Global law firm White & Case LLP has advised VTB Bank on a secured term loan provided to Russian retail chain PJSC M.video, which is owned by SAFMAR Group, for the acquisition of the shares in Russian retail chain Eldorado.

SAFMAR Group intends to consolidate its retail assets by the first quarter of 2019 and become a key player in the Russian consumer electronics retail market.

"Given the current environment, this important deal is a landmark financing in the Russian market," said Moscow-based White & Case local partner Ekaterina Logvinova. "The deal also underlines the strength of the finance team at White & Case, even in uncertain market conditions."

The White & Case team in Moscow which advised on the transaction was led by partner Natalia Nikitina and local partner Ekaterina Logvinova, with support from associates Natalia Tsimbalova, Adel Shageev, Ilyana Scherbakova and Maria Kulmukhametova.

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Global law firm White & Case LLP has advised Consolidated Energy Finance S.A., a financing subsidiary of Switzerland-based leading international methanol and fertilizer manufacturer Consolidated Energy Limited AG, on the issuance of two high yield bonds with a total volume of US$525 million.

The $125 million floating rate notes will be due in 2022. The $400 million fixed rate notes will be due in 2026 and have a coupon of 6.50%. Both bonds are listed on the Luxembourg Stock Exchange.

The White & Case team which advised on the transaction was led by partner Rebecca Emory (Frankfurt) and included partners Gernot Wagner, Karsten Wöckener, Vanessa Schürmann, Mattias von Buttlar and Bodo Bender (all Frankfurt), local partner Florian Ziegler (Frankfurt) and associates Justin Tevelein, Daniel Rogits and Mansha Malhotra (all Frankfurt). White & Case lawyers based in London, New York and Washington, DC also advised on the transaction.

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Global law firm White & Case LLP has advised Mediobanca – Banca di Credito Finanziario S.p.A., as original lender and agent, on a term loan facility granted to Kryalos SGR S.p.A., acting as managing company of the close-ended real estate alternative investment fund 'Tyre'– Fondo di Investimento Alternativo Immobiliare di Tipo Chiuso Riservato.

The term facility will be used to finance the acquisition of the HQ1 building in Milan, the headquarters of Pirelli & C. S.p.A.

The White & Case team which advised on the transaction comprised partner Gianluca Fanti, local partner Giuseppe Barra Caracciolo and associate Riccardo Verzeletti.

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Stanimir Kostov is a counsel in the Firm's Bank Finance group in New York. Stan represents lending institutions, corporate borrowers and private equity sponsors in a wide variety of debt financing transactions. Stan's practice focuses primarily on advising direct lenders and major banks acting as lead arrangers and agents in connection with leveraged buyouts and leveraged recapitalizations. Prior to joining White & Case, Stan worked in the New York and Charlotte offices of other major law firms.

Global law firm White & Case LLP has advised J.P. Morgan and BNP Paribas, as Joint Global Coordinators, on the offering of €600 million Senior Notes by France-based leading global engineering services company Novafives.

The transaction was divided in two tranches – €325 million 5.00% Fixed Rate Senior Secured Notes due 2025, and €275 million Floating Rate Senior Secured Notes due 2025.

White & Case also advised J.P. Morgan Securities plc, BNP Paribas, Barclays Bank plc, LCL, Deutsche Bank, HSBC France, Natixis and Société Générale, as Mandated Lead Arrangers, on a €115 million senior revolving credit facility.

The White & Case team in Paris which advised on the transaction was led by partner Colin Chang and included partner Denise Diallo with support from associates Tatiana Uskova, Mehdi Bali, Roman Picherack and Michel Courtois. Lawyers based in the White & Case offices in London and New York also advised on the transaction.

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Rosanna Bibis is an associate in the Firm's Energy, Infrastructure and Project Finance group based in Johannesburg. Rosanna's experience includes work in acquisition finance, real estate finance, project finance, property and development finance and corporate and commercial law. Rosanna's experience further includes advice in relation to financial regulatory matters.

Global law firm White & Case LLP has advised CVC Capital Partners (CVC), one of the world's leading private equity and investment advisory firms, on the €1.01 billion senior and second lien loan financing for the acquisition by lead investor CVC Fund VII and a consortium of Finnish institutions including LocalTapiola, Varma and Ilmarinen, together with the management of Mehiläinen, of leading Finnish private healthcare and social care provider Mehiläinen.

"White & Case has a strong and established relationship with CVC and a proven track record advising on both private equity and healthcare transactions," said London-based White & Case partner Martin Forbes, who led the Firm's deal team. "These strengths were clearly showcased in a deal of real strategic significance in the Finnish healthcare market that will propel Mehiläinen into its next growth phase."

CVC has mandated Bank of America Merrill Lynch, Barclays, Credit Suisse, Danske Bank, Jefferies and Nordea to arrange the all-loan financing.

Founded in 1909, Mehiläinen is a leading private healthcare and social care provider in Finland. It offers a full range of healthcare and social care services through a comprehensive network of more than 360 units, and employs more than 14,000 professionals. Healthcare services include outpatient clinics, occupational healthcare, specialist care and dental care, with social care including services for the elderly and disabled, mental rehabilitation and child welfare.

The White & Case team in London which advised on the transaction was led by partner Martin Forbes and included partner Justin Wagstaff and associates Nicola Chapman and Ben Morrison.

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Eitan is an associate in the Firm's Bank Finance Practice. His experience includes advising financial institutions, private equity funds and corporate borrowers on a variety of lending transactions, including leveraged and investment grade acquisition finance, ABL credit facilities, debtor-in-possession financings, bankruptcy exit financings and secured notes offerings.

Eitan completed a secondment to the Equity Derivatives group at a global financial institution, where he negotiated documentation for ISDA-based transactions.

Global law firm White & Case LLP has advised SIA S.p.A. on the €375 million acquisition of First Data Slovakia, S.R.O. and First Data Hellas Processing Services and Holdings S.A.

SIA is a high tech company and European leader in the payments infrastructure and services sector. First Data is a global technology leader in payment technology and services.

The White & Case team which advised on the M&A aspects of the transaction comprised partners Michael Immordino (London & Milan) and Leonardo Graffi (Milan), associate Fabrizia Faggiano and lawyer Luca Silviani (both Milan). The Firm also advised as antitrust counsel with a Brussels team which included partner Assimakis Komninos and associate Jan Jeram.

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This article examines the implementation of the Mortgage Law (as defined below) and its potential impacts on the UAE debt finance market.

A high-level summary of the Mortgage Law is contained in Schedule 1 to this article.

Take-away:

Federal Law No. 20 of 2016 on the Mortgage of Moveable Property to Secure Debt (the "Mortgage Law")¹ represents a welcome change for creditors both in the UAE and abroad. Improved enforcement mechanisms, a publically searchable register of existing security interests and the ability to easily take security over assets without taking possession, together means that creditors are now able to give weight to movable assets when structuring transactions in the UAE.

While some of the initial questions surrounding the Mortgage Law remain, Cabinet Decision No. 5 of 2018 Concerning the Implementing Regulation of Federal Law No. 20 of 2016 on Mortgaging Moveable Properties to Secure a Debt (the "Implementing Regulations") has provided some clarity as to steps that are required in order to register a mortgage under the Mortgage Law. While the Implementing Regulations are relatively untested, as the Registry is now accessible, financial institutions should pro-actively work to register all applicable mortgages as quickly as possible.

Why was the Mortgage Law needed?

Traditionally, creditors looking to take security against movable assets in the UAE have had to rely on the provisions of the UAE Civil Code (Federal Law 5 of 1985 (as amended)) and the Commercial Code (Federal Law 18 of 1993 (as amended)) (together, the "Existing Law"). Under the Existing Law, a pledge over moveable assets was only able to be created by a pledgee taking possession of such assets.

