Australia is a member of both the Basel Committee and the G20 and in November, Brisbane was host to the G20 Leaders' Summit.
The agenda focussed on increasing global growth, jobs and economic stability. Despite the positive G20 intentions, David Cameron was quoted as saying "red warning lights are once again flashing on the dashboard of the global economy".
The Australian Prudential Regulation Authority ("APRA") regulates authorised deposit-taking institutions ("ADIs") and the capital standards for ADIs closely follow those set by the Basel Committee. Basel III capital adequacy requirements have implications therefore for Australian regulated entities, as well as for its European bank counterparts. The financial crisis resulted in some Australian banks limiting their European exposure, and European banks re-trenching and exiting the Australian market, providing opportunities for fund investors in both markets.
For example, in August 2013, Lloyds Banking Group sold a GBP 216.4m loan portfolio from its Bank of Scotland International Australia unit to Sankaty Advisors(who opened an office in Melbourne in 2013) and in July 2014, National Australia Bank Ltd (which owns Clydesdale and Yorkshire Bank in the UK) agreed to sell a USD 1bn portfolio of mostly non-performing UK commercial property loans to an affiliate of Cerberus Global Investors.
This month's alert sets out some of the key considerations for loan traders Down Under.
TAX LAWS: COMPLEX AND EVOLVING
Even the method of transfer (by assignment or novation) can impact the tax analysis, therefore local counsel is required to confirm the position for each transfer to assess whether stamp duties will be payable in the relevant Australian territory.
Australian sourced interest payable to non-resident investors is generally subject to10% withholding tax. It may be reduced under applicable double taxation treaties or by the loans having been issued in a manner which satisfies the requirements of a “public offer” under s.128(F) of the Income Tax Assessment Act.
To benefit from double taxation treaties, often an investor must be a "Financial Institution" as defined in the relevant treaty being, for example, “a bank or other enterprise substantially deriving its profits by raising debt finance in the financial markets or by taking deposit at interest and using those funds in carrying on the business of providing finance” (UK/Australia treaty, Article 11(3)(b)). The definition is relatively narrow and will not apply to many fund investors. Click here for more information on withholding tax rates and current treaties.
A funded participation may be entered into to acquire economic exposure to Australian loans, but withholding taxes may still apply.
There are complex rules governing Australian stamp duty which vary across the eight Australian States and Territories. Stamp duty liability may arise on the transfer of a loan (depending on the nature and location of the secured property). Generally speaking a transfer of a loan will only be subject to duty in Australia if the loan is deemed for stamp duty purposes to be located in Queensland or South Australia. Stamp duty is chargeable in Queensland and South Australia at rates of up to 5.75% and 5.5% respectively. Exemptions may apply, to be confirmed by local counsel.
TRANSFERABILITY OF LOANS
METHOD OF TRANSFER
As a commonwealth nation, the Australian legal system is largely based on English common law. Acquiring debt advanced to an Australian borrower is often concluded by transfer under a substitution certificate (akin to a novation in the UK) or by assignment, with notice to the debtor. The Lender, known as a "Financier", transfers its participation in the loan to the New Financier under the terms of the Substitution Certificate, and the New Financier may need to accede to an intercreditor agreement to obtain the benefit of all related security.
AUSTRALIAN FINANCIAL SERVICES LICENCE
Loan agreements and the trading of corporate loans in the secondary market are generally not regulated activities in Australia. Investors are therefore not required to hold an Australian Financial Services Licence (“AFSL”) to be eligible to acquire a corporate loan, or to be an agent, security agent or security trustee for a facility. A banking licence is required however to carry on a banking business, being both the taking of deposit and the making of loans.
An AFSL may be required if the debt is classified as a "derivative", however, this is subject to exceptions if the investor is offshore and its counterparty is a professional or wholesale investor. A debt may constitute a derivative if the amount to be repaid under the terms of the loan is linked to the performance of an underlying asset, but a conventional credit facility would not generally be a derivative.
There may be a requirement to register with APRA under the Financial Sector (Collection of Data) Act 2001 depending on the assets of the investor in Australia. For most offshore entities the obligations under this act are minimal.
Australian law recognises the concept of a trust. Therefore, a security trustee can enforce its rights in the Australian courts where it holds the security on trust for the benefit of all of the lenders or ‘financiers’ from time to time.
The security held by the security trustee usually covers any future financiers allowing new financiers to accede to the security as beneficiaries and departing financiers would transfer their rights.
Securities usually require registration on the Personal Property Securities Register established under the Personal Property Securities Act 2009 (“PPSA”). There are no requirements under the PPSA to obtain a judgment before enforcing rights under the security.
In accordance with section 12(3) of the PPSA, an assignment of a debt may constitute a deemed security interest which may require perfection by registration to protect the investor from the transferor double dealing in the debt. In addition, section 80(7) of the PPSA sets out certain notice formalities, including a requirement that notice be given to the debtor, to perfect the assignment.
