Brown Rudnick Trade Alert – Argentina
PUBLISHED ON: 11/06/2018
In September 2018, Argentina agreed a record credit line of USD 57.1bn support from theInternational Monetary Fund ("IMF") over the next three years. It has already received USD 15bn and will have access to a further USD 35bn by the end of 2019. Will this be enough for Argentina to turn the corner?
Around 70 per cent of Argentina's USD 321bn public debt (57 per cent of GDP) is in foreign currency. Inflation has been as high as 40.3 per cent this year and the Central Bank raised interest rates in August 2018 to 60 per cent in an attempt to curb the devaluing peso.
President Mauricio Macri sought help from the IMF even though many Argentines perceive it as "politically toxic" after the collapse of a loan program in 2001 led to default and a deep recession. The loan conditions include Argentina's pledge to accelerate budget savings and freeze the supply of money to the economy in an effort to stamp out inflation. As well as a "zone of non-intervention rate" for the peso, with the government not using foreign currency reserves to prop up its own currency.
As the IMF loan was being negotiated, Bloomberg reported on 24 September 2018 that BlackRock Inc., Carval Investors LLC and other funds that specialize in distressed debt were interested in opportunities to finance Argentine companies, particularly where traditional bank lending may be more difficult to come by following the "notebooks scandal". In the unravelling corruption investigation, it is alleged that bribes or illegal campaign contributions were paid by some of Argentina's biggest construction companies, energy suppliers, and electricity generators to members of the former government.
Companies including Albanesi SA, MSU Energy, Genneia SA, Pampa Energia SA and YPF SA are stated to need between USD 3bn and USD 4bn to finance infrastructure projects.
Distressed funds are expected to bridge the gap in finance by providing mezzanine loans with equity kickers if a particular event is triggered. The economic climate is therefore advantageous for those who are familiar with distressed investing and can lever the capital shortage in structuring attractive returns.
This month's trade alert considers some of the key legal issues for investors to consider in the Argentine loan market.
We appreciate the assistance of Pablo J. Gayol (Partner) and Agustina Maria Ranieri (Associate) at Marval O'Farrell & Mairal with the discussion on Argentine law, regulation and practice.
THE LEGAL SYSTEM IN ARGENTINA
Argentina is a federal union of 23 provinces (or provincias) and a federal capital district, the City of Buenos Aires. The Argentine legal system is a civil law legal system. Argentina’s first Civil Code dates back to January 1871. It was in effect until 1 August 2015, when Argentina replaced it with a new Civil and Commercial Code (known as Código Civil y Comercial de la Nación). The federal government is made up of the executive, legislative and judicial branches, and each province has three similar branches, as well. Thus, the Argentine judicial system is divided into federal and provincial courts. The Corte Suprema de Justicia de la Nación (the “Federal Supreme Court”) is the highest court in Argentina.
KEY POINTS FOR TRADERS
- Banking licence may be required or authorisation from the Central Bank if a lender is conducting banking activities or "financial intermediation".
- Debt trading can occur by way of assignment or funded participation agreements. Novation is not a recommended form of transfer as the security may be released.
- Registration of a mortgage transfer is the Public Registry of Real Estate may be required or notarisation.
- Lenders in Argentina may be subject to Income Tax, VAT and Turnover Tax on interest. Stamp tax varies by province. Withholding tax applies at a rate of 15.5 per cent or 35 per cent (depending on the lender's domicile).
BANKING LICENCE REQUIREMENTS
Foreign entities that intend to carry out banking activities in Argentina on a regular basis must (a) establish a branch or a subsidiary in Argentina that must (i) be registered with the local Public Registry of Commerce; (ii) establish a domicile in Argentina; and (iii) justify the decision of establishing the branch or subsidiary and appoint a legal representative in Argentina; and (b) such activity carried out by the branch or subsidiary will be subject to regulation by the Central Bank which will grant the requisite authorisations if certain criteria is met by the branch or subsidiary and the foreign entity.