The Existing Law had numerous limitations that impacted on the commercial practicality of taking security over moveables in the UAE, including:

• The inability to create security over future assets.
• A requirement that the pledgee takes possession of the secured assets. While a pledge under the Existing Law requires possession, this is often not possible commercially. As a result, parties would commonly adopt an approach of constructive possession (where physical possession would stay with the pledgor, subject to the pledgee controlling their dealings in the asset, often by way of a bailee structure). The effectiveness of this approach remains uncertain under UAE law.
• A lack of an efficient and commercially practical enforcement regime. As a result of there being no recognised "self-help" remedies, all enforcement steps for possessory pledges were required to be undertaken through the Courts (which can be burdensome and lengthy).

What does the Mortgage Law apply to?

he Mortgage Law applies to any contract creating a security interest² over tangible or intangible moveable assets, whether present or in the future. The Mortgage Law applies to both commercial and civil transactions. In order for a valid mortgage to be created under the Mortgage Law, the following conditions must be met:

Be documented in writing: The mortgage contract shall be in writing, as specified in the Implementing Regulations. The Implementing Regulations state that a mortgage can be created in writing (including in counterparts by way of fax or e-mail), without a requirement for notarisation. In addition, the Implementing Regulations also make it clear that the written approval of the mortgagor must be obtained for the registration of the mortgage.

• Capacity: The mortgagor must be competent to dispose of the mortgaged property or be authorised to create a mortgage over the mortgaged property.
• Certainty: The mortgage contract must include a description of the mortgaged property, in accordance with the requirements of the Implementing Regulations. Importantly, the Implementing Regulations allow for general descriptions of mortgaged property (provided that such description still clearly identifies the Secured Assets), allowing a creditor to easily obtain mortgages over effectively all present or future movable assets or classes of assets.
• Declaration: The mortgage must include a declaration by the mortgagor as to the presence of any third party rights over the mortgaged property.
• Notification: The principal debtor or the mortgagee must notify the owner of the mortgaged property of the mortgage, where the mortgagor is not in possession of the mortgaged property. Notification may be affected through the Registry, if so chosen.
• Consideration: The mortgagee must pay, or commit to pay, the fees covered in the mortgage contract. It is currently unclear whether the reference to "mortgage contract" in this provision is actually intended to refer to the contract documenting the secured obligations (such as a facility agreement). If this is indeed the intention, this requirement may prevent a financial institution from creating a valid mortgage where the secured obligations relate to uncommitted loans that have been entered into but not yet been drawn. If this is the case, financial institutions should ensure that (a) an "in principle" acceptance to create a mortgage is registered prior to advancing funds (as described below) and (b) in the period between signing an uncommitted loan agreement and registering an "inprinciple" creation of a mortgage, no subsequent security has been taken over the proposed mortgaged property.

What the Mortgage Law does not apply to:

The Mortgage Law does not apply to movables for which existing laws already require registration or for which a separate registry specific or relevant to that form of movable asset exists. While there is no set test of when this will be the case, a common sense interpretation suggests that the Mortgage Law will therefore not apply to movables where there is an existing register (for example vehicles registered with traffic departments, ships and shares).

While the Mortgage Law will not apply to the financial free zones, being the DIFC and ADGM, it is still not clear as to how it applies across other free zones in the UAE. Several free zones have mandatory registration of security, whilst relying on the Existing Law. Whether such mandatory registration constitutes a "special register" is currently unclear. Regardless, the Registry (as defined below) does allow for the registration of mortgages over onshore assets by free zone entities.

What are Moveable Assets?

A broad range of movable assets are able to be subject to a mortgage under the Mortgage Law. Potential mortgaged property, as described in Article 3, includes all tangible and intangible movable assets, present and future, such as:

• Receivables (being accounts payable owed to the mortgagor); 
• Deposits at licensed banks, including current accounts and deposit accounts; 
• Written bonds and documents, title to which is transferable through delivery or endorsement (including bills of lading, certificates of deposit and commercial papers);
• Work equipment and tools;
• Material and moral elements of a business concern;
• Goods intended for sale or lease, raw materials and goods in the process of manufacturing or transformation; 
• Agricultural crops, animals and their products, including fish and bees; 
• Fixtures, provided that they can be separated from real estate without causing damage; and 
• Any other movable property considered by the UAE to be valid to be subject to mortgage under the Mortgage Law.

The clarification that a mortgage can be taken over future property is a particularly welcome change to the position under the Existing Law. This is notable as it (a) allows potential creditors to look towards future asset streams in evaluating the creditworthiness of a potential mortgagor and (b) addresses the deficiencies in the Existing Law with taking security over bank accounts with fluctuating balances.

While the definition of moveable assets in Article 3 provides a much broader scope than the current position under the Civil Code, Article 4 removes certain assets from the scope of the Mortgage Law, including public property, salaries and entitlements of an insured or beneficiary of an insurance contract (unless such insurances are proceeds from moveable property that is otherwise secured in accordance with the Mortgage Law).

Registration of security

The Mortgage Law provided for the creation of the Emirates Movable Collateral Registry (the "Registry") by a decision of the Council of Ministers. The Council of Ministers has appointed Emirates Movables Collateral Registry Corporation as the implementing agency for the Register. The Implementing Regulations set out the logistics relating to the register, including the procedures for making a declaration on the Registry, along with the relevant fees.

While largely relevant to branches of foreign companies and foreign financial institutions, the Mortgage Law does not require the mortgagee to be a licensed UAE bank or financial institution. This is reflected in the Registry, which allows any individual or institution to make a registration (subject to signing up to the Registry and paying any relevant fees).

A. Perfection

In order for a mortgage to be effective against third parties, a declaration³ is required to be made on the Registry. In addition, where there is a third party owner of mortgaged property that is not in the possession of the mortgagor, they must be notified of the mortgage.

Where a mortgage contract has not yet been formed, the parties may register their "in-principle" approval to create a mortgage over existing for future property. Such a registration will ensure that the eventual mortgagee will benefit from the same protection as if a mortgage had been registered, provided that the mortgage contract is entered into and registered within 5 days of receipt of the mortgaged property by the mortgagor or principal debtor. By allowing registration of "in-principle" mortgages, creditors can take comfort that the property that is to be secured in their favour will not be subject to any prior ranking interest, preventing the need for a race to registration.

The named mortgagor, mortgagee or principal debtor may object to the registration within 5 business days of being notified of such registration. The Courts of the UAE shall, within 10 days of the objection, make a final determination as to whether the mortgage has been improperly registered.

B. Priority

Where a mortgage has been registered with the Registry, no additional mortgage can be created on the same mortgaged property unless a subsequent registration is made in due course. As set out in Article 17, priority between competing mortgage interests will be determined by the date and time of registration on the Registry (unless a mortgagee waives their right to priority – such as in a subordination agreement – and registers such waiver with the Registry).

Registration of the mortgage will also provide a mortgagee with a secured right in the proceeds of any mortgage (unless the parties otherwise agree), with the same priority as between competing mortgage interests.

C. Duration of protection

While perfection of a mortgage will be completed on registration, the mortgage will be "ineffective" upon the expiry of the validity period specified in the Registry. While there is no specific validity period contemplated in the Mortgage Law or the Implementing Regulations, the Registry will currently only accept registrations for a certain period from the date of registration. The Implementing Regulations however allow for mortgages to be renewed by entering into a renewal of a registration under the Registry.

D. Registering Additional Rights

In addition to the registration of a mortgage, certain additional rights may be recorded on the Registry in order to gain the same protection as a mortgage in relation to determining priority on proceeds and regulating enforceability against third parties. In particular, the rights of a lessor in a financing lease; the rights of an owner of goods placed for sale and the rights of a lessor on funds subject to an operating lease with a duration of more than one year may be registered.

E. Public

The contents of the Registry are largely public, which allows potential creditors to verify whether security has been registered over assets that they intend to take security over. Article 7 provides for a public right of access to the basic information contained on the Registry (which ensures that mortgaged assets can be sufficiently identified), whilst preserving the ability of the parties to a mortgage to keep key information confidential. Under the Implementing Regulations mortgagees are also required to take into account any preagreed restrictions with the mortgagor as to what information can be shared by the mortgagee upon making a registration.

