Cross-Border Financing Report 2017 - Sullivan & Cromwell · Cross-Border Financing Report 2017...

Cross-Border Financing Report 2017

Featuring contributions fromChiomentiJia Yuan Law OfficesLoan Syndications & Trading Association Makarim & Taira SPrager DreifussSullivan & Cromwell Talwar Thakore & AssociatesUdo Udoma & Belo-OsagieYakubu and Associates Chambers

Lead contributor

REPORT PARTICIPANTS

China Hong Kong

India Indonesia

Nigeria Switzerland

Tanzania UK

US

Chiomenti Loan Syndications & Trading Association

CROSS-BORDE R F I NANC I NG R E PORT 2017 | I F LR .COM | 1

INTRODUCTION

Financing themes

Three underlying themes describe the current state of the internationalfinancial markets: the constrained supply of new debt; the high investordemand for debt; and an agnosticism among investors between bankdebt and bond debt, leading to the convergence of pricing and termsbetween bank debt and bonds. These have created an environment of tight pricing and borrower-

friendly terms in the international financing markets.

Constrained supply of new debt

“There hasn’t been much new supply and investors have cash they needto spend.”

Tom O’Reilly, head of non-investment-grade credit for NeubergerBerman Group to the Wall Street Journal on August 8 2017.

Geopolitical uncertainty arising after the Brexit vote and the USelection has helped to reduce new leveraged acquisitions and associatednew debt issuances. Recent new debt issuances have resulted primarilyfrom refinancing or re-pricing transactions, and those do not create anet increase in supply. At the same time, historically high valuations inUS equity markets have been great for equity investors, but M&Aactivity leading to new debt issuances has reduced, as principals waitfor uncertainty to resolve and for toppy valuations to be justified. Thesedynamics are particularly pronounced in Europe.

High investor demand for debt

High demand for debt comes from various sources.• Central banks have been buying government securities and leaving

yield-starved fixed-income investors to scramble for what is left.• Institutional investors in the credit markets have proliferated as fixed

income investors reach for yield in a continuing low-interest rateenvironment, and many new debt issuances are over-subscribed.

• The increase of private credit providers willing to ‘lend and hold’has further increased demand for fixed-income paper. In additionto underwriting banks sourcing financings and syndicating debt toinstitutional bank loan and bond investors, borrowers can approach

A great time to be aborrower

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“Institutional investors in thecredit markets have proliferated”

2 | I F LR .COM | CROSS-BORDE R F I NANC I NG R E PORT 2017

private credit providers who will lend andhold for the long term and save borrowersfrom syndication and pricing risks. Privatecredit providers can often offer moreleverage than commercial banks orunderwritten financings (sometimes inconnection with an equity-kicker).

• Chinese outbound M&A is often financedby Chinese banks rather than internationallenders. In addition, the One Belt OneRoad (OBOR) initiative and constraintson domestic Chinese lending are likely toincrease Chinese banks’ participation inthe international financing markets, whichwill add to the players competing to investin debt financing.

Investor agnosticism betweenbank and bond debt

Institutional investor agnosticism betweenbank loans and bonds, when combined withhigh demand and limited supply, is leadingtowards an increasing convergence of pricingand terms between bank debt and bond debtfor many credits. But this convergence leads investors to get

the worst of both worlds – not the best.Borrowers get the economic benefits of bankdebt (floating rate, limited call protection,limited disclosure) with the covenantstructure of bond debt (incurrence covenantsand related flexibility, which vastly reduces theneed for waivers during the life of theinstrument). Borrowers raising financing inEurope have lately been preferring loans tobonds because they get the benefit of loanpricing and flexibility with bond-likecovenants. The erosion of (or in some cases

disappearance of ) financial maintenancecovenants is a good example of theconsequences of bank/bond convergence. Inthe bank loan world, historically financialmaintenance covenants were the keyprotection for banks. Financial maintenancecovenants gave banks an early warning offinancial difficulty and allowed banks to takecontrol of a distressed situation before itdeteriorated beyond hope. Immediately after the financial crisis in

2008/2009, most borrowers rated below A-could expect to give two or (in Europe) threefinancial maintenance covenants in bankloans. But under current market conditions,

borrowers often only expect to give financialmaintenance covenants in bank debt if they

INTRODUCTION

S Neal McKnightPartner, Sullivan & Cromwell

New York, UST: +1 212 558 3316F: +1 212 558 3588

E: [email protected]:

https://sullcrom.com/lawyers/SNeal-McKnight

About the authorNeal McKnight is co-head of the firm’sfinance and restructuring group. Headvises financial institution, sponsorand corporate clients on a broadrange of corporate financingtransactions, including capital marketsofferings, revolver and term loanfacilities, receivables and asset-basedfacilities, and securitisations.McKnight has particular expertise inacquisition financings, and has actedin a number of refinancing andrecapitalisation transactions in thebank and bond markets, as well asfinancings in distressed contexts. McKnight’s securities experience

includes debt and equity offerings(including high yield debt offerings)under Rule 144A and Regulation S,SEC-registered offerings, exchangeoffers, project and infrastructurebonds and structured financings. Hehas also acted in a number of M&Aand joint-venture transactions.McKnight’s clients have includedAT&T, Bayer, Canadian Pension PlanInvestment Board, Crescent Capital,Gartner, Goldman Sachs, OntarioTeachers’ Pension Plan Board, RhôneCapital and United Rentals.Neal was resident in the Firm’s

London office for almost 10 years,returning to the New York office in2008. He has extensive experience incross-border and multi-jurisdictionalfinancing and M&A transactions.

Presley L WarnerPartner, Sullivan & Cromwell

London, EnglandT: +44 20 7959 8900F: +44 20 7959 8950

E: [email protected] W:

https://sullcrom.com/lawyers/PresleyL-Warner

About the authorPresley Warner is a member ofSullivan & Cromwell’s corporate andfinance, credit and leveraged finance,and restructuring and bankruptcypractices. Warner advises financialinstitutions, private equity andcorporate clients on a broad range ofcross-border financing.His private equity transactions

include advising sponsors and lenderson leveraged private and public-to-private transactions in the UK andEurope through first lien, mezzanine,PIK and hybrid instruments, leveragedrecapitalisations, bid financings,Opco/Propco structured financingsand related intercreditorarrangements. Warner’s corporatetransactions include advisingcorporates and lenders on event-driven investment grade financingsand build-out transactions, and hisrestructuring transactions includeadvising creditors and corporate andprivate equity-owned debtors onrestructurings in the UK, Europe andthe Middle East.


are syndicating to commercial banks and arerated below A-, or if they are leveragedborrowers and must have continuing bankdebt in their structure. For example, banksnormally provide revolving and otherundrawn facilities at more competitive pricingthan institutional investors, and banks willnormally require a maintenance covenant forthat exposure. But in such leveraged deals, themaintenance covenant is often set with highheadroom and is only triggered after a certainlevel of drawing. Furthermore, in the US themajority of term loans issued to sub-investment grade borrowers are nowcovenant-lite and do not contain any financialmaintenance covenants. One of the idiosyncrasies of the effect of the

proliferation of institutional investors (as

opposed to traditional bank lenders) andcurrent market conditions is that investmentgrade borrowers syndicating bank debt tocommercial banks may have financialmaintenance covenants while non-investmentgrade borrowers may not – i.e. lenders to thebetter credit have financial maintenancecovenant protections while lenders to thepoorer credit do not. This is a function of theinvestor base for leveraged borrowers(institutional investors) as compared to theinvestor base for investment grade borrowers(commercial banks). The tighter investment-grade pricing closes out institutional investorsand brings in commercial bank lenders, butcommercial bank lenders often bring financialcovenants. Institutional investors rely onportfolio diversification and liquidity (and thecorresponding ability to trade out of distressedpositions) to manage their exposures and donot demand financial covenants. Bank lendershave historically not relied on liquidity totrade out of distressed position, hence theyoften have entrenched requirements forfinancial covenants. Private credit providers generally take a

‘lend and hold’ approach, which is moreconsistent with a commercial bank approach,and accordingly may seek financialmaintenance covenants in certain

circumstances. But increasing competitionbetween private credit providers often leadsthem to forego financial maintenancecovenants in order to win financing mandates,or as part of the negotiations around anequity-kicker. In addition to financial maintenance

covenants, bank/bond convergence results inother bank loan covenants looking more likebond covenants. Bond covenants arestructured on the assumption that theborrower will not be seeking waivers of bondcovenants in the same way it would seekwaivers from relationship banks on bankloans. So, bond covenants start from thepremise that bondholders exert far less controlover the borrower than bank lenders. This isleading to long-term debt capital imposing far

fewer constraints on borrowers than bankdebt has historically.

How borrowers are responding

Borrowers are keenly aware of competitivemarket dynamics among potential investorsand they normally seek to arbitrage across allproducts and markets. Where marketconditions allow it, European borrowersconsider accessing the US market, and USborrowers consider accessing the Europeanmarket – both the bond market and bankdebt market. Borrowers will work withunderwriting banks that can cover all marketsand products, and will also often work with‘lend and hold’ direct lenders to ensure fullcompetition across products and markets toachieve best execution, pricing and terms.

Long-term implications

So long as the current benign economicconditions continue, we expect to see greaterconvergence between bank and bond debtand continued pressure on pricing and terms.Even apart from current economic conditions,institutional demand for liquidity between

instruments will also drive convergencebetween bank and bond terms. Will a market shock or a surprise issuer

default see a return to financial covenants forbank debt? This will depend on the extent towhich a market shock adjusts the currentsupply/demand imbalance. In Europe in mid-2007, a handful of covenant-lite deals werefinanced (though not syndicated), yet bankdebt went back to including financialcovenants after the financial crisis becauseonly banks provided liquidity at that time(and only some banks at that). Today, unlikein 2007, the bond market in Europe is firmlyestablished (though a market shock couldresult in the market being shut for a period)and it is likely that investors with capital todeploy will continue to be agnostic betweenbank and bond debt, provided debt marketsare open for business. So, the convergence andrelaxation of terms for borrowers is likely hereto stay.Will there be a continued role for

underwriting banks long-term? Of course.Only banks will be able to provide capitalquickly and provide sizeable underwritingcommitments (though direct lending fundsare increasing their ability to underwritefinancings). But institutional investor demandfor long-term bank debt and bond debt willcontinue, so financings initially underwrittenby banks can be expected to be syndicated orrefinanced on very borrower-friendly terms.

Other developments to watch

In Europe there is no clarity on what financialmarkets will look like after Brexit. If the effectis to impose additional regulatory andadministrative burdens on banks and investorsactive in the European capital markets, this islikely to flow through to increased pricing forborrowers seeking to raise finance in Londonand Europe. Fintech, blockchain and the continuing

march of direct lending funds into thefinancial markets may be expected to increasefinancing options available to borrowers, withcorresponding increases in demand for paperand competitive tension between financialproducts and markets. For now, it is a great time to be a borrower.

INTRODUCTION

“This is leading to long-term debt capitalimposing far fewer constraints on borrowers

than bank debt has historically”

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Expert analysis6 Great expectations9 Riding a bull market

Country reports

14 ChinaLiu YueJia Yuan Law Offices

18 Hong KongJamie Logie and Jonathon HannahSullivan & Cromwell

22 IndiaSonali Mahapatra, Rituparno Bhattacharyaand Nidhi RaniTalwar Thakore & Associates

26 IndonesiaMaria Sagrado and Hanny MarpaungMakarim & Taira S

30 NigeriaAniekan Ukpanah and Onyinye OkaforUdo Udoma & Belo-Osagie

35 SwitzerlandDaniel Hayek and Alexander FlinkPrager Dreifuss

40 TanzaniaSaidi Othman Yakubu and Timothy KyepaYakubu and Associates Chambers

44 UKCraig JonesSullivan & Cromwell

49 USAri BlautSullivan & Cromwell

CONTENTS

6 Chiomenti looks at what to expect from new Italian rules tackling NPLs

9 The LSTA presents its analysis of the bullish loan market


In 2016 the Italian government adoptedseveral initiatives and reforms, providingfor, inter alia, the introduction of a state

guarantee on the senior tranche of asset-backed securities (ABS) collateralised byItalian non-performing loans (NPLs) via theGaranzia Cartolarizzazione Sofferenze(GACS). The tool openly incentivised thedisposal of NPLs from Italian banks throughsecuritisation transactions.

The introduction of the GACS wascoupled with other measures including (i) theimprovement of Italian bankruptcy andenforcement proceedings, aimed at reducingthe length of the recovery procedure and atsimplifying the auction process; and (ii) theintroduction of new forms of security interestto streamline the enforcement process, bybringing it outside the courts (reducing boththe court workload and the lengthy timing forthe debt recovery). In addition, the legal andregulatory framework has facilitated access tothe credit market by European alternativeinvestments funds (now allowed to lenddirectly to Italian borrowers subject to certainregulatory requirements).

Despite all these new changes, the pressureto make the Italian NPL market moreinvestor-friendly has not decreased. Whilediscussions at European-level on theconstitution of bad banks funded with publicresources continue, the momentum ofreforms at the Italian-level is still high.

Investor interest in Italian NPLs is stillconsiderable: since the start of 2017, ItalianNPLs with a combined amount of nearly €40

billion ($47.2 billion) (in terms of gross bookvalue) have been transferred from Italianoriginators.

But the stock of NPLs on the books ofItalian banks remains high. A key factorhindering investment in Italian NPLs is theinefficiency of recovery, enforcement andinsolvency proceedings. The latest reform put

in place by the Italian government has triedto further improve the role and the powers ofthe Italian securitisation vehicles by enablingthem to perform certain additional activitieswith more direct access to the assets backingthe ABS.

The latest amendments to Law 130, theItalian securitisation law, enacted on June 24

EXPERT ANALYSISCHIOMENTI

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


EXPERT ANALYSIS CHIOMENTI

2017, are specifically designed to increase thescope of action of Italian securitisationvehicles to facilitate (i) the securitisation of

bank debt vis-à-vis borrowers subject to debtrestructuring schemes, (ii) the securitisationof non-performing financial lease receivablesbacked by real estate or other registered assets;and (iii) the acquisition of the mortgaged realestate in the frame of securitisation of non-performing mortgage loans.

Securitised loans subject todebt restructuring

The first set of changes provides Italiansecuritisation vehicles with a more flexiblescope of action to better exploit investmentopportunities with borrowers in financialdistress. So far, the activities of Italiansecuritisation vehicles were limited, by law, tothe purchase of receivables or debtinstruments. Lending is also permitted butsubject to certain stringent requirements,including the involvement of a bank or afinancial intermediary as sponsor. This is alsoto address issues of risk retention requirementssince in the case of direct lending from asecuritisation vehicle, no entity could beclassified as originator.

According to the new provisions of Law130, Italian securitisation vehicles will now beable to grant new finance to the securitisedNPLs’ debtors to restore their financialsoundness. In addition, and moreimportantly, securitisation vehicles are nowallowed to purchase and/or subscribe shares,quotas, hybrid and profit participationinstruments issued in the context of pre-insolvency or workout schemes. This lastaspect is a significant novelty for Italiansecuritisation vehicles which will now becapable of participating in debt-for-equityswap arrangements or of being employed byinvestors in loan-to-own strategies for theacquisition of distressed borrowers.Furthermore, Law 130 expressly provides thatany financing granted by a securitisationvehicle in the context of pre-insolvency or

workout schemes would not be subject to thestatutory subordination otherwise applicableto shareholder loans.

The above legal changes should provide anincentive for Italian banks to adopt a forwardlooking approach to tackle in advance loanswhich are not non-performing but show clearsigns of financial difficulties (the so-calledunlikely to pay exposures). On the one hand,disposing of such exposures in a timelymanner would help to keep the level of NPLsunder control. On the other, it would requirethe disposing banks to put loans in the marketwhich have not been subject to any substantialdevaluation. In this respect, de-recognition ofsuch assets might prove to be too expensive.

Easier access to the underlyingassets: non-performingfinancial leasing and ReoCos

The second set of changes was designed togive Italian leasing companies access tosecuritisation structures in order for them todispose of their stock of NPLs. Prior to suchchanges, the securitisation of non-performingreceivables arising from leasing agreements(predominantly real estate assets leasing) wasnot appealing to investors since asecuritisation vehicle was allowed to purchasethe receivables arising from a leasingagreement but not the underlying leased assetitself. Investors often look at the financial asset(ie the receivables) to get access to the

underlying asset (ie the real estate). Accordingto the new provisions of Law 130, it is nowenvisaged that any asset subject to a leasingagreement or to a security granted to secure

the securitised loan (namely real estate andregistered movable assets) could be purchased,managed and developed by a separate Italianvehicle (ie other than the securitisationvehicle) whose core business would be themanagement of such assets in the exclusiveinterest of the securitisation vehicle. Theseparate vehicle should also be able to acquirethe entire contractual position of a lessorunder a financial leasing agreement (includingthe ownership of the leased asset): in such acase, the dedicated vehicle should then beincluded in the consolidated financialstatement of a bank (even if not part of abanking group). It is indeed important toconsider that financial leasing is an activityreserved for banks and financialintermediaries, and it was therefore necessarythat the step-in of such a dedicated vehicle inthe position of lessor would require thededicated vehicle to be consolidated in thefinancial statement of a bank.