Lending activities are, in principle, not subject to a banking licence requirement to the extent that such activities are not considered to be financial intermediation by the Central Bank.
"Financial Intermediation" is the combination of raising funds (either in Argentina or in other jurisdictions).
If lending activities are carried out by a foreign entity utilising its own funds, with no financing being obtained in Argentina, in principle, no license should be required. However, it should be noted that the Central Bank may decide to regulate entities that have a significant impact on the market even if the do not carry out financial intermediation.
The foregoing analysis remains the same for both term and revolving loans. However, the provision of a revolving loan is more likely to be considered a regular lending activity in Argentina which may necessitate the establishment of a subsidiary or branch in Argentina.
METHOD OF TRANSFER
The main methods of loan transfer in Argentina are (i) assignment of rights or (ii) assignment of contractual position, which assigns the rights and obligations of an existing lender to a new lender.
Assignment of Rights - Notice of the assignment of rights must be given to the borrower to make it effective against the borrower. To make it effective against third parties, the notice to the borrower must either be given (a) by public instrument (instrument público), most commonly done by way of notarisation, or (b) by a private instrument with a certified date. Borrower's consent is not required.
Assignment of a Contractual Position - Borrower's consent is required for this type of transfer as the creditor is changing (i.e. obligations are transferred). This consent can be provided prior to, simultaneously with or following the transfer. Any guarantor must also expressly authorise the assignment of a contractual position for the assignee to take the benefit of any guarantee.
Novation- The general principle is that novation will have the effect of releasing the security or guarantee as the original obligations and their accessories are terminated and, as such, it is not a recommended form of transfer (unless the debtor's and guarantor's consent is obtained). This analysis may change once the provisions of the Productive Financing Law (as discussed below) which permits collateral agents to hold security and guarantees on behalf of a group of lenders has been tested in court. If a loan is transferred by way of novation, then the consent of the borrower is required. If the guarantor is party to the novation agreement, then the security will remain in place for the assignee.
Funded Participation - Funded Participation Agreements can be entered into in Argentina on a case-by-case basis, and they are usually governed by US or English law. In practice, parties have used the LSTA form. However, it would be prudent to seek Argentine legal advice at the time of structuring the trade as fully Funded Participation Agreements deemed to be transferring 100 per cent of the risk are subject to close scrutiny as they may trigger tax and regulatory issues.
SECURITY AND TRUSTS / AGENCY
Argentina has trusts and agency rules which are governed by the contractual constructs.
On 9 May 2018, the Argentine Congress passed the Productive Financing Law which introduced significant reforms to the Capital Markets Law No.26, 831. This law was introduced with the aim of developing Argentina's economy and creating a modern regulatory framework. One of the reforms was in respect to collateral agents for financial collectives. Prior to the introduction of this law, all creditors were required to be registered as secured parties instead of registering the security in the name of an agent or trustee.
The Productive Financing Law provides that parties may agree, in respect of loans with two or more lenders, to the creation of a mortgage or pledge guarantee in favour of a collateral agent who will act for the benefit of the creditors. In such cases, the secured loans can be transferred to third parties and the assignees will become the beneficiaries of the security without the need of registering the transfer of the security. As such, the holder of the guarantee is dissociated from the holders of the secured loans and the transfer of the credit is permitted without the necessity of modifying the mortgage and pledge guarantees.
Foreign trusts and agency agreements will be recognised under Argentine law if the agreement has international elements. The general principle is that such structures are governed by the laws of the jurisdiction where the assets are located.
It should be noted that a properly created trust may remove the asset from the estate of the debtor insolvency scenarios.
TAX AND STAMP DUTY CONSIDERATIONS
Lenders in Argentina will be subject to Withholding Tax, Income Tax, VAT and Turnover Tax on interest. The local borrower shall act as a withholding agent.
Withholding Tax - Interest payable on loans made by foreign lenders is deemed Argentine source and is thus subject to withholding tax. The rate of this tax will be 15.5 per cent or 35 per cent depending on the jurisdiction of the lender.