F. Possessory pledges

While the Mortgage Law offers numerous improvements over the Existing Law, Article 2 makes it clear that the Existing Law continues to apply. Given that the enforcement mechanisms under the Existing Law are not as creditor friendly as under the Mortgage Law, we expect that the taking of possessory pledges will be a rare occurrence moving forwards.

Where a possessory pledge is to be taken after the entry into force of the Mortgage Law, the relevant secured creditor is required to search in the Registry for the existence of any pre-existing registered rights over the property prior to taking any possessory pledge.

Where a creditor has a pre-existing possessory pledge, Article 44 makes it clear that such possessory pledges were required to be registered prior to 15 March 2018. Priority of existing possessory pledges that were registered within this time is to be determined by the date of creation of the pledge, in accordance with the Existing Law. The Mortgage Law does not expressly state priority will be lost (nor that a pledge will cease to be enforceable against third parties) if they are not registered within this period; although this is the widely held view of financial institutions in the UAE. While the Emirates Movable Collateral Registry Corporation has Client Alert White & Case 5 worked alongside financial institutions to have pre-existing possessory pledges registered within the 15 March 2018 deadline, the Registry itself was not accessible until after this point in time. As such, it is hoped that an extension of the 15 March 2018 deadline will be provided.

Enforcing Security

One of the biggest advantages that the Mortgage Law has is its enforcement mechanics. While enforcement of a possessory pledge occurs through a potentially lengthy court-sanctioned process, the Mortgage Law allows for self-help steps to be taken in addition to obtaining summary enforcement via the UAE Courts.

A. Self –Help

Article 27 and 28 of the Mortgage Law outline the circumstances in which self-help will be available to a mortgagee. There is a distinction between the method of self-help for bank accounts, bonds and documents from other moveable assets:

• Movable assets other than bank accounts or bonds: Where (a) the mortgagor or the principal debtor fail to perform their obligations; or (b) the underlying contract is not implemented for any reason, the mortgagee may exercise the self-help steps outlined in Article 27. In these circumstances, the mortgagee may – after providing written notification to the mortgagor and principal debtor of the breach – seize the mortgaged property, separate it from any attached property and sell it at a market price (no guidance is provided on how a "market price" is to be determined) no earlier than 10 business days after having given the original notice. This is only possible where:
  • there is agreement between the parties that such self-help is available (it is not expressly stated that this agreement may be a standing authority included in the mortgage contract, but this appears to be the generally held view, given that once there is a breach a mortgagor may be unwilling to agree to this);
  • the mortgaged property cannot be otherwise encumbered by another mortgage right or, if there is another mortgage right, consent of all mortgagees is required;
  • notification of the owner of the mortgaged property is provided where the mortgaged property is in the possession of a third party; and
  • where the mortgaged property is a fixture; the owner of the real estate where the fixture is attached, any mortgagee of such real estate, the owner of any movable to which the property is attached and the holder of such movable must be notified.
• Bank accounts or bonds: Self-help will only be available where the mortgagor or principal debtor fail to perform their obligations.
  • Where the mortgaged property is a bank account, and the mortgagee is also the account bank, they may set-off the balance of any account against the relevant secured obligations. Where the account bank is a third party, the mortgagee may claim the balance.
  • Where the mortgaged property consists of bonds or written documents for which ownership is transferred by delivery or endorsement, the mortgagee may take delivery of such property if their value is equivalent to the outstanding obligations.

B. Enforcement through the Court

Self-help remedies may not be possible in all circumstances (such as where consent from the mortgagor was not obtained). Where this occurs (or where the mortgagee deems it more beneficial) a mortgagee may obtain execution of the mortgage through the judiciary. By submitting a request containing, amongst other things, the mortgage contract and details of the mortgaged property, the mortgagee may ask the Magistrate of Summary Justice to issue an order of seizure and execution against the mortgaged property. It may take up to 31 business days for the Magistrate of Summary Justice to make a final declaration on whether the mortgaged property can be seized and executed (assuming objections to seizure are lodged and an appeal to an initial ruling is made).

If the mortgagee’s request is upheld, the Court may authorise them to sell the mortgaged property once it has been seized. The mortgagee has an obligation to act with sufficient care to obtain a sale price that is "not lower than the market price". The Court may, if it deems fit, specify the conditions of sale or the sale method, including setting a minimum amount. The purchaser of mortgaged property that is sold in accordance with the Mortgage Law will take the mortgaged property free from encumbrances. Proceeds of any sale that are received by the mortgagee are to be deposited to the court, within two business days of the sale, for distribution in accordance with the order of priorities established under the Mortgage Law

C. Payment in Kind

In addition to the enforcement mechanisms contained in the Mortgage Law, under Article 26 the mortgagee and mortgagor may agree that title to the mortgaged assets (in whole or in part) shall be transferred to the mortgagee in settlement of the outstanding obligations.

Summary

The publication of the Mortgage Law in December 2016 was met with quiet optimism by UAE financial institutions. The introduction of self-help remedies, coupled with the ability to take effective security over current and future property without taking possession, is a significant improvement on the Existing Law. However, until the Implementing Regulations were published, how the Registry was to be managed was a silent concern for financial institutions and lawyers alike. While some uncertainties remain, the introduction of the Mortgage Law – along with the implementation of the Registry – is a much welcomed addition to the UAE financial landscape.

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¹ Published in the Federal Gazette no. 609 dated 15 December 2016 and came into effect on 15 March 2017
² The English translation of the Mortgage Law refers to both "mortgage" and "pledge" interchangeably. For the purposes of clarity, w e shall refer to mortgages for the purposes of this article.
³ For the purposes of clarity and consistency, w e shall refer to declarations on the Registry as "registrations"

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

On the EMIR Compromise: Reflections and preliminary considerations

The Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories ("EMIR") is currently undergoing a significant review which will result in material changes to make the key regulation of OTC derivatives in the European Union ("EU") more efficient and less onerous. To date, these proposed changes have been reflected in the compromise text which we analyse.

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Lehman Brothers Special Financing Inc v National Power Corporation and another [2018] EWHC 487 (Comm) (12 March 2018): Can calculation statements under the 2002 ISDA Master Agreement be withdrawn and replaced once served?

This article describes the recent case in which the Commercial Court considered, in particular, whether the Determining Party of an Early Termination Amount under a 2002 ISDA Master Agreement could make a replacement determination once the original determination had been served on the counterparty.

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Brexit update

Following publication of the draft 'colour coded' withdrawal agreement by the European Commission, we provide a snapshot update of where the negotiations currently stand and, in particular, look at some of the issues (based on the current wording of the withdrawal agreement) surrounding cross-border recognition and enforcement of English law judgments across the EU in a post-Brexit world. We also take a look at the newly published '2018 ISDA Choice of Court and Governing Law Guide' which offers new model jurisdiction clauses for inclusion in the 1992 and 2002 Master Agreements.

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Variation margin requirements for physically settled FX forwards — EMIR update

On 24 November 2017, the European Supervisory Authorities ("ESAs") issued a statement as to the challenges faced by certain counterparties with regard to the exchange of variation margin for physically-settled FX forwards. The ESAs stated that until the Margin Rules are amended, they would expect competent authorities to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in a proportionate manner. This article reviews the current status of this issue.

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© 2018 White & Case LLP

As part of our periodic updates, we will provide you with an overview of recent developments of relevance to participants in the real estate finance market and who may have an interest in the jurisdictions in which we have offices. For further details on any of the below, please feel free to contact the relevant country partner or your usual White & Case contact.

Finland

On January 19, 2018 the Finnish Ministry of Finance published a draft Government Bill proposing changes to the Finnish Law on Taxation of Business Income. The majority of proposed amendments are based on the interest deduction rules of EU Anti-Tax Avoidance Directive. The amendments will expand the scope of the interest limitation rules and tighten the deductibility of interest expenses and is therefore likely to impact the structuring of Finnish real estate finance deals. The draft Government Bill has been circulated for comments and the amendments, which may deviate from the current draft, are proposed to enter into force from the beginning of 2019.

