Brexit – what can private equity funds do to hedge against sterling risk?

We have seen a dramatic increase in interest in hedging FX risk related to investments by private equity funds.

The precipitous decline in the value of sterling has caused complications for funds which are in the process of acquiring UK assets. For deals which are still going ahead, many sponsors are using or considering deal contingent FX hedges to protect them against further fluctuations. These products are offered by a small number of banks to funds which are buying or selling assets denominated in a different currency to their base currency.

They allow the fund to enter into an FX forward which will only settle if the sale goes ahead (for example, when the conditions precedent to completion such as competition clearance are satisfied). The forward agreement includes a schedule of settlement dates with FX rates which gradually move against the fund depending on when settlement actually occurs. They are, in a sense, options without a premium which are contingent on completion.

EU Referendum – what does it mean for alternative capital providers?

The UK referendum has caused uncertainty in the financial services industry, but what does it mean for alternative capital providers? And could it create some business opportunities?

Alternative capital providers are unregulated, or at least non-bank, financial institutions. Alternative finance embraces lenders from the smallest participants in peer-to-peer platforms to multibillion dollar global alternative lending funds. They cover product areas such as leveraged finance, real estate finance, factoring, leasing, consumer lending and trade finance.

The referendum has two key consequences for the alternative finance industry.

Read the full Client Alert here.

 

German Federal Court Ruling Important for Future Contractual Netting Arrangements

In a decision of 9 June 2016, the German Federal Court of Justice (Bundesgerichtshof, “BGH”) has ruled that the determination of the close-out amount in a netting provision based on the German Master Agreement for Financial Derivatives Transactions (Rahmenvertrag für Finanztermingeschäfte or DRV) is not legally effective in the event of insolvency to the extent that it deviates from section 104 of the German Insolvency Code.

The reasoning of the decision has now been published and provides a number of answers to questions which are important for future contractual netting arrangements.

To read more about the decision, please click here.

The Class X Factor: It’s a NO from the Chancellor

It’s not been a good month for Class X Noteholders. Following the judgment in the Windermere VII case (see our commentary here) in which Snowden J found against the Class X Noteholder, the Chancellor of the High Court, Etherton J, in Titan Europe 2006-1 P.L.C. and others [2016] EWHC 969 (Ch) similarly rejected the arguments put forward by the Class X Noteholders.

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Italian reform and the latent potential for CMBS

Fuelled by continued macro-economic uncertainty, the European CMBS market is currently experiencing a prolonged period of malaise. Meanwhile the Italian legislative cogs have continued to turn. The news last week that the Italian government has finally approved a decree on NPL securitisations, which comes hot off the heels of the proposals to establish a private sector bail-out for banks and the promise of insolvency law reform, once again demonstrates that Italy is the jurisdiction to watch in 2016.

In my view Italy has the potential to play an integral role in not only kick-starting, but revolutionising the European CMBS market – a topic that I explore in greater detail in this week’s edition of Financial News (Leading a renaissance? It’s just what Italians do).

Therefore, as we continue to canter through 2016, I for one, will be watching and waiting to see if Italy begins to deliver on this latent potential…

X-tra, X-tra, Read All About It!

Mr Justice Snowden has handed down judgment of the High Court in the much anticipated Windermere VII Class X Notes dispute.

For those of you who haven’t been following it, the dispute relates to the Windermere VII Pan European CMBS in which the holder of the Class X Notes and a holder of the Class B Notes commenced proceedings in the English High Court seeking a number declarations as to the proper construction of the transaction documents.  Broadly speaking, these declarations were with respect to the basis on which payments of Class X interest had been made historically (specifically, as a result of the application of the intercreditor agreements), whether this underpayment constitutes an Event of Default and whether or not any underpayments accrue interest at the Class X Interest Rate.  The holders of the Class X Notes and a holder of the Class B Notes asserted that there had been historical underpayments of Class X interest, that there had been an Event of Default and that these unpaid amounts should accrue interest at the Class X Interest Rate, which at various points in the life of the transaction had been as much as 6,001%.

The judgment can be found here.

In a nutshell, Mr Justice Snowden dismissed the Class X Noteholder’s arguments and confirmed:

I do not consider that there has been an underpayment of the Class X Interest Amount for the January 2015 or October 2015 Payment Dates, or that any further interest at the Class X Interest Rate would have accrued thereon under Condition 5(i), or that any Note Event of Default has occurred as a consequence.”

The judgment will likely be welcomed by other Noteholders in the structure and makes for interesting reading for anyone involved in CMBS or structured finance generally.  Reed Smith advised the successful issuer, Windermere VII on this dispute.  A further detailed analysis of the case will follow.

It is now fact – CMBS is the answer to Italian bank deleveraging woes!!

Almost a year ago to the day, I posted a blog questioning whether CMBS was the answer to Italian bank deleveraging woes.  One year on, I am pleased to say that the Italian government (clearly channelling me!) has just reached an agreement with the European Commission to provide for a guarantee mechanism for the securitisation of Italian non-performing loans (NPLs).  In effect, the European legislature has given the green light to the deployment of securitisation as a tool to clean up Italian bank balance sheets.  In other words, the answer to my question was YES!