In this respect, the recent changes seem toreflect the practice of certain investors who,in the frame of securitisations of NPLscollateralised by real estate assets, have set upspecific real estate companies (real estateoperating companies or ReoCos) whichwould acquire the relevant real estate asset inthe frame of the enforcement proceedingswhen the auction value is expected to bebelow the purchase price of the correspondingsecuritised loan. The new provisions of Law130 expressly set out that any amounts arisingfrom the management and the disposal ofsuch assets at the ReoCo vehicle level will betreated as collections and will be included inthe cash flow of the securitisation transaction.

The above provisions would thereforeimprove the efficiency of the enforcementproceedings rendering the recovery processmore efficient and expedient since thesecuritisation vehicle, through the separateReoCo vehicle, could play an active role aspotential bidder in the frame of an auction

sale of a mortgaged real estate. According tothe Bank of Italy, nearly three-quarters ofItalian NPLs are secured by real estateproperty, and in most cases, they appear to

“Despite all these new changes, the pressureto make the Italian NPL market moreinvestor-friendly has not decreased”

“Securitisation vehicles will now be able togrant new finance to the securitised NPLs’debtors to restore their financial soundness”


EXPERT ANALYSIS CHIOMENTI

have a market value sufficient to cover therelevant debt exposure.

However, it should be noted that there arestill many aspects that remain unclear in thenew provisions with respect to theintroduction of a ReoCo vehicle in the frameof an Italian securitisation structure.

For instance, it is unclear whether theReoCo vehicle can be incorporated and wholly-controlled by the securitisation vehicle (ie thevehicle issuing the ABS). The provisions do nottouch the point and therefore there is no explicitrestriction. This would constitute an exceptionto the exclusive corporate object of an Italiansecuritisation vehicle.

A more viable route is to have the ReoCovehicle incorporated and participated in bythe same investors subscribing to the asset-backed notes issued by the securitisationvehicle.

In any event clarifying which entity can setup the ReoCo vehicle (eg the investors ratherthan the securitisation vehicle, or the entitiesholding the share capital of the latter) wouldbe key in order to solve two other issues notaddressed by the new provisions: how theReoCo vehicle is supposed to fund thepurchase of the assets and how investors in the

ABS can participate in investment decisionsat the ReoCo vehicle level. The newprovisions of Italian Law 130 do not provideany guidelines on the contractual relationshipwhich needs to be set up between the twovehicles (the securitisation vehicle and theReoCo vehicle) while it is provided that theproceeds arising from the activities of theReoCo vehicle must be dedicated to paymentobligations of the securitisation vehicle.

Nothing is said on the link between thetwo entities. The solution of having theReoCo vehicle incorporated and controlled bythe securitisation vehicle itself would seem,from a structural standpoint, the smoothestsolution. The above-mentioned legaluncertainties (and some tax issues) need to be

cleared to make such a solution viable. Inaddition it is not clear whether the activitiesof the ReoCo vehicle would be subject to thesupervision of the master servicer appointedin the frame of the securitisation transactionas is the case for all the activities carried outby the securitisation vehicle.

It should be finally considered that thenew provisions added to Law 130 expresslyprovide that, in the case of the securitisationof NPLs arising from lease agreements withassignment to the securitisation vehicle of theentire contractual position of the lessor (ie notjust the receivables arising from the leaseagreement), a specific ReoCo vehicle wouldhave to be incorporated with respect to eachsecuritisation transaction. The ReoCo vehiclemust be liquidated once the securitisation isunwound.

Simplified transfer formalitiesfor NPLs

In addition to the above, as a further incentiveto the securitisation of non-performingreceivables, a simplified publicity andregistration formalities regime (already

provided under Law 130 for certain kinds ofcommercial receivables) will apply also in casethe assigned non-performing receivables arenot identified as a pool.

Under the previous regime receivables in aportfolio to be securitised had to be identifiedby the application of common selectioncriteria agreed by the originator and thesecuritisation vehicle and not on a list basis.According to the new provisions it is nowpossible to transfer a pool of receivableswithout adopting selection criteria providedthat the transfer is registered with the registerof enterprises and the transfer notice ispublished in the Italian Official Gazettesimply indicating the names of the assignorand of the assignee, the date of assignment,

the type of receivables, the origination periodand the website where the assignor and theassignee will make available to the assigneddebtors information on the assignedreceivables and, upon request, confirmationof the transfer of a specific receivable. As forany transfer of receivables usually performedaccording to Law 130, any security and/orregistration on public registers (such asregistered transfer deeds of real estate assetssubject to a lease agreement) will remain validwith respect to the assignee without theperfection of any additional formalities butthose indicated above.

Key takeaways

The recent changes would certainly constitutea step forward in creating a more efficientmarket for investors looking at Italian NPLs.There are still many issues which need to beclarified and, in this respect, the recentlawmaking exercise shows some deficiency.

It has been confirmed that adopting anItalian securitisation structure is still the mostefficient route to invest in such assets and it isnot by chance that many funds invest inItalian NPLs through Italian securitisationvehicles rather than directly or throughforeign securitisation vehicles. The addedflexibility provided to Italian securitisationvehicles should also facilitate the investmentin single name distressed loans where investorsneed to be able to adopt a very broadspectrum of solutions to extract value: profitparticipation instruments, debt-to-equityswaps, debtor-in-possession finance etc. Realestate, shipping and renewable energy are thebusiness industries where more transactions ofthis kind are expected in the coming months.

Carmelo RaimondoPartnerChiomenti (Milan)

Alessandra TubiAssociateChiomenti (Milan)

“Adopting an Italian securitisation structureis still the most efficient route to invest in such

assets”


Theodore Basta, Elliott Ganz andBridget Marsh of the LoanSyndications & Trading Association

(LSTA) in New York dissect current trends inthe US loan market. The panel looks at whatthe data is telling us about the market, whatregulatory developments are uppermost onthe agenda and what efforts the LSTA hasrecently been making in Latin America.

What is the general trajectoryof activity in the US loanmarket this year?

Ted Basta (TB): In 2015, loan returns rannegative for only the second time in history(the other year being 2008, of course) and alot of that had to do with specific sectors,most notably the oil and gas industry. In2016, risk assets, including the energy sector,staged a dramatic turnaround as loan returns

hit double digits while the secondary marketrallied to multi-year highs (the median tradeprice has remained at or above par sinceSeptember 2016). The market really startedto turn around during the end of Q1 2016.From that point forward, macro conditions

began to improve, while strong technicalswere supported by robust demand. As a result,monthly loan returns were positive fromMarch 2016 through May 2017 – althoughreturns did go slightly negative in June due toa shift in technicals and then again in August

EXPERT ANALYSISLSTA

Riding a bull marketTheodore Basta, Elliot Ganz and Bridget Marsh speak with IFLR about the

US loan market and its current defining trends

“As refinancing hascome in at recordlevels, net new dealflow has been slowerthan previously

expected”


as investors looked to shed risk in light ofgeopolitical concerns.

That said, when you couple robust demandlevels with a pretty strong fundamentalbackdrop (default rates have trended wellbelow their historical averages), it really setsthe tone for the type of performance we haveseen over the last twelve months (+ 6%) and

should expect for the remainder of this year.In reality, secondary market prices didn’t

have much runway left to move higher thisyear, and therefore most managers believedthe secondary would trade mostly flat andreturns would be right around coupon. Andthat is exactly what we have seen. Throughmid-September, collateralised loan obligation(CLO) issuance has topped $70 billion, whileloan mutual funds reported net inflows ofabout $20 billion. That totals roughly $90billion of new demand entering the asset class,and that doesn’t include the countlessseparately managed accounts (SMAs) that

came on line this year. On the flipside,according to our S&P/LSTA Leveraged LoanIndex, outstandings have increased by $50billion this year to a record $930 billion. Froma technical perspective, that leaves us with anoteworthy demand overhang of about $40billion this year.

Furthermore, the only major sector in ourasset class that has reported negative returnsis retail, which is down a little over 2% so far,whereas the broader market has returned closeto 3%. I think a lot of those same trends applyto the European market.

Would you characterise theloan market as buoyant in boththe US and Europe?

TB: Absolutely. In both the US and Europewe have witnessed massive demand for theloan product and record-level loan issuance.But if you dig deeper into this year’s numbers,about 70% of global new issue has been interms of refinancing. This is because themajority of loans across both markets havebeen trading at par or higher in the secondarymarket for some time. As a result, new issuespreads have declined in both the US andEuropean loan markets.

The big difference between the two marketstoday is in the base rates. Since year-end 2015,3-mo Libor has increased to 132 basis points,following multiple rate hikes, whereas baserates are still negative in Europe – and theEuropean Libor floors are minimal. That said,from a borrower’s perspective, the Europeanmarket certainly looks cheaper today. And justas important, liquidity is very robust inEurope right now, as non-traditional accounts(outside of CLOs) have looked to invest giventhe negative rate environment and the highvaluation levels in the bond markets.

What does it mean that somuch of the market isrefinancing?

TB: At the end of the day when you seespread reductions from a lending standpoint,the markets are generally hot and things aregoing well. And while lenders will in factreceive a lower rate of return, the great thingabout loans is that they are a floating rate assetclass and loan spreads are pegged off Libor.Right now, Libor is at 132 basis points in theUS; six months ago, it was below 100 basispoints. So, while we are seeing spread

EXPERT ANALYSIS LSTA

Theodore BastaSenior vice president of market data

analysis, Loan Syndications & TradingAssociation (LSTA)New York, US

T: +1 (212) 880 3005E: [email protected]: www.lsta.org

About the authorTed Basta is SVP of market analysisfor the LSTA, where he manages keystrategic partnerships and products,including the LSTA’s trade andsettlement data initiatives, theLSTA/Thomson Reuters LPC PricingService and the S&P/LSTA LeveragedLoan Index. In addition, Basta isresponsible for the Association’sanalytical and reporting initiatives; allof which enhance market visibility,transparency and liquidity. Thoseefforts include the continueddevelopment, expansion anddistribution of market analytics andsecondary trading and settlementmetrics. Basta also manages theLSTA’s Shift Date Process, theAssociation’s website and its socialmedia initiatives. Prior to joining the LSTA, Basta

was director of global pricing withLoan Pricing Corporation (LPC),where he was instrumental in drivingnew product development andsecondary market content. Bastareceived an MBA from the ZicklinSchool of Business at Baruch Collegeand a BA in accounting from LongIsland University.

Elliot GanzExecutive vice president & general

counsel, Loan Syndications & TradingAssociation (LSTA)New York, US

T: +1 (212) 8803003E: [email protected]: www.lsta.org

About the authorElliot Ganz is executive VP andgeneral counsel of the LSTA. In thatcapacity, he manages all aspects ofthe LSTA’s legal affairs and co-headsits government policy and advocacycommittee. Ganz received his JD in 1980 from

the New York University School ofLaw where he served as researcheditor of the Annual Survey ofAmerican Law.Ganz was the first chairman of the

legal advisory committee of the LSTAand has served as a member of itsboard of directors. He was elected asa fellow of the American College ofCommercial Finance Lawyers in April2011, was admitted to the USSupreme Court bar in April 2012 andserved as a member of the advisorycommittee on financing Chapter 11for the American BankruptcyInstitute’s Commission to Study theReform of Chapter 11.



reductions in one sense, we are also seeingincreases in Libor, which have offset a portionof the spread reductions. But as refinancinghas come in at record levels, net new deal flowhas been slower than previously expected. Youalways want to see the asset class growing andwhile we have added about $50 billion in newmoney loans this year, I would say that one ofthe trends we have seen over the past year orso is lower M&A volume, and that is how yougrow the industry for the most part – throughM&A.

Have you a sense of how thesetrends are playing out in termsof cross-border activity?

TB: While I don’t track cross-border activityas closely, I do know that total cross-bordervolumes are up roughly 35% year over year –and that trend was beginning to pick up steamin September as several larger M&A dealswere in the process of completion. That said,the big takeaway for me in the cross-borderspace this year is that the market share of dealsthat were syndicated in Europe picked up toa 33% share from 25% last year. In dollarterms, cross-border deals syndicated in Europeincreased 73% this year compared to anincrease of just 23% for those syndicated inthe US.

What are the biggest regulatorydebates in the US?

Elliot Ganz (EG): Two touch points areworth mentioning. The first is in leveraged

lending guidelines. In 2013 the US regulatorsput out the Leveraged Lending Guidelines,which set parameters for what the agencies(financial regulators) thought would beprudent underwriting of leveraged loans.They included, for example, the requirementthat lenders needed to show that theirleveraged borrowers would be able to pay back

all their senior loans or half their total debt infive to seven years from free cash flow. Plus,anything over six times leveraged would besuspect and the agencies would take a closelook. Interestingly, the European leveragedlending guidelines are very similar but incertain respects clearer.

On risk retention, the European guidelinesfirst came out in 2011 and were quite strict,requiring 5% of the value of the securitisationto be retained. After a number of iterationsand some regulatory scares, the market hasreadjusted, though issuance never reallyreturned to pre-financial crisis levels. In theUS, the final guidelines came out in late 2014and went into effect late last year. The markethas adjusted as well, mainly through raisingthird party capital and financing, which hasresulted in fairly robust US issuance this year.

Is the Trump administrationlikely to produce significantchanges regarding leveragedlending guidelines and riskretention rules?

EG: In a recent report issued by the TreasuryDepartment, the US administration hasquestioned whether leveraged lendingguidance has gone too far and has suggestedto the agencies that they open up theguidelines for comments and consider givingmore discretion back to the banks. Nothingconcrete has yet been done but it is clearly anarea the administration is following. We alsounderstand that Treasury will soon bereleasing another report that is likely tocontain something about risk retention.

In both cases, it is important to note thatthe Treasury Department does not by itselfhave the ability to make anything concretehappen, but they can set the tone and putsome pressure on the agencies to dosomething about it.

How has the LSTA’sengagement in Latin Americanmarkets been developing?

Bridget Marsh (BM): The LSTA formallylaunched its Latin American Initiative in2015, but research and preliminary thinkingon the topic had been evolving for several

Bridget MarshExecutive vice president & deputy

general counsel, Loan Syndications &Trading Association (LSTA)

New York, UST: +1 (212) 880 3004E: [email protected]: www.lsta.org

About the authorBridget Marsh is executive VP anddeputy general counsel of the LSTA.Marsh heads the LSTA’s primarymarket committee and trade practicesand forms committee and leads thelegal projects for the developmentand standardisation of the LSTA’sdocumentation. She is responsible forresponding to and addressingsecondary loan market tradingdisruptions and ensuring that theLSTA’s primary market and tradingdocumentation reflect current marketpractices. Prior to joining the LSTA, Marsh

practiced as a corporate financeattorney at Milbank, New York, and asa lawyer in the corporate/M&Adepartment of Simmons & Simmons,London. Marsh received a BA magnacum laude from GeorgetownUniversity, a law degree with firstclass honours from Sydney LawSchool and a masters in politicalScience from the University of NewSouth Wales. She is admitted as anattorney in New York, England &Wales, and New South Wales,Australia.

“The market share of deals that weresyndicated in Europe picked up to a 33%

share from 25% last year”


years before that. Our goal is to developproducts for both the primary market, whereNew York law governed loans to LatinAmerican borrowers are originated, and thesecondary market, where those loans aretraded with a view to helping a liquid marketfurther emerge and grow. Thus far, we havefocused on three jurisdictions — Chile,Colombia and Peru – and have publishedcredit agreement language suited for NewYork law governed loans made to borrowersin those regions. A few months ago, wepublished secondary trading documentswhich can be used to evidence the trading andsettling of the sales of those loans.

Settling loan trades by participation is anapproach that may be used more regularly inthose jurisdictions than it is here, for manydifferent reasons and so we also published aform of participation agreement as well. Next,we are looking at Mexico. We hope that thissimplifies the steps and makes trading loanseasier and quicker.

Where is the region heading? Like so manyindustries, the loan market is increasinglybecoming a global market, and there issignificant growth potential in LatAm. As that

growth is poised to accelerate in differentLatAm regions (some positive data from H12017 sees syndicated lending improving aftera couple of rather quiet years), the LSTAhopes it can play a part in helping to put thenecessary building blocks in place to enablethat growth.

