Since the victory of the anti-austerity leftist Syriza party in the recent Greek elections, 40 per cent has been wiped off the value of the shares of the four main banks; National Bank of Greece, Piraeus, Alpha and Eurobank.

The Syriza party’s promise to renegotiate the bail-out package and “put the troika in the past” has given rise to concerns Greece could defect on its debt repayments relating to the country’s near EUR 240 billion bailout and possibly exit the eurozone. Whilst the party’s leader, Alexis Tsipras, has stated that he does not intend Greece to exit the eurozone, there remains a significant degree of uncertainty as to what type of “renegotiation” of Greece’s substantial debt, currently 175% of GDP, is envisaged and what the consequences of this would be. Attention for now will turn to how the new government deals with Greece’s debt obligations of EUR 4.3 billion falling due in March (with a further EUR 6.5 billion due in July and August) and how it deals with the final bailout tranche of EUR 7.2 billion still to be negotiated.

This alert highlights the main factors for debt investors to consider when trading in the Hellenic Republic.

CREDIT DERIVATIVES IN A “GREXIT”?

This topic was considered by market participants in 2011-2012 in the context of a Greek sovereign default and the 2014 Credit Derivatives Definitions were introduced to make various changes to address concerns that are relevant to a eurozone exit or bail-in.  The changes include amendments to the Restructuring Credit Event.  Please click here for an article by Assia Damianova providing further information.

BANKING LICENSE REQUIREMENTS

There is currently no requirement under Greek law for a non-resident entity to hold a banking licence to create or purchase a debt of a Greek borrower, however in practice, loan transfers in Greece have generally taken place between banks or in the context of securitizations.  

The newly elected Syriza party has proposed to submit a bill in Parliament which will prohibit the transfer of certain types of loans (particularly retail loans) to foreign funds, leading to a degree of uncertainty as to loan transferability analysis.  Non-Bank entities should therefore confirm the applicable licence requirements before any loan purchase.

WITHHOLDING TAX

15% withholding will apply to interest payments by Greek borrowers irrespective of the place of residence of the beneficiary of the interest.  Bilateral tax treaties may apply to override this – a double taxation treaty with the UK provides for a zero rate of withholding tax on interest between the two countries.

VAT, CAPITAL GAINS AND STAMP DUTY

Transfer of Greek loans is not subjected to any Greek stamp duty or VAT.  Nevertheless, capital gains or other income tax implications may arise for the transferor as a result of the transfer.

TRANSFERABILITY OF LOANS AND METHOD OF TRANSFER

Transfers are permitted by way of assignment of rights or novation.  The preferred transfer mechanism is assignment, as it secures the concurrent transfer of any ancillary rights of the loan (including interest and security rights) providing the borrower is notified of the transfer.  Novation will constitute a new contract between the parties and carries a risk of release of existing security and the resetting of hardening periods for insolvency purposes.

SECURITY, TRUSTS

The concept of a trust is not recognised under Greek law. However, parallel debt arrangements, whilst not explicitly provided for under Greek law, are commonly used in Greece.

Since 2003, when the Greek bond loan law (law 3156/2003) was enacted, a large amount of funding arrangements involving Greek entities have been in the form of Greek bond loans, whereby an agent (Bondholders’ Representative) holds security in its name but on behalf of the bondholders from time to time.  If the bonds themselves are transferred, the transferee enjoys all benefits of the transferor without any further requirements.

POST – COMPLETION FORMALITIES

Care should be taken to update public registries (e.g. cadastres) upon a loan transfer, where relevant, to perfect the transfer of security rights.

Special Note:Special thanks to Nikos Salakas at Koutalidis in Greece, who assisted us with this Trade Alert.

NOTABLE TRANSACTIONS

  1. ALPARI (UK) Ltd (“Alpari”): On 19 January 2015, under the Special Administration Regime, Richard Heis, Samantha Bewick, and Mark Firmin of KPMG LLP (“KPMG”) were appointed as joint special administrators of Alpari by the High Court. As a result of the Swiss National Bank removing its trading cap against the euro leading the Swiss franc to rise to more than 15% against other currencies, the foreign-exchange broker was left with losses on its trades and consequently applied for insolvency on the 19th of January 2015. A public website set up by KPMG provides further information on the filings processes. Please contact Caroline Friederichs if you require any assistance with filing claims against Alpari.
  2. ALTICE S.A. (“Altice”): The cable and telecommunications company is currently marketing a EUR c2.204bn  bond (senior notes) with a maturity date set for 2025. The purpose is to raise funds that will go towards its acquisition of Portuguese assets in Portugal Telecom in addition to financing its subsidiaries in Altice International. The bond constitutes of tranches of EUR c500m and USD c1.775bn.
  3. ICELAND: Discussions are reportedly still underway with the Government on lifting capital controls, but specific information has not yet been published.  Creditors' meetings: Glitnir hf.: 3 March 2015 (Reykjavík), Kaupthing hf.: 22 April 2015 (Reykjavík) and LBI hf.: 12 March 2015.
  4. 4.    RIO FORTE INVESTMENTS S.A. (“RioForte”): On 15 January 2015 the report verifying creditors’ claims against RioForte was closed. The hearing of disputes arising from the verification occurred on 26 January 2015 as ordered by the District Court of Luxembourg.  The Receivers have requested that RioForte creditors who have yet to file a claim, do so before 31 March 2015. For further information, click here.
  5. 5.    CYPRUS: Retail offer: The third and final stage of the Bank of Cyprus’s share capital increase took place on 13 January 2015, with the completion of the retail offer of 567,188 new retail shares at the subscription price of EUR 0.24 per retail share, totalling EUR 136,125. This increases the total amount of Issued ordinary shares of the Bank to 8,922,944,533 with a nominal value of EUR 0.10 each. The Bank will proceed to the listing and admission to trading of these retail shares on the Cyprus Stock Exchange (“CSE”) and Athens Exchange (“ATHEX”) in due course. The 8,904,425,940 ordinary shares listed and admitted to trading on the CSE and ATHEX on 16 December 2014 continue to trade on these exchanges.

