Monthly Highlights: May 2017

Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from May 2017.

Lending

New edition of the ACT Borrower's Guide to the LMA’s Investment Grade Agreements

The Association of Corporate Treasurers (ACT) has worked with the Loan Market Association (LMA) on the development of the Investment Grade Agreement (and its revisions) since the project was first launched in 1996. The fifth edition of 'The ACT Borrower's Guide to the LMA's Investment Grade Agreements (produced by Slaughter and May)' has now been published. As well as providing a general overview of the key provisions in the documentation, the Guide also provides clause by clause commentary which considers the implications of each clause from the borrower's perspective. The Guide has been comprehensively updated for changes to the LMA’s templates since the last edition and to address more recent developments affecting lending terms that treasurers may wish to anticipate or take into account in negotiations.

The Guide is available either to members or students on the ACT website or on the 'Publications and Seminars' section of the Slaughter and May website.

Loan syndication and EU competition law

The European Commission has indicated in its 2017 Management Plan that it could potentially engage in a study on potential competition issues relating to loan syndication during the course of 2017. The Commission made a call for tender to award a contract for systematic analysis of the loan syndication market and its possible implications for competition policy.

In News Analysis: Five minutes on loan syndication and competition law, Francesco Liberatore, partner at Squire Patton Boggs, considers where syndicated lending could potentially fall foul of EU competition laws and potential next steps.

Acquisition finance

ECB publishes guidance on leveraged transactions

As we previously reported, on 23 November 2016 the European Central Bank (ECB) launched a public consultation on draft guidance to develop clear and consistent definitions, measures and monitoring with regard to leveraged transactions. The draft guidance aimed to develop a clear and consistent definition of what constitutes leveraged transactions, and to establish guidelines on how to measure and monitor such exposures while ensuring safe and sound origination and distribution practices to contribute to a smooth financing of the real economy.

Following this consultation, the ECB has now published its guidance on leveraged transactions, seeking to aid the identification of leveraged transactions by means of an overarching definition encompassing all business units and geographical areas. The guidance aims to give a bank's senior management a comprehensive overview of the bank's leveraged lending activities. It also outlines expectations regarding the risk management and reporting requirements for leveraged transactions.

According to the ECB, the guidance should:

  1. result in more stringent risk management of such exposures
  2. strengthen banks' ability to operate during an economic downturn, and
  3. facilitate lending to leveraged borrowers through the business cycle

The implementation of the guidance will be part of the day-to-day supervisory dialogue with individual banks. The ECB says it will apply the principle of proportionality and adjust its level of intrusiveness depending on the risk profile of banks’ leveraged transaction activities. The ECB will monitor leveraged lending activities and may ask selected banks to regularly report their exposures to leveraged transactions as well as the evolution and riskiness of these exposures.

The ECB has also published a feedback statement which presents an overall assessment of the comments received during the public consultation and aims to address the most relevant issues raised by those comments. The guidance has been amended as a result of the comments received. In particular, following responses during the public consultation, the ECB has considered, and where it felt appropriate, made amendments in the guidance to the following sections:

  1. the scope of the guidance on leveraged transactions
  2. the definitions used in leveraged transactions
  3. risk appetite and governance
  4. syndication activities
  5. policies and procedure for new deal approval
  6. secondary market activities
  7. reporting requirements and management information systems, and
  8. requirements following release of the guidance

Real Estate Finance

LMA issues response to plans for a register of beneficial owners of overseas companies

We previously reported that the Department for Business, Energy & Industrial Strategy (BEIS) has set out proposals to create the world’s first public beneficial ownership register to increase transparency of overseas investments in UK property. BEIS published a call to evidence, asking overseas investors, property and transparency experts for their opinions on how this register could be delivered and its impact. The deadline for responses was 15 May 2017.

The LMA has now issued its response and expressed concerns over the impact of such a register on real estate finance lending. The LMA has encouraged BEIS to consider the impact on lenders and recommended a 'staged approach' to implementation to prevent a negative impact on property transactions. The response is available to members on the LMA website.

The LMA recommends that BEIS

  1. incorporate the register's requirements within the Persons with Significant Control (PSC) regime:
    • removing the possibility of inconsistency and undue administrative burden, and
    • enabling the PSC regime to be strengthened and consolidated
  2. ensures that the same issues that arose in relation to the current form of definition of PSC do not arise in the context of the register

A copy of the LMA Press Release can be viewed here.

