The current conflict between Ukraine and Russia has impacted on Russian bourses with volume on the ruble bond market hitting a four-year low sliding by 34% to RUB 5.8trln ($157bn) during the last eight months.
Currency control regulations were first introduced in February 1993 to limit the use of foreign currency in Ukraine and to stabilise the Ukrainian Hryvnia ("UAH"). Generally, the UAH is the only lawful payment currency in Ukraine (although foreign currency transfers performed by a Ukrainian commercial bank are permitted) unless an individual licence is granted by the National Bank of Ukraine ("NBU"). Transfers of foreign currency from Ukraine are also restricted unless an individual licence is granted by the NBU (subject to various exemptions).
New currency control regulations were implemented by the NBU on 23 September 2014 and will remain in effect until 21 November 2014. In particular, 75% of all foreign currency proceeds received in Ukraine by any person (excluding banks) must be converted to UAH (100% under the previous regulations). There are various exemptions that may apply.
RECENT SANCTIONS AGAINST RUSSIA
The Ukrainian ‘Sanctions Law’ became effective on 12 September 2014 and is for general application but was adopted with the intention of imposing sanctions against Russia.
Sanctions may be proposed by the Parliament, President, Cabinet of Ministers, NBU or Security Service but must be approved by the National Security and Defence Council (the "NSDC"). All decisions of the NSDC must then be approved by the President (and the Parliament in respect of sectorial sanctions). On 11 September 2014 the Cabinet of Ministers proposed specific sanctions on certain individuals and legal entities connected with the Ukraine-Russian conflict (but the list is not public).
On 12 September 2014 the EU also introduced sanctions against Russia placing restrictions in connection with specific industries and financial instruments. The EU sanctions do not apply to contracts concluded and loans drawn prior to 12 September 2014.
LOAN TRADING OVERVIEW
Banking licence requirements: no licence is required for a non-resident entity making or purchasing a loan. The borrower is required to register the loan agreement with a non-resident entity with the NBU in order to make payments thereunder.
Interest Rate/Loan payments cap: cross-border loans are subject to a borrower ‘total cost of funding’ cap (i.e. including interest, default interest, fees, costs and expenses) on all loan payments (except principal repayment). USD/EUR fixed rate loansare capped at 9.8% (less than 1 year maturity), 10% (1 to 3 year maturity) or 11%(greater than 3 year maturity). USD/EUR floating rate loans are capped at 3 month USD LIBOR plus 7.5%.
Loan early repayment prohibition: the NBU introduced a restriction on early repayment of cross-border loans (potentially including upon acceleration) in early 2014 due to adverse economic conditions. The original one month duration of the restriction was extended and currently lasts until 2 December 2014.
Tax: Withholding tax is payable at 15% for non-resident entities receiving Ukraine-source income subject to any double tax treaty (the UK and US double-tax treaties with Ukraine currently provide for such tax to be reduced to zero).
VAT/capital gains tax/stamp duty: do not apply to the purchase of a loan by a non-resident entity.
Transfer mechanic: assignment is preferred. English law novations are generally not used and could release the security. Participations are generally not used domestically, although a participation between two non-resident entities would not trigger a requirement to amend the NBH registration of the loan agreement.
A Ukrainian language version of the transfer document will need to be executed if a Ukrainian entity is a party. Notarisation may also be necessary in relation to some security documents.
Security: Ukrainian security assets are usually held under joint/several creditor and/or parallel debt structures created under foreign law with the relevant creditor entering into the Ukrainian law security documents. These structures are untested in Ukrainian courts but the general view is that they should be enforceable provided the relevant creditor’s claim is validly created under foreign law. On the other hand, security created in connection with joint/several creditor and/or parallel debt structures created under Ukrainian law may not be enforceable.
The benefit of the security generally passes to the new lender upon assignment of the underlying loan facility. Security over immoveable property requires execution of a separate assignment agreement.
Agency structures are generally enforceable in Ukraine but are inconvenient in the context of security. Trust structures are not recognised.
Governing law and jurisdiction: Ukrainian courts will generally recognise a foreign choice of law provided there is a foreign element (i.e. a non-resident lender) and will also generally recognise foreign judgements where an international treaty applies.
Post Transfer Requirements: borrower notification is necessary so that payments by the borrower to the existing lender do not discharge the borrower.
Registration of cross-border loans with the NBU is required on the initial advance by a non-resident entity (and also when sold to another non-resident entity) in order for the facility itself and for the borrower’s obligation to repay to be effective. The borrower is responsible for the registration,so, effectively, the borrower must approve the transfer - although this issue can potentially be avoided where repayments are made through a facility agent.
Registration of assignment of security with the Ukrainian state registers is necessary to maintain the original security ranking (but not for the legal validity of the assignment).
