Debt buy-backs – not so popular?

The tax treatment of debt buy-backs has been changed with immediate effect.  A Ministerial Statement explaining this was published on Hansard  on 14 October.  This will affect any transaction that involves debt being bought back by a borrower group.  If a borrowing company is released from a liability and pays less than the amount borrowed in order to do so, the discount is normally subject to tax. Until now, the practice in such transactions was to rely on an exemption avoiding a tax liability.  Now, however, the rules have been tightened.  Are the reasons for this an underlying policy for all government departments to do what they can to swell the public coffers?  There was a perceived abuse of the exemption, e.g. by healthy companies buying back their listed debt at a discount without paying tax but surely overall, buying back debt should be encouraged? The Finance Bill, when published, will have details of the proposed legislation.

Letters of credit – Guaranteed reimbursement?

Consultation on a product that guarantees reimbursement of UK confirming banks under letter of credit arrangements has started. The Export Credits Guarantee Department seeks views on such a scheme. Export finance has recently become harder to obtain and more expensive. The ECGD propose to launch the Letter of Credit Guarantee Scheme (provisional title). The LCGS would take the form of a master guarantee issued to participating UK banks, under which those banks cede to the guarantee potential exposure which they would incur by virtue of confirming letters of credit issued by overseas banks in favour of UK exporters. In respect of individual transactions ceded within the limits of the master guarantee, ECGD would guarantee repayment to the confirming bank of sums owed to it by the issuing bank.  Replies to the consultation paper are sought by 3 July 2009.

The Privy Council on “appropriation” under the FCA Regs

The Privy Council have decided (5 May 2009) that it is not necessary for the person taking security in the form of share charges to become the registered holder of the shares for there to be a valid appropriation within the meaning of “appropriation” in Directive 2002/47 and the Financial Collateral Arrangements (No.2) Regulations 2003.  A pragmatic interpretation was required. 

The case arose in the British Virgin Islands and Harney’s, solicitors, have issued a report on it. They comment: “The case is the first known judicial decision anywhere on the interpretation of the Regulations … [it draws] a definitive end to the vexed preliminary issue under British Virgin Islands law.”

1) Cukurova Finance International Ltd (2) Cukurova Holding As V Alfa Telecom Turkey Ltd[2009] UKPC 19 PC (BVI) (Lord Hope of Craighead, Lord Scott of Foscote, Lord Walker of GestingthorpeBaroness Hale of Richmond, Lord Mance) 5/5/2009

Lending Regulation Bill – is it or isn’t it?

There is conflicting news about the progress of this Bill.  A commercial legal information provider this week reports it as having been withdrawn at its second reading in the Commons.   The Parliament website says there was not enough time to complete the debate before the end of the session on 27 February 2009,  so it has been postponed to 15 May.  Perhaps the Parliament website just needs updating to catch up with subsequent, unknown events.  If I find out what is really happening, I will let you know … The Bill is to impose requirements on lenders relating to the calculation of interest rates and to regulate the promotion of lending.

Trends in Lending

The Bank of England has begun a new monthly publication that presents the Bank’s assessment of lending to the UK economy.  The Bank say, this first report provides a longer-term perspective and is therefore more comprehensive than will be the case for future editions.

The report draws on existing monetary and financial statistics collected by the Bank and data from six major UK lenders that participate on the Lending Panel established by the Chancellor in November 2008. The report also draws on intelligence gathered by the Bank’s regional Agents and market contacts, as well as the results of other surveys. 

The main findings of the report are:

• Growth in the stock of lending to UK businesses slowed markedly during 2008 but looking ahead, some lenders expect the overall availability of credit to the corporate sector to increase over the next three months.
• Growth in the stock of mortgage lending to individuals has slowed sharply since the start of the financial crisis as credit availability declined. Lenders expect the demand for secured credit to remain weak in coming months.
• The availability of unsecured credit has tightened over the past year and weak demand for unsecured lending is expected to continue over the coming months.

Timing of changes to law on registration of charges

It might helpful to set out the timing of changes to the law of registration of charges.  The implementation timetable of the Companies Act 2006 is , after all, complicated.  The key date is 1 October 2009.  On that date Part 25 (Company Charges) of the Companies Act 2006 comes into force.  Until 1 October 2009, Sections 395 (Certain charges void if not registered) and 409 (Charges on property in England and Wales created by overseas company) Companies Act 1985 continue to apply. 

Until 1 October 2009, Companies Form 395 registrations, including Slavenburg filings, will continue to be made as usual. Once Part 25 comes into force on 1 October 2009, what you actually do to register charges remains the same.  Part 25 essentially restates Section 395: Section 395 CA 1985 becomes Section 860 CA 2006 and Companies Form 395 becomes Companies Form 860.

As for overseas companies, Part 25 only applies to companies formed and registered under the Companies Acts. It does not reproduce Section 409 CA 1985 which was the section that gave rise to the compromise known as Slavenburg filings.  From 1 October 2009, the registration of charges created by overseas companies will be regulated by the Overseas Companies Regulations 2008  (“OCRs”).  These are still in draft form and under intense discussion but the intention of the OCRs is to remove the need for Slavenburg filings. 