What sort of documentationstructures are common in LatinAmerica? We note in the USand Europe cov-lite structuresand proliferating. Has therebeen an evolution in the playersinvolved in the market?

BM: I cannot comment on the specificdocumentation terms, but more generally, itseems that certain regional banks are able tomake loans entirely on their own withoutseeking the involvement of the large globalbanks; from what I understand, this is a post-global financial crisis development, whichmay be making it more competitive for USbanks doing business in the region. It will beinteresting to see how that progresses


“LatAm banks are able to make loans entirelyon their own without seeking the involvement

of the large global banks”


SECTION 1: Market overview

1.1 Please provide an overview of the cross-borderfinancing market in your jurisdiction.

Due to its foreign exchange control rules and non-availability ofcompetitive finance products, Mainland China is clearly not ajurisdiction a non-Chinese company would normally look at for raisingfunds. However, it is where most financing for Chinese companies’overseas construction or project finance projects (the overseasconstruction financing sector), and Chinese companies’ overseasinvestment (the overseas investment financing sector) are negotiatedand concluded.The overseas construction financing sector is dominated by Chinesebanks. There are two basic financing structures. First, buyer’s credit,where a Chinese contractor brings Chinese banks to its overseas employerand the overseas employer borrows from the Chinese banks to pay theChinese contractor for its work. Second, seller’s credit, where a Chinesecontractor borrows from Chinese banks to finance its work, so that theoverseas employer may defer its payment for the Chinese contractor’swork for a longer period. Buyer’s credit is more often granted based onan overseas employer’s creditability and financial capacity, while seller’scredit is based more on a Chinese contractor’s creditability and capacity.In both structures, sufficient security needs to be taken from the overseasemployer and insurance from Sinosure will be required. By comparison, the financing demands, lenders and financingstructures 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 andsecurities houses) and private equity funds actively provide financing.In general, in this sector banks will provide senior debt, such as anormal corporate loan, while other financing institutions and privateequity funds are more flexible. In addition to senior debt, banks willalso consider subordinated loans and even equity financing. As one canusually expect, the cost of subordinated loans and equity financing isusually high.

ChinaLiu Yue, Jia Yuan Law Offices

www.jiayuan-law.com


CHINA

Another very important difference between the two sectors is theapplication of different foreign exchange control rules. The ultimateuse of the loans in the overseas construction financing sector is mainlytrading payments, which are not restricted under Chinese foreignexchange rules. The ultimate use of financing in the overseasinvestment financing sector is overseas investment, which is subject toprior regulatory control by Chinese authorities. Consequently, one doesnot need to worry about foreign exchange control issues whendesigning an overseas construction financing, while foreign exchangecontrol is one of the key issues that must be properly dealt with whendesigning an overseas investment financing. An overseas investmentfinancing can easily fall apart because of foreign exchange controlconstraints.

1.2 What have been the key trends or developmentsin cross-border financing in your jurisdiction overthe past 12 months?

In the overseas construction financing sector, the seller’s credit structurehas started to become popular.From November 2016, the government tightened its regulatorycontrol regarding Chinese overseas investment. Bank loans cannot bedrawn down until the regulatory approvals for the overseas investmentare granted. Since the timing for obtaining regulatory approvals ismuch longer than the deal closing schedule expected by overseas sellers,this has given rise to fast-increasing demands for bridge financing froman overseas jurisdiction; these do not require PRC security (if PRCsecurity is required, the same regulatory control will apply).

1.3 Have there been interesting changes in thestructure of the banking sector in your jurisdiction?

As far as cross-border financing is concerned, we have not noticed anyinteresting changes.

SECTION 2: Financing structures

2.1 Briefly outline some recent notable transactionsinvolving your jurisdiction, highlighting anyinteresting aspects in their structures and what theymight mean for the market.

In the second half of 2016, China Nonferrous Metal Industry’s ForeignEngineering and Construction Co Ltd entered into a seller’s creditfinancing for its EPC construction project in the Democratic Republicof the Congo. In the financing structure, the employer’s EPC paymentobligation was deferred by way of issuing payment orders and thesepayment orders were assigned to banks for the purpose of obtainingfinancing. This is an innovative structure created for overseasconstruction financing and may soon become popular on the market,since it is one of the few structures workable for employers, contractorsand lenders at the same time as being acceptable to Sinosure.

2.2 Have there been any significant developments inthe way cross-border financing transactions arestructured or in the way borrowers and/or lenders areparticipating in the market?

For a Chinese company’s overseas investment/acquisition, a typicalfinancing structure is overseas lending secured by Chinese guarantee,which means that a Chinese buyer provides satisfactory security to aPRC bank, the PRC bank provides bank guarantee to an overseas bank,then the overseas bank extends loans to the overseas subsidiary of theChinese buyer. Before November 2016, overseas lending secured by Chineseguarantee was only subject to quotas (i.e. an overall amount of bankguarantee that a Chinese bank can provide to overseas banks) assignedto banks; this meant a Chinese bank could lend through such astructure as long as it has quotas. From November 2016, the government tightened its regulatorycontrol regarding Chinese overseas investment. On the one hand, aChinese company’s overseas investment/acquisition will be subject tostricter and more time-consuming prior review by the relevantgovernment authorities (outbound investment approval). On the otherhand, if the purpose of the loan is to finance a Chinese company’soverseas investment/acquisition, Chinese banks can no longer extendoverseas loans secured by a Chinese guarantee until the outboundinvestment approval is obtained.In overseas acquisitions, sellers usually expect to close a deal in ashort period, but this schedule can hardly be met by Chinese buyersdue to the length of time required to obtain outbound investmentapproval. As such, the buyer must resort to short-term bridge financingto close a transaction before the outbound investment approval isobtained and the standard overseas lending secured by Chineseguarantee from banks is in place. Since short-term bridge financingdoes not have to be secured by Chinese entities and the bridge

Liu YuePartner, Jia Yuan Law Offices

Beijing, ChinaT: +86 10 66413377F: +86 10 66412855

E: [email protected]: www.jiayuan-law.com

About the authorLiu Yue is a partner in Jia Yuan Law Offices and leads theinternational practice. With more than 16 years of cross-borderexperience, Liu Yue’s practice focuses on advising Chineseand foreign clients on a broad range of matters includingforeign direct investment/M&A, outbound investment, projectfinance/infrastructure concession and construction. In the pastfew years, Liu Yue has advised on numerous cross-bordertransactions, both from an investment/project perspective anda financing perspective. These include Midea’s acquisition ofKuka and NFC’s EPC and financing for the Congo RTRproject.


CHINA

financing provider requires a certain level of equity contribution to theborrower to subordinate the bridge financing, the financing often needsto be accompanied by third party equity investments made with fundsreadily available outside the PRC. As the risk exposure of the bridgefinancing is usually not acceptable to commercial banks, bridgefinancing is often provided by non-bank financial institutions or privateequity funds.

SECTION 3: Legislation and policy

3.1 Describe the key legislation and regulatory bodiesthat govern cross-border financing in yourjurisdiction.

The key regulatory bodies are the China Banking RegulatoryCommission, which is in charge of banking activities and the StateAdministration of Foreign Exchange, which is in charge of foreignexchange control.

3.2 Have there been any recent changes to regulationsor regulators that may impact the cross-borderfinancing market and what impact do you expectthem to have?

See the information provided under 2.2 above.

3.3 Are there any rules, legislation or policyframeworks under discussion that may impactlenders or borrowers involved in cross-borderfinancing in your jurisdiction?

We are not aware of any such discussions.

SECTION 4: Market idiosyncrasies

4.1 Please describe any common mistakes ormisconceptions that exist about the financing marketin your jurisdiction.

In an overseas lending secured by Chinese guarantee structure, theChinese company will first provide a security to a Chinese bank (firstsecurity), the Chinese bank will then provide a bank guarantee to anoverseas bank (second security) and finally the overseas bank will extendthe loan to the overseas subsidiary of the Chinese company. The secondsecurity provided under this structure is subject to registration with thePRC foreign exchange authority. Most people often mistakenly assumethe first security as the one subject to the registration.

4.2 Are there frequently asked questions or oftenoverlooked areas from parties involved in cross-border financings in your jurisdiction?

In the overseas construction financing sector, the most frequently askedquestion is whether the debt is insurable by Sinosure.In the overseas investment financing sector, the most frequentlyasked question is whether the overseas investment financing is workablein light of the overseas investment control policies.

4.3 Are there any classes of assets over which securitycannot be taken or regulations specific to yourjurisdiction governing the taking of security overcertain classes of assets that lenders should be awareof?

In the PRC there are certain assets where security cannot be taken over,these include the following assets:• ownership of land;• the land-use right to the collectively-owned land owned (subject toa few exceptions);

• educational facilities, medical and health facilities of schools,kindergartens, hospitals and other institutions or publicorganizations established in the interest of the public and otherfacilities in the service of public welfare;

• property in relation to which the ownership or the right of use isunknown or disputed;

• property sealed up, distrained or placed under surveillance inaccordance with law; or

• other property that may not be mortgaged as prescribed by law.

4.4 What measures should be taken to best preparefor your market idiosyncrasies?

The non-recourse project finance concept is rarely accepted by Chineselenders. Chinese lenders always ask for sufficient security. Change of foreign exchange control policies will significantly impacton the workability of a cross-border financing deal. Such change needsto be closely monitored.

SECTION 5: Practical considerations

5.1 Briefly explain the downstream, upstream andcross-stream guarantees available in your jurisdiction,with reference to any specific restrictions orlimitations.

A Chinese company can provide cross-border guarantee only foroverseas entities in which it has direct or indirect equity investmentrelation.Security provided by overseas entities works only for local Chineseloans made by financing institutions. In other words, local Chineseloans made by other lenders cannot take security provided by overseasentities.


CHINA

5.2 Are there any specific issues creditors should bemindful of regarding a bankruptcy and restructuringsituation?

Enforcement of security over assets located in the PRC is lengthy anddifficult.

5.3 Do foreign debt quotas apply in your jurisdictionand is offshore financing to domestic entitiesmonitored?

The PRC applies foreign debt quotas and closely monitors offshorefinancing to domestic entities. As per the latest policy issued in 2017,the total balance of offshore borrowing that a domestic company canraise is limited to two times its net assets.

5.4 Describe your jurisdiction’s relationship withnon-performing loans (NPLs), including volume ofoutstanding NPLs and techniques/challenges inmanaging them.

In the past, when dealing with NPLs, commercial banks have usuallywritten-off or assigned the NPLs. Write-offs are often difficult toimplement on a large scale because of various constraints, such as thestate-owned assets management rule, finance and tax regulations. NPLswere also sometimes sold to an asset management company. Withouta large-scale equity financing, the asset management companies couldnot take NPLs on a large scale. To deal with those issues, somecommercial banks have started to dispose NPLs through assetsecuritisation. Recently, commercial banks were encouraged to swapdebt for equity.

SECTION 6: Outlook

6.1 What are your predictions for the next 12 monthsfor cross-border financing in your jurisdiction? Howdo you expect legal practice to respond?

The government’s control on overseas investment/acquisition willcontinue but will relax to a certain extent. Legal advisors need to closelyfollow the changes and propose appropriate structures in light of thechanges.




As an international financial centre Hong Kong enjoys manyadvantages, not least its strategic geographical position as a major huband gateway to Mainland China and its well-regarded common lawlegal system and independent judiciary. Its bank and bond markets areamong the deepest, most liquid and most mature in the Asia-Pacificregion, and operate under effective and transparent regulations whichmeet international standards. Bank liquidity through 2016/2017 hasremained characteristically strong, with interest rates low, keepingsyndicated loan volumes in Hong Kong at healthy levels despiteturbulence in the global markets and the general slow-down in panAsia-Pacific cross-border financing activity.

While the bank term loan market continues in general to featurelower leverage, higher amortisation and tighter maintenance-basedcovenants than the US term loan B market, practice in this area isgradually converging. US/European-style leveraged finance has alsogained popularity, with market participants making increased use ofleveraged finance structures such as covenant-lite loans and bridge tohigh-yield bonds for acquisitions. We have also seen a number ofleveraged transactions incorporate LMA-style ‘certain funds’ (vs. US-style SunGard) terms, even in transactions based in markets moregenerally familiar with US practice (for example Latin America).

Hong Kong’s largest banks in terms of total assets are HSBC andBank of China (Hong Kong). Bank of China also led the 1H2017mandated lead arranger tables for Asia (excluding Japan and Australia),with HSBC and DBS Bank taking joint second place.


Syndicated loan volumes across Asia-Pacific (excluding Japan) fell to afive-year low of $184 billion in 1H2017, weighed down by the

Hong KongJamie Logie and Jonathon Hannah, Sullivan & Cromwell

sullcrom.com


HONG KONG

slowdown in Chinese outbound M&A (which was the biggest driverbehind the acquisition finance boom in 2016). Although M&Afinancing activity in Hong Kong was also constrained, an increase inthe number of refinancing transactions helped ensure that loan volumesin the territory remained at healthy levels. We expect this trend tocontinue given estimates which point to high volumes of offshore PRCdebt maturing in 2017.

The ever-closer ties between the Hong Kong and Mainland Chinafinancial systems and economies was another significant theme, withHong Kong banks’ Mainland China exposure rising to 29.3% ofsystem-wide assets in March 2017 (up from 27.3% in December2016). Fitch Ratings expects a further increase in lending to theMainland in 2017 as tightening onshore liquidity conditions addincentives for Chinese companies to borrow offshore. Notably, Moody’sInvestor Services downgraded Hong Kong’s credit rating from Aa1 toAa2, following Moody’s earlier downgrade of Mainland China’s ratingfrom A1 to Aa3, reflecting Moody’s view that credit trends in Mainland

China will continue to have a significant impact on Hong Kong’s creditprofile.


While traditional banks remain the main providers of loan financings,the investor base is becoming increasingly diverse, particularly in themezzanine/junior debt market where Chinese private equity sponsorsand hedge funds have become regular participants.

On the regulatory side, the Hong Kong Monetary Authority(HKMA) has been designated the ‘resolution authority’ for HongKong’s banking sector under the Financial Institutions (Resolution)Ordinance (Firo), which came into force in July 2017. Firo providesfor a special resolution regime for systemically important financialinstitutions and gives the HKMA power to take a range of resolutionactions in the event that an institution becomes non-viable.


2.1 Briefly outline some recent notable transactionsinvolving your jurisdiction, highlighting anyinteresting aspects in their structures and what theymight mean for the market.Stand-out examples from 2016/2017 include China National

Jamieson J LogiePartner, Sullivan & Cromwell

Hong Kong, ChinaT: +852 2826 8688F: +852 2522 2280E: [email protected]

W: https://sullcrom.com/lawyers/JamiesonJ-Logie

About the authorJamie Logie is head of Sullivan & Cromwell’s Asia-Pacificprojects and English law finance practices, and has significantexperience acting for developers, borrowers and lenders invarious industries. Logie has more than 30 years of experiencein international legal practice, all focused on project, asset andother finance and development work, including acquisitionfinance and restructurings. Logie’s outstanding experienceincludes advising on the recent TCO $16 billion projectfinancing for the expansion of its upstream operations at theTengiz supergiant oilfield in Kazakhstan; the 2016 restructuringof Kenmare Resources’ project and corporate financings for itsMoma titanium project in Mozambique; the refinancing of theDolphin Energy Project in Qatar/UAE; Australia Pacific LNG’s$8.5 billion financing for its LNG facility in Queensland; theBTC pipeline project financing in Azerbaijan/Georgia/Turkey; anumber of mining projects in Africa and Asia; several of the firstwave of independent power projects (IPPs) in Southeast Asia;and various cross-border corporate financings andrestructurings, including LG Philips’ $2 billion joint-venturefinancing in Asia. Logie has been recognised by numerous legal outlets and is

described as “first rate, an excellent all-around advisor”(IFLR1000, UK, 2017).

Jonathon G HannahSpecial counsel, Sullivan & Cromwell

Hong Kong, ChinaT: +852 2826 8688F: +852 2522 2280

E: [email protected]: https://sullcrom.com/lawyers/JonathonG-Hannah

About the authorJonathon Hannah is special counsel at Sullivan & Cromwell,practicing in the Hong Kong office. Hannah covers the fullbreadth of finance work, including project financing,restructuring, corporate lending and acquisition finance. Hisexperience includes financings in the mining, energy,petrochemicals and telecoms sectors in a wide variety ofjurisdictions, including Australasia, Africa, the CIS and theMiddle East. Hannah has represented developers, sponsors,banks and ECA in relation to some of the most complex andhigh-profile projects globally. He is recommended in the 2016 and 2017 editions of

IFLR1000 and the 2014 edition of The Legal 500 UK for hisproject finance expertise in the natural resources sector.