Registration of assignment of security over immoveable property is necessary to give legal validity to the assignment.
Contractual subordination: Ukrainian statutory priority provisions rank all unsecured creditors together so any subordination provisions in an intercreditor agreement for example may not be effective.
TRADING SWAPS RISKS FOR TRADERS
Purchasers of loan hedges should be aware of the following issues and risks which can, if deemed material in the commercial context of the deal, be made the subject of relevant seller representations:
- Transfers of live hedges will usually require borrower consent and be completed by novation. Consent may not be required where the borrower has defaulted and the hedge has been terminated.
- Purchasers who do not wish to be party to a live hedge or which do not have the requisite hedge counterparty required credit ratings will need to use a fronting bank or, where hedge termination is possible in the commercial context of the deal, take an assignment of the hedge termination amount.
- Hedge or hedge termination amount transfers between broker-dealers are commonly expedited without the full set of seller representations expected in LMA secondary loan trades. However a prudent purchaser in a distressed credit context should aim to include the hedge or hedge termination amount in an LMA confirmation in order to benefit from these protections.
- The ISDA-prescribed hedge termination process (requiring notice to be given in a specified form and in a prescribed manner) and hedge valuation process (requiring close-out, loss or market quotation based calculations to be expedited by the non-defaulting party in a specified manner) may be open to scrutiny (e.g. by other lenders and/or an insolvency officer). Depending on the likelihood of such scrutiny purchasers may, in addition to relevant seller representations, want to include a disallowance provision.
- A hedge termination amount may or may not rank pari passu with the lenders under the loan/intercreditor and there may be loan/intercreditor restrictions on the circumstances in which a borrower can actually pay such amount (e.g. only following a loan default or a payment/insolvency hedge default).
- A hedge termination amount may not remain secured in the hands of the purchaser (e.g. because the loan/intercreditor hedging definitions result in only live hedges being secured).
ESPÍRITO SANTO GROUP UPDATE
- Banque Privée Espírito Santo ("BPES") claims filing deadline: 7 November 2014:The Swiss Financial Supervisory Authority (FINMA) appointed Carrard Consulting SA as Liquidator on 19 September 2014. Claim submission forms and other information can be accessed here. This entity acts as Fiscal Agent, Calculation Agent, Paying Agent and/or Transfer Agent in connection with certain Espírito Santo bond issuances (including Rio Forte). It is therefore advisable to check bond documents carefully to determine if action is required in connection with the Swiss entity insolvency.We are working with Swiss counsel and can assist should you have any exposure to this entity.
- Espírito Santo Financial (Portugal) S.G.P.S., S.A. (in liquidation) - creditors’ general meeting scheduled for 3 October 2014 where the management will present a recovery plan; creditors will be able to dial-in to this meeting. Depending on your bond holding, there are a further three bondholder meetings scheduled for 6 October 2014; items on the agenda are (i) the appointment of a common representative of the bondholders determining its remuneration and duration of the mandate and (ii) discussion and approval of urgent measures for the defence of creditors, namely in relation to the safeguard of assets of the issuer, including the eventual filing of legal proceedings.
- Bond transfers of entities in gestion contrôlée (e.g. ESI, Rio Forte, ESFG, ESFIL) should be notified to the relevant issuer to preserve the rights of the new bondholder. This applies to all transfers concluded after the date of the filing of the relevant issuer (regardless of whether or not claims documentation was agreed to apply at the time of trade).
- Phones 4U Limited entered into UK Administration on 14 September 2014:PriceWaterhouseCoopers LLP were appointed as administrators on 15 September 2014. Phones 4U’s debt includes £430m 9.5% senior secured bonds, £250m 10%PIK notes and a £125m RCF. The administrators confirmed on 22 September 2014that EE will acquire 58 Phones 4U stores for £2.5m. Trades require English law claims documents from 14 September onwards as creditor rights begin from the date of filing for administration.
- LMA Operations Committee update: (i) the Committee is working on a programme to publish average settlement times for trades together with Trade Date, Settlement Date, method of settlement (i.e. electronic platform/paper) and jurisdiction (this is expected to go live in 2015); (ii) the Committee is working with various Agents to reduce moratorium periods for accepting transfers; (iii) primary lenders are encouraged to carefully negotiate loan transfer provisions to avoid unnecessary requirements i.e. minimum transfer/hold, consents, white lists etc; (iv) the Operations Committee is currently discussing whether Agents can begin new lender KYC before Transfer Certificates are submitted.
- LMA Annual Conference (9 September 2014): There is an ‘upbeat and positive outlook’ for the syndicated loan market with 68% of respondents believing the market will grow by at least 10% in the next 12 months. Further information can be found on the LMA’s website.
Thank you to Anton Korobeynikov at Sayenko Kharenko, Ukraine counsel who assisted us with this Trade Alert.