Income Tax - Foreign lenders may be charged income tax on Argentine source income. The transfer of real estate by foreign entities will be subject to income tax. The effective tax rate will be 17.5 per cent on the sale price (the presumed tax rate) or 35 per cent on the result of the sale (the real tax rate).
VAT - VAT applies to the sale of goods, the provision of services and the importation of goods and services. Interest arising from a loan granted by a foreign entity is subject to VAT and the Argentine debtor is responsible for the payment of tax. The tax is levied on interest paid at a rate of 21 per cent unless such loans are granted by a foreign lender whose central bank in its country of incorporation has signed up to the Basel Regulations which reduces the rate to 10.5 per cent.
Turnover Tax - The activity of lending money (even if only done once) is considered habitual for tax purposes and is therefore subject to Turnover Tax (meaning tax levied on gross income obtained from the exercise of onerous and habitual activities). This tax is only charged on interest (not any repayments of principal). It is not clear if this Turnover Tax will apply to foreign lenders. This rate varies in different provinces in Argentina.
Stamp Tax - Is a local tax in Argentina and therefore varies in each province and the City of Buenos Aires has its own applicable legislation. In the City of Buenos Aires, for example, the tax rate for the transfer of a loan where the security is real estate is 1 per cent of the value of the agreement. Other jurisdictions, such as the Province of Buenos Aires, have a rate of 1.8 per cent. Again, it is advisable to seek Argentine legal advice before structuring the trade.
NOTARY REQUIREMENTS AND ENFORCEABILITY
Depending on the transfer method and the type of security, a transfer may require additional formalities such as notarisation or registration of the security. If the security is to be registered, then the registration formalities must be completed. It could take between one to six months depending on the type of asset that needs to be registered. For example, if the security is a mortgage, the transfer should be implemented by a public deed (i.e. the deed will need to be notarised before a public notary which generally incurs fees of approximately 1 per cent of the principal amount or lower for high amount deeds) and then registered in the Public Registry of Real Estate for the purposes of becoming effective vis-à-vis third parties. If the security is a registered pledge, then a public deed is not required to evidence the transfer (i.e. the deed does not need to be notarised and raised to the status of a public document) and an authenticated private instrument using forms provided by and filed with the Registry of Pledges is sufficient. The pledge becomes effective vis-à-vis third parties upon the above-mentioned filing.
SEARS HOLDINGS ("SEARS")
American retail giant, Sears, filed for bankruptcy in the early hours of 15 October 2018 (see below for Sears bankruptcy documents). The century old company - hailed by the New York Times as the Amazon of its day - has been struggling to pay its debts, with a gargantuan USD 134m payment currently in deficit. According to the bankruptcy filing, the company was losing USD 125,000a month. Sears said that it is looking to sell its remaining 700 stores and will close 142 stores this year in addition to the already planned closure of 46 stores in the next month. Additional stores may close pursuant to the bankruptcy process. Sears, which also owns the K-mart store chain, has struggled to stay competitive against what some critics are calling the ''Amazonisation" of the retail industry. CNN reports that, the emergence of the internet and behemoths like Amazon, coupled with decades of mismanagement and poor strategic decisions, led to Sears' fall from grace. While rival stores, such as Macy's and Kohl's, invested in marketing campaigns and ultimately turned profits, Sears, has not done so, making a loss of USD 11.7bn since 2010 with sales plunging 60 per cent since then.
SEARS BANKRUPTCY DOCUMENTS:
First Day Declaration
DIP Financing Motion
Notice and Agenda for First Day Hearing
AMERICAN TIRE DISTRIBUTORS INC. ("AMERICAN TIRES")
On 15 October 2018, American Tires, one of the largest independent sellers of replacement tires in North America, filed a joint plan of reorganisation, which is pending in the US Bankruptcy Court for the District of Delaware.