This news is a hugely significant, positive sign for European securitisation markets.  Hot off the heels of the proposed Securitisation Regulation, by agreeing to this securitisation proposal, the European legislature has once again acknowledged the vital role that securitisation can play for the European economy.  Turning more specifically to CMBS issuance, the magnitude of this development will largely depend on the extent to which Italian banks deploy securitisation as a means of off-loading NPL’s secured by commercial real estate (CRE).  However given the suggested volume of Italian CRE NPLs, the issuance backed by such loans has the potential to be sizeable.

Since the European CMBS market re-opened in June 2011, Italy has been one of the jurisdictional bedrocks of CMBS 2.0 being one of a few countries where there has been a steady flow of deals.  The primary driver for this has, to date, largely been attributable to CMBS being used as a means of overcoming those Italian domestic regulations which require institutions purchasing syndicated loans to have a banking licence.  With this in mind, the news that the European legislature has given the thumbs up to using securitisation as a means of cleaning up the balance sheet of Italian banks will have the metaphoric effect of throwing fuel on the Italian CMBS fire and thus in the coming year it is likely that we will witness a surge in the levels of primary issuance.

Indeed, such an uptick in Italian issuance should promote increased evolutionary change in the CMBS product, spurred on by a need for structures to accommodate a greater variety and number of non-performing CRE loans.  A further consequence of this legislative measure is likely to be the deepening and strengthening of the investor base required to absorb and competitively price CMBS deals.  Similarly investors that are already in this space should finally have the justification to put in place the internal resources and infrastructure required to invest in this asset class in real volume.  Finally, we may also start to see a contagion effect in the European CMBS market, caused by those investors in these deals also demanding product backed by CRE located in jurisdictions other than Italy.

Considering all of the above, it is therefore quite possible that Italian and European legislators could have in fact hatched a plan that may not only prove integral to the rehabilitation of the Italian banking system, but also be positively revolutionary for the re-emergence of European CMBS issuance.

 

CMBS 2016: Tailwinds and wishes

Earlier this month I set out my CMBS predictions for 2016 in the Investment Adviser (Broadening the scope of CMBS loan issuance), where I predicted that macro-economic conditions would continue to challenge the re-establishment of CMBS as financing tool for European commercial real estate (CRE).  Indeed, the first few weeks of the year have done little to alleviate these residual concerns given the renewed and heightened volatility in the Chinese capital market, the continual slide in the price of oil as well as the raft of disappointing UK economic data.  As was demonstrated during 2015, these factors have the potential to have a profound adverse impact on the pricing of CMBS bonds and with it, the ability to act as a metaphoric off-switch for primary issuance.  Despite these warranted notes of caution, it is therefore essential that CMBS market participants do not get too carried away with the headwinds of the potential of another financial crisis, but instead concentrate on those positive tailwinds that have continued to move CMBS along from being a financing myth to potentially becoming an integral financing instrument for European CRE.

Indeed, the most encouraging tailwind for the securitisation product, is the fact that simple, standardised and transparent securitisation is considered by regulators as one of the building blocks of a European capital markets union.  In order to achieve this, the European Commission has therefore published a legislative proposal for creating a European framework for simple, transparent and standardised securitisation (the so called Securitisation Regulation) which is currently making its way through the European consultation mill.  However for this to go from being a headwind to a tailwind, it is important that many of the structural nuances associated with CMBS as an asset class are addressed as currently this regulation does follow a similar direction as other well meant legislation such as Solvency II which has had the unwelcome effect of inadvertently penalising CMBS as an asset class.

Other encouraging CMBS tailwinds to be aware of include the fact that the geographical net of CRE assets financed by CMBS has greatly expanded in recent years, as has the complexity of the deal structures to include multiple loans in different jurisdictions.  Indeed, last year we saw the first Pan-European CMBS deals since the financial crisis which is an important milestone in the evolution of CMBS 2.0.

Taking into account these positive tailwinds, I therefore have four wishes for the European CMBS market in 2016.  Firstly, I wish that European primary CMBS issuance will shortly resume and that unlike 2015, we will witness a steady flow of deals throughout the year.  Secondly, although I acknowledge that this year will be challenging for the financial markets, it is nevertheless my wish that market participants do not get too carried away with those adverse macro-economic reports that are currently monopolising the global financial press.  Thirdly, I wish that the European regulators will appreciate the structural idiosyncrasies of CMBS as an asset class and therefore do not introduce measures that have the unintended consequences of penalising CMBS vis-à-vis other asset classes.  Finally, I wish that the European market experiences an exponential “boom” in CMBS issuance involving multiple loans, multiple jurisdictions and multiple arrangers.

Clearly only time will tell, whether any of these wishes will become true and indeed my fourth and final wish can justifiably considered rather fanciful, but that said, if the other three wishes  materialise, then there is no reason why my fourth and final wish cannot become a CMBS reality…….

Green Bonds – how to unlock its full potential?

The green bond market is currently one of the fastest-growing fixed-income segments, with issuances tripling between 2013 and 2014. There is a sense of excitement and optimism surrounding the market – initially led and developed by the multilateral development banks (MDBs) and international financial institutions (IFIs), but now actively promoted, sponsored and supported by the private sector.

For more information, read our Client Alert on reedsmith.com.

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