – a statutory When the borrower and guarantors are primarily non-US entities that procedure under the UK Companies Act which allows a company may not benefit from a set of uniform restructuring rules like Chapter to enter into compromises and arrangements with its creditors, with 11, the flexibility permitted by such covenant packages (in particular those compromises and arrangements then being sanctioned by an in regard to incurring additional debt, making future investments English court. and acquisitions and certain intercompany transactions) may not be Notwithstanding that a European- or Asian-centric transaction may adequate to preserve the senior secured status of any term loan B have no substantive nexus to England, the scheme of arrangement tranche (and any pari passu revolving facility). The dramatic increase option may still be available, as the English courts have determined in flexibility included in European credit documentation over the past that a sufficient connection will exist to enable them to sanction two years is somewhat surprising in light of this consideration. Thus, a scheme of arrangement so long as a primary finance document an accurate and complete understanding of the insolvency laws in the contains an English choice of law and exclusive jurisdiction clause. jurisdiction and the location of the borrower(s) and the guarantor(s) The primary aim of a scheme of arrangement is to allow an of the senior secured debt is of paramount importance. arrangement or compromise in respect of debt claims of a (solvent or By gaining an understanding of what insolvency regime may apply insolvent) company to be made, and to be binding on all creditors, if to a given credit group, senior secured lenders can better assess the scheme is agreed by a majority in number and 75% by value of all the likelihood of repayment in a default or restructuring scenario. creditors (or each class of creditors) including secured creditors. This This is generally achieved by ensuring that the applicable rules will approach effectively enables a “cram-down” of minority creditors in allow the senior secured lenders to sit at the top of any liquidation a similar manner that Chapter 11 would in the US even if the other or proceeds waterfall. A critical element to achieving this result benefits of a Chapter 11 proceeding (e.g., the automatic stay) may and, thus a greater recovery, is the importance of arming the senior not be present. However, it should be noted that the English courts secured class of creditors with tight controls over any restructuring may use their discretion to grant a stay on action by creditors on a process, and the mechanisms for doing this are unique to where the case-by-case basis if the court considers, among other things, that the debtor is located. scheme of arrangement is reasonably likely to succeed. United States Chapter 11 The role of the intercreditor agreement in out-of-court processes In the US, a typical in-court restructuring in a leveraged finance In order for senior secured lenders in non-US markets to retain transaction is usually accomplished through a Chapter 11 case control of an out-of-court restructuring process (in situations where it under the US Bankruptcy Code. Chapter 11 rules allow, in certain is not possible to rely on a Chapter 11 process, an English scheme of circumstances, senior secured lenders to cram down “out of the arrangement or any other similar local insolvency in-court process), money” junior secured or unsecured creditors and release the related they have traditionally relied on contractual tools contained in a debt claims, guarantee claims and security pursuant to a Bankruptcy European-style intercreditor agreement, with specifically tailored Court-approved plan of reorganisation. provisions relating to enforcement standstills and release provisions. A Chapter 11 restructuring is an in-court process where the primary An enforcement standstill operates to limit or prohibit junior aim is to allow a business to restructure its operations and capital and creditors from taking any enforcement action, including taking emerge out of bankruptcy as a going concern. Approved Chapter 11 any steps to accelerate their debt claim or to enforce (or instruct plans are binding on all creditors of a debtor (or group of debtors). the security agent to enforce) the transaction security. Standstills Prior to a Chapter 11 plan being approved, an automatic stay applies are designed to prevent junior creditors from obtaining leverage by (with global effect) that prohibits any creditor, including trade threatening to force borrowers or guarantors into a value-destroying creditors and suppliers, from taking enforcement action which could local insolvency proceeding and to allow the senior secured lenders diminish the value of the business. time to implement a controlled disposal of the credit group through Europe and Asia – Out-of-court process enforcement of their own, higher ranking, transaction security. By contrast, in Europe and Asia, it is more usual for a restructuring in Release provisions apply upon a “distressed” disposal of the credit a leveraged finance transaction to be accomplished through an out-of- group, i.e. a disposal following an acceleration event or when court process. Most commonly, this is achieved through enforcement transaction security has otherwise become enforceable. The release of share pledge security in order to transfer ownership of the top provisions allow senior secured lenders to sell a business free of
