In September 2008, the seismic collapse of Lehman Brothers initiated one of the largest corporate insolvencies in history. Nearly ten years later, in a landmark decision, the High Court has sanctioned the scheme proposed by the administrators of its principal European trading arm, Lehman Brothers International Europe ("LBIE").¹

The administration of LBIE has, after the repayment of all creditors, produced an unprecedented surplus of £6.6 billion, plus an estimated £1.1 – 1.7 billion of anticipated future recoveries. This surplus was effectively unavailable for distribution on account of creditors' interest claims until all inter-creditor disputes relating to priority and entitlement to the funds had been resolved. The various proceedings outstanding in the English Courts² showed no signs of swift resolution, and creditors were suffering mounting losses in terms of the 'time value' of their money locked up in the administration.

LBIE's administrators therefore proposed a scheme of arrangement as the only realistic way to enable the distribution of the surplus without years of further litigation. Schemes are often used by companies in financial difficulties to reach a compromise with one or more classes of their creditors. The 'cram-down' mechanism is a powerful feature of a scheme which allows companies to override unanimous or super-majority consent requirements, provided that the scheme is approved by 75 per cent in value and a majority in number of voting creditors and sanctioned by the Court.

The use of a scheme by LBIE's administrators was a bold and ambitious approach for several reasons:

• The compromise in the LBIE scheme consisted of the creditors, some of whom were pursuing proceedings to maximise the value of their interest claims, sacrificing the possibility of obtaining a greater quantum of interest through those proceedings in return for a swift resolution and expedited return of the surplus. This contrasts with most restructuring and insolvency schemes, which usually see creditors agreeing to compromise their existing claims in return for new or amended debt claims (and sometimes equity or other entitlements).
• The LBIE scheme was not initially supported by all major creditors, which raised the possibility of challenge, delay or even failure. Whilst the administrators had obtained the support of creditors representing more than 75 per cent in value of the unsubordinated claims, several major creditors expressed objections, including global investment banks and hedge funds.
• Finally, the scheme had to be carefully engineered to reflect the differences in the nature of creditors' interest claims and the treatment of interest prescribed by the judgments to date, and incorporate a procedure for the adjudication of the interest claims of creditors which were contractually entitled to a higher rate of interest ("Higher Rate Creditors").

These challenges made the scheme an ambitious solution on its face. In this context, and given the quantum of claims, it was inevitable that there would be pressure points where the process and treatment of creditors created potential grounds for challenge and prompted careful consideration by the Court.

1. Class composition

Creditors opposed to the scheme argued at the convening hearing that the proposed voting classes were improperly constituted. The classes consisted of:

(i) Specified Interest Creditors (creditors under certain contracts which specified an interest rate higher than the 8% rate which would otherwise have applied) and 8% Creditors (non-Specified Interest Creditors which did not fall within one of the other classes) and voting together as one class, excluding the Senior Creditor Group;

(ii) Higher Rate Creditors (creditors under certain ISDA and other contracts entitling them to a higher interest rate), excluding the Senior Creditor Group;

(iii) the Senior Creditor Group,³ which had received a £35 million consent fee from the Wentworth Group⁴ as part of an arrangement under which it agreed to support the scheme;⁵ and

(iv) the Subordinated Creditor, a member of the Wentworth Group which held a subordinated debt claim.

The two principal objections arose from the Subordinated Creditor being part of the Wentworth Group. The Subordinated Creditor was given special and separate rights (including consultation and control rights in respect of the adjudication process proposed for Higher Rate Creditors), certain of which were adverse to the rights of other Higher Rate Creditors. In addition, the Wentworth Senior Creditors (i.e. the members of the Wentworth Group other than the Subordinated Creditor) were effectively entitled to a proportion of the recoveries of the Subordinated Creditor under a joint venture arrangement.

The objecting creditors argued that the classes were improperly constituted as:

• The close association between the members of the Wentworth Group meant they should be treated as a single legal entity, meaning that their rights going into the scheme and coming out of the scheme were so dissimilar to those of other Higher Rate Creditors that the Wentworth Senior Creditors should (like the Subordinated Creditor) also be placed in a separate class; and
• There was an overriding legal principle that where certain members of a class (i.e. the Wentworth Senior Creditors) had additional rights not held by fellow members of that class (i.e. the other Higher Rate Creditors), and those rights conflicted with the rights of the class generally, the members with conflicting rights could not be included in the class.

Hildyard J carefully reviewed the submissions of the objecting creditors and the previous case law, and noted that the question of class composition in the case was not straightforward. However, he declined to treat the Wentworth Group as a single legal entity and found that the Court was not required to split a class solely as a result of a 'conflict of rights' within that class. Importantly, the LBIE scheme's overriding objective was not a differential treatment of creditors within the same class, but the more general advantage of bringing about an expedited resolution of the dispute and distribution of the surplus. The Court therefore found that the rights of the Higher Rate Creditors were not, in the classic formulation, "so dissimilar as to make it impossible for them to consult together with a view to their common interest."

2. Special interests

The scheme was approved by the requisite majorities of each class at the creditor voting meetings. At the sanction hearing, the Court assessed whether the members of the Wentworth Group, who comprised a significant proportion of the Higher Rate Creditors, had 'special interests' that were different from the other members of that class, which motivated their voting. The 'special interests' in this context were effectively the ancillary (and potentially adverse) rights and interests of the Wentworth Senior Creditors described above.

