The syndicated loan market in Japan amounted to approximately USD 208 billion in size in fiscal year 2014, placing Japan as one of the leading syndicated loan markets after the United States, United Kingdom and Canada. Japanese syndicated lending for the first half of 2015 recorded a total of USD 118.7 billion in proceeds from 1,005 deals, a 4.7% increase in deal count in comparison to the same period in 2014.

According to data published by Thomson Reuters, Mizuho Financial Group are the lead mandated arranger with 285 deals in the region equating to USD 46 billion (38.8% market share) and have also ranked number one as bookrunner with 263 deals equating to USD 48 billion (42% market share) in 2015 YTD.

In the context of this lending market, the secondary debt trading market has recently shown clear signs of further expansion, with the investor base showing greater scope and depth.

This month’s trade alert sets out some of the key considerations for loan traders investing in Japan.

MARKET NORMS

Whilst the growing secondary debt market in Japan has resulted in increased debt trading between banks and other financial institutions, this market remains comparatively less developed than the established US or UK secondary debt markets.

Assignment (and not novation) is the key method of loan transfer in the Japanese secondary market and documents drafted by the Loan Market Association or Japan Syndication and Loan Trading Association are used for transfer.

REGULATION – BANKING LICENCE

Whilst a foreign investor is not required to hold a banking licence to acquire secondary debt in a Japanese borrower, the Money Lending Act (as outlined below) would require a buyer to obtain a licence before acquiring an unfunded term loan or a revolving credit facility, which may obligate a buyer to advance funds to a debtor in Japan.

Any person who is engaged in the "money lending business" (lending money or acting as an intermediary in the lending of money conducted in the course of trade; Article 2.1 of the Money Lending Act) in Japan, must obtain a licence. Therefore, whilst a secondary purchase of, for example, a fully drawn down term loan will not immediately require a banking licence, buyers acquiring a facility under which they may be required to advance funds to a debtor in Japan must be licensed.

SECURITY, TRUSTS

Under Japanese law, a buyer of debt in Japan will automatically be entitled to the benefit of any security or guarantees attached to the debt when a loan is assigned. This excludes revolving facilities, where additional transfer requirements apply under the Civil Code to ensure successful transfer.

If the collateral is real estate, securities or other assets subject to recording requirements, the registration of the transferee would be necessary to perfect the transfer.

A transferee may be required to notify certain Japanese authorities under the Foreign Exchange and Foreign Trade Acts when it acquires collateral in the form of a mortgage in real estate or collateralised securities. With respect to collateralised securities, buyers should seek local counsel advice regarding additional disclosure or registration requirements under securities regulations, anti-trust regulations or other industry specific regulations.

Where a security agent is used in a syndicated loan facility, the security agent does not hold title in the security. However, if the proceeds from collection or enforcement of security are held by the agent at the time of that agent’s insolvency, there is a risk that they will fall into the insolvency estate of the agent. As such, creditors should be aware of the credit risk on the security agent and consider if additional protections are required.

If the collateral is held by a security trustee rather than a security agent, the security and the proceeds from collection or enforcement should not fall into the insolvency estate of the security trustee. However, a security trustee is rarely used in practice.

TRANSFERABILITY OF LOANS AND METHOD OF TRANSFER

Assignment is the key method of loan transfer in Japan and participation agreements are also used.

The borrower has to be notified of a transfer of a loan for the transfer to be effective.

Subject to the terms of the underlying Credit Agreement, borrower consent is not strictly necessary for a transfer of a term loan to be effective.  However, unless the borrower consents to the transfer, the loan may be subject to potential counterclaims against the transferor.  In addition, if the loan being transferred is a facility under which a lender owes obligations to the debtor, the transferor may not be discharged from its obligations unless the borrower consents to the transfer.

WITHHOLDING TAX AND STAMP DUTY

Under the provisions of the Income Tax Act, withholding tax is levied on domestic-sourced income (kokunai-gensen shotoku) including interest payable on loans (20.42%) and bonds (15.315%) to non-residents, unless the rate is reduced under a tax treaty.

The United Kingdom and United States have concluded tax treaties with Japan. Therefore, no withholding tax is currently levied on interest paid to UK lenders under the tax treaty between UK and Japan and no more than 10% withholding tax is levied on interest paid to US lenders under the tax treaty between the US and Japan.

Investors should be aware that stamp duty is payable on the execution of taxable documents and applies to foreign entities if the relevant documents are executed in Japan. With regard to loan transfers, the amount of tax varies depending on the aggregate outstanding principal amount of the loan, and the amount of tax is between JPY 200 and JPY 600,000.

OTHER TAX CONSIDERATIONS

Japan does not impose any transfer tax on a foreign lender acquiring the debt of a domestic borrower, although registration and licence tax may be imposed on registration of security interests. The rates for registration of a transfer of mortgage in real estate would be 0.2% of the secured loan amount (Registration and Licence Tax Law).

Japan has concluded 64 double tax treaties with various other countries and territories, and most of the agreements are based on the OECD model treaty.