Release of final fixed-term deposits: The final tranche of 12-month blocked fixed-term deposits at the Bank (resulting from the recapitalisation process of the Bank in July 2013, whereby 37.4% of uninsured deposits above EUR 100,000 were converted into fixed term deposits of 6,9 and 12 months’ duration), may be released and transferred to the relevant accountholder’s current account from 31 January 2015 upon instructions from the accountholder. All other fixed deposit amounts have been released. Amounts released to current accounts nevertheless remain subject to the country’s capital controls.

OIL AND GAS

The on-going slide in wholesale energy prices that began in the second half of 2014 is showing signs of opportunities for energy-focused investors with an appetite for risk.  Brent Crude Oil prices have fallen by nearly 55% from a June 2014 peak of $115 to below $50 per barrel today, and WTI Crude, natural gas (“only” down approximately 25%) and other energy benchmark prices have also experienced significant downward trends.  The resulting impact on small and medium-sized exploration and production (E&P) participants is starting to show a potentially significant impact.  Likewise, midstream and field services companies are surely to feel pinched as activity in the sector slows in response to lower pricing.  Many of these market participants have capitalized themselves using asset base lending, reserve based lending, or bond financing structures.

Risks and Opportunities

While some of the downside price risk may be mitigated by hedges fortuitously timed to lock-in $80-100 oil (or $4-6 gas), as those hedges run-out throughout 2015 and 2016, trouble will come knocking and balance sheets will be increasingly stretched.  Capex reductions and ITM hedges will defer the problem only so long.  Unless there is a sizeable rebound in energy prices (the “V” shape curve), borrowers will soon face covenant issues and financial distress.  However, those counter-cyclical or value investors will increasingly be able to take advantage of the reduction in prices which will become available in the rig (for exploration) and fabrication markets (for construction/production).  There is also expected to be significant activity in the M&A market as companies dispose of assets or consolidate in order to ride out the storm.

The opportunity, thus, exists now for deploying creative, strategic solutions to add existing debt capital, raise new capital, or for the wholesale acquisition of distressed E&P companies.

Please contact Kenneth W. Irvin, Partner in our Distressed Energy practice in Washington D.C. for assistance with E&P investment opportunities.

Cadwalader has the specialist energy sector knowledge, together with the M&A, restructuring and trading expertise to help with any of these investment strategies.

Trading in Oil and Gas

  1. Afren Plc (“Afren”), an independent exploration and production company listed on the London Stock Exchange with operations in West Africa, has confirmed it has entered into restructuring talks with its lenders and bondholders. According to recent company press releases it is seeking to defer a USD 50m amortization payment due at the end of January as well as the utilizing the 30 day grace period with respect to the $15 million 2016 Note interest payment due on 1 February.  Afren is also in discussions with SEPLAT Petroleum Development Company plc (“SEPLAT”) concerning a possible combination with Afren, and SEPLAT have until 5:00 p.m. on 30 January 2015 to announce whether they intend to make an offer.

Contact Special Counsel Adam Topping in the Energy and Commodities Group if you require assistance.

  1. Beware U.S. Sanctions! – When transacting in oil and gas (particularly in Russia), parties should give particular consideration to U.S. sanctions laws. Traders need to ensure they are not dealing with sanctioned entities, including individuals on the OFAC SDN and blocked persons list (including entities owned 50% or more by a blocked person) or entities subject to sectoral sanctions.

Any transaction that involves the extension of new debt of longer than90 days’ maturity by U.S. persons to sanctioned companies is prohibited (Directive 2). There is also a prohibition on the provision (directly or indirectly) of goods, non-financial services or technology by U.S. persons in support of exploration or production for certain projects that have the potential to produce oil in Russia (as well as transactions seeking to evade this) (Directive 4).

The definition of “U.S. persons” is wide. It includes foreign branches of U.S. incorporated entities and can extend to foreign subsidiaries owned or controlled by U.S. companies. Please contact Jodi Avergun for any Sanctions related queries.