Key changes

The current interest deductibility limitations only apply to interest payments between related parties and certain industries are carved out from the applicability of such limitations. The draft Bill proposes that interest deductibility limitations would apply to interest expenses generally, including those payable on loans from unrelated, external parties. Further, all corporations with a permanent establishment would be subject to these rules, including real estate companies which are currently excluded from the scope of application.

According to the draft Bill, interest expenses would continue to be fully deductible up to the amount of interest income and any net interest expenses (i.e., interest expenses exceeding interest income) up to €500,000, would be fully deductible. Net interest expenses exceeding such threshold will continue to be deductible up to an amount of 25% of the adjusted taxable income of the company. Net interest expenses to unrelated, external parties could additionally be deducted up to the amount of €3,000,000 provided that such expenses are otherwise arm’s length and related to the company’s business. As before, interest expenses payable on a loan taken from an external party would be treated as interest expenses payable to a related party (and thus not entitled to the €3,000,000 additional deduction) if such loan is, e.g., secured by a receivable owing to a related party.

Furthermore, the exemption regarding financial companies and current balance sheet based safe harbour, pursuant to which interest deduction limitation rules do not apply if the company can file a submission stating that its equity to total assets ratio is greater than or equal to the corresponding ratio of its adopted consolidated balance sheet, will be removed.

Possible effects of the proposed amendments

According to the Finnish Ministry of Finance, the proposed amendments would have a significant positive effect on the tax base of Finland. Correspondingly, for entities which are currently excluded from the scope of interest deduction limitation rules, the proposed amendments would mean a significant change by creating a stricter environment for their current financial structures. In practise, among others, financing structures used in real estate finance transactions should be re-evaluated as some of the internal financing expenses would become non-deductible. Additionally, this would also mean that the use of internal loans within a group, will diminish in relation to future real estate finance transactions and, in respect of current financial structures, companies must further consider options such as conversions of internal loans into capital or transfer of debts by debt push down arrangements.

Germany

Pre-formulated fee arrangements

Recent judgments of the German Federal Court of Justice have held that pre-formulated fee arrangements where fees are payable by a borrower independent of the terms and structure of the underlying loan are invalid even where the borrower is an entrepreneur (rather than a consumer). It was held that a bank may only charge amounts other than interest if a corresponding service is provided to the borrower or the relevant fees are individually negotiated (note the threshold as to whether a fee is individually negotiated is quite high).

As such, borrowers may be entitled to claim the repayment of various fees which have been payable as of 2015 (claims prior to 2015 are time-barred). The types of fees which could be the subject of claims include handling fees, arrangement fees, underwriting fees, assessment fees, commitment fees and (to some extent) structuring fees together with any related third party costs. As a result there is currently some uncertainty in the market as to whether borrowers will be successful in reclaiming any fees that have already been paid and how fee arrangements should be structured in order to ensure that financial institutions validly generate such fees.

Update to German VAT guidelines

Recent amendments to German VAT guidelines have extended the general VAT exemption for the rental of real estate to furnishings rented out together with the real estate (though some exemptions are possible). Such furnishings could include movable inventory in a retirement home or movable office furniture although any operating equipment which is rented out will remain subject to VAT. It will therefore be important for those who rent out real estate together with furnishings to be mindful of the new rules.

Poland

Ban on Sunday trading in Poland

Due to recent law changes, Poland will see a gradual ban on Sunday shopping that will limit Sunday trade to two Sundays in a month from March 2018, and then to one Sunday in a month in 2019. From 2020, stores will be allowed to open only on seven Sundays a year. The ban, however, does accommodate numerous exemptions including for example small private retailers, e-commerce, pharmacies, cafes, restaurants, gas stations and flower shops.

Tax on income derived from fixed assets

New tax law introduces a tax on income derived from certain fixed assets situated in the territory of Poland whose initial value exceeds PLN 10,000,000 (approximately €2,500,000), i.e., commercial buildings classified as shopping centers, department stores, shops, boutiques, etc., as well as office buildings. The tax base is the income equal to the original value of the fixed asset as of the first day of each month in the relevant period, reduced by the amount of PLN 10,000,000. The tax is calculated as 0.035% of such tax base for each month. The tax amount may be deducted from the general income tax advance; therefore, if the fixed asset generates a certain level of income, the net effect of the amendment is tax neutral.

Pre-emption right to land covered with inland standing water

A statutory pre-emption right for the State Treasury has been established with respect to any land under inland standing water, regardless of the surface area of the water or the land. Thus, any transaction involving the sale of real estate where inland standing water is located can only be effective if the relevant head of a county (Polish: Starosta) liaising with the minister responsible for water management does not exercise his pre-emption right, which must be exercised within one month from the date of receipt by the head of a relevant county of the notification of the agreement.

"Standing water" is defined as "inland water in lakes and other natural bodies of water not directly and naturally connected with flowing inland surface water." It appears (on the basis of recent case law) that the pre-emption right may also apply to land on which ditches are located, which significantly broadens its application.

New rules governing investor liability for payments to subcontractors under construction agreements

New rules governing investor liability for payments to subcontractors under construction agreements have come into force. As a result: (i) investors are jointly and severally liable together with the (general) contractor (GC) for payment of the subcontractor’s remuneration for construction works performed by a subcontractor if the detailed scope was notified in writing to the investor by the GC or the subcontractor before commencement of their performance; (ii) an investor can avoid liability by delivering a written objection, within 30 days from receiving the relevant notification, to the subcontractor and the GC regarding the subcontractor’s performance of works; (iii) If the investor and GC have determined in a written contract (the GC Agreement) the precise scope of construction works that will be performed by a given subcontractor, no notification is required and the investor is jointly and severally liable together with the GC for payment of the subcontractor’s remuneration; and (iv) the investor’s liability for the payment of a subcontractor’s remuneration is limited to the amount determined in the agreement executed between the GC and the subcontractor, the scope of which was notified to the investor or agreed in the GC Agreement. The investor is not liable for additional payments such as penalties or changes of remuneration due to a court ruling.

Slovakia

The Constitutional Court of the Slovak Republic has recently addressed the question of the bona fide acquisition of real estate.

The issue, which had been subject of legal debate in Slovakia for a long time, is whether the law should protect the ownership title of person "C" who acquired real estate from a person "B" after it was proved that person "B" did not acquire the real estate from person "A" in accordance with the law. In other words, the question is whether the good faith of a bona fide acquirer should prevail over another key legal principle, nemo plus iuris ad alium transfere potest quam ipse habet (no one can transfer to another more rights than he himself has).

The Constitutional Court considered both principles (bona fide acquisition and nemo plus iuris) to be equal. It further held that in the event of their conflict, the particular circumstances of each case should be taken into account in order to achieve a fair outcome. However, the Constitutional Court added that the legal risk (of not having ownership title and related consequences) should primarily be borne by the negligent original owner (i.e., person A in the above example), rather than by the bona fide acquirer (i.e., person C in the above example) who has no knowledge of the legal grounds under which the previous owner (A) was deprived of the ownership and deregistered as owner from the cadastral register. In short, the Constitutional Court reinforced the protection afforded to bona fide acquirers.

UK

The challenging climate faced by UK retailers has led to a recent increase in the number of UK companies turning to company voluntary arrangements (CVAs) and it is predicted that this trend will continue in 2018.

CVAs are a compromise or arrangement between a company and its creditors which can be used by UK companies who hold significant numbers of leasehold interests to impose improved lease terms on landlords where unsecured creditors generally are supportive of the relevant proposal. In the current market, this makes them particularly attractive to bricks and mortar retailers, as well as to casual dining brands that have over-expanded. As such, CVAs have been proposed and approved in several high profile cases in recent months, and that trend only seems set to continue. CVAs are voted on and, if approved by a majority in number and 75% in value of the creditors voting at a creditor’s meeting considering the CVA, will bind all unsecured creditors of the company (though not secured creditors who do not consent).