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Chemical Corp’s $12.7 billion bridge loan for the acquisition of Swissagribusiness Syngenta AG and Tencent’s $3.5 billion term loan andrevolver for the acquisition of mobile gaming company Supercell Oy.

The Syngenta transaction was the largest ever foreign acquisition bya Chinese company to date. The Tencent transaction attractedoversubscription from a diverse group of lenders, signalling increasedmarket interest in lending to support emerging market companies (forexample in the tech sector) which are perceived to be growthcompanies.


We have seen a number of banks add mezzanine debt tranches totransactions where leverage for a senior portion exceeds 6x (up from4x, the average limit a year ago). This is consistent with an observableincrease in Hong Kong banks’ willingness to accommodate loans athigher leverage and bullet repayments with minimal amortisation.

In the bond markets, the Hong Kong-China Bond Connectprogramme launched in July 2017, kicking off a new cross-borderregime giving international investors streamlined access to the PRC’s$9 trillion inter-bank bond market. Earlier in 2017, the Hong Konggovernment issued the first 10-year sukuk (Islamic bond) launched byan AAA-rated government, attracting $1.72 billion in orders. Long-term sukuk with a high credit rating is unusual in the internationalmarkets and by extending the yield curve to 10 years, Hong Kong seta new pricing benchmark for sukuk bonds (3.132%, or 68 basis pointsover 10-year US treasuries).



An entity which carries on a banking or deposit-taking business inHong Kong must obtain a licence and become an authorisedinstitution under the Banking Ordinance. Authorised institutions areregulated by the HKMA.

Any person other than an authorised institution that carries onbusiness as a money lender (or who holds himself out as operating alending business) must apply to a licensing court for a licence. Severalexemptions are available in relation to this requirement, including loansto a company with a paid-up share capital of HKD1 million($128,000) or more.


See 1.3 regarding the implementation of Firo in Hong Kong. In Mainland China, a new nationwide macro-prudential

management system for cross-border financings applies. Introduced by

the People’s Bank of China in May 2016, the rules introduce a newmethod for capping foreign debt incurred by PRC entities which isbased on an assessment of their net value/capital and outstandingborrowings on a risk-weighted basis, rather than by reference to anannual quota issued by China’s National Development and ReformCommission. The new regime is generally viewed as a liberalising move,which we expect will contribute to the increasing number of PRCentities accessing debt offshore, particularly in Hong Kong.


The Hong Kong Financial Services and the Treasury Bureau ispreparing draft instructions for an amendment bill introducing astatutory corporate rescue procedure and insolvent trading provisionsinto Hong Kong law. The Bureau has indicated that it will introducethe bill to the Legislative Council in late 2017/2018, though thetimetable for implementation remains unclear.



Since its return to Chinese sovereignty in 1997, Hong Kong hasmaintained its own independent legal system, protected under theHong Kong SAR Basic Law, based on English common law and rulesof equity. Participants unfamiliar with Hong Kong’s One Country, TwoSystems constitutional framework are sometimes surprised by thenumber of differences between Hong Kong and PRC law and practiceand the level of independence of Hong Kong’s judiciary. One exampleis in relation to the choice of governing law. Under Hong Kong law,parties to a contract are free to choose the law that governs thatagreement (as long as the choice of law is legal, unambiguous, bona-fide and not contrary to public policy) and the Hong Kong courts willgenerally give effect to and enforce such agreements. Facility documentsgoverned by New York or English law are therefore commonplace inHong Kong.


We are frequently asked to advise on matters relating to the grantingand enforcement of security. Common questions include: how securityis taken over Hong Kong-incorporated/listed entities (generally bymortgage or charge, though this depends on the type of shares inquestion and whether they are publicly listed); and whether MainlandChinese entities can provide security in respect of offshore financingsmade available to offshore debtors (generally yes, subject to PRCregistration/reporting requirements and other restrictions on maximumleverage and use and repatriation of proceeds).

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4.3 Are there any classes of assets over which securitycannot be taken or regulations specific to yourjurisdiction governing the taking of security over certainclasses of assets that lenders should be aware of?

In general, security can be taken over any class of asset in Hong Kong.There are a limited number of statutory restrictions (for example in relationto assets of registered occupational retirement schemes).

4.4 What measures should be taken to best prepare foryour market idiosyncrasies?

Hong Kong is a mature and highly sophisticated financing market.Participants familiar with UK/European practice should not find themarket particularly surprising, though it is still important to obtain localadvice, particularly where a transaction involves a PRC nexus. It is alsouseful to have some knowledge of market conditions and recentcomparable transactions in order to secure the best pricing terms (whichcan vary by institution) and covenant package and to determine theoptimal financing structure. Most bank loan documents negotiated inHong Kong will be based on the standard forms recommended by the AsiaPacific Loan Market Association and/or the UK Loan Market Association,so familiarity with those documents is also beneficial.


5.1 Briefly explain the downstream, upstream and cross-stream guarantees available in your jurisdiction, withreference to any specific restrictions or limitations.

A Hong Kong-incorporated company may give upstream, downstream orcross-stream guarantees, provided that it is not restricted by its articles ofassociation from doing so. In addition, it must demonstrate that it hasrequisite corporate capacity to enter into and derives sufficient corporatebenefit from the transaction. For upstream guarantees and othertransactions where the benefit to the guarantor is less obvious, it is prudentto obtain both board and shareholder resolutions of the guarantorapproving the transaction.

Under the Companies Ordinance, a prohibition on financial assistanceapplies where a Hong Kong-incorporated company (or its subsidiary) givesfinancial assistance for the acquisition of its own shares (or those of itsHong Kong-incorporated parent). Part 5 of the Ordinance provides forthree principal “whitewash” procedures which apply to both listed andunlisted companies, including one where the giving of financial assistanceis approved by written resolution of all members of the company andsupported by a solvency statement and resolution of its directors in favourof giving the assistance.

Additional restrictions may also apply to Hong Kong-listed companiesunder the “connected transactions” provisions of the Hong Kong Listing Rules.


There is no US Chapter 11-equivalent under Hong Kong law. The maincollective winding up process is regulated by the Companies (Winding Up

and Miscellaneous Provisions) Ordinance, which applies to solvent,insolvent, members’ and creditors’ voluntary winding up processes. Whilerestructurings implemented by way of scheme of arrangement undersection 669 of the Companies Ordinance are common, creditors shouldbe aware that, in common with other jurisdictions such as the UK, thisprocedure lacks a moratorium on creditor actions and so is vulnerable topotential challenge from dissenting minorities.

Creditors should also note that a lender may not be able to enforcesecurity for a loan against a defaulting debtor if it is found that the securityconstitutes a transaction at an undervalue or an unfair preference underthe C(WUMP)O. Certain floating charges may also be invalidated underthe C(WUMP)O, except to the extent that valuable consideration has beenprovided. Other restrictions on enforcement of security also apply underthe C(WUMP)O and other Hong Kong legislation, including theBankruptcy Ordinance.

5.3 Do foreign debt quotas apply in your jurisdiction andis offshore financing to domestic entities monitored?

No.

5.4 Describe your jurisdiction’s relationship with non-performing loans (NPLs), including volume ofoutstanding NPLs and techniques/challenges inmanaging them.

Despite a slight increase in NPL volumes in 2015/2016, the volume ofloans overdue by three months or more end-March 2017 remained low at0.66% of total gross loans according to HKMA statistics. Volumes are notexpected to increase significantly in 2017, though a further slowdown inChinese outbound activity could have implications on Hong Kong banks’asset quality risk, particularly given high average credit-to-GDP ratio andcorporate sector leverage on the Mainland.

Credit risk is tightly managed by Hong Kong’s banking institutions,who maintain stringent underwriting practices and operate under the closesupervision of the HKMA in relation to both their Hong Kong andMainland lending activities.

SECTION 6: Outlook

6.1 What are your predictions for the next 12 monthsfor cross-border financing in your jurisdiction? How doyou expect legal practice to respond?

Consistent with developments over the last 12 months, we expect furthera steady growth in lending by Hong Kong’s financing sector to Chinesestate-owned enterprises, corporates and non-bank borrowers, which shouldlead to interesting opportunities for the legal profession. In particular, asBeijing’s ambitious Belt and Road initiative gains momentum, we predictincreased opportunities in 2017/2018 for Hong Kong as a hub foroutbound Chinese financing activity in infrastructure and otherinvestments across the Belt and Road regions. Practitioners who are ableto provide creative and flexible advice across the full spectrum of financingoptions are likely to be in high demand, particularly in the infrastructureinvestment space, where cutting-edge project finance expertise will be ofparticular relevance.




Cross-border financing in India can broadly be divided into fourcategories:• 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 Boardof India (Sebi);

• Offshore financing to subsidiaries and joint-ventures of Indianparties, guaranteed or secured by the Indian party or its groupentities (ODI financing) and;

• Offshore financing to offshore shareholders of Indian companiessecured 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 securedby listed shares, Sebi.International banks have been active in the ECB and offshore

financing markets for a number of years. These have traditionallyincluded European and American banks as well as (especially for ECBs)Japanese, Taiwanese, Australian and, more recently, Chinese banks. Anumber of them also have FPI entities which subscribe to NCDs.


As Indian banks are not permitted to provide acquisition financing, anumber of acquisitions have been financed by NCDs subscribed to byFPIs and other domestic investors.Similarly, since foreign-owned and controlled Indian companies are

not permitted to access the Indian rupee (INR) debt market for

IndiaSonali Mahapatra, Rituparno Bhattacharya and Nidhi Rani,

Talwar Thakore & Associates


INDIA

domestic acquisitions, they have started to explore the NCD route forfinancing downstream acquisitions.


The market has witnessed the entry of various alternative creditproviders such as mutual funds, distressed asset funds and credit desksof private equity houses. In the banking sector, the RBI has amended its policy on universal

banking licences by adopting an ‘on tap’ policy for eligible applicants,under which resident professionals with experience in banking areeligible to promote banks. Large industrial houses are not permittedto promote banks but may invest up to a prescribed threshold. The RBI has also introduced the licensing of new categories of Small

Finance Banks and Payments Banks with the object of furtheringfinancial inclusion. Payments Banks are not permitted to lend, but canaccept demand deposits up to prescribed limits and provide paymentand remittance services. Small Finance Banks can undertake the basicbanking activities of acceptance of deposits and lending to underservedsectors, including micro and small industries and the unorganisedsector.



In one of the largest acquisition transactions in the Indian market, theNirma group acquired the Indian cement assets of LafargeHolcim.Given the restriction on acquisition financing by Indian banks, the

debt component was financed by mutual funds and other alternativecredit providers through NCDs.In another interesting transaction, various subsidiaries of ReNew

Power Ventures Private Limited (ReNew Power) issued INRdenominated bonds overseas (commonly referred to as Masala bonds).Each issuance was secured by Indian assets and guaranteed by ReNewPower and each other issuer. The Masala bonds were subscribed to byan offshore special purpose vehicle (SPV), which raised funds for thesubscription by issuing US dollar bonds to global investors, which werein turn secured by the Masala bonds. This unique structure addressedthe foreign investors’ concerns relating to taking a pure INR risk, whileenabling the Indian issuers to raise INR funding.


A few key trends have included an increase in financings beingstructured through NCDs as opposed to ECBs; the issuance of Masalabonds (but see paragraph 3.2 below); and widely syndicated deals beingreplaced by bilateral or club deals.



The Foreign Exchange (Management) Act 1999, is the umbrellalegislation governing foreign exchange control, with the RBI as themain regulator governing, among other things, cross-border financings.The Securities and Exchange Board of India Act 1992, is the umbrella

Sonali MahapatraPartner, Talwar Thakore & Associates

Mumbai, IndiaT: +91 226 613 6988F: +91 226 613 6901

E: [email protected]

About the authorSonali Mahapatra is a partner in the firm and a specialist inbanking and finance with wide experience in Indian andinternational financings. She also advises a number of investorsfor their infrastructure investments in India. Her experienceincludes advising on acquisition finance, project and assetfinance and structured finance. She has advised on a numberof leading financing transactions.

Rituparno BhattacharyaPartner, Talwar Thakore & Associates

Mumbai, IndiaT: +91 226 613 6936F: +91 226 613 6901

E: [email protected]

About the authorRituparno Bhattacharya is a partner in the firm and anexperienced practitioner in banking and finance. He hasworked for international and domestic institutions on severalstructured finance, acquisition finance, asset finance and tradefinance transactions.


INDIA

legislation for the securities market, with Sebi as the main regulatorgoverning, among other things, the issuance of listed debt securities, theregistration and regulation of FPIs and takeovers of listed entities.


The market has seen some lender/investor friendly changes in theregulations, for example:• Eligible start-ups are now permitted to avail ECBs up to a specified

limit without an ‘all-in-cost’ cap, which otherwise applies to ECBs. • FPIs are now permitted to invest in unlisted NCDs, subject to some

end-use restrictions (previously they could invest only in listedNCDs except in the infrastructure sector).

• The benefit of certain special legislation for debt recovery andsecurity enforcement, previously available only to Indian banks andcertain financial institutions, is now extended to debenture trusteesfor listed debentures (and through them, FPI investors).There have also been some instances of tightening regulatory norms,

for example:• FPIs can now only subscribe to NCDs with a remaining average

maturity of three years at the time of investment, thus excludingthem from the market for shorter tenor instruments.

• The issuance of Masala bonds now requires the approval of the RBIand has been made subject to additional conditions.


Amendments to the Companies Act 2013, (including in relation to theprovision of guarantee and security) are currently being discussed inthe Indian parliament. The Indian government is also expected to review the working of

the new Insolvency and Bankruptcy Code, 2016 (IBC), with a view tostrengthening processes and timelines based on interpretational issuesthat have arisen. The RBI has proposed draft regulations governing cross-border

mergers, which will impact the structuring of acquisition finance dealsinvolving debt pushdown through mergers.



The INR is not fully convertible and RBI imposes several restrictionson cross-border transactions, often prohibiting or regulatingtransactions that would be considered standard in developed markets.New foreign entrants to the Indian market are often not aware of thesignificant impact this can have on the structuring of cross-borderfinancings.


Other than exchange control restrictions, another critical point is theimpact of stamp duty. Stamp duty is payable on any agreementexecuted in India or brought to India after execution. The rate variesfrom state to state and in certain cases, such as the assignment ofcontractual rights, it can be prohibitively high. This can have asignificant impact on transaction and security structuring.

4.3 Are there any classes of assets over which securitycannot be taken or regulations specific to yourjurisdiction governing the taking of security overcertain classes of assets that lenders should be aware of?

Prior approval of the RBI is required for cross-border security exceptfor security for ECBs, ODI financing and in some cases, FDIfinancing. Even in these cases (except for NCDs) security creation issubject to approval from authorised dealer banks and prescribedconditions. Enforcement may be subject to restrictions as well. For example,

immovable assets can only be sold to an Indian resident and pledgedshares must be sold in compliance with relevant regulations (includingforeign investment regulations and, for listed shares, takeoverregulations). Finally, any remittance pursuant to a judgment of a court requires

prior RBI approval.


Given the highly regulated nature of the Indian cross-border financingmarket, it would be advisable for lenders to analyse the Indianregulatory impact on their structures at an early stage to avoid any lastminute road blocks that may stall the transaction.

Nidhi RaniManaging associate, Talwar Thakore & Associates

Mumbai, IndiaT: +91 226 613 6947F: +91 226 613 6901E: [email protected]

About the authorNidhi Rani is a managing associate with the firm specialising inthe banking and finance space and has advised severalinternational as well as domestic lenders.


INDIA



The key restrictions (most of which apply to security creation as well)are:• if the guarantor is a public company, financial assistance restrictions

apply; • subject to certain exceptions, no guarantee can be provided by a

company to or on behalf of: a private company in which a directorof the guarantor (Director) is a director or a member; any firm inwhich a Director or its relative is a partner; a body corporate inwhich at least 25% of the voting rights is exercised by one or moreDirectors; or a body corporate, whose board or manager acts inaccordance with the instructions of any Director.

• The guarantees must be within the limits prescribed under theCompanies Act 2013, unless increased through a special resolutionof the shareholders; and

• the guarantee will require prior approval of a public financialinstitution if the guarantor has taken any loans from it and eitherthe amount of the guarantee exceeds the limits under CompaniesAct 2013 or the guarantor has defaulted under such loan.

• For cross-border guarantees, where:(a) guarantees for offshore joint-ventures/wholly-owned subsidiaries

are permitted subject to financial caps, equity holding and otherspecified requirements;(b) guarantees for overseas holding companies require RBI approval;(c) guarantees for any ECBs by an Indian company are subject to

specified requirements and must be approved by an authorised dealerbank – ECBs cannot be guaranteed by banks or non-bank financecompanies;(d) NCDs can be guaranteed by parent/group companies/promoters

of the issuer without regulatory approvals but not by banks; and(e) necessary filings must be made.