American Tires filed for Chapter 11 bankruptcy on 4 October 2018following a tumultuous financial period in 2018 blamed by CFO William Williams on the "recent trend towards disintermediation and online retail shopping… [disrupting] the replacement tire industry." Goodyear Tire & Rubber Co.'s and Bridgestone Americas Inc.'s decisions in April and June 2018 respectively to deal directly with customers and repair shops (as opposed to through entities like American Tires), as well as the announcement in August 2018 that Sears Holding Corp's auto centers would install tires purchased on Amazon.com, contributed to the drying up of American Tire's cash reserves leading to credit agencies cutting its rating. This subsequently made it more expensive for suppliers to buy credit insurance leading to the makers of tires imposing tighter terms in their dealings with American Tires.
It was announced in court on 5 October 2018 that American Tires had reached an agreement in principle with the majority of its senior lenders which, together with the agreement already in place with 75 per cent of its bondholders, will enable it to exit bankruptcy. This deal (which is subject to court approval) would allow bondholders to receive a 95 per cent equity stake in the reorganised company with the existing shareholders (includingTPG Capital LP and Ares Management LP). This reorganisation agreement with the bondholders aims to cut around USD 1.1bn of its debts, previously detailed at totaling over USD 2.3bn. Furthermore, it is reported that US Bankruptcy, Judge Kevin J. Carey, gave interim approval for USD 250m in new financing from certain bondholders to help American Tires fund its business during the Chapter 11 proceedings which, together with the refinancing of a pre-existing USD 980m asset-backed credit facility, forms the USD 1.23bn debtor-in-possession loan.
STEINHOFF INTERNATIONAL HOLDINGS N.V. (“STEINHOFF”)
Steinhoff confirmed in a SENS statement issued on 19 October 2018 that in excess of 85 per centof the creditors have confirmed support of the proposed extension for the long-stop date requested from creditors under the lock-up agreement on 15 October 2018. This extension pushes the long-stop date back from 20 October 2018 until 20 November 2018. Steinhoff requested additional time to allow for the finalisation of the documentation to implement the restructuring of Steinhoff, Steinhoff Europe AG ("SEAG"), Steinhoff Finance Holding GmbH and Stripes US Holding ("SUSHI"). The deadline for creditors to consent to this request was on 23 October 2018.
It was reported on 4 October 2018that a group of Steinhoff bondholders may inject USD 300minto Mattress Firm Inc. ("Mattress Firm") as part of the bankruptcy filing. Furthermore, following reports on 5 October 2018 that Mattress Firm was taking steps to implement a pre-packaged restructuring through a voluntary Chapter 11 filing it was also announced on 24 October 2018that the High Court in England had granted SUSHI (a direct subsidiary of SEAG) permission to convene a creditors meeting for a proposed scheme of arrangement. The proposal under the SUSHI scheme of arrangement is that lenders under the current SUSHI revolving credit of around USD 200m will grant substantially similar rights under a new revolving credit facility between, amongst others, SEAG as borrower with the SUSHI revolving credit facility being cancelled.
It was further reported by Bloomberg on 17 October 2018that VEB - the Dutch investor group given permission last month to take Steinhoff to court in the Netherlands following claims of the publication of incorrect financial statements and press releases ahead of the accounting scandal leading to the share price dropping by 95 per cent in value - had agreed to hold off on legal action until 1 April 2019 to allow Steinhoff time to reorganise its business and prepare audited financial statements. This follows reports on 28 September 2018 that South African investors, includingInvestec's asset management arm and OldMutual, were also backing litigation against Steinhoff in the Netherlands (separate from VEB's class action). Reuters Africa reported that this case is being paid for by Claims Funding Europe, a litigation-funding company based in Ireland and run by BarentsKrans (a Dutch law firm). These legal actions are in addition to Steinhoff being sued in Germany and South Africa and Christo Wiese (the former No.1 shareholder) claiming ZAR 59bn (USD 4.2bn).