Whilst a CVA is a tool for imposing altered lease terms on landlords to the benefit of tenants, they often receive support from landlords as well as other unsecured creditors as they typically result in a significantly greater return than the alternative of an administration or liquidation of the tenant.

In light of the predicted increase in CVAs, it is important for lenders, landlords and tenants to consider how a CVA will impact upon, or be treated under, their financing arrangements. Lenders should seek to ensure that it is clear that their borrower (whether a landlord or a tenant) is required to seek consent in order to propose or vote (as applicable) in a CVA so that the lender is made aware of the changes proposed to the underlying leasehold arrangements. As there are often very short notice periods associated with CVAs (there is a prescribed statutory minimum notice period of seven days for physical creditor meetings and 14 days where any other decision making procedure is being used), landlords should consider whether their financing arrangements allow them the flexibility to vote in CVAs on short notice without the need for a potentially lengthy wait for lender consent. Finally, whilst CVAs are focused on changes to the terms of their leases, tenant companies will need to ensure that proposing a CVA will not result in a breach of their financing agreements and in particular, any restrictions on negotiations with creditors, by virtue of entering into a CVA.

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© 2018 White & Case LLP

On 26 July 2017, the President signed Federal Law No. 212-FZ "On Amendments to Part One and Part Two of the Civil Code and Certain Laws of the Russian Federation."

The amendments aim to streamline the legal framework for finance transactions and cover assignments, loans, bank accounts and deposits, payment settlements (including with letters of credit), escrow and factoring. Some changes are novel, whereas others reflect the existing practices or existing laws and regulations. Below we provide a summary of the key changes.

The amendments entered into force on 1 June 2018.

Assignment

Limitations on objections of the debtor against a new creditor's claims. According to the Civil Code, the debtor can raise objections against the claims of a new creditor which could be presented against the initial creditor, provided that the grounds for such objections arose before the debtor was notified of the assignment. The amendments also provide that, within a reasonable time after being notified of the assignment, the debtor must inform the new creditor of the occurrence of the grounds for the objections known to it (otherwise, the debtor will not be able to refer to those grounds later).

Limitation of the assignor's liability. Parties to an assignment agreement are allowed to agree that the assignor will not be liable for invalidity of the assigned claims. Such limitation of the assignor's liability is possible, provided that: 1) the agreement underlying the assigned claims relates to business activities of its parties, and 2) the invalidity of the assigned claims is caused by circumstances which the assignor was not or could not be aware of or by circumstances of which the assignor has informed the assignee. This possibility can become the basis for structuring assignments on a non-recourse basis.

Conclusion of a contract through a tender as required by law

Assignment of monetary claims. Previously, the Civil Code prohibited the assignment of claims under contracts concluded by virtue of law through a tender (according to the position of the Ministry of Finance, the ban applied, in particular, to the assignment of monetary claims under such contracts).¹

The amendments now allow the assignment of monetary claims under such contracts (previously this possibility was confirmed by the court practice).

Amendments to a contract. Previously, the Civil Code allowed changing a contract concluded by virtue of law through a tender only: 1) if the change did not affect the contract terms that were essential for the determination of the price in the tender and 2) in other cases provided by law. The amendments introduced an additional basis for changes by expressly providing that the parties can change the interest rate under a loan (credit) agreement concluded by virtue of law through a tender in case of changes in a key rate established by the Central Bank, pro rata to such changes.

Loan

Consensual loan. It is now possible to agree that the creditor will undertake to provide a loan to the borrower (unless the borrower is an individual). Therefore, as opposed to the previous model of a "real loan," whereby a loan agreement was deemed concluded only when the loan is actually provided by the creditor to the borrower, the parties can agree on a "consensual loan," which is similar to a credit.

Similar to the regulations on credit agreements, the amendments provide that:

• the creditor can refuse to perform an agreement if there are grounds which clearly show that the loan will not be repaid on time;
• the creditor can refuse to continue performing the agreement if the loan is not used for its designated purpose,² and
• a borrower engaged in entrepreneurial activities, in turn, can refuse to utilize a loan by notifying the creditor accordingly before the agreed date on which the loan is to be made, unless the law or agreement provides otherwise.

Lending of securities. The amendments expressly allow securities to be lent, irrespective of whether they are certified or uncertified securities. Previously, the possibility to lend uncertified securities was confirmed by the court practice in the context of marginal transactions made by brokers under the Securities Market Law.

Providing loans to third parties. The amendments envisage that a loan provided to a third party specified by the borrower will be deemed to have been provided to the borrower. Previously, the possibility of providing a loan to a third party was generally confirmed by the court practice.

Interest. The amendments envisage that an interest rate can be fixed or floating (i.e., can change depending on the agreed circumstances, including depending on changes in an agreed variable value). This was not expressly provided for in the Civil Code before; however, it was not prohibited either and was expressly provided for in the Law on Consumer Loans.

Loan agreements between individuals. A loan agreement between individuals must be concluded in writing if its amount exceeds RUB 10,000.

By default, a loan agreement between individuals (including entrepreneurs) is deemed interest-free if its amount does not exceed RUB 100,000.

Usury. The amendments limit interest rates agreed in loan agreements between individuals and between individuals and companies that are not professionally engaged in consumer lending (i.e., other than banks, microfinance organizations, etc.). If the agreed interest rate is at least twice the rate that is normally charged in similar cases and, as a result, it is extremely burdensome for the borrower, it can be decreased by the court to the interest rate that is normally charged in similar circumstances.

There is an exemption for loan agreements between individuals and companies that are professionally engaged in consumer lending because the relevant limits with respect to the "full cost" of consumer loans are already envisaged by the Law on Consumer Loans.

Prepayment. Loan prepayment at the initiative of the borrower, as a rule, requires the creditor's consent. The amendments specify that such consent can be included directly in a loan agreement.

Credit

Fees. According to the amendments, the borrower under a credit agreement undertakes to pay to the creditor not only interest, but also make other payments envisaged in the agreement, including those related to payments is subject to the Law on Consumer Loans.

The possibility of setting contractual fees is generally provided by the Law on Banks. However, the issue of whether certain fees can be charged has often arisen in practice. The previous court practice suggested that banks were entitled to charge a fee only if: 1) the fee was for rendering a standalone service which provides the borrower with some additional benefit or other positive effect, or 2) the fee could be considered as payment for the use of the credit. It remains unclear at this stage whether the amendments will change this approach.

Refinancing. Where a credit is provided to discharge another credit provided by the same creditor and it is agreed that the credit proceeds will not be credited to the borrower's account, the credit is deemed to have been provided when the borrower is notified by the creditor of the discharge.

Acceleration. Under the amendments, when a credit is granted to a company or an entrepreneur, it can be accelerated not only on the grounds envisaged by law, but also on the grounds envisaged by the agreement. This should allow the parties to be more confident when setting out contractual grounds for the acceleration of a credit.

Factoring

Definition of a factoring agreement. The amendments introduce a new definition of a factoring agreement: one party (a client) undertakes to assign monetary claims against a third party (a debtor) to another party (a financial agent/factor) and pay for the services of the latter, and the financial agent undertakes to perform at least two of the following functions in relation to the assigned claims:

1) finance the client on account of the claims (including with a loan or an advance);

2) maintain accounts relating to the claims;

3) exercise rights relating to the claims (in particular, collect payments from the debtors);

4) exercise rights under the agreements securing the performance of obligations by the debtors.

This definition is quite close to the definition envisaged by the UNIDROIT Convention on International Factoring, which is effective in Russia as of 1 March 2015.

It is expected that the amendments will contribute to the development of not only factoring arrangements, but also securitization instruments.

Liability of a client to a financial agent. According to the amendments, unless agreed otherwise, the client will be liable to the financial agent if the assigned claim is invalid. At the same time, the definition of a valid claim previously provided in the Civil Code was abolished (it suggested that, at the time of the assignment, the client was not aware of the circumstances allowing the debtor not to satisfy the claim). Thus, based on the amendments, the risk of the debtor's latent objections lies with the client.

