Countries around the world are imposing further restrictions in light of the second wave of coronavirus cases with the Republic of Ireland having moved their restrictions policies into level 5 (their highest level), arguably adopting "Europe's strictest regime" as Taoiseach (the prime minister of the Republic of Ireland), Mícheál Martin, said.
To facilitate the survival and recovery of thousands of businesses, amongst other measures, Ireland has passed The Companies (Miscellaneous Provisions) (COVID-19) Act 2020 which is an interim piece of legislation effective until 31 December 2020 (unless further extended). Some of the relief brought about by this legislation includes the following:
- Power by the courts to extend the maximum period of examinership (a procedure, largely based on the US Chapter 11 procedure, which provides breathing space to the company enabling it to explore options in an attempt to survive) from 100 days to 150 days.
- The ability to hold virtual (i) creditors' meetings in voluntary and other liquidations, examinerships and statutory schemes of arrangement; and (ii) Annual General Meetings.
- Protections for directors from personal liability (directors must now have regard to the interests of the creditors and preserve property of the company).
- Allows for the execution of documents under company seal in counterparts.
In the aftermath of the last financial crisis, a large number of non-performing loan (“NPL”) portfolio sales came to the market as Irish banks were tasked with either cleaning up their balance sheets or deciding to withdraw from the Irish lending market. At the end of 2019, the average NPL ratio across Irish banks stood at around 3.4 per cent (down from an all-time high of 25.7 per cent in December 2013). In August, it was reported that Bank of Ireland “has taken a EUR 937m impairment charge to cover loan losses” and that its exposure to NPLs “rose EUR 1.1bn to EUR 4.6bn or 5.8 per cent of gross lending, a reflection primarily of conditions in its corporate, property and construction loan books”.
On 27 October 2020, Permanent TSB Plc (“PTSB”) announced a sale of a portfolio comprising of c.3,700 performing Buy to Let (“BTL”) loans secured against BTL properties, with a gross balance sheet of USD 1.4bn (not inclusive of any loans subject to COVID-19 payment holidays) to Citibank NA London (“Citi”). On acquisition of the portfolio and receipt of the USD 1.2bn consideration PTSB’s NPL Ratio will increase from c.7 per cent to c.7.7 per cent. Citi’s intention is to syndicate the portfolio by way of securitisation. This transaction may be the beginning of a new wave of non-performing loans coming to the market following the COVID-19 crisis.
This month’s trade alert considers key points for investors to consider when acquiring loans in Ireland.
IRISH LEGAL SYSTEM
Similar to the UK (and the US), Ireland has a common law legal system. Ireland is a member state of the EU and also of the Organisation for Economic Co-operation and Development. It is an EU onshore jurisdiction and in coming to Ireland parties must consider relevant laws and regulations relating to certain Irish legal and regulatory matters, along with any relevant tax issues, in connection with any particular transaction involving Irish assets. The focus of this overview is on certain considerations parties often keep in mind when looking to acquire Irish loans (whether performing, non-performing or re-performing).
KEY POINTS FOR TRADERS
- No banking licence required
- Business of lending is subject to AML and CFT legislation
- Transfer by assignment, novation or transfer
- Notification to the borrower is necessary to perfect the assignment
- Contractual liabilities transferred by novation
- Trusts and agency concepts are recognised
- Withholding tax applies at the standard rate of tax (although a broad range of exemptions may apply)
BANKING LICENCE REQUIREMENTS
A banking licence is not required in Ireland for lending to corporates unless the lender accepts deposits or other repayable funds from the public. Commercial lending (i.e. lending to large corporates) is generally an unregulated activity in Ireland, although lending to natural persons (i.e. lending to consumers) will require authorisation from the Central Bank of Ireland (the “CBI”) (e.g. as a retail credit firm).
Irrespective of whether a lender is authorised or not by the CBI, the business of lending in Ireland is a “Schedule 2 Activity” under Irish anti-money laundering (“AML”) and countering of terrorist financing (“CFT”) legislation which requires the lender to comply with certain laws and to be registered with the CBI.