The RBI prescribes various contractual mechanisms for restructuringof debts, which are available to and mandatory for Indian lenders.Overseas lenders and bondholders are not bound by such restructuringsbut neither do they have any role to play and, as a result, may findthemselves excluded from the restructuring of a significant part of theborrower’s debt.The IBC provides a more unified approach. Any creditor (including

foreign creditors) whose debt is under default can make an applicationto the National Company Law Tribunal (NCLT) to initiate aninsolvency resolution process. A few key considerations to note here are:

• if the petition is admitted, an automatic moratorium (of 180 days,extendable to 270 days) is imposed on any suits or claims againstthe company;

• while foreign creditors may initiate a resolution process, given thatdecision making is by a 75% vote (by value) of all financial

creditors, they may have limited control given that the debt profileof Indian borrowers is typically skewed in favour of domestic debt;

• as with other jurisdictions, the IBC provides for avoidance of certainpreferential transactions, transactions at an undervalue, extortionatecredit transactions and certain floating charges, in each case, withinspecified hardening periods.


Foreign investments in corporate debt instruments (which includeNCDs and Masala bonds) is capped at an aggregate of $51 billion. In addition, there are limits on raising of ECBs by a borrower

(ranging between $100 million to $750 million, depending on theindustry sector the borrower is in) and any ECB in excess of such limitrequires approval of the RBI. These limits are monitored throughmechanisms prescribed by the RBI and Sebi.


Indian banks are burdened with high levels of non-performing debt,with estimates varying between 7.5% to over 9% of total gross loans.While macroeconomic factors and questionable credit assessment havebeen major causes, debtor-friendly courts, long resolution periods andlow recovery rates and have only compounded the problem. Domestic lenders have in the past typically contractually restructured

their debt under the RBI’s schemes mentioned in paragraph 5.2 above,as these provide them provisioning benefits. Another method has beento sell NPLs to asset reconstruction companies at a discount underspecial legislation. However, these methods have shown limited successin the revival of stressed assets or in providing a broader solution tosystemic issues. The IBC is a new legislation with its own share ofteething problems, but is clearly a step in the right direction toaddressing this issue.

SECTION 6: Outlook


Acquisition finance (primarily led by private equity houses) throughboth offshore financing and NCDs is expected to continue and increasein volume. With the increased level of non-performing assets in theIndian banking system, more activity can be expected in the distresseddebt space as well. Lastly, alternative credit providers such as stressedasset funds and the credit desks of private equity houses are expectedto play a prominent role in the financing market. Legal practitionerswill need to be aware of the issues and considerations that are relevantto these new financiers, which may often be different from thetraditional players in the market.




The Indonesian banking sector is dominated by state-owned banks andsome private banks, such as BCA and CIMB Niaga. Among the state-owned banks, Bank Rakyat Indonesia has the most assets, followed byBank Mandiri. Many foreign banks provide cross-border loans toIndonesian companies. Financing can be either bilateral or syndicatedand can be used for a specific project in Indonesia, for the purchase ofmachinery (ECA) by an Indonesian borrower or as the working capitalof the Indonesian borrower. Currently, our jurisdiction’s role is stilldominated by borrowing rather than lending.


As there are many infrastructure projects currently in process, muchrecent cross-border financing is related to these projects. This includesfinancing toll roads, power plants, smelters and a high-speed train. In2016, the Financial Services Authority (Otoritas Jasa Keuangan –OJK), as the regulator of the banking and financial sector, started toregulate so fintech activities under regulations on peer-to-peer lendingactivities.


There has been no significant interesting change in the structure of thebanking sector in Indonesia. However, offshores financing provided bybanks from Asian countries seems to be increasing. From a regulatorypoint of view, there has been increased focus on bank ownership,

IndonesiaMaria Sagrado and Hanny Marpaung, Makarim & Taira S

www.makarim.com


INDONESIA

governance and compliance as well as on foreign workers in thebanking industry.



In the first quarter of 2017, a syndication of Japan Bank forInternational Corporation, Mizuho Bank, Sumitono Mitsui BankingCorporation, The Bank of Tokyo-Mitsubishi UFJ, Sumitomo MitsuiTrust Bank, Mitsubishi UFJ Trust and Banking Corporation, TheNorinchukin Bank and Singapore’s Oversea-Chinese BankingCorporation extended a $4.3 billion loan to PT Bhumi Jati Power for

the development of two 1,000MW coal-fired power plants located inCentral Java Province, Indonesia. Upon its completion, the project willbe one of the largest independent power producers (IPP) in Asia. Also,in the pipeline, there will be another syndication of offshore bankswhich will provide $1.74 billion of loan facilities to a project companyfor the development of a 1,000MW coal-fired power plant. Theseprojects are very important to support the government’s 3.5GW powerproject plan. These projects involve so many corporate and financeaspects, including the development of a complex ‘self-help’ remedymechanism for the lenders that could set a precedent for similar projectsin the future.In March 2017, the Republic of Indonesia issued a global five-year

sukuk worth $1 billion and a 10-year sukuk of $2 billion under RegS/144A Trust Certificates due in 2022 and 2027, respectively (theWakala Sukuk). The Wakala Sukuk are the largest ever non-GCC (GulfCooperation Council) US dollar sukuk transactions, and the largestUS dollar sukuk issued by Indonesia.

Maria H SagradoPartner, Makarim & Taira S

Jakarta, IndonesiaT: +62 21 2521272F: +62 21 2522750

E: [email protected]: www.makarim.com

About the authorMaria Sagrado has extensive high-level experience instructuring foreign investment and financial transactions. Sherepresents the interests of numerous foreign clients investing inIndonesia, including companies and investors from the China,the US, the UK, Singapore and the European Union across awide range of sectors, including power plants,pharmaceuticals, plantations, distribution, department stores,mining and other business areas. Combining her European andIndonesian exposure, Sagrado’s well-rounded experience inrelevant corporate and commercial practices enables her tocomprehensively advise and guide foreign clients on localinvestments or transactions in Indonesia, with dueconsideration of the various aspects involved. Sagrado’s ability to forge a rapport between disparate

parties and drive solutions is also showcased by hersuccessful track record executing prominent financetransactions involving leading foreign banks, in particular banksfrom 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 Indonesianborrowers including state-owned enterprises (SOEs), powerplants, major mining related industries and manufacturingcompanies.

Hanny MarpaungSenior associate, Makarim & Taira S

Jakarta, IndonesiaT: +62 21 2521272F: +62 21 2522750

E: [email protected]: www.makarim.com

About the authorHanny Marpaung works on a broad range of capital marketsmatters. She has extensive experience in structuringtransactions; conducting legal research and due diligence;preparing legal opinions; drafting and reviewing transactiondocuments; and other matters related to initial public offerings,rights issues, bond issuances, tender offers, acquisition andcorporate actions conducted by public as well as privatecompanies. Marpaung has an extensive experience in thecorporate and commercial and financial services area and hasbeen involved in a wide range of significant transactionsinvolving both domestic and international corporations. She isalso experienced in mergers and acquisitions, joint-venturesand advising clients ranging from business start-ups toseasoned companies.


INDONESIA


There has been no significant development in the structuring of cross-border financing. As the Indonesia Stock Exchange composite indexhas been growing steadily, Indonesia’s bond market has also grown overthe past year, including Islamic finance. Indonesia’s financing marketcan now be seen as a balanced combination of conventional financingand more diversified debt instruments.



The OJK is the regulatory agency that governs financing activities inIndonesia and Bank Indonesia, as the central bank, regulates paymentsystems and overseas macro-prudential aspects of the banking sector.There is no specific regulation on cross-border financing, except thatIndonesian borrowers must comply with certain reportingrequirements (and in some cases, obtain prior approval). Thesereporting requirements include reporting by Indonesian companies oftheir offshore plans and their implementation to Bank Indonesia. Thesecompanies must also comply with the prudential principle by applyingthe required hedging ratio, liquidity ratio and credit rating, unless theyare eligible for a certain exemption. Certain reports must also besubmitted to the Minister of Finance and the Offshore CommercialLoan Coordinating Team (PKLN Team).


The obligation to apply the prudential principle to offshore loans inforeign currencies came fully into effect in 2017, the latest developmentbeing the requirement that all hedging transactions be conducted withIndonesian banks, effective January 1 2017. Regulations on securityinterests and guarantees remain the same.


In 2017, the OJK plans to issue regulations on the management ofconglomerate liquidity risks, conglomerate capital management andintragroup transactions. The OJK also plans to issue regulations onliquidity management and the prevention and management of afinancial system crisis. Some regulations on Sharia banking andfinancing as well as fintech activities are expected to be issued as well.However, there is no certainty that these new regulations will in factbe issued this year.



Regardless of a court case over this requirement, we see in the marketthat foreign lenders are still using the English language only as thelanguage of most loan documentation. Since the enactment of theNational Flag, Language, Emblem and Anthem Law (the LanguageLaw) in 2009, many foreign lenders have signed their loan agreementsin at least a bilingual English and Indonesian version. This trendbecame more pronounced in 2013 after the West Jakarta District Courtdeclared a loan agreement signed in the English language only null andvoid. This decision was upheld by both the High and the SupremeCourt. It is expected that this situation will not change until theimplementing regulation of the Language Law, which may regulate anysanctions for failure to comply is issued.Reporting obligations to Bank Indonesia and others must also be

complied with because some courts have ruled that failure to reportaffects the validity of a loan agreement. Even if Indonesian law doesnot require judges to follow precedent, these rulings may be taken asan indication of Indonesian judges’ view of certain matters.


Depending on their line of business, some companies in Indonesia maybe required to obtain additional approval for their proposed offshoreloan. For instance, for a power plant, if the project owner enters into asale and purchase of power agreement (a PPA) with PT PLN (Persero)and wants to obtain an offshore loan, it must, regardless of the amountof the loan, obtain prior approval from the PKLN Team. Also, it isimportant to check the business licences of Indonesian borrowers, suchas their Investment Coordinating Board (BKPM) approvals that statetheir loans as part of their investments, against the amount of the loanthat they will obtain from the lenders.Indonesia does not yet have a centralised data system that is

accessible to the public regarding any dispute or case (includingbankruptcy) involving a company. A manual search by submitting anapplication to each relevant court, under a power of attorney from therelevant company, is required for court searches.

4.3 Are there any classes of assets over which securitycannot be taken or regulations specific to yourjurisdiction governing the taking of security overcertain classes of assets that lenders should be aware of?

In Indonesia, bank accounts cannot be secured by way of fiduciarysecurity. In some cases, they are secured under a pledge, and it remainsunclear whether this is an appropriate security interest for bankaccounts. The establishment of security over aircraft is not clear eitherbecause there is, as yet, no formal and clear type of security recognisedby the authorities that can be placed over an aircraft. In practice, thesecurity interests are established over the machinery and equipment ofthe aircraft.


INDONESIA


As it is now possible to access the Ministry of Law and Human Rightsonline system to check certain corporate information, such as listedshareholders, the members of the board of directors and the board ofcommissioners and the latest company deed etc., it is advisable toconduct a search to obtain preliminary information about anIndonesian borrower. Based on the information, lenders can then askfor the complete set of the Articles of Association of a company to findout if there is any limitation on the board of directors’ authority toobtain loans or establish security over the company’s assets.For taking security over plots of land, the lender should consider

checking the status of the land at the relevant Land Office. Thisrequires a power of attorney from the borrower or the landowner.Lenders should also check the borrower’s business licences and

approvals, such as its BKPM approvals, to check the permitted loanamount. If the permitted loan amount does not correspond to the loanamount to be obtained by the company, the company should amendthe relevant approval to change the loan amount.



In Indonesia, the types of security usually used for financing are thefollowing:a) fiduciary security: usually established over receivables, insurance

proceeds, inventory, machinery and equipment and/or immovableassets that cannot be secured by security rights;b) security rights over land (Hak Tanggungan): which can be

established over plots of land and assets attached to the land;c) pledges; usually established over shares;d) corporate guarantees and/or personal guarantees.Contracts cannot be an object of security. Most commonly, they are

‘secured’ under a conditional assignment agreement by the lender andthe borrower and acknowledged by the counterparty.Shares can be secured by either a pledge or a fiduciary security.

However, since fiduciary security must be registered with the FiduciaryRegistration Office where the grantor is domiciled, fiduciary securityover shares owned by foreign parties cannot be registered and therefore,established. In this situation, the shares can be secured under a pledge.If the security granted to the creditors involves assets that constitute

more than 50% of the net assets of the company in one or moretransactions (whether related or unrelated transactions whichcumulatively constitute more than 50% of net assets), then that actionrequires approval from a general meeting of shareholders of thecompany. In Indonesia, to provide guarantees or security for another party’s

debt, a corporate benefit should exist. Actions which do not clearlyshow a corporate benefit for the company may be difficult to enforce.


Under the Indonesia Bankruptcy Law, two types of proceedings may becommenced: bankruptcy proceedings, whereby the borrower will lose itspower to manage and dispose of its assets; and a legal debt moratoriumor suspension of payment proceedings, whereby the borrower, at therequest of the lender or the borrower itself, is given temporary relief torestructure its debts and continue doing business, and ultimately to satisfyits obligation to its creditors.All the procedures for these types of proceedings must be completed

within a certain timeline and cannot be avoided and the lenders shouldbe careful about the timing issues. A petition for bankruptcy also has tworequirements: the borrower must have more than one lender and musthave failed to settle in full one of its debts, which must be due and payable.In addition, the bankruptcy/suspension of payment petition can begranted if there are facts and circumstances that can be simply proven. Since the proceedings will involve other creditors, it is important that

all the creditors communicate and remain on good terms and cooperatewith each other.


No foreign debt quotas apply. However, the licences and permits of aforeign investment company, such as its BKPM approval and theapproval from the PKLN team, may set out the total amount of loansthe company may have. BKPM has been imposing a policy thatrequires foreign investment companies to limit their debt-to-equityratio to the ratio stated in their BKPM approval. The debt-to-equity(paid up capital) ratio imposed by BKPM depends on the company’sline of business, but is usually 3:1. Certain lines of business, such aspower companies, may obtain a higher ratio, such as 10:1 or 15:1.


According to the Indonesia Banking Statistics issued by the OJK in March2017, the NPL ratio has increased since 2014. According to the report,the gross NPL in 2014 was 2.16%, while as of March 2017, the grossNPL was 3.04%. NPLs are usually managed by restructuring the loans.

SECTION 6: Outlook


Indonesia still requires significant further infrastructure investment.Therefore, the trend in financing will likely remain in infrastructureprojects. Asian banks from China, Japan and Korea will be increasinglyactive in cross-border financing activities in Indonesia.




In Nigeria, most cross-border financing transactions involve foreignlenders providing loans to Nigerian banks and other corporates. Theparties may, in order to gain certain tax benefits, either structure theloan to have, among other things, a tenor of between five to seven yearsfor the interest payments to be partly or wholly exempt from thewithholding of tax, or structure the transaction such that the lenderwould be an entity incorporated in a country that has an effectivedouble tax treaty with Nigeria. For such cross-border financingtransactions, the Nigerian party is most likely to be the borrower, as itis not common for Nigerian parties to lend money to foreign entities.Some of the dominant lenders we have seen in the Nigerian market inrecent times include international financial institutions, developmentfinance institutions, multi-national banks, export credit agencies andprivate 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 foreigncapital was brought into Nigeria and converted into naira. Other thanthis foreign exchange requirement, there are no particular requirementsthat must be met by a foreign lender in order to engage in cross-borderfinancing transactions in Nigeria.


