Monthly Highlights: December 2016

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

Lending

LMA publishes guidance on amendments to loan agreements

The Loan Market Association (LMA) has published guidance providing recommendations for best practice when dealing with amendments to loan agreements. These amendments may be necessary during the term of the loan due to changes in the status of the relevant parties, regulatory changes or market variations, each of which may result in the need to review the terms of the loan documentation.

The LMA guidance sets out the best practice steps to take when dealing with any such required amendments and is available to LMA members on the LMA website.

Standards of lending practices for business customers to be phased in

The Lending Standards Board (LSB) has confirmed that standards of lending practices for business customers will be launched in phases, with the first phase due in early 2017. The standards will relate to businesses with a turnover of up to £6.5m and will replace the micro-enterprise provisions of the Lending Code.

The standards will be launched as follows:

  1. phase 1: early 2017—this will apply to the existing Lending Code product scope
  2. phase 2/3: later in 2017—this will extend the standards to cover asset finance and peer-to-peer lending

Security

Unpaid vendor’s lien held to be an equitable charge

In the case of Menelaou v Bank of Cyprus UK Ltd [2016] EWHC 2656 (Ch), the Chancery Division held, further to earlier proceedings in which the defendant bank had successfully counterclaimed for a declaration that it was entitled to be subrogated to an unpaid vendor’s lien over the claimant’s family home, that the bank was entitled to an order for sale of the property. The court held, among other things, that an unpaid vendor’s lien was an equitable charge and that the power to realise equitable charges contained in section 90 of the Law of Property Act 1925 (LPA 1925) applied.

In News Analysis: Intended security after the event (Menelaou v Bank of Cyprus), Gateley Plc Finance litigation associate John Williams and partner Rob Payne, explain the litigious actions between the Menelaou family and the Bank of Cyprus UK, taking into consideration the judicial action taken and the subsequent influence on this area of the law.

Project finance

EIB paper looks at project finance in Europe

A paper looking at the pricing of project finance (PF) and non-project finance (NPF) loans has been published by the European Investment Bank (EIB). The paper examines the factors which influence the borrower’s choice between project financing and corporate financing.

The paper used a sample of 210,273 syndicated loans closed between 2000 and 2014.

The EIB found that PF and NPF loans are influenced differently by common pricing characteristics, and that PF loans in the USA and Western Europe are priced in segmented markets. It additionally found:

  1. borrowers chose PF when they seek long-term financing and funding cost reduction
  2. transaction cost considerations, the financial crisis and country risk affect the financing choice
  3. publicaly-traded sponsors who prefer project financing to corporate financing are larger, less profitable, more financially distressed and have a higher asset tangibility

Trade finance

New measures to support UK Export Finance

The Export Credits Guarantee Department (ECGD) is the UK's official export credit agency and operates under the name UK Export Finance (UKEF). As part of the Autumn Statement on 23 November, the Chancellor announced some new measures designed to boost UK exports and build upon existing trade policy expertise ahead of Brexit. In particular:

  1. financial support for UK exporters will double through UKEF, and
  2. the Department for International Trade (DIT) will receive £79.4m to develop and deliver an independent international trade policy

As a result of the new measures, UKEF's total risk appetite will double to £5bn and the maximum cover limit for individual markets will increase by up to 100%, potentially resulting in as much as £2.5bn of additional capacity to support exports to some destinations. In addition, the number of pre-approved currencies in which UKEF can offer support has increased from 10 to 40.

The Autumn Statement also included measures to support an enhanced approach to risk management for UKEF, including the use of private insurance markets, which it is hoped will create additional appetite to support UK exports in popular markets.

Derivatives

Derivatives as a wagering contract

The Lexis®PSL Banking & Finance team have reported on the recent case of WW Property Investments Ltd v National Westminster Bank plc [2016] EWCA Civ 1142, in which Lord Justice Christopher Clarke discussed at length whether collars and a swap transaction could be categorised as a wager. See News Analysis: When is a derivative a wagering contract? (WW Property Investments v National Westminster Bank).