Credit servicing is a regulated activity in Ireland. Purchasers of certain loan portfolios may have to appoint a regulated “credit servicing firm” to undertake credit servicing activities (including holding legal title to loans) on their behalf. Broadly, the regulation of “credit servicing” activities seeks to ensure that borrowers whose loans (i.e. performing and non-performing consumer loans) are sold by a regulated entity to an unregulated entity maintain the same regulatory protections as they had prior to the sale (including those protections provided by the CBI Code of Conduct on Mortgage Arrears and the Consumer Protection Code). There is a safe-harbour from authorisation where a “securitisation special purpose entity” meets certain conditions.
METHOD OF TRANSFER
The normal methods of transferring loans are contractual assignment, novation or transfer. Participation agreements can also be used in Ireland.
Notification to the borrower is necessary to perfect the assignment of the legal interest in a loan and notification will be required in any enforcement proceedings against the borrower taken directly by the assignee. In practice, it is normally prudent to notify borrowers (and any guarantors) and there may also be a regulatory requirement under the CBI’s codes of practice when the loan was originated by a regulated entity.
A transfer of a loan originated by a regulated entity and secured by a mortgage of residential property may require written borrower consent (normally this is provided for in the lender's standard loan documentation). Loans originated by unregulated entities may be transferred without consent if the loan agreement so permits.
The general practice is that liabilities under a contract (i.e. the obligation to provide future credit in a revolving credit facility) are transferred by novation. If a revolving credit facility will involve the on-going provision of credit to a consumer, there will be a requirement to be authorised as a regulated entity (e.g. a retail credit firm) and comply with certain AML and CFT legislation in Ireland.
SECURITY AND TRUSTS / AGENCY
Trusts and agency concepts are recognised in Ireland. Where a new lender wants to take the benefit of existing security (e.g. under a bilateral loan), and assuming the assignment (or novation) is correctly structured, the security should transfer on assignment and the new lender will be assigned the benefit of the relevant security documents. Certain formalities should be completed to ensure that public records (e.g. companies registration office, Land Registry or Registry of Deeds) are updated - it is important that these formalities are completed prior to any enforcement action. In order to mitigate risk in an insolvency situation of a security agent, it would be normal to hold the security on trust so that any security held by the security agent will not form part of the agent's estate in the event of their insolvency.
TAX AND STAMP DUTY CONSIDERATIONS
Irish withholding tax applies at the standard rate of tax (currently 20 per cent) on payments of Irish source yearly interest (e.g. payable by an Irish resident borrower) which are made by a company to Irish resident persons, and by any person (including a company) to non-Irish resident persons. Domestic Irish legislation does however provide for a very broad range of exemptions from the withholding tax including: (a) interest paid by an Irish company to an Irish authorised credit institution or EEA authorised credit institution providing its commitment through an Irish branch, (b) interest paid to a company which is resident for tax purposes in certain EU member states or jurisdictions with which Ireland has a double tax treaty (Ireland has entered into 74 double tax treaties), provided the interest is not payable in connection with an Irish branch or agency of the lender, (c) interest which is paid by an Irish securitisation company (aka a "Section 110 company") to a person who is resident for tax purposes in an EU member state or jurisdiction with which Ireland has a double tax treaty, provided the interest is not payable in connection with an Irish branch or agency of the lender, (d) interest which is paid by an Irish company to a US incorporated company that is subject to US tax on its worldwide income, provided that interest is not payable in connection with an Irish branch or agency of the US lender, and (e) interest which is paid to an Irish securitisation company.
Withholding tax of 15 per cent must be deducted by a purchaser from sale proceeds arising on the sale of certain assets (i.e. Irish land, Irish mineral or certain exploration rights, or shares which derive the greater part of their value from land or Irish minerals or certain exploration rights). No withholding is required where the consideration is EUR 500,000 or less, or EUR 1m in the case of a residential house or apartment, or where the vendor/receiver produces a tax clearance certificate.
In general loans are novated rather than assigned. No charge to Irish stamp duty arises on a novation as it does not constitute a conveyance or transfer, and so does not fall within the charge to Irish stamp duty. Where a novation is not possible, the transfer of a debt of a corporate borrower will be exempt from Irish stamp duty under the "loan capital" exemption where the loan:
(i) is not convertible into stocks or marketable securities (other than loan capital) of an Irish registered company or into loan capital having such a right;
(ii) does not carry rights that generally attach to shares (for example, voting rights, rights to distributions of profits);
(iii) is issued for not less than 90 per cent of its nominal value; and
(iv) is not linked to any share or marketable security indices.
The transfer of a loan secured on Irish real estate should also be exempt from stamp duty.