The decline in oil prices from 2014 caused a shortage in foreigncurrency inflow into Nigeria. The country also witnessed a significantreduction in foreign lending to Nigerian institutions. The situation wasexacerbated by the challenges encountered by Nigerian borrowers in

NigeriaAniekan Ukpanah and Onyinye Okafor, Udo Udoma & Belo-Osagie

www.uubo.org


NIGERIA

sourcing foreign exchange to settle their maturing foreign debtobligations to foreign lenders due to the unavailability of foreigncurrency. This led to parties restructuring some of their foreign loanseither by re-denominating the loans, where possible, in local currencyor transferring the debt obligations to an offshore related party. Someforeign lenders who took a more optimistic view of the marketextended the tenor of their loans. Responding to the liquidity challenges in the foreign exchange

market, the Central Bank of Nigeria (CBN) introduced certainmeasures, which were aimed at managing the available foreign currencyand ensuring timely settlement of transactions eligible for foreignexchange. One of the notable measures was the introduction of a specialinvestors’ and exporters’ FX window called the Nigerian AutonomousForeign Exchange Fixing (Nafex Window) on April 24 2017. Thisenables parties with foreign currency to buy and sell foreign exchangeat a market-determined rate. Participants in the Nafex Window canbuy and sell foreign exchange at rates mutually agreed between them.In relation to lending, foreign lenders are now able to obtain foreigncurrency in the Nafex Window at a market-determined rate in orderto repatriate interest and principal on loans provided to Nigerianborrowers.Other notable developments in the Nigerian market are:

• the CBN has replaced physical CCIs with electronic certificates. Allinvestors with physical CCIs that have not been fully utilised orcancelled are required to have such certificates dematerialised andconverted into e-CCIs. Going forward, CCIs will be issued throughthe e-CCI electronic platform;

• the Federal Inland Revenue Service (FIRS) issued a notice inDecember 2016 which seems to revise the rate of stamp dutypayable on loan agreements. Prior to the notice and as prescribed

in the Stamp Duties Act, unsecured loan agreements (as a categoryof agreements under hand) were subject to stamp duty at a nominalamount of NGN500.00 but the notice specifies that the stamp dutypayable on unsecured loan agreements will be assessable at an advalorem rate of 0.125% of the loan sum. Expectedly, the notice hasgenerated much debate as it has had a significant impact on lendingcosts in Nigeria. Arguably, the notice by the FIRS cannot amendthe provisions of the Stamp Duties Act and, therefore, is illegal.However, until it is set aside by a court of competent jurisdiction,it is certain that, in order to meet its revenue targets, the stampduties commissioner in assessing stamp duty payable on unsecuredloan agreements will do so in accordance with the notice.


In 2016, Providus Bank was granted a commercial banking licence bythe CBN to operate as a regional bank.



There are some notable transactions in Nigeria, which we are unableto disclose for confidential reasons. Some of these transactions have

Aniekan UkpanahPartner, Udo Udoma & Belo-Osagie

Lagos, Nigeria T: + 234 1 462 2307-12

E: [email protected]: www.uubo.org

About the authorAniekan Ukpanah heads the firm’s banking and finance practiceas well as the projects and infrastructure practice. Hisspecialisations include banking, capital markets, corporate andproject finance, syndicated lending, debt restructuring,securitisation and infrastructure projects including publicprivate partnerships. Ukpanah also has particular expertise inmulti-sourced financings. He has advised clients extensively onproject development and infrastructure financing transactions.A good number of his transactions have been recognised asaward winning deals in Nigeria.

Onyinye OkaforManaging associate, Udo Udoma & Belo-Osagie

Lagos, Nigeria T: + 234 1 462 2307-12 E: [email protected]

W: www.uubo.org

About the authorOnyinye Okafor is a managing associate in the firm’s bankingand finance team. She is familiar with the documentationrequirements for the implementation of financing arrangements.Her specialisations include corporate and project finance,derivatives and structured finance, debt restructuring,syndicated lending, on-lending transactions, securedtransactions, capital market and insolvency. She has beeninvolved in the structuring and financing of various projects andadvises clients on a day to day basis on a range of corporateadvisory matters and issues concerning the creation andperfection of security.


NIGERIA

some interesting elements. For instance, in one of such transactions,which involves lending by related parties, the related-party lendersagreed to convert their outstanding loans to equity. This restructuringis aimed at managing the debt portfolio of the Nigerian borrower.In another cross-border finance transaction, the parties structured

the transaction such that an offshore affiliate of the Nigerian entitybecame the borrower of record even though the purpose of the loanwas to finance the project of the Nigerian entity. The loan provided tothe offshore affiliate was pushed to the Nigerian entity as an advancepayment for products to be exported by the Nigerian entity to thirdparty purchasers. Due to exchange regulations in Nigeria restrictingthe use of export proceeds, payment for the export by third partypurchasers were paid directly to the lender through the offshoreborrower.Another notable transaction that completed recently, is the financing

of the Azura Independent Power Plant IPP. In that transaction, theFederal Government of Nigeria nominated the Azura IPP for the worldbank partial risk guarantee (WB PRG). Although a number of othergreenfield IPPs have been nominated for the WB PRG, the issuance ofthe WB PRG had a positive influence in the bankability of the AzuraIPP and made it possible for the parties to achieve financial close.


No.



There is no singular legislation or regulatory body that governs cross-border financing in Nigeria. Where the relevant Nigerian entity is abank, the bank would be required to comply with the regulations anddirectives issued by the CBN from time to time.


No.


There is none to the best of our knowledge.



A misconception which exists in relation to financing transactions inNigeria is that foreign lenders often believe that they are able to remitinterest and loan repayments made by a borrower, through the officialforeign exchange market without a CCI. Even where the lendersunderstand that a CCI is necessary for repatriation, they believe thatonce the funds are remitted to a borrower in Nigeria, a CCI will beissued without having to take any further steps. This is largely untrueas the foreign exchange regulations, require that the foreign capital(where it is in the form of cash) being brought into Nigeria has to beconverted into naira before a CCI can be issued. Another common mistake is where parties structure a transaction

such that fees (such as agency fees, arrangement fees etc.) payable tothe finance parties in respect of the transaction, are deducted at sourceprior to an inflow of the loan into Nigeria. As we indicated above, aCCI evidences that foreign capital was inflowed into Nigeria and isrequired to reflect the actual amount of foreign capital brought intoNigeria. Where fees are deducted at source, the CCI will only reflectthe amount that was actually brought into Nigeria, which is the loansum less the fees that was deducted offshore. What this means is thatat the time of repayment, the lender can only repatriate the amountindicated on the CCI and interest thereon from the official foreignexchange market (i.e. the loan amount less the fees).


Some of the frequently asked questions in cross-border financingsinclude tax and foreign exchange restrictions, corporate benefit rules,whether there are any advantages in having the security documentsgoverned by local law, and enforcement of security. We have discussedthe foreign exchange restrictions above. In relation to tax, foreignlenders often seek to understand the rate at which tax would bewithheld on payments in lending transactions and the availablestructuring options. It is possible to structure foreign loans in a mannersuch that no tax is payable on interest. Some partial tax exemptionscan be achieved where the lender is incorporated in a country withwhich Nigeria has signed a double taxation agreement.


Generally, security can be created over all classes of assets. However,there are regulatory or contractual restrictions to the creation of validand enforceable security over certain classes of assets. For example,under Nigeria’s Land Use Act, an assignment, mortgage, transfer,sublease or other disposal of an interest in land requires the consent ofthe Governor of the state where the land is situated in order to be valid


NIGERIA

and enforceable. In relation to rights arising under authorisations andlicences, since these are considered personal to the beneficiary or licenceholder, an assignment or transfer of the beneficiary’s or licence holder’srights to a third party as security requires the issuing authority’s consent.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’insurance policies, that lender would either: (i) appoint a local securityagent to which the insurance proceeds are assigned on the lender’sbehalf, or (ii) require the borrower to establish an insurance proceedsaccount into which all insurance proceeds are paid, and then takesecurity over that account. The insurance industry prudential guidelinesprohibit the assignment of reinsurance policies.


Other than in relation to foreign exchange requirements and corporateauthorisations, there are no mandatory or specific requirements thatparties are required to meet in order enter into cross-border financingtransactions in Nigeria. In entering such transactions, however, partiesshould seek legal advice at an early stage of the transaction in order toavoid mistakes in structuring the transaction and also to ensure thatthey do not breach any regulatory requirements.



Under Nigerian law, a company incorporated in Nigeria can providethird party security or guarantee if its constitutional documents permitthe company to do so, and if its directors, acting in good faith and inthe best interests of the company, approve the arrangement. If thecommercial benefit of such arrangement is unclear, it would be prudentfor the lenders to obtain the company shareholders’ approvalconfirming that the arrangement is for the benefit of the company.In relation to upstream guarantees, however, the issue to be

considered is whether the subsidiary providing such guarantee to theparent company will breach the financial assistance restriction underNigeria’s companies’ law by providing the guarantee. Section 159 of Companies and Allied Matters Act 2004 (Cama)

prohibits Nigerian companies or their subsidiaries from giving financialassistance, directly or indirectly, to any person for the purpose ofacquiring the shares of that company or reducing or discharging anyliability incurred in relation to such acquisition. This means that wherethe guarantee is provided by the subsidiary to support a loan whichwould be used by the parent to acquire shares of the subsidiary, thiswould amount to a breach of the financial assistance and would beunlawful. Nigerian banks are restricted from accepting foreign guarantees on

naira loans. The only foreign guarantees allowed on naira loans arelimited to bank guarantees and foreign currency deposits irrespectiveof whether the foreign currency is in a foreign bank or in a domiciliaryaccount with a bank in Nigeria. In relation the bank guarantee, CBN

regulations require that the foreign guarantor must be a first-class bankor any other bank that is acceptable to the CBN. Where the guaranteeis in the form of foreign currency deposits, the funds must be held inan account that is acceptable to the CBN.


One issue that creditors should be mindful of in restructuringtransactions relates to fraudulent preference. By virtue of section 495of Cama, section 498 of Cama (specifically applicable to floatingcharges created during the ‘hardening period’), and of section 46 ofthe Bankruptcy Act 2004, any payment, conveyance, security, etc. orother act relating to property made or done by or against a companywithin the three month period prior to the commencement of windingup proceedings against the company, or of when the company’sshareholders pass a resolution for the voluntary winding up of thecompany, shall be deemed a fraudulent preference of the company’screditors and be invalid accordingly. In this event, the liquidator willhave the right to claw back any payment made during this period. Alender may however challenge the liquidator’s right to claw back suchsecurity or guarantee if it can establish that the borrower or theguarantor was in fact not insolvent at the time of the conveyance,payment or creation of security.


Foreign debt quotas, generally, do not apply in Nigeria. However,where the borrower is a Nigerian bank, such bank must comply withthe foreign currency exposure limits stipulated by the CBN.


The issue of non-performing loans (NPLs) is relevant in respect offinancing transactions where the lender is a Nigerian bank. The totalNPLs which a Nigerian bank is allowed to hold cannot be more than5% of the bank’s total loan portfolio. Banks are required to makeprovisions ranging from 25% to 100% of the outstanding amountdepending on the number days for which the loan is delinquent.According to the Financial Stability Report of the CBN in 2016, theratio of NPL to gross loans was 14% as at December 2016.


NIGERIA

SECTION 6: Outlook


Following the introduction of the Nafex Window, which has enhancedliquidity in the foreign exchange market, we are seeing an increase inforeign investment into Nigeria. Barring any significant shock in themarket, we expect, therefore, that there will be an increase in cross-border financing over the next 12 months. Agriculture and exportrelated funding seem to be on the increase and we expect to see morecross-border funding for this sector. We also believe that export creditagencies and investment funds will become a significant provider ofcross border funding in the next 12 months.The Nigerian government intends to launch a Power Sector

Recovery Programme (PSRP) in partnership with the World BankGroup (including the International Finance Corporation (IFC), theMultilateral Investment Guaranty Agency (Miga) and the AfricanDevelopment Bank (AfDB)) to restructure the sector. As part of thePSRP, the World Bank Group will directly invest $2.5 billion oncecertain conditions are met, the AfDB will invest $1billion and the IFCand Miga have, in principle, offered to mobilise additional $2.7 billionof private capital to the sector. A key obligation of the FGN under thePSRP 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 isprovided by the CBN. The PAG is to ensure that undisputed invoicesissued by the power generating companies within 24 months fromJanuary 2017 are paid in full by the Nigerian Bulk Electricity Trading.With these measures, we expect to see more cross-border funding inthe 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 firmswill be very competitive in pricing in order to win deals.




Switzerland is home to more than 260 banks, with an aggregate balancesheet total of approximately CHF3.1 trillion. Consequently, the Swisscross-border market is mature and well-developed. Major local bankssuch as Credit Suisse, UBS and Zurich Cantonal Bank (ZKB) are thedominant lenders when it comes to cross-border financing butinternational banks are quite active in the Swiss market as well. This isbecause headquarters of large international groups are located inSwitzerland and also because borrowers frequently have Swiss affiliateswhich grant security. The Swiss jurisdiction provides the necessary legalcertainty for large scale financial transactions to resolve resultingdisputes. However, borrowers and lenders usually tend to find anamicable solution in disputes, rather than resorting to litigation.


The ongoing Brexit negotiations may have had a slightly negativeimpact on cross-border financing, but the market has been rather steadyover the last twelve months.


It appears that Chinese banks are increasingly active as lenders in theSwiss market in connection with the acquisition of Swiss targets.

SwitzerlandDaniel Hayek and Alexander Flink, Prager Dreifuss

www.prager-dreifuss.com


SWITZERLAND



We have seen a multi-billion euro transaction in order to finance alarge-scale infrastructure project. The most interesting aspect of thetransaction was that the current lenders are European energy companiesthat do not have a banking licence. At present, there are no banklenders involved, even though they may provide financing at a laterstage of the project. This raised some difficult questions in relation tothe so-called 10/20 Non-Bank Rule, which limits the number ofpotential non-bank lenders (for further details see section 3.3 below).Consequently, finding a solution for the allocation of “slots” for lenderswithout a banking licence providing mezzanine, bridge or funding gapcapital, as well as the transfer of loan shares to non-banks, proved tobe challenging. The composition of the lenders made this transactionquite unique. Therefore, we do not expect that its structure willinfluence the Swiss market standard.


Syndicated secured loan facilities are probably the most frequent typeof cross-border financing transactions and it appears that this will notchange in the near future.



There is no specific legislation or regulatory body that exclusively orpredominantly governs cross-border financing in Switzerland.However, it goes without saying that the Swiss Financial MarketSupervisory Authority (Finma) is relevant when it comes to theregulation of domestic (bank) lenders and that the Swiss Federal TaxAdministration is relevant in relation to ancillary tax issues.

Daniel HayekPartner, Prager DreifussZurich, SwitzerlandT: +41 44 254 55 55F: +41 44 254 55 99

E: [email protected]: www.prager-dreifuss.com

About the authorDaniel Hayek is a member of the management committee andhead of Prager Dreifuss’ corporate and M&A team. Hespecialises in mergers and acquisitions (mainly strategicbuyers), corporate finance, takeovers, banking and finance andcorporate matters. He advises business clients in all types ofdomestic and cross-border transactions, including finance andreal estate transactions. He has also advised major US andGerman banks in acquisition finance transactions and in therecovery of distressed debt. In these fields he is alsorepresenting clients in court and before arbitration tribunals.Lately, his practice has involved acquisitions of Swiss targetsfor major strategic buyers from a variety of industries (chemical,automotive, transport), as well as debt restructuring andinsolvency law.

Alexander FlinkAssociate, Prager Dreifuss

Zurich, SwitzerlandT: +41 44 254 55 55F: +41 44 254 55 99

E: [email protected]: www.prager-dreifuss.com

About the authorAlexander Flink is a member of the corporate and M&A andbanking & finance teams of Prager Dreifuss. He focuses mainlyon restructuring transactions and financing. He has alsosignificant experience in presenting lenders as well asborrowers in the negotiation of credit facilities regardingleveraged finance and project finance, as well as in acquisitionfinance for private equity companies and providers of seniorand mezzanine debt. His recent practice has involved therepresentation of major banks in domestic and cross-bordertransactions, including corporate finance, real estate and IPtransactions. He further advises clients in connection withinsolvency laws and the recovery of distressed debt.


SWITZERLAND


There have been no changes to regulations or regulators which wouldhave had a significant impact on the cross-border market.


The abolition of the 10/20 Non-Bank Rule has been widely discussed,because it could considerably improve the appeal of lending directly toSwiss borrowers. In a nutshell, this rule states that interest paymentsare subject to the 35% Swiss Withholding Tax, if the number of lenderswithout a banking licence exceeds 10 (under a single debt instrument)or 20 (under all debt instruments of the Swiss borrower taken together),respectively. Under certain circumstances, interest payments guaranteedby a Swiss guarantor may be subject to the Swiss Withholding Tax aswell. The limitation of syndication to non-bank lenders due to the10/20 Non-Bank Rule is a viable solution to avoid or mitigate theconsequences of this rule. However, such an approach may not be satisfying to larger

syndicated finance transactions or if the involvement of lenders withouta banking licence is a necessity. In this case, the funds are often raisedby a foreign parent company and the Swiss entity solely acts asguarantor and security provider. If this structure is properly plannedand implemented, the applicable upstream and cross-stream limitations(see section 5.1) can be reduced to a minimum, but it would bepreferable if the lenders had unlimited claims against the Swiss entityand the transfer of loan shares to non-banks was not restricted.Therefore, the abolition of the 10/20 Non-Bank Rule would be mostwelcome to borrowers and lenders. As a positive side effect, the volumeof loans made available to Swiss borrowers could increase substantially.



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 havea significant impact on the structuring of a deal. This is frequentlyunderestimated by foreign lenders who are not familiar with the Swissmarket.