A transfer of debt effected by a novation or a substitution agreement should avoid any registration or notice requirements under the PPSA.
ICELAND CREDITORS' MEETINGS
Click here for the CWT Client Update (includes links to public financial statements and statements of assets and liabilities)
- Distributions: The Supreme Court of Iceland in Kaupthing v Aresbank S.A. (case no.707/2014) on 12 November 2014, found that distributions to pay creditors’ priority claims under Article 112 should have been paid using the exchange rate of the date of payment, and not the rate that applied on 22 April 2009, resulting in an additional payment to Art.112 creditors of EUR 4.6m.
- Currency Controls: The currency control exemption applications are still being progressed with theCentral Bank of Iceland and the Finance Minister has expressed that further information will be provided "before the end of the year". Click here for Financial Stability Report.
- Taxes: Additional taxes now apply to entities in winding-up proceedings due to amendments to legislation introduced last year (being disputed): Financial Activities Tax (5.5%), Surcharge on Income Tax (6% on income over ISK 1bn), Bank Tax (0.376% on accepted claims over ISK 50bn) and abolishment of joint taxation of entities. Rumours of a 10%-35% "Exit Tax" are not substantiated and there is no clear proposal or explanation of its levy or impact to creditors.
NEXT CREDITORS’ MEETINGS (REYKJAVÍK)
Glitnir hf. 18 December 2014
Kaupthing hf. 22 April 2015
- Espírito Santo Control S.A. which holds 56.5% of Espírito Santo International S.A. was declared bankrupt (en faillite) (under case 2014/611) by the Luxembourg Commercial Court (Tribunal d'Arrondissement siégeant en matière commerciale) on 5 November 2014 and Me Alain Rukavina was appointed as bankruptcy receiver (curateur). The filing deadline was 24 November 2014, however, this was not a hard deadline and claims may be filed after this date.
- Cyprus: on 21 November 2014, Bank of Cyprus ("BoC") ceased processing share transfers andtrading of the ordinary shares is suspended until they are listed on the Cyprus Stock Exchange (CSE) and Athens Exchange (ATHEX), which is expected in mid-December 2014 (at a reported price of 24c a share). Once listed, shares will transfer over the exchanges through a broker. BoC has officially recognised Cisco, who will be able to assist with this. The bank held its AGM on 20 November 2014, at which Josef Ackermann (former Deutsche Bank CEO) was appointed as Chairman of the Board of Directors. John Hourican remains as CEO. On 27 November, BoC published its Group Financial Results for 9 months ending 30 September 2014.
- Italy: The ECB completed its asset quality review (“AQR”) in October 2014. 25 banks failed, 9 of which were in Italy. Reuters reported that Italian banks are ready to sell up to EUR 16bn in bad loans by 2016. Intesta Sanpaolo, Unicredit, and Banca Monte dei Paschi di Siena are among the active sellers. The Italian securitisation regime facilitates portfolio acquisitions by foreign entities under Destinazione Italia Decree (Law Decree No.145/2013). Contact Stephen Day, partner for more information.
- Irish Bank Resolution Corporation Limited (“IBRC”), has set a Claim Submission Deadline of 31 March 2015. The IBRC Special Liquidators who recently commenced the adjudication process for unsecured claims, have requested that all notifications be sent to the Special Liquidators in writing setting out details of the claims in addition to providing all the relevant documentation. Further information can be found on the IBRC website or by direct contact to email@example.com. Please contact us if you require assistance with filing claims.
SPAIN: Voting rights: Pursuant to an amendment to the Spanish Insolvency Act which came into effect on 7 September 2014, if a Spanish borrower files for insolvency (“concurso”) it is now possible for a seller of a claim against this entity to transfer the voting rights to a buyer that is a fund entity and which may not be regulated. For Spanish borrowers who filed for insolvency prior to 7 September 2014 and the insolvency trustee had already issued the report on the borrower’s estate and claims, it is still necessary for a buyer to be an “entidad sometida a supervision financiera“ (subject to financial supervision), otherwise the vote may be lost on the assignment. It is possible in such situations to settle a trade transaction on the basis of the LMA form of Funded Participation (Distressed/Claims) which will preserve the voting rights of the Grantor.
TRADING DOCUMENTS UPDATE
Facility Documentation Revisions: the Loan Market Association ("LMA") published a revised suite of facility documentation. The changes focus mainly on interest provisions, operational changes and auditor control provisions. Only available to LMA members.
New Super Senior High Yield Facility and Intercreditor Documentation was launched on 12 November 2014 by the LMA. Click here for further information on the documentation.
Term Sheet for Real Estate Finance Transaction – the LMA published the "REF Term Sheet" on 17 November 2014. It is split into senior, mezzanine and intercreditor sections. Click here.
Thanks to Andrew Maynes of King & Wood Mallesons Australia, who assisted us with this Trade Alert.