Monthly Highlights: October 2016

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

Lending

ICMA issues updated corporate debt private placement market guide

An updated version of the European Corporate Debt Private Placement (ECPP) Market Guide has been published by a European ECPP Joint Committee coordinated by the International Capital Market Association (ICMA).

First published in 2015, the Guide has become an important contributing factor in the development of the market. The new edition of the Guide has been produced as a result of evolutions in the ECPP market, and now also covers aspects of the German Schuldscheindarlehen market as part of the wider ECPP landscape, and includes an appendix on general principles of, and best practice applicable to, ECPP deal amendments and waivers.

The updated guide can be accessed here.

Real estate finance

Analysis on the new contractual subordination-only LMA intercreditor agreement for real estate finance transactions

On 30 August 2016, the Loan Market Association (LMA) announced the launch of a new recommended form of contractual subordination-only intercreditor agreement for real estate finance transactions (REF Contractual ICA).

In News Analysis: The LMA REF intercreditor agreement for contractual subordination, Andrew Besser, partner and head of real estate finance (REF) at Olswang, reviews the background to the new REF Contractual ICA and outlines the circumstances in which it is to be used.

Case on duty of care when issuing certificates of title

Connaught Income Fund, Series 1 (in liquidation) v Hewetts Solicitors (a former firm) [2016] EWHC 2286 (Ch)

This case concerned a claim for damages for professional negligence in relation to a certificate of title (COT). The lender claimed it had relied on a COT produced by the defendant solicitors, who had been instructed by the first instance borrowers, in authorising drawdown on a loan for the purchase of a property by the eventual borrower. The court held that solicitors, in circumstances such as in the present case, did not owe to the lender the wider duty as set out in Mortgage Express Ltd v Bowerman Partners Ltd [1996] 2 All ER 836. The duty set out in that case is:

'[I]f in the course of doing the work he is instructed to do the solicitor comes into possession of information which is not confidential and which is clearly of potential significance to the client, I think that the client would reasonably expect the solicitor to pass it on and feel understandably aggrieved if he did not. [...] [I]f, in the course of investigating title, a solicitor discovers facts which a reasonably competent solicitor would realise might have a material bearing on the valuation of the lender's security or some other ingredient of the lending decision, then it is his duty to point this out'.

In this case, it was held that the solicitors owed a duty limited to exercising due skill and care when speaking in the form of the COT.

Case on lender’s reliance on valuation reports and contributory negligence

Barclays Bank plc v Christie Owen & Davies Ltd (trading as Christie & Co) [2016] EWHC 2351 (Ch)

This case concerned a loan to finance the purchase and/or improvement of three properties. The defendant company issued two valuation reports and the bank advanced a loan to the borrower. The property purchase and the improvement works took place but after some time the borrower's business experienced difficulties and the borrower was placed into administration. The bank commenced proceedings for professional negligence against the defendant valuer, based on the two reports. It contended that the true values were lower than the values in the report, and that it was entitled to recover damages from the defendant because it had loaned money to the borrower in reliance on the over-inflated valuations and had been unable to recover its loan in full.

The Chancery Division held that:

  1. the valuer had been negligent because it had not valued the properties on an EBITDA basis

  2. the bank had relied upon the defendant's valuations and had done so reasonably—its case for causation had been made out, and
  3. on the evidence, the bank had contributed to the loss by its own negligence so that it would only be entitled to 60% of the sum that it sought

For more information, see case analysis: Negligent valuations and lenders losses (Barclays Bank v Christie Owen & Davies)

Derivatives

Derivatives market survey

The European Central Bank (ECB) published the results of the September 2016 survey on credit terms and conditions in euro-denominated securities financing and over-the-counter (OTC) derivatives markets. The survey collected qualitative information on changes in credit terms and conditions between June 2016 and August 2016. The results are based on responses from a panel of 28 large banks, comprising 14 euro area banks and 14 banks with head offices outside the euro area.