Most questions concern the potential structure of a transaction in thelight of the 10/20 Non-Bank Rule, the applicable up- and cross-streamlimitations (see section 5.1) and the resulting tax consequences. Not

all foreign lenders are aware of the significance of these issues. To alesser extent, lenders want also to know which asset classes can be takenas security and what documentation or formalities are required tocreate, perfect and maintain such security.


Security can be taken over all classes of assets a lender would usuallyexpect, such as shares, bank accounts, receivables, insurance policies,real property and intellectual property.In order to perfect and maintain a pledge over shares (or other

movable objects), the security trustee needs to be in physical possessionof the pledged movable objects during the security period(Faustpfandprinzip). As a consequence of this requirement, securityover plants, machinery, equipment or inventory is possible, but isusually not taken.There are some limitations to security taken over real estate that

serves primarily as living accommodation and there are certainformalities which must be observed. However, the quality and value ofthe security is usually worth the extra effort.In principle, floating charges are not available in Switzerland.

However, there is the option to grant security over a value quota of anintermediated securities account. Therefore, it is possible to create aSwiss security over intermediated securities that is, to a certain extent,similar to a floating charge. It should be noted that there are severalways to create security interest over intermediated securities.


Solutions exist for most of the Swiss market idiosyncrasies to avoid orat least mitigate the resulting impact for the lenders and the borrowers.The best approach for a lender that is not familiar with the Swissmarket is to contact a specialised Swiss law firm before the parties haveagreed to a financing structure that is difficult or impossible toimplement in Switzerland.



Downstream guarantees are not subject to restrictions or limitations,but upstream and cross-stream guarantee payments are consideredconstructive dividends and are, hence, limited to the profits andreserves freely available for distribution in the guarantor’s balance sheet.Consequently, the respective rules for distribution of dividends mustbe observed. This includes the preparation of an up-to-date balancesheet by the guarantor and the approval of the resulting distributionby the shareholders’ meeting. In order to maximise the available assets


SWITZERLAND

for distribution, the finance documents should contain Swiss guarantorlimitation language to that effect and it is standard to combine aguarantee with a pledge over the shares in the Swiss guarantor.It should also be noted that the proceeds from upstream and cross-

stream guarantees are subject to 35% withholding tax and, in recentyears, it has become common for the Swiss Federal Tax Authority torequest that the Swiss company providing a guarantee to its parentcompany receives an appropriate remuneration for the guarantee(guarantee fee).


The enforceability of any contract may be limited under the rules ofthe Swiss Debt Enforcement and Bankruptcy Act. In particular, thefollowing transactions may be fully or partially voidable: • transactions carried out during the year prior to the bankruptcy or

insolvency decree, in which the Swiss security grantor accepted toreceive no consideration at all or a consideration out of proportionto its own performance;

• certain financially inadequate transactions, if carried out during theyear prior to the bankruptcy or insolvency decree and if the Swisssecurity grantor was at the time of the transaction already over-indebted; however, the transaction is not voided if the recipientproves to have been unaware of the security grantor’s over-indebtedness; and,

• all transactions which the Swiss security grantor carried out duringthe five years prior to the bankruptcy or insolvency decree with theapparent intention of disadvantaging its creditors or of favouringcertain creditors to the disadvantage of others.Another major insolvency related issue that should be addressed in

the finance documents is the allocation of proceeds between thedifferent classes of lenders. Frequently, there is a UK or US lawgoverned intercreditor agreement that provides for a certain waterfallthat does not necessarily take into account Swiss insolvency law. Inparticular, the subordination of claims can lead to issues and delays inrelation to the enforcement of security in Swiss insolvency proceedingsif not properly addressed in the intercreditor agreement, the securitydocuments and other ancillary documentation.


In connection with cross-border financing there are no foreign debtquotas which would have to be observed. In addition, there are no ruleswhich would require to specifically monitor offshore financing todomestic entities, subject to the applicable money launderinglegislation and sanction regimes.


Over the last decade, the ratio of Swiss bank nonperforming loans tototal gross loans has continuously fallen from 1.3% in 2005 to 0.755%in 2015, which is low in comparison to other jurisdictions.Consequently, NPLs are not as relevant in Switzerland as in otherjurisdictions. A reason for this low ratio may be that non-performingloans suggest that the obligor is facing liquidity problems. This is amajor issue for Swiss directors. The board of a Swiss obligor will haveto convene an extraordinary shareholder’s meeting and to proposerestructuring measures if half of the company’s share capital and legalreserves are no longer covered by its assets. In the event that the balancesheet of a Swiss obligor shows negative equity, the board of directorsmust notify the court. This usually leads to bankruptcy. If the boardfails to observe its obligations, the individual directors may incurpersonal liability. It goes without saying that the board will try to finda commercial solution with the existing lenders or try to raise additionalcapital from alternative sources to avoid such a situation.

SECTION 6: Outlook


The so called 10/20 Non-Bank Rule has been identified as an obstaclefor cross-border financing connected to Switzerland and it has beendebated to abolish this rule or at least to replace it with a more marketfriendly rule. However, this will take more than 12 months.


SECTION 1 Market overview


The Bank of Tanzania’s (BOT) Monthly Economic Review Report June2017 is indicative of a vibrant cross-border financing market. Generally,cross-border financing is biased towards government projects. Thatsaid, cross-border financing for the private sector is growing. As of May2017, external debt stock for both the public and private sectors was$17.9 billion.

Dominant lenders in the market include: World Bank organisationssuch as the International Bank for Reconstruction and Development(IBRD), the International Development Association (IDA) andInternational Finance Corporation (IFC); the African DevelopmentBank (AfDB); the OPEC Fund for International Development; foreignbanks; and other institutional lenders.

Common financing structures include debt financing, equityfinancing and hybrid financing structures, such as loans and bonds andmezzanine financing. There is also an increasing interest in publicprivate partnerships (PPP). Crowd funding and venture capital forstart-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. Forexample, the Tanzania route was selected over other routes for the EastAfrican Crude Oil Pipeline Project running from Hoima, Uganda, toTanga, Tanzania. The oil pipeline project is expected to attractsubstantial cross-border financing for both the pipeline project andrelated projects. Also, Tanzania’s Dar es Salaam port is the port of choicefor several countries in the African hinterland. These include Rwanda,Burundi, the Democratic Republic of the Congo, Uganda, Zambia andMalawi. It follows that cross-border financing for trade in the abovecountries depends on the efficient handling of goods at the Dar esSalaam port.

TanzaniaSaidi Othman Yakubu and Timothy Kyepa, Yakubu and Associates Chambers

www.yakubuchambers.com


TANZANIA


The East African Crude Oil Pipeline Project and related projects willattract substantial cross-border financing in the next 12 months.

Tanzania is also in the penultimate stages of commencingconstruction of the Standard Gauge Railway. The first phase ofconstruction, covering approximately 207 kilometres and linking Dares Salaam to Morogoro and the second phase, covering 336 kilometresand linking Morogoro to Dodoma, will attract cross-border finance.

The recent amendments to legislation regulating the mining sectorhave also created potential for cross-border financing opportunities dueto anticipated associated M&A transactions.

We have also witnessed an increased interest in loan transactionsbetween local financial institutions and foreign institutional lendersduring the last 12 months.

Additionally, the recently concluded initial public offering byVodacom Tanzania attracted cross-border finance. We anticipate thatsubsequent IPOs issued by other telecommunication companies willattract cross-border finance.


Yes, there are new entrants such as Guaranty Trust Bank. There havealso been a number of new foreign lenders, including impactinvestment funds that have lent money to financial institutions.

BOT has recently taken over a local bank that failed to meet capitaladequacy requirements. Also, BOT revoked the licence of a bank onthe grounds of money laundering.

BOT also recently issued new rules requiring banks and financialinstitutions to maintain a capital conservation buffer of 2.5% of risk-weighted assets and off-balance sheet exposure.



We recently advised on a cross-border financing transaction involvingan impact investment fund and a financial institution in Tanzania. Theinvestment decision and financing structure of this transaction hingedon the social impact of the borrower’s business, as opposed to theborrower’s business performance and collateral provided by thebusiness. This was the most important consideration of the lender.

The increased participation of impact investment funds in Tanzaniawill require investors and existing companies to review their socialimpact.

We have also witnessed increasing cross-border financing throughterm loans. These are usually supported by cross-corporate guarantees.

Transactions in the mining sector are largely structured throughequity and debt financing.

Saidi Othman YakubuManaging counsel, Yakubu and Associates Chambers

Dar es Salaam, TanzaniaT: +255 762 089 225

E: [email protected]: www.yakubuchambers.com

About the authorAdvocate Saidi Othman Yakubu is a leading authority on cross-border finance in Tanzania and has published widely on thesubject. He has acted for both lenders and borrowers onvarious finance transactions in various sectors in Tanzania,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 partnerof the ICSA Tanzania branch. He is also a member of theAssociation of International Petroleum Negotiators. He is anadvocate of the High Court of Tanzania.

Timothy KyepaDeputy managing counsel, Yakubu and Associates Chambers

Dar es Salaam, TanzaniaT: +255 718 160 095

E: [email protected]: www.yakubuchambers.com

About the authorDr Timothy Kyepa has advised clients on cross-borderfinancings in East Africa. He has acted for clients in variousfinancing transactions involving various sectors such as:energy, transport, oil and gas and financial institutions.


TANZANIA


Increasingly, lenders prefer to transact directly with local subsidiariesas principals and not third-party beneficiaries of loan agreementsexecuted with foreign holding companies. This may be attributed toaverting the risk of failed enforcement of the loan agreement or decreesand orders arising from dispute resolution proceedings against localsubsidiaries, as well as BOT regulations that require the registration offoreign loans.

Initially, the recent Vodacom Tanzania IPO had been ring-fencedfor local investors. However, IPO rules were revised to permit foreignfirms and citizens to participate. We believe subsequent IPOs in thetelecommunications sector will be opened to both local and foreigninvestors.



The pre-eminent piece of legislation that regulates cross-borderfinancing in Tanzania is the Banking and Financial Institutions ActCap 342. This Act regulates banking and financial activities inTanzania. The Bank of Tanzania Act 2006 regulates BOT and BOT isthe regulatory body charged with the supervision of banks and financialinstitutions in Tanzania. Although BOT does not regulate foreignfinancial institutions, local borrowers are required to register all foreignloans with BOT.

The Anti-Money Laundering Act Cap 423 is also relevant inregulating cross-border financing in Tanzania. The Act prohibits moneylaundering. As such, cross-border financing transactions must complywith provisions of this Act. The Act also underpins a regulatory body:the Financial Intelligence Unit.

The Capital Markets Authority (CMA) is another importantregulatory authority in cross-border financing in Tanzania. It isestablished under the Capital Markets and Securities Act, Cap 79. Theauthority regulates all trade in securities in Tanzania.

Other relevant pieces of legislation include the Electronic and PostalCommunications Act, 2010 as amended by the Finance Act 2017.These Acts require all licensed firms operating network facilities andservices, among others, to offer shares to the public and list on the stockexchange. The Tanzania Communications Regulatory Authority(TCRA) is charged with regulating electronic communication inTanzania.

Pursuant to the Mining Act 2010, the Minister for Mining is chargedwith enacting appropriate regulations for minimum shareholding andshare sales to Tanzanians. The Mining (Minimum Shareholding andPublic Offering) Regulations 2016 were enacted to implementprovisions in the Mining Act. The Ministry responsible for mining andthe Capital Markets Authority regulate minimum shareholding andpublic offering.

The Companies Act No 12 of 2002 and its attendant regulatorybody, the Business Registration and Licensing Authority and the LandAct Cap 113, are relevant in the registration of securities.


The recent amendment (Finance Act 2017) to the Bank of TanzaniaAct, which requires all government and public authorities to openaccounts with BOT and to deposit all their monies on these accounts,may increase cross-border financing between foreign lenders and localfinancial institutions as they will require funds to boost their lendingcapacities and to fill the void left by government deposits. Thisamendment was enacted to control the amount of public funds incommercial banks.

The Natural Wealth and Resources Contracts (Review and Re-negotiation of Unconscionable Terms) Act 2017, the Natural Wealthand Resources (Permanent Sovereignty) Act 2017 and the Written Laws(Miscellaneous Amendments) Act 2017 may have an impact on thenumber of cross-border financing transactions in the mining sector.The conditions in the new laws may encourage new entrants to investin the market and also lead to some companies exiting the market. Thismay increase M&A activity in the mining sector in Tanzania.


We are not aware of any rules, legislation or policy framework underdiscussion that may impact lenders or borrowers involved in cross-border financing.



Foreign lenders often assume that they require local licences to lendin Tanzania. This is not true. Licensing under the Banking andFinancial Institutions Act 2006 and the Banking and FinancialInstitutions (licensing) Regulations 2008 is only required where theforeign lenders intend to establish local presence in Tanzania.

Foreign lenders assume that foreign judgements and arbitrationawards are not enforceable in Tanzania. This is also not true. Underthe Reciprocal Enforcement of Foreign Judgments Act 2002, theprocedure for the enforcement of foreign judgements is provided. Also,under the Arbitration Act Cap 15, the High Court will recognise andenforce foreign arbitral awards without re-examining the merits of thedecision.


TANZANIA


We have received various inquiries as to whether licences are requiredfor investment advisers in securities trade. The law requires allinvestment advisers to obtain appropriate licenses from the CapitalMarkets Authority.

Foreign lenders also often assume that the debt record number willbe obtained by the borrower/borrower’s bank in less than two weeks.This process in our experience takes about 30 days.


Security can be taken over all classes of assets. These include: shares;bank accounts; receivables; contractual rights; insurance policies; realproperty; plant and machinery; intellectual property; debt securities;future/after acquired property; and floating charges over all assets.


It is important that both lenders and local borrowers appoint good legalcounsel to advise on the financing agreements and local laws. It is alsoimportant that lenders and local borrowers consider all licences andregistrations that may be required in structuring financing transactions.



Downstream guarantees are usually granted by the parent company toassist a subsidiary to obtain financing or guarantee the performance ofan obligation. These guarantees are common in Tanzania. Partiesshould ensure that there is consideration for the guarantee.

Upstream guarantees are usually provided by the subsidiary toguarantee the obligations of the parent company. These are lesscommon. Similarly, the parties should ensure that there is considerationfor the guarantee.

Cross-stream guarantees are often provided by related entities toguarantee enforcement of their respective obligations. Similarly, theparties should ensure that there is consideration for the guarantees.


It is important that debts are secured as generally in bankruptcymatters, the secured debts rank above unsecured debts.


Tanzania does not operate foreign debt quotas. However, offshorefinancing to domestic entities is monitored as all foreign loans have tobe registered and debt record numbers acquired.


The acceptable threshold of NPLs in Tanzania is 5%. All banks withNPLs above 5% are required to submit NPL regularisation plans withclear timelines to Bank of Tanzania.

SECTION 6: Outlook


We expect an increase in the volume of cross-border financing forfinancial institution businesses, telecommunications firms and themining sector in Tanzania.

We expect that the law firms will advise local and foreign investorsand financial institutions, telecommunications firms and miningcompanies on the requirements for issuing IPOs and listings on thestock exchange.




Despite the British public voting to leave the European Union in June2016 and the resulting climate of political uncertainty, London remainsa global financial centre and thus far the loan and bond markets haveremained resilient. Liquidity in the loan market in particular has beenstrong, with interest rates low, and there has been a supply/demandimbalance creating a strong environment for borrowers/issuers. Indeed,the first half of 2017 was dominated by opportunistic repricing andrefinancing transactions, in many cases on substantially enhanced termsfor 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 anddirect lenders are also key players, have different credit concerns andare 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 commonplace.


Convergence between the European covenant-lite (cov-lite) market andthe US term loan B (TLB) market is a trend that has been observedfor some time now as a result of institutional investor agnosticismbetween bank debt and bond debt, and the past 12 months have beenno different. There has though, been little consistency in the mannerin which US terms have been incorporated into English lawdocumentation. Some deals, often labelled “high yield in disguise”,have adopted wholesale New York-law governed high yield (HY) style

UKCraig Jones, Sullivan & Cromwell

sullcrom.com


UK

incurrence packages (often plus a springing financial covenant for thebenefit of the revolving facility or other undrawn facilities) withoutmaterial modification to reflect a secured bank loan. Others importprovisions substantially equivalent to those in US TLB documents,while another subset features a combination of these approachespeppered with other terms, which while not common in the US TLBor HY markets, have cleared the market in other European deals.As noted above, the market is becoming increasingly accepting of

covenant and terms flexibility. In particular, cov-lite deals are nowbecoming the norm, no longer attracting a significant pricingpremium. EBITDA add-backs to financial covenants are common, andthe ability to raise additional indebtedness and make distributions isno longer as tightly controlled.


