The acquisition of non-performing loans (NPLs) secured by real estate can be attractive.
Recently, we have seen a considerable uptake in multi-jurisdictional portfolio transactions. Such transactions are complex and require a considerable amount of due diligence for both vendors and investors. Cross-border lending is often based on Loan Market Association (LMA)-style finance documents, amended to comply with local law, and perfection of security often requires strict compliance with local regulations. This article highlights some key aspects of multi-jurisdictional portfolio transactions.
Some noticeable changes can be observed in the NPL market in Europe. There are far more cross-border transactions, with a much broader multi-jurisdictional scope. Also, there is an increasing desire for a complete closing by transferring the full contractual relationships, as opposed to mere assignments of loans/receivables. Assignments tend not to be the preferred route to closing because transfer secures both full control by the acquirer and full release by the transferor. In order to avoid pitfalls at closing, due diligence is required not only in relation to validity and enforcement but increasingly, also to transfer. As many multi-jurisdiction loan agreements are based on LMA-style documents, these often include transfer provisions and even transfer forms, but not necessarily for the transfer of the full loan connection including security and business roles. Also, not all courts, especially those in Central and Eastern Europe, are used to LMA-style documentation. This means that issues which might be clear, say in the UK, may not be so clear in Hungary or Romania.
Care is required when collateral and business roles are also being transferred. There may be specific eligibility criteria which may not be met by everyone, such as “Qualified Lenders”. Resignation from business roles can be problematic, depending on the role. The transfer of the facility agency role can normally be accomplished more easily and quickly than the transfer of the role of the security agent.
Transfer forms do not generally provide for the transfer of collateral. Particular care needs to be taken regarding continuing security. Some collateral is deemed strictly accessory to the underlying debt and may get lost if not properly transferred. This can be addressed at closing by using a master transfer agreement based on transfer forms. Local law may also require compliance with particular formalities. This needs to be taken into consideration and can be costly. If at closing security cannot be transferred to the acquirer of the loan (or a new security trustee), then the holder (either the old lender or security agent) will need to keep it and will have to continue to act as a security trustee—the role of such a continuing security trustee must first be carefully reviewed and then re-negotiated in order to fit to the new structure.
Last, but not least, NPL investors will wish to have the acquisition of liabilities limited to those disclosed. Again, this is a question of due diligence, and the documents and data made available for due diligence. It is fair to say that fair disclosure ensures comfort on both sides of the transaction, and, hence, is to be encouraged.
Often, transfer of business roles requires instructions from majority lenders which needs to be arranged in a timely manner. Other potential hurdles are consent, co-operation or consultation requirements which may even have different meanings in different jurisdictions.
Further, the consultation requirements may cause delays in various jurisdictions. A general observation is that transfer provisions have not often been tested in courts across Europe and this creates a certain level of uncertainty, particularly if not all parties are co-operative.
Closing and elevation
Based on their due diligence, both seller and purchaser are advised to agree on and substance of the actual transfer of the loan portfolio. As a contingency, it is advisable for the parties to agree on an alternative transfer method if the full transfer fails, such as an assignment of loan receivables only, or a funded sub-participation. In all cases, the asset management would have to be transferred as well. In practice, both sellers and purchasers of NPLs should take time to properly prepare the elevation protocol, in order to secure an effective transfer of the full loan connections. Again, borrower consent remains key. This may already have been granted in the original loan documentation. Such prior consent is more likely to have been granted in older finance documents.
If the acquisition requires financing, the elevation protocol may also consider and provide for a transfer mechanism that allows the ultimate lender to take and to perfect security over the loan assets.
The importance of documentation
In multi-jurisdictional NPL deals, the quality of the documentation may vary. Documentation may be lost or mishandled, and notarized documents and seals may be damaged and thus lose their evidentiary value. It is therefore crucial to ascertain what documents are required to commence enforcement proceedings.
Some jurisdictions (notably Switzerland, Germany and Belgium) require original deeds. However, many others will accept copies. While German law certificated land charges (Briefgrundschulden) can be transferred without registration of the transfer, it is standard practice to register the transfer of certificated land charges in the German land register—this will result in additional legal costs.
Modern NPL transactions involving real estate as collateral are cross-border and multi-jurisdictional transactions. The goal is to close by transferring in full the assets of the loan portfolio (loan receivable and security) together with all accompanying business roles. Due diligence is crucial. Each jurisdiction will have its own rules on transfer, documentation and particular legal hurdles for parties to overcome. These all need to be addressed in the closing documentation.
Key to successful NPL transactions is obtaining excellent, wide-ranging legal advice and undertaking comprehensive due diligence. Proper due diligence will form the basis for a complete and swift elevation of the loan portfolio to the transferee. A welcome side effect of proper due diligence for both vendor and buyer, is not only a more transparent closing process, but also a quicker and more secure closing.