Restructuring

Supreme Court delivers ruling on Lehman appeal

The Supreme Court has delivered its ruling on issues arising in the administrations of the Lehman Brothers group (The Joint Administrators of LB Holdings Intermediate 2 Limited (Appellant) v The Joint Administrators of Lehman Brothers International (Europe) and others (Respondents); The Joint Administrators of Lehman Brothers Limited (Appellant) v Lehman Brothers International (Europe) (In Administration) and others (Respondents); Lehman Brothers Holdings Inc (Appellant) v The Joint Administrators of Lehman Brothers International (Europe) and others (Respondents) [2017] UKSC 38 (On appeal from [2015] EWCA Civ 485)). The court has disagreed with some of the earlier rulings in the case, including on the issues of foreign currency creditors' rights and statutory interest.

The appeal and cross-appeal arose from the 2008 collapse of the Lehman Brothers group. In February 2013, the administrators of Lehman Brothers International (Europe) (LBIE), Lehman Brothers Ltd (LBL) and LB Holdings Intermediate 2 Ltd (LBHI2) issued proceedings seeking the determination of the court on issues arising in the administrations. In March 2014, the High Court delivered a judgment and made 10 consequential declarations. The Court of Appeal upheld most, but varied some of the declarations.

The Supreme Court ruling concerns the following determinations:

  1. the ranking in the waterfall which can be claimed by LBHI2 in its capacity as holder of three subordinated loans made to LBIE—the Supreme Court held LBHI2 cannot prove for the subordinated loans until the non-provable liabilities are paid or clearly could be met
  2. the fact that LBIE’s creditors with debts denominated in a foreign currency will be paid under the Insolvency Rules 1986, SI 1986/1925, r 2.86 at the rate of exchange prevailing at the date LBIE went into administration—disagreeing with the judge and the majority of the Court of Appeal, the Supreme Court has concluded by a majority that rule 2.86 spells out the full extent of a foreign currency creditor’s rights
  3. whether a creditor of LBIE who had been entitled to, but had not been paid, statutory interest, can claim such interest in a subsequent liquidation—the Supreme Court has concluded the contractual right to interest for the post-administration period does not revive or survive in favour of a creditor who has proved for a debt and been paid on his proof in a distributing administration
  4. four issues arising from the fact LBIE is an unlimited company, including whether contributions can be sought in respect of liability for statutory interest and for non-provable liabilities of LBIE—in disagreement with the High Court and the Court of Appeal, the Supreme Court has held the Insolvency Act 1986, s 74 (IA 1986), cannot be invoked to create a surplus from which statutory interest can then be paid
  5. three issues arising from the fact LBHI2 and LBL are creditors of LBIE as well as members of LBIE liable to contribute as such, including whether LBIE can prove in the administrations of LBHI2 and of LBL in respect of their contingent liabilities to make contributions in LBIE’s prospective liquidation if they are called on to do so pursuant to IA 1986, s 50—contrary to the view of the earlier courts, the Supreme Court considers that the nature of the Section 50 obligation is such that it is incapable of being the subject matter of a proof unless the company concerned is in liquidation
  6. whether LBIE can exercise a right of set off—the Supreme Court has held prospective IA 1986, s 150 liabilities cannot be set off by the LBIE administrators, and
  7. whether LBIE can invoke the so-called 'contributory rule' which applies in a liquidation, namely that a person cannot recover as a creditor until his liability as a contributory had been discharged—the Supreme Court has held the contributory rule can properly be, and should be, extended to a distributing administration, with procedural modifications to achieve consistency with the legislative framework

A copy of the Press Release from the Supreme Court can be viewed here.

Derivatives

Working Group recommends SONIA as near risk-free interest rate benchmark for sterling

The Working Group on Sterling Risk-Free Reference Rates, a group of major dealers active in sterling interest rate swap markets, has announced the Sterling Over Night Index Average (SONIA) as its preferred near risk-free interest rate benchmark (RFR) for use in sterling derivatives and relevant financial contracts. The Working Group's recommendation will be subject to a broad market consultation to be held in the middle of 2017.