The Scottish register of floating charges introduced, though not yet implemented by the Bankruptcy and Diligence (Scotland) Act 2007 creates a further complication.  Its benefits are still the subject of debate but the register might be in place from 2010.  Any company, regardless of its place of incorporation, would be required to register a Scottish floating charge on the new Scottish floating charge register.  We might find we have problems of double registration, priority and a charge-holder not being able to show they have a charge over the whole or substantially the whole of a company’s assets.

Financial Collateral Arrangements

Will we see any UK case law soon on the Financial Collateral Arrangements (No. 2) Regulations?  Recent events at Lehman’s in particular might throw up some issues.  In any case, the Privy Council are set to hear the Alpha Telecom v Cukurova British Virgin Islands’ case on 23 February 2009.  The Financial Markets Law Committee issued a paper on 17 July 2008 on the extent to which the Regs are ultra vires under the European Communities Act 1972.  When the UK gold-plated the Regulations back in 2002, I thought there might be an Animal v Oakley  vires problem and quite a number of other people thought so too.  However, the praticalities of undoing all the transactions since the Regulations were passed are too horrible to think about – which is perhaps why the Court of Appeal in the BVI reached the conclusion they did.

Rome 2

If you are dealing with cross-border finance agreements, “Rome 2″ might affect the drafting of your governing law and submission-to-jurisdiction clauses.  “Rome 2″ is the EU Regulation that harmonises conflict of law rules in non-contractual obligations (tort) in civil and commercial matters. 

Rome 2 applies from 11 January 2009.  Don’t relax.  It came into force on 20 August 2007 and the Regulation says, it “shall apply to events giving rise to damage which occur after its entry into force”.  Remember, there has to be a cross-border element to the transaction for Rome 2 to apply.  A purely domestic transaction will not be affected.  Under Article 4(2), where the contracting parties have their “habitual residence” in the same country when the event constituting the tort happens, there is no need to worry about Rome 2.  But as the habitual residence of companies and other bodies is the place of central administration (not the place of incorporation) it is possible for a company’s residency to change. 

The rules are complex.  There is a lot more to be said on the subject than can be squeezed in here, but very roughly, Rome 2 might apply to acts in tort in the context of lending and in the fields of competition, IP, product liability.

Tortious acts in the lending context might include a breach of the duty of care owed by an arranger to the syndicate; negligent misrepresentation by a bank to a prospective security provider; nuisance for wrongful entry by a mortgagee; or breach of the duty of care by a security trustee in relation to the realisation of the security. 

Some non-contractual obligations are excluded from Rome 2: the most important exclusion for bank lawyers relates to bills of exchange, cheques and other negotiable instruments.

Loan buy-backs

It makes good press to express doubt over the legality of borrowers buying back their borrowing cheap.  There has been a flurry of articles about debt buy-backs.  “Debt” in the language of our trade journals – really “loan buy-backs”: to distinguish them from the practice in the securities world which raises no eyebrows.

The discussion has arisen because of the cheapness of secondary debt available for purchase.  The pricing has been driven by the crisis in liquidity and not by the credit status of the borrower.  Yesterday afternoon, the LMA’s (Loan Market Association) seminar on the problem was packed out.  What it boils down to is that buy-backs might be in breach of the terms of the original loan agreement on the facts of the particular transaction.  There is, too, a principle in syndicated lending that lenders should be treated equally by the borrower.  Perhaps as a result of the buy-back, the lenders will not receive a pari passu distribution.

Does a buy-back amount to a “prepayment”?  Does it matter?  Yes, if prepayment is prohibited by the loan agreement or if very specific conditions are imposed on prepayment.  Has a covenant been breached? Does it affect the financial covenants?  All these questions are matters of basic contract law and specific to the transaction and its documentation.  Counsel’s advice has been sought as to whether by implication a buy-back is a prepayment and understandably, Counsel has sat very firmly on the fence (“it’s too close to call”).  he suggests that only the House of Lords will be able to decide.  Some pointers though: the greater the discount, or the non-cash consideration, the more likely it is not to be a prepayment.  If it is not a prepayment and the contract only permits prepayment, the contract is breached.

Alternatives to buy-backs that don’t carry these anxieties are funded participations or total return swaps.

The Loan Syndications and Trading Association  (in America) prohibits buy-backs outright.  The LMA proposes instead to amend its standard form loan documentation so that parties have a choice either to prohibit buy-backs or to permit them provided specific conditions are met and processes are followed.

A storm in a tea-cup? 

 

 

Silver linings and other cliches

In the period of Christmas quiet , it has been easier than usual to spot patterns of publishing in the trade rags. It’s a rare disaster that brings no good to lawyers, and the credit crunch is no exception. On the surface it is more surprising that it also benefits bankers. An article in “Hedge Fund Week” (23.11.07) by P Feinberg, “Turning misfortune into a fortune – easy if you know how” shows the credit collapse means big business for the distressed debt investors, especially those in the Asset-backed Securities market. And “ABL: Beneficiaries of the Credit Crunch?” by Swillman & Cropley in the Journal of International Banking and Financial Law, Issue 11 follows a similar theme for Asset Based Lending.