With-Hold on a second?! New ISE rule leads to automatic de-listing of debt securities at scheduled maturity

Picture this: it’s 1793. In England, George III is on the throne and the Bank of England issues the first ever ‘fiver’.  In the U.S.A, George Washington hosts the first US cabinet meeting as President and the capital moves from Philadelphia to Washington, D.C.  In France, the French Revolution is in full swing with King Louis XVI guillotined, and France becomes the first country to adopt the metric system.

And in Ireland, the Irish Stock Exchange is founded. Though of course, that is not to say that there weren’t other important things happening in Ireland at the time as well…. Continue Reading

The NPL Circus: the Italian Tightrope

This summer, fans of the non-performing loan (NPL) circus, are in for a treat with the launch of the Italian tightrope trick.

Spurred on by the recent European Banking Authority stress tests, the news last week that Banca Popolare di Bari will become the first bank to utilise the Italian state guarantee scheme and deploy securitisation technology as a means of off-loading a €470m portfolio of non-performing loans is a significant step forward for the global NPL market and therefore the NPL circus.

As we noted in April (Italian reform and the latent potential for CMBS), Italy is certainly the jurisdiction to watch in 2016 and in that vein, we are pleased to see that after months of waiting, the first Italian NPL securitisation will be deployed as a mechanism to address Italian bank NPL anguish. Although the application of this technology could be a huge boost for both the European NPL market and the utilisation of securitisation technology, the realities of whether this will become a commercial success will ultimately be contingent on the pricing of notes. Assuming, that these commercial objectives can be met (and there is every chance that they will be, given that the capital markets are currently awash with low yielding paper) then this is likely to be the first of many deals from the beleaguered Italian market and with it the NPL circus will have a new trick.

The establishment of this structure will be a massive feat for Italy, as somehow the Italian legislature has managed to conjure the impossible: on the one hand they have been prevented from applying state aid to address the NPL issue without “bailing in” creditors yet on the other hand the “bailing in” of creditors has not been a viable option given that these largely comprise Italian retail investors. In other words by devising a state guaranteed securitisation structure that is capable of divesting a significant volume of NPL’s, the Italians have somehow proven that it is metaphorically possible for someone to walk along a tightrope with their arms tied firmly behind their back and a parrot stood on their shoulder for good measure!

Although admittedly it has taken a while for the first transaction to reach fruition, the fact that Italy has proven that the seemingly impossible is possible, in a world where there is ever increasing focus on those banks that possess sizeable NPL exposures, then it is quite conceivable that from the doldrums of banking woes, Italy has managed to prove that there is a glimmer of hope for those banks and jurisdictions currently  struggling under the weight of their NPL’s.

As for the NPL circus, it is fantastic news that finally we can watch the long awaited Italian tightrope trick, however as the audience watch with bated breath, we cannot help but think, is this is a one trick wonder or a regular addition to the show!


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.

Continue Reading

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.