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the claims of junior creditors that are party to the intercreditor “offshore” US term loan B investors are unable to lend directly to agreement. Such release provisions provide that all of the borrowing borrowers located in certain European jurisdictions without triggering and guarantee liabilities of, and the security granted by, the borrower withholding tax or interest deductibility issues). In addition, some or guarantor being sold (together with the borrowing and guarantee European jurisdictions may impose limits on the number of creditors liabilities of, and the security granted by, any of its subsidiaries) will of a particular nature that a borrower organised in that jurisdiction be released upon a distressed disposal. may have without triggering additional withholding tax obligations. Because the release provisions give senior secured lenders the right Foreign debt restrictions to eliminate the debt claims of junior creditors, so called “fair value In certain jurisdictions in Asia and Latin America, there are protections” are typically included to give junior creditors some restrictions prohibiting or limiting local borrowers from issuing degree of comfort that the enforcing senior secured lenders will sell foreign debt (i.e. debt that is either provided by a non-resident lender the business for a “fair price” on arm’s length terms. This “fair value or that is not denominated in the borrower’s local currency). protection” is a contractual attempt to provide comfort similar to that Foreign exchange restrictions obtained through the judicial oversight afforded in a Chapter 11 or scheme of arrangement in-court process. In certain jurisdictions in Asia and Latin America, foreign currency exchange rules mean that there are limitations – or in some cases, Automatic acceleration prohibitions – on expatriating cash and, to add to the complexity, One final note with regard to insolvency laws – the US Bankruptcy these rules in some cases can be vague, untested and subject to Code does not permit creditors to take any action against a debtor frequent and unpredictable change. in a US bankruptcy case to collect outstanding obligations after that debtor files for US bankruptcy, including taking actions against any collateral or to accelerate the maturity of the loans. Part III – Documenting Cross-Border Loans Since most guarantees provide that the guarantor is obligated to – Considerations Regarding the Different pay the guaranteed debt “when due”, it is necessary that such debt Terms and Practices in US and European be accelerated for a guarantee to be fully called upon prior to the Leveraged Loan Markets final scheduled maturity of the guaranteed debt. The automatic acceleration provision is crucial, therefore, since it removes any doubt While, as noted above, the US and European loan markets have as to whether the loans have been accelerated and does so without experienced much broader convergence of terms in the last two to violating the automatic stay applicable to the debtor (by avoiding the three years, the two markets still operate differently in many practical need for service of any acceleration notice), thereby enabling lenders ways and remain subject to separate and differing sets of rules and to call on any guarantees of non-bankrupt guarantors and crystallise regulations. The following is a non-exhaustive list of some key areas their claims against any bankrupt guarantors. However, including for all market participants to be aware of when negotiating either a US-style automatic acceleration provision, whilst an important New York law or English law credit documentation. structural feature in a domestic US deal (due to the automatic stay applicable upon a US bankruptcy filing), may not result in the right outcome in the context of a non-US credit group. Such a provision Value leakage and debt incurrence could force certain non-US borrowers and guarantors into a local insolvency process which may be value-destructive and may derail Lenders in any financing should be concerned if credit parties are the manner in which a senior secured creditor is trying to organise able to move value outside of the credit group, whether it is via a and control a restructuring process. Careful thought should therefore removal of valuable assets from the collateral package or through the be given as to which non-US borrowers and guarantors are subject to exclusion of valuable subsidiaries from the guaranty requirement. automatic acceleration provisions (taking into account the fact that Such value leakage is amplified greatly if such subsidiaries are then certain non-US entities can easily file for US bankruptcy protection). permitted to incur additional debt which may even be supported by the very assets that were just removed from the collateral package.