Markus Jooste, the former CEO, has also been referred by the company to a South African police unit with Bloomberg reporting on 10 October 2018 that it had seen text messages sent by Markus Jooste to friends advising them to sell their shares before the stock collapsed.
AGROKOR D.D. ("AGROKOR")
On 24 October 2018, a New York bankruptcy judge ruled that the food giant’s foreign restructuring proceedings are enforceable in the US. The judge ruled that, despite the fact that modifications of the English law-governed debt are needed, the settlement reached earlier this year is enforceable in the US. The judge noted that English case law may not permit recognition and enforcement of the decision and held that there was, nonetheless, comity between Croatian insolvency principles and US insolvency laws. This news comes as Ivica Todoric, who built Agrokor from a flower trader to a conglomerate, is facing extradition from the UK to Croatia to face allegations of fraud linked to the collapse of Agrokor.
LEHMAN BROTHERS HOLDINGS INC. ("LEHMAN") UPDATE: MAVERICK PROPERTY CLAIM AGAINST LEHMAN REJECTED
The US District Court hearing an appeal filed by a collection of Maverick funds has rejected its arguments in a blow to the property giant. Maverick argued that pursuant to the guarantee provided by Lehman with respect to certain obligations of Lehman Brothers International (Europe) ("LBIE"), it is entitled to the difference between (i) the market value of Maverick's properties at the time it entered into a settlement and netting agreement with LBIE; and (ii) the market value of the property at the time when Lehman and LBIE filed for bankruptcy. This difference totalled around USD 17m. The court noted that Maverick had entered into two separate agreements: (i) a prime brokerage agreement with LBIE and (ii) a separate absolute and unconditional guarantee with Lehman with respect to the Maverick property in LBIE's custody. The court opined that a combination of two exculpation clauses in the prime brokerage agreements and a US Bankruptcy Code rule which specifies the relevant date for assessing damages, means that Maverick's claims could never have been successful. The court also noted that the damages alleged by Maverick were not contemplated as within the remit of the Bankruptcy Code. What this means for claims falling within the grey area of bankruptcy-related claims, remains to be seen.
Court decision attached here.
LOAN MARKET ASSOCIATION (“LMA”) UPDATES
UPDATED LMA STANDARD TERMS AND CONDITIONS - 29 OCTOBER 2018
The LMA recently amended its Standard Terms and Conditions as well as its forms of Participation Agreements to take into account the revocation of the ERISA fiduciary rule from 2017. The rule, drafted by the US Department of Labor, required financial advisors to act in their clients' best interests where retirement accounts were concerned. This is in part a result of President Trump's attempts to investigate the financial burden the ERISA rule caused for the financial services industry. Revocation of the rule now means that financial advisors can give financial advice on ''suitable'' investments for ERISA funds, without having to act in the clients' best interests. For now, the LMA has updated its standard templates by removing the ERISA fiduciary representations.
LMA FORM OF TRADE RECAP
The LMA has recently issued a new form of trade recap template to make the trading of debt more efficient and reduce settlement times. It is intended to provide the basis on which the Trade Confirmation is drafted and include the key terms agreed at the time of trade.
INSOLVENCY LAW UPDATE
LOW-COST AIRLINES: COMMON PATTERNS LEADING TO INSOLVENCY
Primera Air, the low-cost airline originally based in Iceland and now operating out of Denmark, has followed many other low-cost airlines into insolvency. In an article for Law360, Brown Rudnick partner, Henry Kikoyo, details the pattern of insolvencies seen in the low-cost airlines industry. Henry suggests that part of the reason for this trend is the erratic business model, over ambitious route plans, and excessive debt of these low-cost airlines. Furthermore, the requirement under Regulation (EC) No. 261/2004 for airlines to compensate and provide assistance to passengers where flights are cancelled or experience long delays or if passengers are denied boarding can be crippling for low-cost airlines like Primera Air. Where this leaves the low-cost airline industry remains to be seen.
For more information please contact Henry Kikoyo.
FOR QUESTIONS OR MORE INFORMATION, PLEASE CONTACT: