In April 2014, the Goldschmidt Committee published its final report on the making of “coordinated loans”, a term covering consortium and syndicated lending by institutional investors in Israel. The report was aimed at improving the standard of lending by institutional investors and “providing the institutional investors with a toolkit to be used in their lending activity”.
In order to implement the recommendations of the Goldschmidt Committee, the Capital Market, Insurance, and Savings Department at the Israeli Ministry of Finance circulated in January 2015 two draft circulars.
The first publication is a draft amendment to the existing Management of Investment Assets Circular (the “MIA Circular Amendment”), the main objective of which is to regulate the participation of Israeli institutional investors in consortium and syndicated loan transactions, including in the secondary market. The draft also imposes certain requirements that are applicable to the other participants in the syndication. Further objectives, which are focused on the process of analysis and approval of such investments, are: (i) to require Israeli institutional investors to form an internal credit committee; and (ii) to expand investment control functions within each institutional investor by requiring the implementation of mandatory risk-based models in the credit approval process.
The second publication is a new draft circular (the “20% Holding Circular”)which sets out rules under which institutional investors are permitted to continue to hold 20% of the means of control in a corporation (such as voting rights) following enforcement of a security interest, notwithstanding the maximum holding limits applicable to institutional investors under the Israeli law.
MIA Circular Amendment
Participation in consortium and syndicated loan transactions
The MIA Circular Amendment determines that an institutional investor may only participate in a consortium or syndicated loan transaction if it meets the following conditions:
(i) Full Disclosure of Potential Conflicts – where one third or more of the debt is held by Israeli entities (“Israeli Consortium”), the institutional investormust receive full disclosure from the arranger of such consortium or syndicate regarding any substantial potential conflict between the arranger and the other lenders in the consortium or syndicate. The disclosure must include: (A) fees, benefits and other payments to be made to the arranger by the borrower; (B) differences between the terms of the transaction applicable to the arranger and those applicable to the other lenders (including with respect to the type of credit, preferences, security package, duration of the loan, voting rights); and (C) information as to whether the credit extended will be used to refinance an existing debt owed by the borrower to the arranger or will improve the ability to repay such indebtedness. If there is no arranger, this disclosure obligation will apply among all the lenders;
(ii) Minimum Period for Information Review – the institutional investor mustreceive all relevant information, allowing sufficient time for review, as specified by the investment committee of the institutional investor, taking into consideration the complexity of the transaction. The minimum period should be 21 days, and may be shortened only under certain limited circumstances and only when approved by the investment committee. Periods may vary between certain types and stages of finance transactions. In addition, the institutional investor must ensure that it has received all information and professional reports provided to the arranger by the borrower;
(iii) Minimum Arranger Duties – the duties of the arranger of the syndicate towards the lenders must include at least those duties which were specified by the board of directors of the lenders as minimum requirements. The institutional investor must ensure that until one third of the principal of the consortium loan has been repaid, the arranger must maintain at least 10% of the participation of the loan and may not enter into any hedging arrangements in respect of that 10% holding; and
(iv) Minimum Arranger Duties in Israeli Consortium – the duties of an arranger in an Israeli Consortium must include the duty: (A) to ensure the validity of the collateral before extending the loan (and the institutional investor must ensure that that an appropriate description of such collateral is included in the transaction documents); (B) to examine the validity of the collateral annually, and more often if required; (C) to monitor the fulfillment of the borrower’s commitments under the transaction documents (in particular its financial covenants and any events of default); (D) to monitor the milestones for financing under the transaction documents, where relevant. It should be noted that if the arranger does not perform its monitoring obligations, then the institutional investor must perform these itself.
If the arranger adds the debt to its credit watch-list, based on any external information which for any reason has not been disclosed to the lenders, then the arranger should notify all other lenders accordingly.
It is further determined that the arranger must convene a meeting of the lenders if it becomes aware of any material breach of the transaction documents, if it becomes aware of any cause to take any action available to it pursuant to the transaction documents. or if one of the lenders approaches the arranger informing it of any such breach or circumstance.
Extension of Coordinated Loans to a Corporation in Financial Difficulties or its Owner
Any investment in a coordinated loan by a financial institution where the borrower of such coordinated loan, its owner or any entity controlled by such owner has been involved in one of the insolvency-related events set out in the MIA Circular Amendment within the previous 7 years, requires the approval of the investment committee. Prior to approving such investment, the owner of the borrower may provide the investment committee with its written statement (verified by a lawyer) with respect to the circumstances of any such event that may have occurred, including the type of event, an explanation of the event and any remedial actions taken.
Analysis and Approval of Investments
The MIA Circular Amendment proposes a number of Corporate Governance rules with respect to the approval of investments in coordinated loans and the monitoring thereof.
According to these rules, each financial institution which participates in a coordinated loan is required to appoint an internal credit committee. The main role of the committee is to provide advice and recommendations to the persons authorized to approve such investments within the financial institution, and in certain circumstances also to approve the investments themselves. Further roles include approving minor deviations from the financial covenant guidelines set by the relevant institutional investor and providing recommendations regarding distressed debts within the financial institution and measures to be taken with respect to the distressed debts.
Each financial institution must form an independent advisory body to be responsible for monitoring and reporting to the internal credit committee all debt owing to that financial institution, and dealing with any distressed debt and debt settlement arrangements.
With respect to the process of analysing any proposal to grant credit, the MIA Circular Amendment provides that the relevant department within each institutional investor responsible for supervising and assessing investments must now apply independent risk-based models, in addition to its existing evaluation methods. Any potential risk or difficulties in the enforcement of security highlighted by applying such models must be brought to the attention of the appropriate officers at the institutional investor.
20% Holding Circular
The 20% Holding Circular implements the recommendations of the Goldschmidt Report and sets out rules under which institutional investors are permitted to continue to hold 20% or more of the means of control of a corporation following enforcement of a security interest, notwithstanding the maximum holding limits applicable to institutional investors pursuant to the Control of Financial Services (Investment Rules Applicable to Financial Institutions) Regulations, 5772-2012.
The institutional investor must report to the Commissioner of the Capital Markets, Insurance and Savings Department at the Israeli Ministry of Finance immediately following any event which causes the institutional investor to hold more than 20% of the means of control of the relevant corporation, to transfer these means of control, which shall not have voting rights, to a custodian, to monitor these excess holdings internally on a monthly basis, and to sell the means of control within a period specified by the Commissioner following consultation with the institutional investor