Other considerations based on the location of borrowers European and US loan markets have historically prevented such and guarantors value leakage in two important and distinct ways. The US market historically capped the amount of assets or investments that could In US secured loan transactions, the borrower could be organised flow from loan parties (i.e., the borrower and its subsidiaries that are in any state of the US without giving rise to material concerns for guaranteeing the loan) to subsidiaries that are not loan parties. This senior secured lenders based solely on jurisdictional considerations. cap also served to limit the acquisition of subsidiaries that do not In Europe, however, there are a number of considerations which are become loan parties. of material importance to senior secured lenders when evaluating European deals relied on the guarantor coverage test discussed above in which European jurisdiction a borrower should be organised and to prevent leakage or, in other words, companies were permitted to the quality and value of credit support that will be available from its move assets around freely so long as the subsidiaries guaranteeing subsidiaries and affiliates. the loans represented at least 80% of consolidated EBITDA and total Lender licensing rules assets. Many European jurisdictions impose regulatory licensing Both of these approaches are far more restrictive than the high yield requirements for lenders providing loans to borrowers organised in bond market where investments between “restricted” subsidiaries that particular jurisdiction (which is not a consideration that generally (i.e., those subsidiaries that are restricted by the covenants) are freely causes concern in US deals). permitted. This makes sense given that the high yield bonds have typically been unsecured, so the bondholders are in no worse position Withholding tax on interest payments if assets are moved throughout the structure. Withholding tax may be payable in respect of payments made by While free transferability of value from credit parties (i.e., issuers borrowers organised in many European jurisdictions to lenders and guarantors) into non-guarantor restricted subsidiaries results in located outside of the same jurisdiction (in particular, many a loss of direct credit support with respect to the value invested, that
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value can still be captured residually through guarantees provided by This important interplay of the debt and investments covenants parent entities that are themselves direct obligors. But, that is only underscores that the potential for value leakage may not always be the case if there is no structurally senior debt incurred directly by the obvious and often requires a deep understanding of how covenant non-guarantor restricted subsidiary. Such debt would have a direct terms work together. Some high-profile deals in the US market over claim at an entity with respect to which the bondholders do not and the past year have highlighted additional value leakage concerns. therefore all the value of that subsidiary would accrue to the benefit The now infamous J. Crew trapdoor provision that is included in a of the direct debt claim before the bondholders saw any residual value lot of existing precedents in the US market could lead to additional – this is the practical or structural subordination issue. With this in leakage via a seemingly innocuous provision allowing for non- mind, high yield bond investors have historically taken comfort with guarantor restricted subsidiaries to make unlimited investments unlimited investment capacity in non-guarantor restricted subsidiaries in unrestricted subsidiaries with proceeds of an initial permitted in reliance on non-guarantor debt caps that limit the amount of debt investment from the borrower or guarantor into the non-guarantor that can be incurred by non-guarantor restricted subsidiaries. restricted subsidiary. Investors in both the US and European markets As noted above, there has been significant convergence of term loan continue to be focused on this provision in recent transactions and B covenant packages with traditional high yield covenant packages have been resisting the inclusion of the trapdoor in new issue US and and the prevalence in the loan market of flexibility to make unlimited European term loan B facilities (including cross-border loans) and investment capacity in all restricted subsidiaries is no exception. have introduced ways to limit its impact when included. Even with this construct, in a purely US domestic deal that does not Lenders also watched closely as Petsmart took advantage of a involve (nor permit the creation or acquisition of foreign subsidiaries), provision that excludes any non-wholly owned subsidiary from lenders’ exposure to value leakage would still be limited as most the guarantee requirement. By distributing a portion of a valuable domestic subsidiaries would be required to guaranty and secure the subsidiary’s equity using dividend capacity, Petsmart was able to loan obligations with a few exceptions, the most important one of render the subsidiary into a non-wholly owned subsidiary and take which is an exception for immaterial subsidiaries. A large transfer advantage of favourable contractual language requiring the release of of assets to any such immaterial subsidiary, however, would push it guarantors that become “excluded subsidiaries” following the closing over the materiality threshold, requiring the borrower to designate date of the facility. that subsidiary or another immaterial subsidiary as a guarantor in Neiman Marcus was also in the news this year in the US market when order to once again satisfy the threshold. it designated a valuable subsidiary as an unrestricted subsidiary using In a US credit group that either has non-US subsidiaries or is its investment covenant capacity for unrestricted subsidiaries, and permitted to include such subsidiaries in the credit group there are then distributed such unrestricted subsidiary (and all of the cash and several other