The investor base is diversifying. Direct lending is no longer confinedto the mid-market space; some of the larger funds are competingagainst banks for mandates and winning deals at the top end of themarket. Also, banks and direct lenders are collaborating, with directlenders helping to arrange loans that banks would be unable tounderwrite alone.Brexit is of course a wild card and no one knows yet what the

ultimate impact of the expected withdrawal from the single market andpotential loss of passporting rights will be.



Examples of direct lender activity in the big ticket space are theunitranche facilities provided to Soho House, Zenith and Consolis,and the second lien facilities for Diaverum, Parkdean Resorts andCorialis. The Eircom refinancing of late 2016 was a good example of a

borrower using an opportunistic refinancing to substantially amend itsterms.


The European Central Bank (ECB) published its final guidance onleveraged transactions on May 16 2016. The guidance provides thatunderwritten transactions with a total debt-to-EBITDA ratio of morethan 6x should remain the exception rather than the rule, and must bejustifiable. The impact on the market remains to be seen, but giventhat most affected institutions were already subject to the LeveragedLending Guidelines in the US which impose similar requirements, itmay well be minimal. The increased flexibility afforded by cov-lite loans and the continued

convergence with the US TLB market has caused many sponsors toopt for loan financing rather than bond, or to refinance existing bonddebt with loans. Investors are attracted not only by the flexibility ofthe product, but also lack of call protection and public disclosurerequirements.



The Financial Services and Markets Act 2000 (FSMA) establishes theframework for financial services legislation in the UK. The Financial

Craig D JonesPartner, Sullivan & Cromwell

London, EnglandT: +44 20 7959 8900F: +44 20 7959 8950

E: [email protected]: https://sullcrom.com/lawyers/CraigD-Jones

About the authorCraig Jones is a partner based in the firm’s London office. He isadmitted to the bar in England and Wales and in New York.Jones pursues a broad-based finance and corporate practice,and has acted for financial institutions, private equity sponsorsand corporate clients across a range of industries. His workhas included new money financings, refinancing transactionsand restructurings. His transactions include investment gradeborrowing, leveraged financing and project financing. Jones’s most recent experience includes: advising Philips on

the financing for its Spectranetics acquisition; Swisscom oninfrastructure financing arrangements with the EuropeanInvestment Bank (EIB); GLAS in connection with thereorganisation and recapitalisation of the Hibu Group; thecoordinating committee of bank creditors to Abengoa during itsrestructuring; Coca-Cola HBC on the replacement of itsrevolving credit facility (RCF) – having advised on the originalfinancing arrangements in connection with the client’s re-domiciliation; and Reykjavik Geothermal on a convertible loanfacility.In addition to his financing work, Jones has advised on a

number of corporate acquisitions and divestitures, usuallyinvolving private equity. He has significant experience of equityco-investment and fund structures.


UK

Conduct Authority (FCA) and the Prudential Regulation Authority(PRA) are the two UK financial services regulators. The FCA isresponsible for the conduct of all firms authorised under FSMA. It isalso responsible for the regulation of conduct in retail and wholesalefinancial markets, supervision of trading infrastructure that supportsthose markets, and the prudential regulation of firms not regulated bythe PRA. The PRA is responsible for the micro-prudential regulationof systemically important firms, including banks and insurers. The loanmarket itself, however, is not a regulated market in the strict sense –loan agreements are not regulated products under FSMA.The City Code on Takeovers and Mergers is relevant to the extent

that financing relates to the acquisition of a public company. ECB guidance as noted above is relevant.


See above regarding ECB guidance and above and below for Brexit.


Brexit will of course impact the market in a myriad of ways, but in theabsence of clarity as to the final shape Brexit will take, in exactly whatways it will impact is still difficult to say. One area of concern for non-EU lenders licensed in the UK is the potential loss of passporting rightsand consequent access to the single market. To maintain access, suchlenders will likely seek to become licensed in another EU jurisdiction,but the extent to which a substantive physical presence in the newjurisdiction is required (for example whether there will be a need to setup a fully-fledged subsidiary and locate decision-makers there) is stillunknown.



There is no Chapter 11 equivalent in the UK. In the UK investorsassume contractual rights through an intercreditor agreement (ICA).The relationship between them is not governed by statute. It isimportant to be cognizant of this when structuring a transaction andimporting US HY and TLB concepts into English law governeddocuments, because some concepts when imported wholesale will haveunintended results. Take for example the debt incurrence covenant. Inthe US debt incurrence flexibility is accepted in part because if alldebtors are American, there is generally no concern about being ableto deal with unsecured creditors or junior secured creditors in abankruptcy or restructuring process as it is regulated by statute. This isdifferent in England where the intercreditor relationship is governedby the ICA. This has led to the debt incurrence covenant in Europe

being constrained by caps on unsecured or junior debt, unless therelevant creditor signs up to the intercreditor agreement, and ‘evergreen’intercreditor agreements, which contemplate at the outset flexibility toincur future indebtedness at various levels.


Despite convergence and importation of US style terms there stillremain areas of difference in market practice and documentation. Atthe time of press, these included Libor floors, flex provisions, mostfavoured nation provisions, ticking fees and transfer restrictions.


No, security can be taken over any asset or class of assets. However,asset-backed revolving lending arrangements similar to US ABL-facilities are not common in the UK market.


The UK market is well developed and relatively straightforward tonavigate when properly advised. It is useful to be familiar with thedifferences between loan and bond products on offer as well as generalmarket terms. As choice of financing product is often driven by marketdemand and pricing, flexibility and adaptability in terms of productchoice can be useful.



A company incorporated in England and Wales can grant downstream,upstream and cross-stream guarantees. To do so, it must demonstratethat it has requisite corporate capacity and derive sufficient corporatebenefit from the transaction. Demonstrating corporate benefit isstraight forward for downstream guarantees (and is generally dealt within board resolutions). For upstream or cross-stream guarantees, inaddition to a specific reference to corporate benefit in board resolutions,it is also prudent to obtain a shareholders resolution. If a company isin financial difficulties, the director’s duty to act in the best interests ofthe company shifts from being shareholder focused to creditor focused,and so particular care is required. Guarantees may be capable of beingset aside if the company is, or as a result of the guarantee becomesinsolvent and subsequently goes into liquidation or administrationduring the relevant hardening period.


UK

Under the Companies Act 2006, a prohibition on financial assistance(which includes the provision of guarantees) applies where a publiccompany gives financial assistance for the acquisition of its own sharesor those of a parent company; or a private company gives financialassistance for the acquisition of shares in its public parent company.


English common law upholds the principle established in the Gibbscase (Gibbs & Sons v Société Industrielle et Commerciale de Métaux1890) that English courts will only recognise a discharge or release ofan English law governed right or obligation if the discharge/release isalso governed by or effective in accordance with, English law. The courtwill not recognise a variation of English law rights / obligations arisingas a result of an overseas proceeding if the creditor party has notsubmitted to and is not present in the overseas jurisdiction.


No.


N/A.

SECTION 6: Outlook


A continuation of the trends seen over the last 12 months. Flexibilityin covenant terms and no financial covenants are likely to remainconstant given institutional investors’ agnosticism between bank andbond terms. Practitioners who can advise on a multitude of structuresand products are likely to be sought out. Creativity and flexibility onthe part of the legal community as the market responds to Brexit inreal time will also be required.




The US loan and debt capital markets represent one of the deepestsources of capital for cross-border financings. Liquidity has remainedstrong in both markets, given historically low interest rates, low defaultrates, investor appetite for yields and a technical imbalance betweensupply and demand, which has created a strong environment forborrowers 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 playedan increasing and significant role in both arranging and providing bankdebt financing for acquisitions (including cross-border financings). Thegrowth of these private credit providers has been one of the mostsignificant changes in the acquisition financing market over the pastcouple years. The type of debt financing depends on the credit rating of the

borrower. For investment grade acquirers, unsecured bridge loanscoupled with a bond take-out and potentially a permanent term loantend to be the most common financing structure. For sub-investmentgrade acquirers, first lien/second lien bank financings have been morecommon, although a first lien bank financing with an unsecured bondis also another common financing structure.


The US loan and debt capital markets have remained buoyant andcontinue to offer attractive terms to foreign and domestic borrowersand issuers. Recent transactions have generally been characterised bylow interest rates and borrower-friendly covenant packages. In the

USAri Blaut, Sullivan & Cromwell

sullcrom.com


leveraged loan market, covenant-lite (cov-lite) term loans remaincommon in the US. In addition, borrowers and issuers, particularly sponsors in

acquisition financings, have been successful in pushing aggressiveterms, including: increases in maximum first lien leverage ratio above6x; unlimited restricted payments subject to a specified leverage ratio;springing financial maintenance covenants (limited to revolving creditfacilities only); increases in or elimination of caps on EBITDAaddbacks; deterioration in most favoured nation (MFN) protection;use of EBITDA as the gauge for incremental facilities; and growerbaskets or starter amounts in builder baskets.


There has been a significant increase over the past five years in privatecredit providers directly participating in the debt financing markets.These providers compete directly against banks for lending mandatesfor all loan sizes or collaborate with banks to arrange loans which bankswould be unable to underwrite alone.



The $40 billion bank acquisition financing for the AT&T/TimeWarner merger was documented with a credit agreement rather thantraditional commitments. For large investment grade buyouts, therehave been a couple of recent examples of going to credit agreementsdirectly.As noted above, the growth of private credit providers is increasingly

causing disruptions in the banks’ traditional dominance of the largeleveraged buy-out market. For instance, Ares Capital, a private creditprovider, provided a $1.1 billion unitranche loan to Thorma Bravo forits acquisition of Qlik Technologies. Historically, a deal of this sizewould have been underwritten by traditional financial institutions.


The increased flexibility afforded by cov-lite loans and continuedconvergence between the term loan B and high yield bond marketshave caused many corporates and sponsors to opt for loan financing,rather than bond financing, or refinancing existing bonds with loans,due to the covenant flexibility afforded in loans (previously confinedto the bond market) and the lack of call protection and disclosurerequirements.



The Securities Act of 1933 and the Securities Exchange Act of 1934,together with the rules and regulations promulgated thereunder by theSecurities and Exchange Commission (SEC), govern, among others,the issuance of debt securities in the US.With respect to syndicated loans, in 2013, the Office of the

Comptroller of the Currency, the Board of Governors of the FederalReserve System and the Federal Deposit Insurance company releasedthe Interagency Guidance on Leveraged Lending to assist financialinstitutions in providing leveraged lending to creditworthy borrowersin a “safe-and-sound” manner. The Guidance provided items for banksto consider in terms of establishing an internal risk managementframework around highly leveraged loans, such as underwritingstandards, valuation standards, reporting and analytic practices andother similar items. The Guidance provided a significant hurdle toinvestment banks’ abilities to underwrite transactions, particularly thosewith 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 FederalDeposit Insurance Corporation, and the Office of the Comptroller of

US

Ari B BlautPartner, Sullivan & Cromwell

New York, USAT: +1 212 558 1656F: +1 212 558 3588E: [email protected]

W: https://sullcrom.com/lawyers/AriB-Blaut

About the authorAri Blaut is a partner in Sullivan & Cromwell’s finance andrestructuring group. Blaut maintains a broad corporate practiceadvising clients on a wide range of financing transactions,including bank financings, high yield bond issuances, PIPEtransactions, debt restructurings, liability management andcreditor representations. He has particular expertise inleveraged finance, acquisition finance and private credittransactions, with recent clients including AT&T, Andeavor,Ares Management, Oaktree, Eastman Kodak, CyrusOne, ForestCity and Canada Pension Plan Investment Board (CPPIB),among numerous others.Blaut has published a number of articles for several legal

outlets, including M&A Lawyer, Law360, Lexology and DealLawyers. He is also a member of the New York City BarAssociation Committee on Commercial Law and Uniform StateLaws.


US

the Currency, the National Credit Union Administration, and theOffice of Thrift Supervision. There are also regulators at the state level.


See above for the 2013 Interagency Guidance on Leveraged Lending.


The Trump administration has signalled an intention to undertake asubstantial overhaul of the Dodd-Frank Wall Street Reform andConsumer Protection Act. Any changes which pulls back securities andbanking regulation is also likely to impact the behaviour andparticipation of regulated financial institutions involved in cross-borderfinancing, which could result in greater competition for loan and bondproducts and in turn lead to more borrower/issuer-favourable terms.



In secured transactions involving assets located in the US, it isimportant for borrowers and lenders to understand that the creationand perfection of security interests in the US is not governed by auniform system but depends on the type of asset and the relevant state.While the attachment and perfection of security interests in most typesof personal property are governed by Article 9 of the UniformCommercial Code, a model statute that has been largely enacted ineach state, there are important variations among states. In addition,security interests in real estate are governed by state real estate lawswhich are non-uniform across state and the perfection of securityinterests in other assets is specifically excluded from the UniformCommercial Code and is governed by other federal or state laws.


In the bond market, the US federal securities laws provide extensivedisclosure requirements in connection with an issuer’s business andoperations, which often goes significantly beyond what issuers in capitalmarkets transactions are required to disclose under financial regulatoryregimes in their own jurisdictions. In addition to implications this mayhave on timing for the capital markets transaction, substantial resourceswould also be required to ensure that the information included in anyoffering document or to the market generally meet the applicabledisclosure standards.


The assets of regulated entities are typically subject to regulatoryregimes which limit their ability to provide collateral or requireregulatory approval to grant security over their assets. Examples includetelecommunications providers, broker-dealers and casino-gamingcompanies.In addition, there may be potential tax issues in instances where the

borrower’s corporate structure includes non-US corporate entities.Section 956 of the US Internal Revenue Code could result inundesirable US federal tax implications if the transaction is notstructured appropriately.


It is important to understand that, despite the convergence betweenthe two markets, there are significant differences between thesyndicated loan market and the debt capital market, particularly arounddisclosure requirements, liability standards and market standard terms.The US debt markets are well developed and experienced when dealingwith debt offerings by foreign borrowers. Both lenders and localborrowers/issuers should be advised by competent and experiencedadvisers and counsel when undertaking cross-border financing.



Restrictions on guarantees are generally governed by state corporatelaw, federal bankruptcy law and the organisational documents of theguarantor. For guarantors incorporated in the US, it is important toreview the applicable state law of the relevant guarantor, as jurisdictionsdiffer on the permissibility of certain types of guarantees and whetherboard or shareholder approval is required. For example, in Delaware (apopular jurisdiction for incorporating corporations), the DelawareGeneral Corporation Law (which governs corporations) expresslypermits a Delaware corporation to provide downstream, upstream andcross-stream guarantees to the extent such guarantee is “necessary orconvenient to the conduct of the corporation’s business”. Upstream andcross-stream guarantees may be subject to potential vulnerabilitiesincluding the possibility that the guarantee may be set aside by UScourts as fraudulent conveyances on the grounds that it may be moredifficult to demonstrate that the guarantor has received reasonablyequivalent value for its guarantee.


US


The filing by a debtor for bankruptcy under the US Bankruptcy Codetriggers an automatic stay, automatically stopping substantially all actsand proceedings against the debtor and its property. The automaticstay has a broad scope and applies to all creditors, whether secured orunsecured, and to all of the debtor’s property, wherever located. Itprohibits creditors from pursuing both formal and informal actionsand remedies against the debtor and its properties, including filingproceedings against the debtor to collect a prepetition claim,enforcement a prepetition judgment against the debtor or property ofthe estate, obtaining possession or control over the estate property,creating, perfecting or enforcing a lien against the property, collecting,recovering or assessing a prepetition claim against the debtor andsetting off mutual prepetition debtors arising from differenttransactions. There are a number of judicial and statutory exceptionsto the automatic stay.Creditors should be aware a debtor-in-possession or bankruptcy

trustee has broad powers to set aside or avoid certain pre-bankruptcytransfers of the debtor’s assets to third parties. The most important ofthese are fraudulent transfers and voidable preferences.


No. Foreign lenders (other than lenders in jurisdictions that are thetarget of broad US economic sanctions) may generally make loans inthe same manner as US based lenders.


N/A

SECTION 6: Outlook


The current environment of historically low interest rates and investordemand for yield is likely to continue to drive repricing and refinancingtransactions, particularly in the leveraged finance market, untilborrowers and issuers no longer perceive interest rates as at all-timelows. Combined with the demand/supply imbalance and barring anysignificant market disruptions, borrower and issuers – particularly well-known active borrowers such as large private equity sponsors – are likelyto be able to push for even more favourable terms and pricing andgreater flexibility in their covenant packages. Legal practitioners will continue to be called upon by sponsors to

provide creative solutions that provide borrowers and issuers withincreased flexibility. Those with sophistication and familiarity withdifferent types of financing at all levels of the capital structure will befavoured.

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