The Court declined to exercise its discretion to disregard the votes of the Wentworth Group or to refuse to sanction the scheme on fairness grounds. Hildyard J accepted that the interests of the Wentworth Senior Creditors were not only 'special interests', but were also in a sense 'adverse' to the interests of other Higher Rate Creditors. However, the Court found that the special interests of the Wentworth Group were not their dominant reason for voting in favour of the scheme. The scheme's overriding objective, namely the speedy distribution of the surplus to creditors, again featured in the Court's reasoning and was recognised as the driving force behind the creditors' voting. This reasoning was borne out by the voting results themselves, which showed that an overwhelming majority of the 'independent' Higher Rate Creditors had also voted in favour of the scheme.

3. Sub-participation

LBIE debt has been traded extensively throughout the administration, with many claims being held through sub-participations. Hildyard J confirmed that the existence of voting sub-participations will not generally affect class composition – a logical approach as a borrower will often not be aware of the identity of sub-participants in its debt. The Court noted that sub-participations may be relevant to the assessment of a scheme's overall fairness, but the fairness implications of the treatment of sub-participated claims in the LBIE scheme was not considered in detail.

The voting procedures for the LBIE scheme provided that creditors who had sub-participated their claims were entitled to request that the administrators split those claims for voting purposes. Where sub-participated creditors split their votes in this way and cast at least one vote in favour and at least one vote against the scheme, they were counted for the purposes of the numerosity threshold (i.e. determining whether the scheme was approved by a majority in number of the relevant class) as having cast just one vote in favour and one vote against. The potential implication of this treatment is that for the purposes of the numerosity threshold, a large number of sub-participant votes against a scheme could be effectively cancelled out by a much smaller number of sub-participant votes in favour (or vice versa).

This approach is also somewhat inconsistent with the 'contingent creditor analysis' on which the Courts have relied for bondholder schemes, in respect of which the legal and beneficial holders of the claim against the debtor are usually different entities.⁶ The difference in approach can potentially be justified on the basis that the position of sub-participants differs from that of bondholders in certain respects.⁷ Nonetheless, it seems preferable that the votes of 'indirect creditors' should be passed through either completely (where practicable) or not at all. This point was not ultimately considered by the Court in LBIE, and it will be interesting to see if a similar approach is approved in future cases.

4. Concluding comments

The use of a scheme of arrangement in the LBIE administration to curtail the ongoing litigation and achieve a timely resolution of the process is another example of the power and flexibility of the key English restructuring tools. Hildyard J's comprehensive landmark judgment offers helpful insight into several areas of scheme jurisprudence, particularly in respect of class composition, and will be of interest to practitioners and market participants alike. It is to be hoped that this development marks the beginning of the end of one of the most significant corporate insolvencies of modern times.

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¹Re Lehman Brothers International Europe (in administration) [2018] EWHC 1980 (Ch).
² The proceedings include the various 'Waterfall' applications, the 'Olivant' application and the 'Lacuna' application.
³ The Senior Creditor Group was a group of entities controlled by certain hedge funds which collectively and indirectly held approximately 40 per cent of the unsubordinated debt.
⁴ The Wentworth Group was a group of entities controlled by certain hedge funds which collectively and indirectly held approximately 38 per cent of the unsubordinated debt.
⁵ Where a consent fee is (i) made available to all creditors, (ii) de minimis in size, and (iii) appropriately disclosed, it will not usually require creditors who receive it to be placed in a separate class. See paragraphs 5 – 047 to 5 – 053 of Schemes of Arrangement in Corporate Restructuring, C. Pilkington, 2nd edition, 2017, London, Sweet & Maxwell for further discussion. In the LBIE scheme, the consent fee paid by the Wentworth Group was: (i) available only to the Senior Creditor Group, (ii) material in size, and (iii) not disclosed to creditors in the original practice statement letter describing the scheme (the "PSL") (as the LBIE administrators only became aware of it after the issuance of the PSL). For these reasons, the LBIE administrators decided to issue a supplemental PSL stating that the Senior Creditor Group would vote as a separate class.
⁶ The effect of the application of the contingent creditor analysis is usually that the ultimate beneficial holder of the bonds is entitled to vote on the scheme as if it were a direct creditor. For further detail on the contingent creditor analysis, see Chapter 7 of Schemes of Arrangement in Corporate Restructuring, C. Pilkington, 2nd edition, 2017, London, Sweet & Maxwell.
⁷ Notably in that it is difficult to characterise a sub-participant as a 'contingent creditor' of the underlying debtor unless the sub-participation agreement includes rights to 'elevate' or otherwise acquire the direct claim.

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2018 White & Case LLP

Petar Bojovic is an associate in our Bank Finance practice in Stockholm and joined White & Case in 2018. He advises banks, private equity funds and corporate borrowers on a variety of domestic and cross-border bank finance transactions, including syndicated and bilateral loans, leveraged acquisition financings and real estate financings.

Prior to joining White & Case, Petar worked at another leading Swedish law firm.

Global law firm White & Case LLP has advised the ad-hoc group of secured creditors of Concordia International Corp. (Concordia) on its US$3.7 billion recapitalization.

"Our work on the Concordia transaction, as well as other complex restructurings involving enterprises that have material debt obligations, assets, operations and stakeholders in multiple jurisdictions, such as the recently completed reorganization of deep-sea drilling giant, Seadrill, demonstrates the value we can deliver to our clients from the realization of our long-standing firm vision of delivering seamless, comprehensive legal services to our clients on a global basis," said White & Case partner Thomas E Lauria, the Global Head of White & Case's Financial Restructuring and Insolvency practice. "Not only did the transaction require our global reach, it also required us to deploy a team that encompassed multiple areas of expertise working together as a cohesive unit to get the deal done."