guarantee and collateral exceptions that come into play, assets held by it) upstream to its equity holders. which exceptions may exclude such non-US subsidiaries from the obligation to guarantee the loans (i.e., local law restrictions, adverse Some other differences to keep in mind between US and tax consequences, cost-benefit analysis), not to mention the broad European markets exclusion for foreign subsidiaries noted earlier in this article that have persisted despite the changes to the US Tax Code. Despite not being As one would expect, there is a host of different rules and regulations guarantors, such foreign subsidiaries might still constitute restricted in each lending market. The following are just a few examples of subsidiaries to which unlimited value could be transferred via the some different standards, rules and regulations applicable between high yield-style investment covenant carveouts leaving lenders with markets and, of course, market players should seek counsel in the a higher risk of value leaking outside of their collateral support group. relevant jurisdiction to fully understand what practical implications The same value leakage concern has become an issue in an increasing there are when seeking to place debt in a given market. number of large covenant-lite European term loan B deals which Assignments and transfers – again modelled after the high yield bond market – permit free investments into all restricted subsidiaries (regardless of whether or Most English law-governed credit documentation that includes not they are guarantors). Many of these deals may still include the a term loan B tranche is being documented with European-style guarantor coverage test discussed above, but that too has been diluted transferability provisions and restrictions, which are generally more by the applicability of agreed guarantee and security principles that restrictive on transferability of loans than the typical US market limit the requirements to provide guarantees and security (as well approach. So, the European approach of a permitted “white list” as the guarantor coverage test) to only some of the jurisdictions in of lenders with the ability to remove a certain number of names which the credit group operates. The result is that, unless specifically on an annual basis after closing (as opposed to the US approach of negotiated otherwise, unlimited investments can be made into a Disqualified Lender list, which typically cannot be updated after restricted subsidiaries organised in jurisdictions that are not “covered closing except for updates to include bona fide competitors), a blanket jurisdictions” and which, therefore, do not provide guarantees and prohibition on transfers to loan-to-own or distressed investors, and collateral, without throwing off the percentage of EBITDA/assets expansion of transfer limitations to apply not only to assignments necessary to satisfy the guarantor coverage test. but also to participations and sub-participations and even certain derivative transactions has been maintained in most European term But, similar to the high yield market, while unlimited investment loan B deals (including some cross-border loans – notwithstanding capacity in all restricted subsidiaries is now fairly common in both the intent to syndicate the US dollar tranche in those deals to the US the US and European markets for large syndicated term loan B institutional market). facilities, lenders have, for the most part, insisted that non-guarantor subsidiaries remain subject to a cap on debt incurrence (at least under There has been a recent push to try to expand some of the more the unlimited ratio-based incurrence carveouts). As noted above, by common European restrictions on transferability into traditional US ensuring that unlimited debt cannot be incurred by non-guarantor term loan B deals (including cross-border loans), but these attempts subsidiaries that may become recipients of valuable assets and have so far not gained widespread acceptance with US investors operations via intercompany investments, lenders can limit the degree (where such tighter restrictions continue to be much more heavily to which structural subordination issues can impact the residual value resisted by investors). Based on US market reaction, we may well see that accrues to them from those subsidiaries. deals in 2019 that include a bifurcated approach to transferability for
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different loan tranches, depending on the target market in which the there is still not firm unanimous consensus as to what the solution tranche will be syndicated. It is therefore critical that underwriters, is, both US and European credit facilities in the term loan B markets investors and other market participants understand the impact that executed during the previous two years have started including these provisions may have on the overall liquidity of a particular fallback provisions that aim to deal with a permanent LIBOR tranche and the ability to freely enter into participations and similar cessation. While in Europe, the LMA endorsed standardvi dominates transactions, in light of the intended syndication strategy for that the market, these provisions vary significantly in US transactions. tranche. In the US, provisions to facilitate a switch to replacement benchmark Regulatory clearance started to appear in the latter half of 2017, but there are significant While there are no specific regulatory constraints on the marketing variations in these provisions with respect to: (i) what types of events or issuing of European borrower private debt into the US, where trigger the switch to a replacement benchmark; (ii) mechanisms certain other products are being offered alongside bank loans, e.g. a and procedures for implementing and documenting replacement concurrent US debt securities or notes offering, care must be given benchmarks; and (iii) consent rights (while the vast majority of to respect the US “anti-tying” bank regulations and securities laws. agreements include a negative consent approach (i.e., agent and borrower select the replacement rate and majority lenders have Shifting sanctions an opportunity to reject) there are some agreements that employ Historically, governments between the United States and Western affirmative consent rights for either a majority or supermajority of Europe have been, in a broad sense, aligned with respect to the states lenders). Notably, some of the early forms of these provisions may that were subject to the sanctions rules imposed by The Office of not address the need to include certain pricing spread adjustments Foreign Assets Control of the US Department of the Treasury and the and therefore might still require an all lender consent. EU’s Common Foreign and Security Policy, respectively. And, while An important nuance for market participants to keep in mind with there are numerous differences between the LMA approach and the respect to USD LIBOR and the US syndicated loan market is the standard US approach to sanctions representations and covenants, the existence of the “base rate” option. Deals with a USD LIBOR countries covered by the sanctions rules themselves were sufficiently component in the US market have for decades included a “base aligned to the degree that borrowers entering both markets were rate” benchmark (usually based on the greater of the federal funds aware of the jurisdictions in which operations needed to be avoided effective rate plus 50 basis points and the administrative agent’s so as not to cause issues for their prospective lenders. However, “prime rate” – with both of these rates presumed to be greater than the widely reported recent fissure between US and European LIBOR). The related provisions permit borrowers to elect for loans governments regarding Iranian sanctions indicates that this may not to be priced based on the base rate plus a margin instead of LIBOR always be the case, going forward. So, market participants must not plus a margin. Further, most US credit agreements have historically forget that while covenant terms continue to converge across the US included provisions that would mandate the use of the base rate and European syndicated loan markets, regulatory constraints can option as a fallback if LIBOR is unable to be determined. While that sometimes limit the degree to which certain categories of covenants fallback provision is generally assumed to be applicable only upon and other terms can be assumed to operate similarly in both markets. temporary LIBOR disruption as opposed to permanent cessation, US co-borrower for US institutional market the very existence of an alternate reference rate does provide greater Many institutional investors in the US leveraged loan market (CLOs certainty in the US market as to the presence of some alternative in particular) continue to have investment criteria that govern the type should a permanent USD LIBOR replacement not emerge prior to the of loans in which they may participate. These criteria usually include end of 2021. As the base rate fallback is unique to the USD LIBOR specifying the jurisdiction of the borrower of the relevant loans, with market, borrowers should take note that in the unlikely event that a larger availability or “baskets” for loans to US borrowers, and smaller true successor to LIBOR is not identified on time, their USD LIBOR debt may fall back to a more costly interest rate. “baskets” for loans to non-US borrowers. As a result, some US cross- border loan deals have included US co-borrowers (even if they are Certain funds vs. SunGard conditionality only shell entities and borrowers in name only) in an effort to ensure Borrowers and sponsors in leveraged finance deals in the European that a maximum number of US term loan B institutional investors can market and the US market both strive to limit conditionality in a participate in any US-dollar term loan financings. There is generally committed financing, particularly when the loan is funding an not a similar requirement in European market deals. acquisition. Sellers in a given M&A transaction demand the assurance that the debt-financing component of their purchase price will be there at closing. But, there is also the recognition that certain Differing market practices conditions to the financing must be included. The result is an ever- diminishing limited universe of manageable conditions that can The end of LIBOR be satisfied with relative certainty and within the necessary M&A As banks, financial institutions and other market players around the timeline. world are well aware, the UK Financial Conduct Authority will no Conditionality standards imposed by European vendors have longer require London banks to report the London interbank offered historically been tighter (i.e., less stringent in nature and fewer rate (LIBOR) – the standard benchmark for floating interest rates conditions to be satisfied) than those in the US market, and European in debt instruments – after the end of 2021 and, barring a stopgap sellers are accustomed to this tighter standard. One of the key measure, LIBOR is expected to no longer be available at that time. differences is that in most European deals, the parties will negotiate a Financial markets around the world have used LIBOR for over three version of all of the financing documents (including most deliverables decades so the process and task of identifying an alternative is a such as opinions and certificates) that are to be used in the event that daunting one that affects not only loans and other cash products but long form credit documentation is not be available when closing derivative instruments, as well. time arrives. Though the parties do not intend to enter into this Financial regulators, lending trade associations and financial basic version of the financing documentation, it provides a fallback institutions around the word are engaging in ongoing discussions that they can rely on if they are unable to reach an agreement on full about how best to deal with the phasing out of LIBOR and though long form credit documentation prior to the closing and funding of the acquisition.