The results of the survey indicate:

  1. little change reported on the liquidity and functioning of markets
  2. less favourable credit terms offered to hedge funds and banks, and
  3. less favourable credit terms for non-centrally cleared interest rate derivatives

The survey indicated that credit terms offered to counterparties in both the provision of finance that is collateralised by euro-denominated securities and OTC derivatives markets became somewhat less favourable for hedge funds and banks over the three-month reference period ending in August 2016. Credit terms are expected to tighten further over the next three-month reference period between September and November 2016.

Regulation of derivatives and capital markets

Capital Markets Union

The European Council has called for the Capital Markets Union (CMU) initiative to be completed and implemented by 2018. In conclusions adopted at its meeting in Brussels on 20-21 October 2016, the Council said that work should be taken up promptly on the completion of the Capital Markets Union, notably by swiftly reaching an agreement with the European Parliament on prospectus rules to improve access to finance for companies and on securitisation.

Market Abuse Regulation

The European Securities and Markets Authority (ESMA) has translated its final guidance on legitimate interests of issuers to delay the disclosure of insider information under the Market Abuse Regulation  (MAR) into the official languages of the EU and published them on its website. The guidelines will apply from 20 December 2016.

ESMA has also published a final report on its guidelines on information relating to commodity derivatives markets or related spot markets for the purpose of the definition of inside information on commodity derivatives under the MAR.

PRIIPs

The European Parliament has decided not to object to a delegated regulation that was adopted by the European Commission in July 2016 with regard to product intervention under Regulation (EU) 1286/2014 on key information documents for packaged retail and insurance-based investment products (PRIIPS). This clears the way for the delegated regulation to be published in the EU Official Journal and to enter into force.

Structured products and securitisation

Extension of interim securitisation tax regime

The government is consulting on regulations to extend the interim regime under which securitisation companies can continue to use old UK GAAP as the basis for their tax computations. This allows companies to be taxed on their actual cash profit, rather than their accounting profit. The interim regime has previously been extended twice, but is due to expire by 1 January 2017. The regulations are expected to come into force in December 2016 and apply to periods of account ending before 1 January 2037.

Benchmarks

BoE consultation sets out proposals on SONIA reform

The Bank of England (BoE) has published a second consultation paper ‘The reform of SONIA’ seeking respondents’ views on the BoE’s proposals for the reform of SONIA, a sterling unsecured overnight interest rate benchmark administered by the BoE. The consultation paper includes illustrative calculations, based on the BoE’s sterling money market data collection, which are intended to show how the proposed new SONIA methodology would work. The BoE’s aim in reforming SONIA is to strengthen a benchmark which is considered critical for the sterling financial markets, but is currently based on a market for brokered deposits which has limited transaction volumes.

Responses to the consultation should be submitted by 31 December 2016. The BoE intends to provide its final view on the methodology for and definition of SONIA, the transition arrangements and publication and licensing arrangements in early 2017.

For more information on the proposals to reform SONIA, see the BoE website.

Restructuring

New Insolvency (England and Wales) Rules 2016 laid before Parliament

The Insolvency (England and Wales) Rules 2016 (SI 2016/1024) have been laid before Parliament, and will come into force on 6 April 2017, subject to some transitional provisions. On that date, the Insolvency Rules 1986 and other secondary legislation that has subsequently amended them will be repealed. As the biggest change in insolvency law for 30 years, there will be relief that the new insolvency rules have finally been laid before Parliament, but also apprehension that insolvency professionals now have little under six months to digest the new insolvency rules, which contain a number of changes to procedures and processes, and be ready for their commencement.

In News Analysis: New Insolvency Rules laid before Parliament, the Lexis®PSL Restructuring & Insolvency team describes the background to the new insolvency rules, their main features and what the Lexis®PSL teams will be doing in relation to the new insolvency rules in the lead-up to their enactment.

For more information, see the Insolvency Service press release and the Explanatory Memorandum prepared by the Department for Business, Energy & Industrial Strategy in conjunction with the Insolvency Service.

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