"This deal illustrates our ability to combine our global restructuring, finance and regulatory capabilities with our deep knowledge of the pharmaceutical industry," said White & Case partner Christian Pilkington, who co-led the Firm's deal team and heads the Financial Restructuring & Insolvency team in EMEA. "We have significant bankruptcy and restructuring experience in the US and Europe, allowing us to provide consistent transatlantic support to our clients. In addition to our involvement in Seadrill's international reorganization as mentioned by Thomas, the Concordia deal follows our involvement in the recent transatlantic restructuring of Oi."

Concordia, a publicly listed international generics pharmaceuticals business with sales in more than 90 countries, faced a number of key issues prior to the launch of its restructuring, including:

• increased competitive pressures, particularly in relation to its North American business;
• regulatory focus on past business practices; and
• a significant debt burden resulting from its previous acquisition-focused growth strategy.

Following lengthy negotiations between Concordia, its creditors and other key stakeholders in the business, the recapitalization, which was implemented by way of a court approved plan of arrangement pursuant to the Canada Business Corporations Act (CBCA), received overwhelming support from each creditor class.

It reduces Concordia's total debt from around US$3.7 billion to approximately US$1.4 billion and allows Concordia to benefit from US$586.5 million of new money injected by way of a private placement share sale. It also allows Concordia to execute its future strategy of acquiring specific products and companies to realize short and medium term growth, to achieve longer term value.

The debt restructuring was a particularly complex exercise due to the nature of Concordia's business and assets, and the multiple jurisdictions in which it operates. Implementation of the agreed restructuring deal involved the innovative use of the CBCA to conduct an all-encompassing balance sheet restructuring of New York law-governed debt and to facilitate the injection of significant amount of new equity capital.

The White & Case team that advised on the transaction was led by partners Christian Pilkington, Ben Davies (both London), Thomas Lauria (New York and Miami) and Harrison Denman (New York), and included partners Kenneth Suh, David Joyce, David Johansen, Holt Goddard, David Dreier (all New York), James Killick (Brussels) and Anthony Vasey (Hong Kong), and associates Morvyn Radlow, Grant Clemson, Misha Ross, Aqeel Kadri (all London), Adam Cieply, John Ramirez, Anastasiya Lisovskaya, Jason Woolmer, Adam Plotkin, Celeste Jackson, Thomas Green (all New York) and Jennifer Hedges (Hong Kong). The White & Case team worked alongside Canadian law firm Osler, Hoskin & Harcourt LLP and Houlihan Lokey as financial adviser.

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Global law firm White & Case LLP has advised Nordea Bank AB (publ), Skandinaviska Enskilda Banken AB (publ) and AB Svensk Exportkredit (publ) on the EUR 405 million financing of Mekonomen Aktiebolag (publ)’s acquisition of FTZ in Denmark and INTER-TEAM in Poland. The acquisition nearly doubles Mekonomen Aktiebolag (publ)'s turnover and strengthens its position in the sale of automotive spare parts in northern Europe and establishes a strong market position in Denmark and Poland, where Mekonomen Aktiebolag (publ) has no current operations. 

The White & Case team that advised on the transaction was led by partner Magnus Wennerhorn and associate Alexandra Berglin in Stockholm.

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Heather is a corporate associate in the Firm's New York office, where she works on a variety of matters in the areas of Investment Funds, Bank Finance, Capital Markets, and Project Finance. She is actively involved in pro bono initiatives at the firm.

During law school, Heather was a member of the American University International Law Review and University of Ottawa Law Review. She served as an Intern at the International Organization for Migration in Geneva, Switzerland and Global Affairs Canada. She also served as a Researcher for the Open African Innovation Research Partnership and as a Student Attorney in the American University International Human Rights Law Clinic.

Prior to law school, Heather worked as an English Teacher in Chile through a volunteer initiative sponsored by the United Nations Development Programme.

Global law firm White & Case LLP has expanded its Global Banking Practice and its Global Real Estate Industry Group with the addition of Sudhir Nair as a new partner in London.

"The UK property investment market is currently experiencing increased transaction volumes, particularly from overseas investors, and we expect the market to continue to perform well despite Brexit," said White & Case partner Eric Leicht, Head of the Firm's Global Banking Practice. "Our ambition in London, across EMEA and globally is to continue growing our role advising both lenders and borrowers on their most important, complex, cross-border real estate finance deals, and Sudhir adds further strength and depth to the support we provide."

Sudhir, who joins the Firm's Global Banking Practice, focuses on real estate finance and has extensive experience advising both lenders and borrowers on real estate financings and investments, including distressed investments and restructurings. He also advises lenders and financial sponsors on a variety of cross-border and domestic leveraged infrastructure financings, and has additional experience advising bank lenders and sponsors on transactions in India. Sudhir joins White & Case from Baker McKenzie, where he was a senior associate, and brings nearly 15 years of experience.

"Sudhir is an energetic, commercially-minded and technically capable lawyer who is held in high regard by his clients," said White & Case partner David Plch, Regional Section Head, EMEA Banking. "Real estate finance as a dedicated practice area is primed for further growth, and Sudhir is another exciting addition to the Firm who complements and adds materially to the experienced existing real estate finance team in London."

Partner Oliver Brettle, London-based member of White & Case's global Executive Committee, said: "Sudhir's arrival supports our ongoing strategic growth in London and he augments strong existing real estate and banking practices, which have continued to expand with the recent arrivals of lateral partners including Shane McDonald, Mike Weir and Jeffrey Rubinoff, as well as a number of internal partner promotions. London and the broader Firm achieved strong financial results in 2017 – evidence that the investments we've made over a period of years are bearing fruit – and our positive trajectory during 2018 to date is cause for continued confidence in our performance."

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Global law firm White & Case LLP has advised Gamenet Group S.p.A. on the issuance of its €225 million Senior Secured Guaranteed Floating Rate Notes due 2023.