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European borrowers accessing US markets should be aware that with respect to enforceability of the credit documentation while the US banks are accustomed to a more onerous (from a borrower’s US norm is for borrower’s counsel to issue all opinions including perspective) conditions package. Though US banks will limit those that go to enforceability. There is also a distinction between conditionality to a manageable universe of items (known as SunGard what opinions law firms are typically willing to give between the conditionality), they do not negotiate any credit documentation prior two markets. For example, firms delivering opinions on European to providing the commitment and the set of conditions, while limited, deals regularly opine as to choice of law whereas many US-based is more robust than a typical European certain funds package. This firms are more hesitant to do so. These distinctions rarely prove has changed somewhat in recent years in instances where US lenders insurmountable in practice, but borrowers and lenders should be have been lending to fund an acquisition with vendors based in conscious of such differences in the interest of smooth deal execution. Europe, but even in those instances, it is not a universally acceptable practice. So, prior to engaging with US banks for acquisition Conclusion financing, borrowers seeking financing to support an auction bid for a Europe-based acquisition target should weigh the pros and cons As terms (and some practices) have converged between the US and of each market and recognise that the conditionality lenders may be European debt markets, borrowers are able to venture into either willing to offer might depend on the market in which the loans will market with greater ease. Barring any unforeseen liquidity crunches, ultimately be syndicated. this convergence will likely continue. Borrowers and lenders should Due diligence be aware of those differences that remain between the two markets Historically, in European transactions lenders were generally entitled but should also take advantage of the wider pool of capital. This to rely on diligence reports prepared by a borrower’s advisors. That will be especially true for sponsors entering into complex cross- is not the case in the US market and, as a result, the lead banks in border acquisitions where purchase prices may need to be funded in a US financing and their counsel undertake their own due diligence multiple currencies and in multiple jurisdictions – all of which can investigation of the borrower group, the target (in the acquisition now be done under a single credit agreement governed by either NY context) and the subject transactions (although they are usually or English law. In today’s climate, different currency tranches could allowed to review the buy side reports on a non-reliance basis). more readily be syndicated in their respective markets where financial While in reliance has also been limited or completely prohibited in investors are increasingly becoming comfortable with accepting a number of recent deals in the European market, underwriters and terms that were historically only found in one or the other market. borrowers should consider this element of a syndication early on in All borrowers with multi-jurisdictional operations, including those the process so as to avoid unforeseen complications based on market that are looking for refinancing opportunities, should be encouraged expectations. to explore opportunities for a cross-border loan financing, particularly if such financing can provide better pricing along with terms that are Public vs. private information generally familiar to the borrower and the prospective loan investors. Due to US securities regulations, US institutional investors (including those that regularly participate in the term loan B market) take great care to distinguish between material non-public information Endnotes relating to a corporate group and their securities and, alternatively, “public” information. To accommodate this sensitivity, for purposes i. LCD Global Review (4Q 2018), Leveraged Commentary & Data unit in Standard & Poor’s Global Market Intelligence. of marketing these deals in the US term loan B market, borrowers are often required to take steps to ensure the “public” vs. “private” ii. LCD Global Review (4Q 2018), Leveraged Commentary & Data unit in Standard & Poor’s Global Market Intelligence. information distinction is respected, including by producing separate sets of marketing materials. As this is a lead-time item and one that iii. LCD’s Quarterly European Leveraged Lending Review: 4Q18, would not be intuitive to European issuers, planning at the outset of Leveraged Commentary & Data unit in Standard & Poor’s Global Market Intelligence. a transaction with a cross-border loan being placed in the US markets should account for the time and resources required