Monthly Highlights: April 2016

Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from April 2016.

Lending

LMA amends recommended secondary debt trading documentation

The Loan Market Association (LMA) has amended its recommended Standard Terms and Conditions for Par and Distressed Trade Transactions (the Standard Terms and Conditions) to incorporate language dealing with withholding on US source FDAP income where required under the Foreign Account Tax Compliance Act of 2009 (FATCA). In certain limited circumstances, this could include accrued interest.

A new Condition 29.4 (FATCA withholding) has been included in the Standard Terms and Conditions to deal with these amendments. It provides that each party to the trade documents: (i) must provide information relating to its FATCA status to the other parties and, (ii) has the right to withhold any amounts it is required to withhold on account of FATCA. As a result, it should no longer be necessary for trading counterparties to refer to the historic LMA FATCA Riders (published in July 2013) in trade confirmations. The LMA's Secondary Trading Documentation User Guide has also been amended to reflect the changes to the Standard Terms and Conditions.

The revised documents went live on Wednesday, 20 April 2016. Members can access these on the LMA website.

LMA updates private placement documentation to reflect WHT exemption

The new exemption from UK withholding taxes on payments of interest on 'qualifying private placements' (QPPs) came into force on 1 January 2016 as a result of the Qualifying Private Placement Regulations 2015. These regulations set out the conditions for an unlisted debt instrument to be considered a QQP.

The Loan Market Association (LMA) has now amended its template private placement facility agreement and subscription agreement to address the new exemption.

LMA members can access the updated documentation and an explanation of the changes on the LMA's website.

Acquisition finance

Case relating to a claim of negligent performance of due diligence

The recent case of Barclays Trust Company (Jersey) Ltd and others v Ernst & Young LLP (E&Y) [2016] All ER (D) 154 (Apr), [2016] EWHC 869 (Comm) concerned a claim of negligence against E&Y. The facts of the case are of interest to acquisition finance lawyers because E&Y had provided commercial due diligence services to the claimant in connection with its acquisition of the Esporta group of health clubs in 2007 for a sum of £474.3 million.

E&Y had reported on what alterations should be made to management's forecasts in its business plan to reflect the most likely outcome. Management's report was positive, but E&Y's was more negative. However following the decline and subsequent bank enforcement against the Esporta chain, management changed its mind and claimed that E&Y should have produced an even more negative report. It was argued that E&Y should have forecasted a decline in membership leading to a likely reduction in EBITDA for the year in question by approximately £1m. If it had done so, it was claimed, the Esporta acquisition would not have completed—notwithstanding that the claimant had already signed the sale and purchase agreement and would have forfeited its deposit as a result. Even so, the damages claimed from E&Y were in the region of £17.9m.

The Queen's Bench Division, Commercial Court, rejected the claim of negligence, holding that the analysis provided by E&Y had been entirely reasonable and complete on the basis of the information provided to it. The court's comments on the claim were interesting—it considered that the claim was "opportunistic and unprincipled" and that it was difficult to explain management's change in opinion as to the likely performance of the Esporta business, which the claimant had failed to coherently explain.

Project finance—Export credit agency arrangements

UKEF adopts Equator Principles

The Export Credits Guarantee Department, or ECGD, is the UK's official export credit agency and operates under the name UK Export Finance (UKEF). UKEF has announced that it has adopted the Equator Principles, a global risk management framework aimed at promoting sustainable environmental, social and human rights decision-making in financing projects. According to the Equator Principles Association, the Principles have been adopted by more than 80 financial institutions and cover 70% of project finance debt for projects in emerging markets.

Over the course of the next year, the Equator Principles will be incorporated into UKEF's existing environmental, social and human rights due diligence processes, which also meet all the requirements of the OECD Recommendation on Common Approaches for Officially Supported Export Credits and Environmental and Social Due Diligence.

UKEF's Chief Executive Officer said that in adopting the Equator Principles, UKEF does not anticipate any additional administrative burden to UK exporters applying for export finance support.

For more information, see the UKEF Press Release.