Debtor recovery of a sum paid to the financial agent. Previously, if a client was in breach of its obligations under an assigned contract, the debtor was entitled, in certain circumstances, to recover the paid sum from the financial agent. According to the amendments, the debtor will not be entitled to recover the paid sum from the financial agent, but will still be entitled to recover that sum from the client (i.e., from its direct counterparty). Thus, the financial agent will not be involved in disagreements between the client and its debtor arising from the client's non-performance under the assigned contract.

Bank deposit

Irrevocable deposits. Previously, banks were obliged to return deposits to individual depositors on demand and individual depositors could not waive their right to receive a deposit on demand. The amendments allow banks to accept irrevocable deposits that will be certified by a savings certificate, which is a registered security and clearly states that an individual depositor is not entitled to receive a deposit early on demand.

With respect to irrevocable deposits of companies, the amendments specify that: 1) the dates and the procedure for the return of a deposit to the company are to be defined by the deposit agreement and 2) if the deposit is certified by a deposit certificate, the certificate can contain a ban on early demand of the deposit.

Savings and deposit certificates. The amendments specify that savings and deposit certificates can only be registered securities (previously they could also be bearer securities). Savings certificates can only be held by individuals, including entrepreneurs, whereas deposit certificates can only be held by companies.³

Bank account

Entitlement to funds in an account. According to the amendments, funds in a bank account are deemed not to belong to the client within a certain term (not exceeding 10 days) if the payee and/or its servicing bank have confirmation that the client's debiting instruction can be executed. After that term, funds that still remain in the client's account are deemed to belong to the client again.

Joint accounts. The amendments introduce the possibility of opening joint bank accounts. This option is available for individuals only. Rights to funds in a joint account belong to the relevant individuals pro rata to the amounts contributed by each of them or by third parties in their favor (unless a bank account agreement provides otherwise). If a joint account is opened by spouses, they are deemed to have joint rights to the funds in the account (unless otherwise envisaged by a marriage contract, of which the bank was notified).

Funds in a joint account may not be attached to discharge the debts of one of the account holders in an amount exceeding his/her share. If the account is held by spouses, the attachment would be subject to the family law rules.

Pool of bank accounts. The amendments allow banks to execute a debiting instruction even if there are no funds in an account, provided that the account is included in a pool of accounts (including those held by different entities) and the total amount in those accounts is sufficient to execute the debiting instruction. Potentially, these amendments will contribute to the development of cash pooling services helping to optimize cash flows within a group of companies. However, the relevant secondary laws or clarifications would be needed in relation to the procedure for debiting and the procedure for pooling accounts.

The possibility of imposing contractual restrictions. The amendments eliminate the uncertainty as to whether an agreement can impose restrictions on operations in a bank account. It is envisaged that: 1) unless the law provides otherwise, a bank account agreement can specify cases when a bank must refuse to credit/debit the client's account, and 2) the law or an agreement can restrict the disposal of funds in the account. These clarifications are positive, in particular, for direct debiting agreements, which are often used in practice as a form of quasi-security.

Closing inactive accounts. The amendments aim to simplify the procedure for banks closing inactive accounts. Previously, a bank could refuse to perform a bank account agreement if there were no funds and operations in an account for two years (subject to a two-month notice to the client). After the amendments' entry into force, these rules remain in effect for the accounts opened to individuals who are not entrepreneurs. However, the rules changed with respect to the accounts opened for companies and entrepreneurs. First, banks are entitled to refuse to perform a bank account agreement if there are no operations in the account, rather than both "funds and operations" in the account as before (i.e., even if there are funds in the account), and, second, a bank account agreement can specify a different period for considering an account inactive, i.e., other than two years (but in any case no less than six months).

In addition, according to the amendments, a prior notice to the client can be sent not only in writing, but also in another way specified in the agreement.

A bank account agreement can also contain the bank's waiver of its right to close an inactive account.

Public deposit account

General comment. The amendments combine the deposit accounts that already exist in practice, i.e., deposit accounts of notaries, court bailiffs and other authorities, into a single category of "public deposit accounts" and introduce detailed regulations for such accounts. Public deposit accounts can be opened only by banks whose capital is no less than RUB 20 billion.

Accounts/deposits in precious metals

General comment. The amendments introduce in the Civil Code concepts of bank accounts and bank deposits in precious metals. This is not completely new as it is already possible to open "metal accounts" (as envisaged by Central Bank Regulation No. 50 "On Credit Organizations' Operations with Precious Metals […]" of 1 November 1996).

Notably, bank operations on opening and maintaining bank accounts in precious metals and on making transfers through such accounts are now considered as standalone operations (i.e., they are indicated in the Law on Banks separately, in addition to the operations on accepting precious metals in deposits and their placement envisaged before).

Escrow account

Entitlement to funds in an escrow account. The amendments specify that before the date when the grounds for releasing funds to the beneficiary arise, the funds are deemed to belong to the depositor, and after that date to the beneficiary.

Immunity of an escrow account. The amendments expressly prohibit the suspension of operations in an escrow account, the attachment of funds in an escrow account and its debiting to discharge debts of the depositor or the beneficiary.

Crediting funds to an escrow account. The amendments exclude the possibility of crediting an escrow account with the depositor's funds other than those to be deposited in accordance with the escrow account agreement.

Regulation. Unless the special rules on escrow account agreements provide otherwise, the relationship of the parties will also be subject to the rules on escrow agreements (please see below).

Escrow agreements

Definition of an escrow agreement. In addition to the escrow account agreement envisaged by the Civil Code before, the amendments introduce a new instrument – the escrow agreement. It differs from escrow account agreements by the range of persons that can act as escrow agents and the assets that can be deposited in escrow, and is generally regulated in more detail.

Under an escrow agreement, a depositor undertakes to deposit certain property with the escrow agent in order to perform its obligation to transfer that property to a third party (the beneficiary of the escrow) and the escrow agent undertakes to secure that property and transfer it to the beneficiary once the agreed circumstances arise.

It is expected that this instrument could be used, for example, in agreements for the sale and purchase of securities.

Key features of an escrow agreement:

• the term of the agreement is no more than five years;
• the agreement is made between the depositor, the beneficiary and the escrow agent;
• the agreement must be notarized, except for cases where cashless funds or uncertified securities are deposited in escrow;
• there are no restrictions on the range of persons that can act as escrow agents;
• the property deposited in escrow can include: 1) movable property (including cash, certified securities and documents), 2) cashless funds and 3) uncertified securities;
• the property in escrow must be segregated from the other property of the escrow agent;
• neither the depositor nor the escrow agent are entitled to dispose of the property in escrow (unless agreed otherwise);
• a reciprocal escrow is also possible, i.e., the placement in escrow of property that is to be mutually transferred by the parties to a bilateral agreement;
• the following grounds, among others, can serve as a basis for releasing the property in escrow to the beneficiary: 1) the performance of the agreed actions by the beneficiary or a third party, or 2) the occurrence of the agreed date or event. The beneficiary may or may not be required to present documents confirming that the agreed grounds have arisen;
• as a rule, the escrow agent has to check the documents presented by the beneficiary (if they were required at all). However, the agreement can require the escrow agent to verify whether the grounds for the transfer of property in escrow have arisen;
• the property in escrow may not be seized to discharge debts of the escrow agent, depositor or beneficiary, but, to discharge the depositor's or the beneficiary's debts, their claims against the escrow agent can be enforced (regarding the return or transfer of the property in escrow).

Bankruptcy of the depositor. The depositor's bankruptcy will not prevent the escrow agent from transferring the property in escrow to the beneficiary to fulfill the depositor's obligations. The property in escrow will be included in the bankruptcy estate of the depositor only if no grounds for its transfer to the beneficiary arise within six months after the receivership procedure has commenced.