Debt capital markets

ICMA responds to FSB’s proposed evaluation of G20 reforms

The International Capital Market Association (ICMA) has responded to the Financial Stability Board (FSB) consultation document on the main elements of the proposed framework for post-implementation evaluation of the effects of the G20 financial regulatory reforms. While ICMA says the FSB’s efforts to develop the proposed framework are ‘a positive step’, it highlights corporate bond and repo market liquidity, and systemic risk as applied to asset managers, as priorities for further evaluation work.

In its response, ICMA refers to prior communications with the European Commission and the FSB, in which it has raised these issues. According to ICMA, the ‘extreme volatility and market dislocation’ experienced in the euro repo market at the end of 2016 ‘provides clear evidence’ of the need for more to be done to rectify its concerns regarding corporate bond and repo market liquidity.

ICMA also advises that more evaluation of the current situation is needed before proceeding with any further work regarding ‘structural vulnerabilities’ related to asset management. In the meantime, it says, efforts should be made to make better use of already collected applicable data, and securities regulators should ensure they have taken on board best practices relating to fund liquidity.

LSE introduces International Securities Market rulebook

The London Stock Exchange (LSE) has published the new International Securities Market (ISM) rulebook. ISM is open for applications for admission to trading from 8 May 2017. The LSE has confirmed the Admission and Disclosure Standards have been amended to reflect the introduction of the ISM. These amendments are also effective from 8 May 2017.

On 6 April 2017, the LSE published proposals for the ISM and associated ISM rulebook. The ISM is a multilateral trading facility designed to meet the demands of issuers and professional investors and to improve the effectiveness and competitiveness of UK primary debt markets.

Structured products and securitisation

ECON tables amendments on proposed pan-European covered bonds framework

The Committee on Economic and Monetary Affairs (ECON) has issued a draft report containing amendments to the proposed pan-European covered bonds framework. A committee vote is scheduled for 19 June 2017.

Covered bonds are defined in the draft report as being 'instruments with a long-established track record of low default rates and reliable payments, helping to finance around 20% of European mortgages and representing more than €2,000bn of liabilities in Europe in 2015'.

Regulation of derivatives and capital markets products

FCA provides more detail on PRIIPs definition

The FCA has updated its webpage on key information documents for PRIIPs. The page now provides extra detail on what products PRIIPs will or will not apply to.

EMIR

The European Commission has proposed targeted reforms to EMIR, to improve the functioning of the derivatives market in the EU. It says the reforms provide simpler and more proportionate rules for OTC derivatives, reducing costs and regulatory burdens for market participants, without compromising financial stability.

The Commission says the proposed changes introduce more proportionate rules for corporates, re-focusing the scope of the clearing obligation for financial counterparties to include some additional relevant market players while exempting the smallest financial counterparties. They also aim to allow for more time to develop clearing solutions for pension funds.

In addition, the Commission aims to streamline the application of reporting requirements and make them more proportionate, while also introducing improvements to ensure the quality of reported data. The Commission says the changes include measures that could save market participants, and in particular corporates such as energy companies or manufacturers, up to €2.6bn in operational costs and up to €6.9bn in one-off costs.

In a speech on the proposals, the European Commission vice-president, Valdis Dombrovskis said ‘EMIR is doing well overall. However, there is room for targeted adjustments to make it more proportionate and efficient. Our aim is to achieve the same prudential results but with less cost to Europe's companies and our economy.’

set of Q&As on the proposal to amend EMIR has also been published.

Capital Markets Union

The ECB has published details of its contribution to the European Commission's consultation on the Capital Markets Union (CMU) mid-term review 2017, saying the Commission's action plan on CMU is a step in the right direction.

According to the ECB, further action is needed to foster robust cross-border capital flows and sound financial integration. Importantly, further action is needed regarding the harmonisation of insolvency frameworks, taxation and company law to remove cross-border barriers to financial integration. Moreover, debt recovery procedures should become faster and less expensive.

The ECB also commented on the role of regulation and supervision. An increased non-bank financial sector should be accompanied by an expansion of the prudential framework for non-bank financial institutions to adequately address systemic risks. The regulatory agenda for the non-bank financial sector is still developing, and the supervisory framework is highly fragmented. Also, a strengthening of the single market supervision at EU level is needed.

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