to satisfy this iv. 2018 European Loan Trends Round up, January 21, 2019, Xtract Research. requirement. v. Temp. Treas. Reg. § 114540-18 (2018). Financial statements vi. https://www.bankofengland.co.uk/-/media/boe/files/markets/ In a similar vein, US term loan B investors will generally expect to benchmarks/risk-free-reference-rates-replacement-of-screen- receive and review historical financial statements of the borrower rate-clause. group that are prepared in accordance with US GAAP or IFRS. For a European borrower that has historically employed the “local” GAAP of its home jurisdiction, it would be advisable from a term loan B Acknowledgments marketing and liquidity standpoint to instead (or additionally) prepare The authors would like to thank Alan Rockwell, Leveraged Finance its consolidated financial statements on the basis of the internationally Partner, Allen & Overy New York, for his invaluable contribution recognised standards. and guidance in connection with this chapter. This chapter builds off Opinion practice of the basis and foundation of Alan’s work on this topic in previous Another example where markets have developed different approaches editions of the ICLG. They also thank Associate Adam Zecharia of Allen & Overy London and Fiona Cumming, a Partner of Allen & is with respect to legal opinion practice. It has been the norm in Overy Hong Kong. deals across Europe that lender’s counsel issues the legal opinions
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Judah Frogel Jonathan Homer Allen & Overy LLP Allen & Overy LLP 1221 Avenue of the Americas 1221 Avenue of the Americas New York, NY 10020 New York, NY 10020 USA USA
Tel: +1 212 610 6367 Tel: +1 212 756 1175 Email: [email protected] Email: [email protected] URL: www.allenovery.com URL: www.allenovery.com
Judah Frogel is a partner in Allen & Overy’s New York office and a Jonathan Homer is an associate in the leveraged finance group of member of the Global Banking and Finance practice. His practice Allen & Overy’s New York office with extensive experience in debt focuses on representation of major investment and commercial banks in transactions, including unsecured, junior lien and complex secured their capacities as lead arrangers, underwriters and agents in leveraged debt facilities. He advises both private equity firms and arrangers loan and acquisition finance transactions. Judah’s experience also throughout the full leveraged buyout lifecycle, including with respect to includes advising banks, institutional investors and funds, private equity covenant compliance, refinancing and repricing, as well as corporate sponsors, and corporate borrowers, in general corporate financings restructurings including internal restructurings, asset dispositions and and financial restructurings. He has extensive experience advising public equity offerings. Jonathan regularly advises on large, cross- on cross-border transactions including deals involving borrowers border transactions and provides clients with technical and commercial and guarantors from Australia, Belgium, Brazil, British Virgin Islands, know-how on complex multijurisdictional financings. Canada, Colombia, Czech Republic, France, Germany, Israel, Japan, Luxembourg, Mauritius, Mexico, Netherlands, Portugal, Singapore, Slovakia, Spain, Sweden, Switzerland, Turkey and the UK. Judah is a member of the New York State Bar and a registered Foreign Lawyer with the Israel Bar Association.
Our ambition at Allen & Overy is to help the world’s leading businesses both maximise the opportunities that globalisation presents and meet the potential challenges. Our teams across the world work together in a highly integrated manner to leverage their expertise and experience for our clients’ benefit. We foster creative, independent thinking within a collaborative culture and, as a result, our lawyers are involved in many of the most influential cutting-edge commercial transactions, and are known for providing our clients with transformative solutions to the toughest legal challenges. Allen & Overy’s market-leading New York and English law global leveraged finance practice (comprising an integrated loans and high yield bonds practice) operates in all of the main financial centres throughout the world. With over 1,000 specialist lawyers worldwide, Allen & Overy has one of the largest and most international teams of banking and finance lawyers of any global law firm. Our practice is supported by pre-eminent Private Equity, Equity Capital Markets, Debt Capital Markets, Securitization and Restructuring teams. This collective expertise combined with in-depth sector insights makes us one of very few firms with the ability to advise on complex cross-border leveraged finance transactions across the full spectrum of the capital structure, as well as on all types of “crossover” and emerging markets loan and bond transactions.
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