The notes have been offered and sold pursuant to Rule 144A and Regulation S under the Securities Act and listed on the Luxembourg Stock Exchange. The proceeds will be used to finance the acquisition of GoldBet S.r.l.

White & Case also advised Gamenet on an additional commitment of €20 million under the original €30 million super senior revolving credit facility agreement dated April 23, 2018 to support the increased size of the group.

The White & Case team advised on US, English and Italian law aspects of the transaction and comprised partners Michael Immordino (London & Milan), Tommaso Tosi, Iacopo Canino (both Milan) and James Greene (London), associates Robert Becker, Silvia Pasqualini and Nicolò Miglio and lawyers Alessandro Piga, Charles English, Olga Primiani and Ioana Gaga (all Milan).

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With calls to phase out the scandal-ridden LIBOR by the end of 2021 and the potential size of the disruption this will cause, loan market participants should be prepared. Sabrena Silver, partner, and Simon Cassell, associate, of global law firm White & Case, explain.

Regulators, banks and other market participants are grappling with the many challenging questions that transitioning to alternative benchmarks brings about: What will be the consequence of the London Interbank Offered Rate (LIBOR) discontinuation in the context of credit agreements both in the Latin American loan market and in the New York loan market? What will be the proposed replacement benchmark rate? And how will the current trends in loan documentation and in the New York market address this change as they apply to loans in the Latin American market?

US$350tn
LIBOR underpins an estimated US$350 trillion worth of financial contracts worldwid
Source: Various market estimates, PwC

What is LIBOR, and why are we leaving it?

LIBOR is the most widely used benchmark for short-term interest rates, including for US-dollar loans in the New York market, and among the most widely used for short-term interest rates in the Latin American market. LIBOR rates are published for US-dollars, British pounds sterling, Euros, Japanese yen, and Swiss francs at seven different maturities ranging from overnight to one year. LIBOR is an indicative average interest rate at which a panel of 11 to 18 banks (chosen by the ICE Benchmark Administration, which has responsibility for administering LIBOR) indicate that they are prepared to lend funds on an unsecured basis to one another in the London money market.

In 2012, it came to light that certain of the panel banks had been manipulating LIBOR rates by adjusting the rate they reported to the British Banker’s Association (ICE Benchmark Administration’s predecessor) in order to achieve an advantage in their trading positions or to improve the perception of their creditworthiness. Since then, the current method of determining LIBOR, based on indicative quotes, has been widely criticized for being without a basis in actual transactions, and there has been extensive discussion of a replacement benchmark. Unfortunately, basing LIBOR on actual transactions has proven difficult, because there are insufficient transactions at each panel bank for each maturity in each currency on each day. As a result, the LIBOR panel banks are still forced to exercise considerable judgment when submitting their rates.

In a speech on July 27, 2017, Andrew Bailey, chief executive of the Financial Conduct Authority (the UK governmental agency charged with regulating LIBOR), publicly called for LIBOR to be discontinued and replaced by the end of 2021. In particular, he acknowledged the panel banks’ reluctance to continue to quote LIBOR, as banks have become weary of the potential legal risk and liability in quoting LIBOR. The Financial Conduct Authority has persuaded the panel banks to continue their roles through the end of 2021, with the goal of completing a transition from LIBOR to a replacement benchmark rate by that date.

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SOFR: Another fish in the sea?

For US-dollar loans, currently the most-commonly proposed replacement for LIBOR is the SOFR (Secured Overnight Financing Rate), which is published by the New York Federal Reserve and is a measure of the cost of borrowing cash overnight secured by US Treasury securities. SOFR addresses two concerns with LIBOR. One, it is based on actual and abundant transactions, currently approximately US$800 billion in transactions. Two, the rate is provided by the New York Federal Reserve, removing the ability of panel banks to manipulate the rate and obviating the dependence on the willingness of a panel of banks to participate.

Given the uncertainty surrounding a benchmark rate that will replace LIBOR, there is still no clear market standard for addressing the anticipated disappearance of LIBOR or its replacement in loan documentation

Unfortunately, however, SOFR raises challenges as a potential replacement of LIBOR due to two fundamental differences between SOFR and LIBOR. First, SOFR is an overnight rate only. It does not provide an indicative fixed rate for the longer LIBOR maturities. Second, SOFR is a secured rate and does not include the spread related to bank credit risk that is currently built into LIBOR, which is the rate at which banks will lend to each other on an unsecured basis. Given these fundamental differences between SOFR and LIBOR, market participants are concerned that the replacement of LIBOR with SOFR will ultimately cause potentially economically significant changes in the interest rates payable on loans for which LIBOR currently functions as a benchmark rate.

The Alternative Reference Rates Committee ("ARRC", a working group convened by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York) has set itself the goal of the development of forward-looking term rates based on SOFR derivative markets, but no such rates have been proposed as yet.

Other alternatives have been proposed for different currencies, such as SONIA (Sterling Overnight Index Average) for British pounds sterling, and TONAR (Tokyo Overnight Average Rate) for Japanese yen, and they all have similar concerns.

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A potential suitor hiding in plain sight?

Almost every loan agreement in the New York market—and some, but not all in the Latin American market—provides that a base rate, a daily floating rate that is typically the highest of either the Federal Funds Rate plus a spread, one-month LIBOR plus a spread, and a "prime" rate, would be available in the absence of LIBOR. Unfortunately, the use of a base rate is not an adequate solution because it is usually a higher rate than LIBOR, and a base rate does not allow the borrower to fix the interest rate for a given period of time, as it is a daily floating rate.

In loan agreements that include the base rate option, the base rate could potentially function as a temporary safety valve in the event that LIBOR is discontinued, providing a well-established and orderly mechanism for determining the interest rate at least on a temporary basis while the borrower, the administrative agent and the lenders negotiate a LIBOR alternative.