In addition, the transfer of a loan should also be exempt from Irish stamp duty under the "debt factoring" exemption where the debt is transferred in the ordinary course of business of the vendor or the purchaser and the transfer does not relate to Irish land or stocks or marketable securities of an Irish registered company (other than an Irish securitisation company or an Irish regulated fund) (e.g., the transfer is not made in return for shares).
EUROPCAR MOBILITY GROUP (“EUROPCAR”)
Europcar, a French car rental company listed on Euronext Paris since 2015, has been impacted severely amid worldwide COVID-19 restrictions on the tourism and travel industry, suffering a loss of EUR 286m in H1. The company’s shares price has declined from c. EUR 4.80 in October 2019 to c. EUR 0.66 in October this year, partially driven by an announcement of the company to commence debt restructuring discussions on 7 September 2020. The company has EUR 1.32bn of net debt as at 30 September 2020 comprising of loans and bonds.
On 30 September 2020, the company further announced that it was beginning to solicit consents from the holders of the Senior Notes and EUR 500m Senior Secured Notes due 2022 to amend the related documentation “to permit the appointment by the Group of a mandataire ad hoc and/or a conciliateur with respect to one or more of the main holding companies of the Group” without triggering a Default or and Event of Default.
On 14 October 2020 the company confirmed that they had received the requisite majority of consents and the supplemental indentures effectuating the proposed amendments were executed on 13 October 2020 appointing a Mandataire ad hoc (“MAH”). As a practical matter, the appointment of a MAH will give Europcar and those of its creditors that are invited to the negotiation table, the duration of the MAH (generally 4 to 6 months) to find an agreement on a strictly voluntary basis. The creditors of Europcar might find themselves in less amicable/voluntary waters should an expedited safeguard procedure (procedure de sauvegarde accélérée) be opened. Indeed, should the MAH fail to result in an agreement, the conciliation procedure is usually opted for in order to continue amicable negotiations or ultimately coerce the creditors within expedited safeguard proceedings.
The company further confirmed on 26 October 2020 with the release of its Q3 results, that it has commenced discussions with its corporate debt creditors as a means of achieving a financial restructuring, the aim of which will be “to ensure a sustainable capital structure adapted to its level of revenue, with reduced corporate indebtedness and appropriate liquidity”.
Europcar’s Q3 results showed the adjusted corporate EBITDA, despite near EUR 200m less than in Q3 2019, was a positive EUR 45m. The revenue was reported to be down by 50 per cent to EUR 537m compared with Q3 2019 amid the impact of the COVID-19 related travel restrictions and it was further reported that Europcar has been limiting its cash consumption which went down from EUR 184m in Q2 to EUR 71m in Q3.
PIZZAEXPRESS GROUP ("PIZZAEXPRESS")
In August 2020, Pizza Express (Restaurants) Limited announced it would enter into a Company Voluntary Arrangement ("CVA") as part of a wider restructuring to reduce the group's debts. The restaurant chain had been struggling even before the COVID-19 pandemic and, in November 2019, the group's owner, Chinese private equity firm Hony Capital, offered to buy back bonds maturing in 2022 in an attempt to tackle the company's debt pile. Despite this, the UK's national lockdown measures which forced restaurants to close in March 2020, coupled with a missed bond interest payment due on 31 July 2020 of approximately GBP 20m, meant the group had to look to restructure its debts.
On 7 September 2020, PizzaExpress confirmed that more than 89 per cent of its creditors who voted on the CVA had approved it. The CVA proposed the closure of 73 of the company's 450 restaurants and the loss of around 1,100 jobs and on 29 October 2020, PizzaExpress announced it would cut a further 1,300 jobs as rising COVID-19 cases and further restrictions cause footfall to decline.
In addition to the CVA of Pizza Express (Restaurants) Limited, PizzaExpress Financing 2 Plc, proposed a Restructuring Plan under Part 26A of the Companies Act 2006. This is only the second time a company has used the new Restructuring Plan, which was introduced earlier this year by the Corporate Insolvency and Governance Act 2020. On 30 September 2020, the English High Court granted the company permission to hold creditor meetings for the three classes of creditors to vote on the Plan (for further information please see the skeleton argument here). The creditor meetings took place on 21 October 2020, and the requisite majority of plan creditors voted in favour of the Restructuring Plan, resulting in no court approved cross-class cramdown being required. The Plan involves the restructuring of the company's share capital as well as the GBP 465m senior secured notes due 2021 which are worth around GBP 200m.