POST COMPLETION FORMALITIES

Perfection of an assignment as against the obligors is achieved by giving notice to, or obtaining an acknowledgement from, each obligor to the finance documents. Perfection as against third parties is achieved by notarizing the notice or obtaining an acknowledgement from the relevant third party (Article 467, Civil Code).

A notification to a guarantor is not strictly necessary to ensure that the guarantee will continue to apply following the transfer.  However, in practice, the transferee will require that the transferor notify the relevant guarantors of the transfer, to ensure payments are made to the correct party.

Special Note:

Special thanks to Tatsu Katayama and Eiichiro Natatani from Anderson Mori & Tomotsune, who assisted with this Trade Alert.

***NEW***

LMA DOCUMENTATION

16 DECEMBER 2015

On 18 November 2015, the LMA published further revised versions of the Standard Terms and Conditions, Trade Confirmations, Participation Agreements and User Guide (the “Documents”) on the pending page of the LMA website. The revised Documents are available now with a “go-livedate of 16 December 2015 and any trades concluded on or after this date will be subject to the new provisions.

The revised Documents address, inter alia, the following points:

  1. Negative IBOR: when selling, if the IBOR rate is negative, this can result in the Seller paying the Buyer under the delayed settlement compensation methodology.  We recommend that traders who are selling agree a “zero IBOR floor” at time of trade if negative IBOR applies, otherwise the standard LMA position applies the negative rate;
  2. Notarial Fees: where there is no express provision contained in the Credit Agreement for the requirement to notarise, parties should agree at the time of trade who is to be responsible for notarial fees, whether Seller, Buyer or both in equal shares.  In absence of an express requirement in the Credit Agreement, the default position is that the fees are for the Buyer’s account; and
  3. Non-Cash Distributions: clarified to remove requirement to hold on trust or in the capacity as agent when holding non-cash distributions on behalf of the other party.

NOTABLE TRANSACTIONS

ICELAND UPDATE 

KAUPTHING 

Kaupthing hf. (“Kaupthing”) held its latest Composition Voting Meeting on 24 November 2015 where creditors had the opportunity to vote on the composition proposal for a composition under the Act on Bankruptcy etc, No. 21/1991, as amended, and under Act No. 161/2002on Financial Undertakings, as amended.

Creditors of Kaupthing, representing 93.66% of the total amount of claims on the voting registry, participated in the vote and the composition proposal was approved at the meeting with all valid votes cast in favour.

In accordance with this outcome, the next step is for the Winding-up Committee of Kaupthing to submit a request for confirmation of the composition agreement to the District Court of Reykjavik.

Please click here to view a recent update provided by Kaupthing.

LBI 

The composition proposal of LBI hf. was approved with 99.76% of votes in favour weighted by amount of claim and 99.67% in favour by number of votes at its latest creditors‘ meeting held in Iceland on 23 November 2015.

In accordance with this outcome, the Winding-up Board of LBI hf. will now be submitting a petition to the Reykjavík District Court for confirmation of the composition of LBI hf. The Central Bank of Iceland, in response to LBI´s exemption request based on the composition proposal, has provided its provisional approval to that request and the intended stability contribution and will now require the Icelandic Courts’ sanction to proceed.

Please click here for a recent update provided by LBI.

GLITNIR 

At the latest composition meeting held on 20 November 2015, the composition proposal which was published on 6 November 2015 pursuant to Chapter XXI of the Act No. 21/1991 on Bankruptcy (as amended) and Article 103a of Act No. 161/2002 on Financial Undertakings (as amended) was approved by composition creditors by the requisite majorities to progress the composition.

The meeting was attended by composition creditors representing 91% of claims by value and creditors voted 99.99% by value and 99.63% by number voted in favour of the composition proposal.

Please click here for a recent update provided by Glitnir.

OW BUNKER

O.W Bunker & Trading A/S filed for bankruptcy on 7 November 2014 following the discovery of fraud in a Singaporean subsidiary and substantial risk management losses.

A more detailed CWT summary is available here but in summary, on 18 November 2015, the bankruptcy court presiding over the jointly administered Chapter 11 cases of O.W. Bunker North America Inc., O.W. Bunker USA Inc., and their parent company, O.W. Bunker Holding North America Inc. (together the “Debtors”) approved the following:

  1. Settlements that resolve certain priority claims against the Debtors’ estates, which will facilitate confirmation of the proposed plan of liquidation.
  2. An agreement whereby ING Bank will transfer all receipts from supply receivables to the Debtors’ accounts, subject to ING Bank’s liens and claims. These funds shall not be used (i) prior to the effective date of the liquidation plan; or (ii) without ING Bank’s consent, or absent such consent, further order of the bankruptcy court (this relief is a condition precedent to plan funding).

Additionally, the Debtors filed (a) a Plan Supplement, which includes, among other things, an updated liquidation analysis that details claims recoveries; and (b) a Modified Liquidation Plan.

The Debtors commenced solicitation of votes to accept or reject the Modified Liquidation Plan on 3 November 2015, following approval of the Disclosure Statement on 29 October 2015. The deadline to submit votes is 3 December 2015, and the hearing to consider confirmation of the Modified Liquidation Plan is scheduled for 10 December 2015.