Real estate finance

Case relating to appropriate quantum of damages for negligent report on title

The recent judgment in LSREF III Wight Ltd v Gateley LLP [2016] All ER (D) 145 (Apr),[2016] EWCA Civ 359, concerned a professional negligence claim by a bank against its solicitors, Gateley LLP. The case is of interest to real estate finance lawyers as the firm had been retained by thebank to provide a report on title in relation to a property being offered by the bank's borrower as security for a development loan facility in the amount of £1.1m, which was to be used mainly to develop the property. The report on title, when delivered shortly before the completion of the loan transaction, failed to mention the existence and consequences of a provision in the lease relating to the property which provided for the lease to be forfeited if the borrower, which was the tenant under the lease, suffered an insolvency event. The effect of that provision was to seriously impair the value of the bank's security. When the bank subsequently turned its mind to enforcement of the security and the defect was discovered, Gateley LLP admitted negligence and breach of its contract of retainer with its client.

Gateley LLP contended that the bank had failed to negotiate a variation of the lease with the landlord which, by the time of the trial, had indicated its willingness to remove the insolvency forfeiture provision from the lease on payment of £150,000, and that the amendment would have significantly increased the marketability of the property. Gateley LLP argued that the bank would, in fact, not have suffered any loss in this scenario, even taking the landlord's amendment fee into account. At first instance the court held, rejecting Gateley's argument, that the loss attributable to the negligence had been caused at the commencement of the transaction and that that was the appropriate time at which any loss should be measured. The court also rejected the mitigation argument, considering that obtaining the amendment to the lease was a complicated, risky and uncertain exercise and that it was not possible to say that the bank had acted unreasonably in failing to conclude it.

However in this case, the Court of Appeal, Civil Division, rejected the first instance decision on both points, holding that: (1) while the judge had been correct to conclude that a loss had been suffered at the transaction date, he was wrong to confine himself to this instance in determining loss—he also had an obligation to quantify the bank's transactional, but still un-crystallised, loss as at the trial date from the potential realisation of the security, and (2) since the offer to amend the lease had been available, the benefit would have been double or treble the outlay and it was not suggested that the bank lacked the funds to complete the amendment, the judge had been wrong to conclude that it had not failed to mitigate its loss.

Derivatives

ESMA announces first EU-wide stress tests for CCPs

The European Securities and Markets Authority (ESMA) has announced that it will publish the results of its first EU-wide stress test exercise in relation to central counterparties (CCPs) on 29 April 2016.

ESMA must conduct stress tests of CCPs under the European Markets Infrastructure Regulation (EMIR). Such tests assess the resilience and safety of the European CCP sector, and set out to identify any potential vulnerabilities in these CCPs by exposing them to adverse market scenarios. It focuses on the counterparty credit risk that CCPs would face as a result of multiple clearing member defaults and simultaneous market price shocks.

For more information, see the ESMA press release.

Structured products and securitisation

Analysis of decision relating to rating agency confirmations

In BNY Mellon Corporate Trustee Services Ltd v Taberna Europe CDO I plc and other companies; Citicorp Trustee Company Ltd v Taberna Europe CDO II plc and other companies [2016] EWHC 781 (Ch), the parties sought summary judgment on whether an event of default had occurred. The background to the case was that certain notes had been issued by two collateralised debt obligation (CDO) special purpose vehicles and the proceeds used to acquire pools of assets to service the noteholders. The assets were managed by a collateral manager. Barclays held the most senior notes in each structure and claimed that the issuer had breached its obligations to the noteholders to obtain a rating agency confirmation (RAC) in relation to certain, non-approved interest rate hedge transactions, which would constitute an event of default under the note documentation. The court granted summary judgment where there was no evidence that a RAC had been obtained.

The obligation to obtain a RAC is typical for most rated structured products transactions. The case highlights how important it is to obtain RACs where the documents require it and how each transaction should be looked at individually (unless otherwise set out in the underlying document).  In the event of a downgrade it is clear that a RAC should be obtained if stated in the document (which it is very likely to). The case also highlights that practitioners should also be careful to ensure that their clients clearly understand what they have to do in various other 'non urgent' circumstances. In this case, it was clear that where a hedge was not pre-approved under the documentation, a RAC had to be obtained.

The Lexis PSL Banking & Finance team discusses the case in news analysis: Seeking rating agency confirmation.

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