Unfortunately, due to a difference in market practice from the broader New York loan market, many LatAm loans do not typically have a "base rate" option, so this safety valve may not be available in those financings. As a result, many LatAm loans may not have a clear mechanism for even a temporary solution in the event that LIBOR is discontinued (rather than just temporarily unavailable). As such, particular attention should be applied to this issue in Latin America.

_US$9bn
Approximate cost incurred by banks in LIBOR-related penalties globally
Source: The Financial Times

Loan documentation: Keeping our options open

Given the uncertainty surrounding what benchmark rate will replace LIBOR and the related economics, there has not yet emerged a clear market standard or practice for addressing the anticipated disappearance of LIBOR or its replacement in loan documentation.

However, certain key documentation trends appear frequently, which we discuss below.

On September 24th of this year, ARRC released for public consultation two proposed documentation approaches. The first is an ‘amendment approach’ that lays out a framework for expediting an amendment in response to the replacement of LIBOR. The second is a ‘hardwired approach’ that, upon the replacement of LIBOR, sets up a waterfall of different SOFR-based benchmarks that would be used depending on whether they are available at that time. The ‘amendment approach’ is based on current market practice and broadly addresses the same issues as the key documentation trends that we identify . The ‘hardwired approach’, in contrast, does not seem to have been adopted by the market, but perhaps suggests a potential direction when there is more certainty around the replacement benchmarks.

Bouncing back from the breakup

At this stage, it is not possible to predict the effects of replacing LIBOR as the benchmark rate, or where the market will settle once it happens. But 2021 is fast approaching, and given the potential size of the disruption this will cause, loan market participants should be prepared. Best practice, and the current direction of market standards, is to maintain flexibility in the solution while providing clarity on the process of implementing a replacement. Implementing now clear mechanisms and procedures for who determines when LIBOR must be replaced and on what basis, who determines what the new rate will be, whether lender consent is required and what fundamental protections on economics are included will greatly facilitate an orderly transition to our new benchmark rate partner.

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This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2018 White & Case LLP

Sudhir Nair is a Partner in the Firm's London Banking practice. Sudhir focuses on real estate finance and has extensive experience advising both lenders and borrowers on real estate financings and investments, including distressed investments and restructurings. He also advises lenders and financial sponsors on a variety of cross-border and domestic leveraged infrastructure financings, and has additional experience advising bank lenders and sponsors on transactions in India.

Following recent judgements of the German Federal Court of Justice ("FCJ") on the invalidity of handling fees (see our newsletter of October 2017), the FCJ recently held that pre-formulated interest cap premiums or interest hedging fees agreed in consumer loans are invalid. The ruling raises questions as to (i) whether consumers may reclaim any fees already paid, (ii) whether prospectively this decision will be extended to loan agreements with entrepreneurs, and (iii) the possibility of alternative structures.

On 5 June 2018, the FCJ held that pre-formulated clauses of so-called interest rate cap premiums ("Zinscap-Prämie") or interest hedging fees ("Zinssicherungsgebühr") in variable-interest consumer loans are invalid. This decision is in line with FCJ’s recent jurisprudence of July 2017 on the invalidity of handling fees set out in pre-formulated clauses. As in the past, the FCJ based its ruling on a deviation of the respective fee clauses from the principal ideas of the German Civil Code, according to which, only (term-dependent) interest may be charged as the price of a loan.

Background

In the decision, a consumer association brought an action for an injunction against the use of interest cap clauses by a German bank. In these clauses, the bank had charged its customers an interest cap premium or interest hedging fee so that in return interest rates could not rise above a certain level. The fee was due immediately upon conclusion of the contract without a pro rata refund in the event of a loan prepayment.

According to the FCJ, the respective fee provisions are pre-formulated clauses (and not individually negotiated provisions), and thus considered to be general terms and conditions; irrespective of the fact that the respective fee amount was only agreed by completing a gap text.

The FCJ held that the clauses do not constitute a permissible agreement on the price of the loan since such an agreement on the price would have to be term-dependent. Neither do the clauses contain a valid fee for a special service of the bank since — from the point of view of the average customer — the clauses aim to ensure that the bank is compensated for any loss of additional income in the event that the variable interest rate exceeds the agreed interest cap. In this function, the clauses form an integral part of the interest calculation of the bank so that the respective fees are incurred in relation to the granting of the loan, and not for a special service by the bank. In consequence, the FCJ interpreted the clauses to contain an additional fee independent of the term for the granting of the loan. This conflicts with the principal ideas of the German Civil Code, according to which, only (term-dependent) interest may be charged as the price of a loan.

Within the context of a concluding comprehensive balancing of interests, the FCJ held that there were no circumstances apparent, which would rebut the presumed effect of the clauses to unreasonably disadvantage the consumer.

Extension to loans with entrepreneurs

It is currently unclear as to whether this decision will, in future, be extended to loans between entrepreneurs. The likelihood of an extension is supported by the fact that the FCJ extended case law on consumer loans to corporate loans in the past, and by the fact that the decision was not based on specific aspects of consumer law. It is, however, also possible that the FCJ might give greater consideration to the private autonomy of entrepreneurs in the context of a comprehensive balancing of interests.

Repayment claims

Following this judgement, borrowers that are consumers may be entitled to claim the repayment of interest rate cap premiums or interest hedging fees if the underlying obligation was contained in the lender’s standard terms and conditions. Any claims of premiums or fees paid until the end of the year 2014 are, in general, time-barred and can no longer be made. A claim for repayment of such premiums or fees paid in 2015 will become time-barred by the end of 2018.

Alternative structures?