Bondholders will inject GBP 144m into the company taking ownership of the UK and Irish arms of the business with the group's debt being cut by more than half to GBP 319m. Hony Capital will retain ownership of the Chinese operations.
The Restructuring Plan was sanctioned by the court on 29 October 2020 and PizzaExpress is expecting to complete the restructuring by 6 November 2020.
For more information on PizzaExpress' Restructuring Plan, please see our recent article.
GARRETT MOTION INC (“GARRETT”)
Garett is a Swiss based auto-parts maker, previously owned by Honeywell International Inc (“Honeywell”), which on 20 September 2020 filed for Chapter 11 protection amid COVID-19 related downturn in business activity combined with some USD 1.3bn legacy asbestos liabilities it still owes to Honeywell. At the time of filing, Garrett sought approval of USD 250m debtor in possession (“DIP”) financing to aid in continuing its operations through the restructuring process, and entered into a “stalking horse” purchase agreement for a potential USD 1.2bn sale of the company to KPS Capital Partners (“KPS”), a private equity firm. This motion was opposed by Honeywell and other undisclosed shareholders, partly due to the inclusion of deadlines which carried a risk of rushing the sale to KPS.
Following Honeywell’s objections to this deal at the court hearing, Garrett agreed to consider the alternative financing proposal to be put forward by Oaktree Capital Management and Centerbridge Partners, and together with Honeywell (the “Bidding Group”). On 16 October 2020 the Bidding Group entered into a coordination agreement and put forward a non-binding proposal to sell control in the company to the Bidding Group and discontinue a further marketing process. Shortly after the announcement of the Bidding Group proposal, KPS have raised their “stalking horse” bid by USD 500m to USD 2.6bn with an opportunity for Garrett stockholders to potentially invest in a new parent company. Garrett have responded to both of these proposals on 20 October 2020, raising further questions in relation to the Bidding Group’s non-binding proposal and inviting them to participate in the bidding process with an indication of intention to proceed with the KPS bid.
On 21 October 2020, the court granted approval for a USD 50m lower than initially planned DIP financing of USD 200m and notwithstanding the strong opposition, on 23 October 2020 the court also approved the bidding procedures motion enabling Garrett to offer bidding protections to KPS (in terms of the break up costs in case they are out-bid) and encouraging a competitive auction process to take place on 18 December 2020 whereby Garrett will be able to sell its business or consider alternative restructuring proposals.
Garrett’s expectation to emerge from bankruptcy and complete a sale process is set for early 2021.
CARNIVAL CORPORATION (“CARNIVAL”)
Carnival, the world’s largest, US-headquartered cruise line operator, had been struggling to stay afloat since the early days of COVID-19 as the USD 45bn cruise industry was battling to regain the trust of its customers following the crisis surrounding Diamond Princess and Grand Princess (both owned by Carnival). As early as March this year, it drew down on its USD 3bn revolving facility, and was looking to issue new senior secured bonds and new stock, as well as converting the bonds into equity in an attempt to raise USD 6bn to remain solvent. Since March, Carnival reported in its Business Update published on 8 October 2020, that it raised USD 12.5bn through (amongst other transactions) (i) borrowing USD 2.8bn under the term loan facility; (ii) issuing of USD 2.8bn second priority senior secured notes; (iii) the sales of shares under the equity distribution agreement; and (iv) purchase of USD 886m of its 5.75 per cent Convertible Senior Notes due 2023 from the proceeds of new 99.2m shares issued. On the same day, Carnival released its Q3 results showing a staggering 99.5 per cent fall in revenue to USD 31m (compared to USD 6.53bn in Q3 2019) and a net loss of USD 2.86bn (compared to net income of USD 1.78bn in Q3 2019). Carnival also reported that its monthly cash burn in Q3 stood at USD 770m but it is expected to drop in Q4 down to USD 530m.
As of 17 October 2020, the company is only operating two of its brands (AIDA and Costa Cruises), as the US operations have been under a “no-sail” order until 31 October 2020 after which it may resume operations in the US subject to any further COVID-19 travel restrictions which could accelerate its recovery. In the meantime Carnival is focusing on maintaining liquidity and had a total of USD 8.2bn in cash and cash equivalents as at 31 August 2020.