2016 Variation Margin Protocol and assistance by ISDA in preparing for the Variation Margin requirements

The International Swaps and Derivatives Association, Inc (ISDA) and IHS Markit have announced the launch of the ISDA 2016 Variation Margin Protocol on ISDA Amend, which automates the process for amending existing collateral documents or setting up new agreements in order to comply with new variation margin requirements going into effect on 1 March 2017.

ISDA have also published a useful document which sets out the steps to be taken by market participants in order to prepare for the variation margin requirements coming into force on 1 March 2017.

Structured products and securitisation

EBA final guidelines on implicit support for securitisation transactions

The European Banking Authority (EBA) has translated its guidelines on implicit support for securitisation transactions into the official languages of the European Union and published the final guidelines on its website. The guidelines clarify what constitutes arm’s length conditions and specify when a transaction is not structured to provide support for securitisations for the purposes of the Capital Requirements Regulation (CRR) (Regulation (EU) 575/2013). The consultation runs until 20 April 2016.

The guidelines were developed pursuant to Article 248 of the CRR, which lays down restrictions on sponsor institutions and originator institutions providing support to securitisations beyond their contractual obligations. The guidelines also elaborate further on the notification and documentation requirements of Article 248(1) of the CRR. The guidelines are without prejudice to the ongoing assessment of significant risk transfer during the life of the securitisation.

Regulation of derivatives and debt capital markets

Packaged retail and insurance-based investment products (PRIIPs)

The Council of the European Union has announced that it is to postpone the application date of the Regulation on key information documents for PRIIPs (Regulation 1286/2014, known as the 'PRIIPs Regulation') by 12 months. It will now be applied from 1 January 2018, instead of 31 December 2016 as initially stipulated.

European Commission adopts resolution and recovery framework proposal for central counterparties

The European Commission has adopted a proposal for a framework for the recovery and resolution of central counterparties (CCPs) which amends the Regulation establishing a European Supervisory Authority (Regulation (EU) 1095/2010), the European Markets Infrastructure Regulation (Regulation (EU) No 648/2012) (EMIR) and the Securities Financing Transactions Regulation (Regulation (EU) 2015/2365) (SFTR). The proposal discusses its objectives, including the scale and importance of CCPs in Europe and beyond, which is set to increase via EMIR in its implementation of the G20 commitment to clear, standardised derivatives transacted OTC through CCPs. EMIR also sets out comprehensive prudential requirements for CCPs, as well as requirements regarding their operations and oversight. One of the reasons for bringing about the proposal is that there is currently a lack of harmonised EU rules to deal with CCPs facing severe stress or outright failure beyond the instances envisaged by EMIR. Past crises illustrated that the failure of an important financial institution that is highly interconnected with others in the financial markets can cause critical problems for the rest of the financial system.

Regulation

Bank Recovery and Resolution Order 2016

From 16 December 2016, the special resolution regime for banks and investment firms is amended to strengthen and clarify the UK’s transposition of the EU Bank Recovery and Resolution Directive 2014/59/EU (BRRD).

The Order implements in part Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms.

The Directive requires EEA states to have powers to manage the failure of credit institutions and investment firms and their group companies as an alternative to insolvency, in order to ensure that critical functions continue to be performed.

The Order amends the Banking Act 2009 to complete the implementation of BRRD.

Restructuring

LMA revises co-ordinating committee appointment letters

The LMA has published updated company and lender co-ordinating committee appointment letters along with accompanying guidance notes. It has also launched a rider designed for use where funds or other non-bank lenders are serving as members of the co-ordinating committee.

Among the key changes made to the co-ordinating letters:

  • removing the concept of a ‘co-ordinator’ and replacing it with a flat committee structure, potentially headed by a chairperson
  • expansion of the description of the underlying transaction, so that it can be more easily tailored to fit the particular circumstances of the relevant matter
  • streamlining of the description of the role and function of the committee
  • changes in relation to indemnity provisions
  • inclusion of provisions covering payment and quantum of fees to the co-ordinating committee

The revised documentation can be viewed by members on the LMA website.

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