In order to make effective interest rate cap agreements, it is possible to agree these individually, to submit the fees and expenses to a foreign jurisdiction (which requires a certain nexus of the transaction to such jurisdiction) or to an arbitration tribunal, or to calculate and charge an additional interest that corresponds with such fees and expenses. In line with the legally recognised practice of disagio, it would also be possible to provide for a pro rata refund of the interest cap premium or interest hedging fee paid. Another possibility would be to charge the interest-hedging fee as a fee for a special service, which, of course, requires that the fee is solely incurred for interest rate hedging.

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This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2018 White & Case LLP

Ben is an associate in the Firm's Banking Practice in London. Ben's experience includes advising on a range of domestic and cross-border acquisition finance transactions acting for private equity sponsors, their portfolio companies, other borrowers and banks.

Ben also spent six months working in the Firm's Paris office, as part of the Capital Markets team.

White & Case LLP has promoted 41 lawyers around the world to its partnership. The promotions are effective on January 1, 2019 and represent 12 of the Firm's global practices in 15 locations.

"Becoming a partner is the result of many years of dedication and top quality work for our clients," said White & Case Chairman Hugh Verrier. "This year's class is the largest in our history, which illustrates the level of talent we have cultivated within the Firm. As we grow the White & Case partnership through both internal promotions and lateral hires, we are poised to deliver on our 2020 Strategy."

Listed by the regions in which they are based, our new partners are:

AMERICAS

• Jessica Chen has been named a partner in our Global Capital Markets Practice. Based in New York, Jessica represents issuers and investment banks in domestic and cross-border registered and exempt securities offerings, block trades and liability management transactions, and advises on securities matters in connection with mergers and acquisitions.
• Elizabeth (Lisa) Feld has been named a partner in our Global Financial Restructuring and Insolvency Practice. Based in New York, Lisa's practice focuses on representing agent banks, secured and unsecured creditors, hedge funds and companies in connection with chapter 11 reorganizations, financing transactions and out-of-court restructurings.
• Jennifer Glasser has been named a partner in our Global International Arbitration Practice. Based in New York, Jennifer represents clients in institutional and ad hoc arbitrations involving common and civil laws, as well as sovereigns in investor-state disputes. She is experienced in a range of industries, including energy, oil & gas, manufacturing, mining, financial services and technology.
• Michael Hamburger has been named a partner in our Global Antitrust Practice in New York. Michael represents clients in both civil and criminal antitrust matters and has defended numerous companies in multijurisdictional cartel litigation. He advises companies on obtaining antitrust clearance from domestic and foreign regulatory authorities for mergers and acquisitions.
• Seth Kerschner has been named a partner in our Global Mergers & Acquisitions Practice. Based in New York, Seth practices environmental law, assisting clients with environmental aspects of transactions, environmental litigation, climate change matters and environmental regulatory compliance, and advises public and private sector clients, including corporates, governments and nonprofits.
• Anna Kertesz has been named a partner in our Global Antitrust Practice in Washington, DC. Anna's practice focuses on defending clients in proposed and completed mergers before the US Department of Justice and the Federal Trade Commission, and she has significant experience in the healthcare, food products, oil & gas and technology industries.
• Elizabeth Kirk has been named a partner in our Global Banking Practice in New York. Elizabeth advises commercial and investment banks, financial institutions, export credit agencies and borrowers on secured and unsecured credit facilities, cross-border acquisition financings and general bank lending across industries, with particular experience in the maritime finance market.
• Karalyn Mildorf has been named a partner in our Global Trade Practice. Based in Washington, DC, Karalyn focuses on CFIUS and National Security matters, including Team Telecom reviews and mitigation of foreign ownership, control or influence (FOCI) under the National Industrial Security Program.
• Thomas Pate has been named a partner in our Global Project Development and Finance Practice. Currently based in Miami, Thomas will relocate to New York where he will continue to play an important role in the Firm's Latin America Group. He focuses on project and bank finance matters in the power, infrastructure, renewable energy and financial services industries.
• Heather Waters Borthwick has been named a partner in our Global Banking Practice. Based in New York, Heather advises financial institutions, private equity sponsors and corporate borrowers on domestic and cross-border leveraged acquisition financings, asset-based financings and investment-grade lending transactions.
• Colin West has been named a partner in our Global Commercial Litigation Practice in New York. Colin provides clients with counsel on a range of complex contract and business disputes, bankruptcy-related litigation, litigation involving foreign sovereigns, government investigations and antitrust matters.
• Andrew Zatz has been named a partner in our Global Financial Restructuring and Insolvency Practice in New York. Andrew's experience includes advising clients on bankruptcy law, including representing debtors, creditors and other interested parties in both chapter 11 and out-of-court restructurings.

EUROPE, MIDDLE EAST AND AFRICA

• Jonah Anderson has been named a partner in our Global White Collar Practice in London. Jonah has experience conducting internal investigations across the financial services, mining, pharmaceuticals, infrastructure, technology and real estate sectors, and advises clients on investigations by UK authorities including the Serious Fraud Office, HM Revenue and Customs and the Financial Conduct Authority.
• Lucy Bullock has been named a partner in our Global Mergers & Acquisitions Practice. Based in London, Lucy advises private equity houses and their portfolio companies on all aspects of their business, including capital structures, governance, compliance and advisory work.
• Katarzyna Czapracka has been named a partner in our Global Antitrust Practice in Brussels. Katarzyna advises multinational clients on compliance with EU and international merger control rules, with a focus on the technology, telecoms and private equity sectors. She also counsels clients on cartel investigations and abuse of dominance issues, particularly related to the exercise of IP rights.
• Noor Davies has been named a partner in our Global International Arbitration Practice. Based in Paris, Noor represents sovereign entities and corporates in a variety of international arbitration matters, including those brought under ICC, SCC, UNCITRAL and ICSID Rules.
• Nikolay Feoktistov has been named a partner in our Global Mergers & Acquisitions Practice in Moscow. Nikolay's practice focuses on M&A transactions and joint ventures, particularly in the telecommunications, energy and food & beverages industries, both in domestic and cross-border corporate transactions.
• Genevra Forwood has been named a partner in our Global Antitrust Practice. Based in Brussels, Genevra advises and litigates on a broad range of EU law, across a number of sectors ranging from energy and manufacturing to pharmaceuticals and chemicals. She counsels clients on matters around state aid proceedings, economic sanctions, public procurement, environmental law and consumer protection.
• Clara Hainsdorf has been named a partner in our Global Intellectual Property Practice in Paris. Clara's practice focuses on intellectual property, online platforms and IT, as well as commercial contracts. She has extensive experience in privacy and data protection and has been involved in multijurisdictional commercial and economic matters involving distribution, supply and manufacturing contracts.
• James Holden has been named a partner in our Global International Arbitration Practice in London. James provides counsel to clients in sectors including energy, infrastructure, industrials and finance. He has experience in ICC and LCIA arbitrations, as well as in the English High Court.
• Monica Holden has been named a partner in our Global Capital Markets Practice in London. Monica's practice focuses on advising investment banks and issuers on both public and private equity and debt offerings, including IPOs, secondary equity offerings and high yield bond transactions.
• Laura Hoyland has been named a partner in our Global Tax Practice in London. Laura advises corporate and individual clients and family offices on direct and indirect tax aspects of financing and corporate transactions including capital markets, securitizations, bank finance, asset and share transfers and restructurings.
• Tomáš Jíně has been named a partner in our Global Banking Practice. Based in Prague, Tomáš's practice covers a range of areas, with a particular focus on cross-border leveraged finance, restructurings and derivatives transactions.
• Hyder Jumabhoy has been named a partner in our Global Mergers & Acquisitions Practice. Based in London, Hyder has advised a range of corporates in the financial sector on matters such as cross-border mergers, acquisitions, disposals, joint ventures, corporate restructurings and business integrations.
• Luka Kristovic Blazevic has been named a partner in our Global International Arbitration Practice. Currently based in Dubai, Luka will relocate to Riyadh. He focuses on complex international construction disputes that have been conducted under the auspices of the ICC, LCIA and ICSID.
• Helen Levendi has been named a partner in our Global Mergers & Acquisitions Practice. Based in London, Helen is a member of the Employment, Compensation & Benefits Group, where she focuses on private equity funds and companies in the technology sector, counseling them on contracts, executive service agreements, secondment arrangements, board appointments and more.
• Richard Lloyd has been named a partner in our Global Banking Practice. Based in London, Richard advises on domestic and cross-border finance transactions, including leveraged acquisition finance, bank lending and financial restructuring. He also works on trade and receivables finance, structured finance and securitizations.
• Sylvia Lorenz has been named a partner in our Global Intellectual Property Practice. Currently based in Hamburg, Sylvia will relocate to Berlin. She advises companies on IP, IT and privacy law in relation to domestic and cross-border matters. She has a particular focus on advising online platforms on regulatory, privacy, IP and consumer protection laws, as well as on commercial contracts.
• Tom Matthews has been named a partner in our Global Mergers & Acquisitions Practice in London. Tom's practice focuses on public mergers and acquisitions, listed company advisory and equity capital markets work, advising corporates, financial institutions and private equity sponsors on a range of activities, including corporate governance, primary and secondary equity capital raisings, activist strategies and post-IPO sell-downs.
• Alexandre Mazuranic has been named a partner in our Global International Arbitration Practice. Based in Geneva, Alexandre advises clients on disputes in construction and engineering, commodities trading and the pharmaceuticals industry. He has represented clients before the Swiss Supreme Court in proceedings related to arbitral awards.
• Michael Mountain has been named a partner in our Global Mergers & Acquisitions Practice. Based in London, Michael advises clients on a broad range of corporate transactions, including mergers and acquisitions, private equity transactions, disposals, joint ventures, corporate finance and equity capital markets.
• Heather Rees has been named a partner in our Global Capital Markets Practice. Based in London, Heather focuses on corporate trustee representation, and she has experience in debt capital markets representing issuers, underwriters and trustees in a variety of securities transactions, including Rule 144A and Regulation S offerings.
• Yasser Riad has been named a partner in our Global Project Development and Finance Practice. Based in Abu Dhabi, Yasser advises sponsors, lenders and other stakeholders on project finance, infrastructure, transportation and power transactions in the Americas, Europe, Asia-Pacific and the Middle East.
• John Rogerson has been named a partner in our Global Commercial Litigation Practice. Based in London, John's practice focuses on commercial litigation before the English Courts as well as in offshore jurisdictions. John regularly advises clients in connection with judicial proceedings brought in support of arbitrations.
• Tine Schauenburg has been named a partner in our Global White Collar Practice. Based in Berlin, Tine advises businesses and their executives in connection with investigative proceedings and official investigations, including those where businesses have suffered damage caused by their own personnel or third parties.
• Shameer Shah has been named a partner in our Global Banking Practice in London. Shameer's practice focuses on advising alternative capital providers, financial institutions, private equity sponsors and corporates on cross-border financings across a range of capital structures, with a particular focus on acquisition and leveraged finance transactions.
• Christian Theissen has been named a partner in our Global International Arbitration Practice in Frankfurt. Christian advises on disputes relating to supply contracts, liability issues, post-M&A matters and sports law.
• Max Turner has been named a partner in our Global Capital Markets Practice. Based in Paris, Max advises global corporations and financial institutions on matters of US law, particularly with regard to equity and debt issuance, Rule 144A offerings, private placements in the United States and matters related to SEC regulation.
• Florian Ziegler has been named a partner in our Global Banking Practice. Based in Frankfurt, Florian focuses on leveraged acquisition finance and investment-grade loans, and has a broad range of experience with real estate and ship financing, as well as restructurings.

ASIA-PACIFIC

• Andrew Bishop has been named a partner in our Global Banking Practice. Based in Hong Kong, Andrew's primary focus is advising private equity sponsors, their portfolio companies and other borrowers. He also advises financiers and other investors on leveraged acquisition finance, take-private finance, refinancings and restructurings, debt buybacks and other financings.
• Jessica Zhou has been named a partner in our Global Capital Markets Practice. Based in Hong Kong, Jessica represents issuers and underwriters in Rule 144A and Regulation S transactions, as well as SEC-registered debt and equity offerings. She advises on international financings, including high-yield, acquisition finance, transportation finance, pre-IPO investments and restructurings.

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Simon Cassell is an associate in the Bank Finance group of White & Case's New York office. His practice focuses primarily on the representation of major commercial banks, investment banks, private equity sponsors, funds and corporate borrowers in connection with secured and unsecured syndicated credit facilities and leveraged acquisition financings. Simon has international and domestic experience, having worked on financings in Latin America and Europe, as well as domestic transactions.

Global law firm White & Case LLP has advised Commerzbank Aktiengesellschaft as coordinator, bookrunner and mandated lead arranger, on the provision of a €1 billion financing for Vonovia Finance B.V. which includes a €300 million swingline facility.

The White & Case team in Frankfurt which advised on the transaction was co-led by partner Thomas Flatten and local partner Sébastien Seele, and included counsel Alexander Born, senior transaction lawyer Alexander Hansen Diaz and portfolio manager Juliana Leao.

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Global law firm White & Case LLP has advised CVC Capital Partners on a €1.3 billion high yield bond issuance related to the proposed acquisition of FIMEI S.p.A., which owns 51.8 percent of the outstanding share capital of Recordati S.p.A.

The senior secured notes have been issued by Rossini S.à.r.l. in two tranches: €650 million 6.750% fixed rate notes due 2025, and €650 million floating rates notes due 2025 – three-month EURIBOR with 0% floor, plus a margin of 6.250%. The notes have been offered and sold pursuant to Rule 144A and Regulation S under the Securities Act and listed on the Luxembourg Stock Exchange.

The White & Case team which advised on US, English and Italian law aspects of the transaction comprised partners Michael Immordino (London & Milan), Tommaso Tosi, Iacopo Canino (both Milan) and James Greene (London), associates Robert Becker, Silvia Pasqualini and Bart Galvin and lawyers Alessandro Piga and Charles English (all Milan).

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Global law firm White & Case LLP has expanded its Global Banking Practice with the addition of Julia Smithers Excell as a new partner in London.

"Banks face a high level of regulatory scrutiny in today's environment," said White & Case partner Eric Leicht, head of the Firm's Global Banking Practice. "Julia's experience at two leading global banks positions her perfectly to guide our banking clients on the array of regulatory and compliance issues they must contend with around the globe."

Smithers Excell joins White & Case from JPMorgan Chase, where she served as Executive Director and Assistant General Counsel in the Corporate & Investment Bank in London. She has extensive experience advising stakeholders in a number of key areas, including Brexit-related issues and CCP Recovery & Resolution. Smithers Excell has worked across regulatory jurisdictions around the globe including Paris, Zurich and Singapore, in addition to London. During her career, she has worked at a number of large investment banks and law firms.

"Julia brings an important perspective to our banking practice due to her time at global investment banks throughout the financial crisis and recovery," said White & Case partner David Plch, Regional Section Head, EMEA Banking. "She will work on our clients' behalf to ensure we are providing them with the best possible counsel."

Partner Oliver Brettle, London-based member of White & Case's global Executive Committee, said: "As we continue to grow our banking practice, it's crucial that we add lateral partners who can address the array of regulations to which these financial institutions must adhere. Our clients consistently require our lawyers to be experts no matter the issue at hand, and adding partners of Julia's calibre solidifies our ability to work on our clients' behalf."

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Julia is a partner in the Firm's Banking group in London specializing in financial regulation. She has extensive experience advising stakeholders in a number of key banking and markets regulatory areas, including Brexit-related issues, EMIR, derivatives clearing, CCP rulebook, governance and financial market infrastructure matters, recovery and resolution, MiFID II/MiFIR, benchmarks, regulatory capital, payments and consumer credit.

Julia has also worked in Paris, Zürich and Singapore, in addition to London, as a transactional lawyer. During her career, she has advised on wholesale and retail banking and markets regulatory issues and worked on derivatives, banking, capital markets and structured finance transactions and securitisations at several large US and Swiss investment banks and international law firms. Her in-house regulatory experience encompasses the full range of advocacy, analysis, interpretation and application through to advice on implementation of and compliance with banking and markets regulation.

Julia regularly speaks at conferences and seminars on topics including derivatives clearing, EMIR, CCPs and recovery and resolution. She is a working group member of the Financial Markets Law Committee (FMLC) contributing to FMLC publications including the following: Issues of legal uncertainty arising in the context of the withdrawal of the UK from the EU - the provision and application of third country regimes in EU legislation; The obligations of central counterparties and their clearing members under Part VII Companies Act 1989: Issues of legal uncertainty which may arise in the context of proprietary claims to collateral.

Robert Nachama advises banks and other financial institutions, private equity investors and corporates in connection with public and private debt and equity transactions, including high yield debt offerings and as well as in connection with loan/bond structures, acquisition finance and leveraged finance.