Movable property. Before the grounds for the transfer of movable property in escrow to the beneficiary arise, the title to it belongs to the depositor, and after that it passes to the beneficiary (the law can provide otherwise, however). Also, as a rule, the parties' relationship is subject to the Civil Code rules on storage agreements.

Uncertified securities. Based on the amendments, securities are deposited in escrow by way of making a record that the securities are encumbered in the securities' owner's account. The Securities Market Law may specify a different procedure and rules. Due to the lack of specific regulations in the Securities Market Law and the relevant secondary laws, the mechanism for the escrow agent's transfer of securities held in escrow to the beneficiary remains unclear.

Cashless funds. If the escrow agent is not a bank, then funds need to be deposited in a nominal account of the escrow agent.⁴ The beneficiary of such nominal account before the grounds for the transfer of funds arise is the depositor, and after that date it is the beneficiary under the escrow agreement.

Notably, the Civil Code rules on attachment of funds in nominal accounts and debiting such accounts do not apply to nominal accounts used for depositing funds in escrow.

Letters of credit

General comment. A number of the amendments reflect the existing regulations contained in Central Bank Regulation No. 383-P "On Transfer of Funds Rules" of 19 June 2012. In particular, the following issues are now regulated by the Civil Code: 1) letters of credit are available not only by payment or acceptance of a bill of exchange, but also "in other ways"; 2) letters of credit are by nature separate transactions; 3) the term for the examination of presented documents is specified (five business days), and 4) nominated banks are entitled not to honor an uncovered letter of credit before they receive funds from the issuing bank.

Irrevocable letter of credit. Under the amendments, a letter of credit is deemed to be irrevocable, unless it explicitly states otherwise (which differs from the previous rule).

Banks' liability to the payee. The amendments provide that: 1) confirming banks must honor letters of credit on a joint and several basis with the issuing bank, and 2) the issuing bank and confirming bank have joint and several liability to the payee for failure to properly honor a letter of credit. At the same time, the amendments fail to expressly state that a letter of credit can be made available with a confirming bank.

Transferable letters of credit. The amendments introduce a new category of letters of credit in the Civil Code – a transferable letter of credit, which may be made available to a third party specified by the payee (subject to the consent of a nominated bank). It should be noted that Regulation No. 383-P already permits letters of credit to be made available to third parties.

The Civil Code rules on assignments do not apply to transferable letters of credit.

The assignment of claims by the payee. The payee is not allowed to assign its claims under a letter of credit unless the letter of credit provides otherwise.

Banks' liability to the payer. Issuing banks will continue to be liable to payers. However, the rule allowing a nominated bank to be held liable to the payer in case of incorrect payment under a covered or a confirmed letter of credit has been abolished.

Payment order

General comment. Overall, the amendments reflect regulations already contained in Central Bank Regulation No. 383-P. In particular, the following issues will now be regulated by the Civil Code: 1) the procedure for the acceptance of a payment order for execution, 2) the terms for notifying the payer of a refusal or the execution of a payment order and 3) the possibility for the payer to revoke a payment order before the transfer becomes irrevocable.

Joint and several liability of banks. According to the amendments, in certain cases a court can hold the intermediary bank or the payee's bank liable to the payer on a joint and several basis. The payer's bank can be held liable if it chose the intermediary bank.

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¹ Please see, for example, the Letter of the Ministry of Finance No. 24-05-09/57010, dated 5 September 2017, relating to the application of Federal Law No. 44-FZ "On the Contractual System for Procurement of Goods, Works and Services for State and Municipal Needs."
² If the loan is not used for its designated purpose, the creditor is also entitled to accelerate the loan (this possibility existed before and, therefore, it is not related to the potentially consensual nature of a loan).
³ On 23 April 2018, the President signed Federal Law No. 106-FZ amending the Law on Banks and other laws in relation to savings and deposit certificates (in particular, it describes the procedure for the transfer of rights certified by certificates). The Law entered into force on 1 June 2018.
⁴ Based on Federal Laws Nos. 119-FZ and 120-FZ, which were signed by the President on 23 May 2018, if an escrow agent is a notary, funds are to be deposited in his/her public deposit account. The Laws entered into force on 1 June 2018.

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

Max Axelsson is an associate in our Bank Finance practice in Stockholm and joined White & Case in 2018.

Prior to joining White & Case, Max studied at Stockholm University.

Kajsa Sundklev is an associate in our Bank Finance practice in Stockholm and joined White & Case in 2018.

Prior to joining White & Case, Kajsa studied at Stockholm University.  

Peter Raish is an Associate in the Houston office of White & Case LLP and a member of the firm's Banking and Mergers & Acquisitions practice groups. His practice focuses principally on financing transactions, with particular expertise in the oil and gas exploration and production, midstream and related services sectors. Peter represents borrowers, commercial and investment banks and mezzanine lenders in a range of financing transactions including acquisition and committed financings, asset-based and reserve-based credit facilities, investment grade financings, second lien credit facilities and mezzanine financings. He also has experience with upstream acquisition and divestiture transactions.

Prior to joining White & Case, Peter was an associate in the Houston office of a New-York based law firm.

Global law firm White & Case LLP has advised Absa Bank Limited (acting through its Corporate and Investment Banking Division), as exclusive mandated lead arranger, sole underwriter and sole hedge provider, on the R6.6 billion financing for Mainstream Renewable Power's two wind projects in the Northern Cape and Western Cape provinces in South Africa.

"White & Case is recognised as one of the world's leading law firms for project finance," said Johannesburg-based White & Case partner Craig Whitley, who led the Firm's deal team. "We have advised on two important projects in South Africa that are designed for socio-economic and environmentally sustainable growth, and are expected to generate an estimated R1 billion in community investment over the next two decades."

The projects, Kangnas and Perdekraal East, were awarded under Round 4 of the South African Department of Energy's Renewable Energy Independent Power Producer Procurement Programme, and will generate a combined 250 MW once completed. Construction is expected to commence in June 2018 and the projects should be operational by 2020.

Johan Koorts, Transactor, Resource and Project Finance at Absa, said: "The White & Case team provided invaluable guidance on all matters related to local law and guided lenders through an intricate set of legal considerations. Their support was integral in reaching financial close and providing a world class deliverable."

Equity investors included Lekela Power, OMLACSA, AREP, H1 and a community trust. Financial close was reached on June 5, 2018 with an approximate total amount invested of R6.6 billion.

The White & Case team in Johannesburg which advised on the transaction was led by partner Craig Whitley and included partner Quintin du Plessis, local partner Nathisha Maharaj and associates Matthew Richards, Marianna Naicker and Rosanna Bibis.

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White & Case represented Sempra Energy (NYSE: SRE), a Fortune 500 energy services holding company, in an acquisition named "M&A Deal of the Year" at The Deal's inaugural deal award ceremony in New York on June 21, 2018.

Sempra Energy's US$9.45 billion all-cash acquisition of Energy Future Holdings Corp. and its subsidiary Energy Future Intermediate Holding Company (together the EFH Debtors), the indirect owners of 80 percent of Oncor Electric Delivery Company, LLC, the largest utility in Texas, created the largest utility holding company in the US by customer base.

The deal, which valued Oncor at approximately US$18.8 billion at signing, ended the EFH Debtors’ long-running chapter 11 case, which had been pending for nearly four years and had seen two prior confirmed plans fail to consummate because of regulatory issues. It was the largest industrial bankruptcy in US history.

White & Case is one of the most active and experienced law firms for both energy M&A transactions and complex restructuring matters. The Firm was ranked the #1 Legal Advisor for Energy, Mining, Oil & Gas in the Americas by deal value by Mergermarket in 2017 and 2016, and it was named Restructuring Firm of the Year by both the International Financial Law Review and The M&A Advisor in 2017.

The Deal is a leading M&A publication, and The Deal Awards recognize the leading lawyers, bankers, service providers and investors shaping the deal economy.

European Leveraged Finance Alert Series: Issue 6, 2018

One: Regulatory framework for Lending in Spain

Lending in Spain is generally not considered a reserved activity for Spanish-licensed and EU-passported banks or financial institutions authorized by the Bank of Spain. Nevertheless, such financial institutions may have certain advantages, such as exemptions in terms of withholding taxes or the ability to create and enforce financial guarantees as per Royal Decree Law 5/2005 on urgent reforms to encourage, among others, productivity and improve public procurement ("RDL 5/2005") which implements the European Collateral Directive (Directive 2002/47 EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements) in Spain.

Two: Corporate Benefit

A Spanish company must derive a benefit from any transaction it enters into. Under Spanish law, a company is required to use its assets and credit to further its own corporate purposes and for its own benefit. Therefore, the granting of an up-stream/cross-stream or even down-stream guarantee by a Spanish company may violate this rule if that company cannot prove that it obtains a benefit from the guarantee. The determination of whether a particular transaction (e.g., granting of a guarantee) complies with such requirement is a factual matter to be determined by the directors. This assessment needs to be made on a case by case basis, analyzing all circumstances pertaining to the transaction (e.g., type, size, purpose, structure of the group, etc.). Directors of Spanish companies have to comply with fiduciary duties (namely the duties of loyalty and care) when performing their obligations, including the approval of such transactions. Directors may be liable and exposed to sanctions and claims for failure to comply with this requirement. Often times certain limitation language is included in the finance documents and in the corporate resolutions with the aim to contractually limit the guarantee obligations of the Spanish company/guarantor to an amount equal to the amount of the proceeds of the guaranteed parent/sister company debt (whether under a facility or debt securities) that is directly or indirectly on-lent to that guarantor by the parent/sister company borrower under intra-group loans.

Three: Financial Assistance

Spanish corporate law places restrictions on Spanish limited liability companies (sociedades de responsabilidad limitada (SRLs) and sociedades anónimas (SAs)) granting financing assistance, generally, to acquire its own shares or those of companies within its group. The financial assistance extends not only to providing financing, advancing funds and granting loans, but also to granting security interests or guarantees of debt incurred by a third party, or participating or assisting in any manner that contributes to the purchase of the shares of that company or of its parent company (in the case of SAs) or of any of the group companies (in the case of SRLs). Any financing, guarantee, security, etc. created in breach of such rules will be considered null and void and may raise liabilities for the directors of the directors of the companies involved.

There are no whitewash mechanisms available under Spanish law (other than as described hereunder) and the refinancing of any acquisition finance does not cure any previous financial assistance breaches.

It used to be market practice that, in leverage finance transactions, a forward merger was effected as a means to avoid the application of the financial assistance rules. However, such practice has been somewhat limited in recent years by the application of the Corporate Structural Modifications Law, which provides that in case of a merger of companies where any of them has incurred debt, in the three years preceding the merger, in order to gain control over any of the other companies involved in the merger or to acquire any of their essential assets required to operate in the ordinary course of their business or assets which are relevant in terms of the equity value, certain requirements need to be complied with. Such requirements include an independent expert report determining whether there had been financial assistance.

Four: Parallel Debt and Security Trustees

Spanish law does not envisage parallel debt schemes where "parallel obligations" which mirror the obligations of the underlying debt owed by such borrower/issuer are created in favor of the security agent for the same amount and payable at the same time as the underlying debt. Similarly, the concept of a trust , and therefore, of trustees, is not regulated under Spanish law. The reason for this is that security rights under Spanish law need to be based on a legitimate reason and are considered as "accessory" or "ancillary" in nature to the principal obligation. This means that the validity, enforceability and scope of the security rights is strictly linked to the existence and scope of the rights of the holder of the principal obligation (whether under a facility or debt securities). Therefore, in order for the lenders in a syndicated loan to be direct beneficiaries of any security interest, they should be parties to the Spanish security documents (either directly or duly represented by the security agent). Such authorization is, in most instances, effected by means of a power of attorney granted by each of the lenders which should be notarized in their home countries and apostil led.

Five: Approval of Finance Transactions

Entering into finance transactions (which do not involved issuing securities) by limited liability companies (SAs or SRLs) are usually considered in Spain to be actions performed in the ordinary course of business. Hence, Spanish regulation does not normally require approval from the shareholders of the company. As an exception to this rule, approval will be required when: (i) such actions are excluded or not envisaged in the corporate purpose of the company; (ii) expressly required by the by-laws of the company; (iii) required by the finance parties; (iv) in the case of SRLs, if such guarantee is granted in favor of its shareholders or directors; or (v) if the security is granted over assets that are essential for the company. There is a presumption that the creation of a security interest over assets representing over 25 percent of the assets of the company is material, and therefore requires such approval.

Six: Bankruptcy Claw-back and Guarantees

Any guarantee of any nature (including up and downstream, as well as cross-stream or in rem securities) given or granted by a Spanish company can be subject to claw-back provisions where the guarantor or grantor of such guarantee or security interest becomes insolvent. The claw-back period extends for a period of two years from the granting of such interest. Such claw-back action will only succeed to the extent the claimant (e.g., creditor to the insolvent company or insolvency receiver) can prove that such action was detrimental for the estate of the insolvent company. For obvious reasons, proving the existence of benefits for a company in case of cross-stream and upstream guarantees is more challenging than of a downstream guarantee and may be disputed.

Transactions (including any security interests) entered into or granted as part of refinancing transactions effected as per articles 71bis and Additional Provision 4 of the Spanish Insolvency Act are not subject to such claw-back actions (the "Protected Refinancing Schemes"). These schemes are debt restructuring plans, conducted on a private basis but approved by the Spanish courts.

Seven: Subordination

Under Spanish law, a credit right may be subordinated as a consequence of an agreement or by operation of law. According to the Spanish Insolvency Act, a specially related party debt shall be considered as subordinated debt.

Such related parties include, among others: (i) shareholders of at least five percent of the share capital of the debtor (in the case of listed companies) or ten percent of the share capital (for non-listed companies); (ii) directors, liquidators and representatives with general powers of the debtor, as well as those who have acted as such during the two years preceding the declaration of insolvency (for these purposes the concept of director extends not only to legally appointed directors but also those considered de facto directors); and (iii) companies forming part of the same group as the insolvent company and their "common shareholders ."

It is worth noting, though, that creditors who hold shares/equity as a consequence of one of the Protected Refinancing Schemes are not deemed specially related persons as a result of such refinancing.

Eight: Collateral in Spanish Security Interests

Security in Spain needs to be taken on an asset-by-asset basis. In Spanish leveraged finance transactions, the most commonly taken security is over shares (and other securities), receivables and bank accounts. Other assets (including intellectual property, inventory or ongoing business) can also be included in the security package on a case-by-case basis.

Security in Spanish real estate can be expensive due to stamp duty levied on the amount secured by the mortgage. Therefore, a more common practice is for promissory mortgages to be created. This arrangement does not create an in rem security interest, but rather an undertaking to create a mortgage upon the occurrence of any of the situations or circumstances agreed to by the lenders and debtor.

Perfection formalities (e.g., dispossession of the pledged asset, registration and notification) will depend on the type of security interest and the nature of the pledged asset. In most instances, public deeds executed before Spanish public notaries are required, as well as, in certain cases, registration with the relevant registries. Should such registration be required the security document will need to be drafted or translated into Spanish and taxes are payable levied on the secured amount.

It is common that irrevocable powers of attorney are granted in favor of the security agent to effect certain actions on behalf of the grantor of the security in relation to such security. The type of actions covered by this power of attorney are usually related to the perfection of the security interest, and it is intended to be used only in cases when the grantor refuses to perform such actions and, therefore, the lenders’ rights might be jeopardized. This power of attorney must be granted in a public deed before a Spanish public notary.

Nine: Enforcement and Prohibition of Appropriation (Pacto Comisorio)

There is a general prohibition in Spain, enshrined in article 1859 of the Spanish Civil Code, whereby a secured party cannot appropriate or directly dispose of the asset given as collateral (pacto comisorio). As a result, the beneficiaries of the security must initiate enforcement proceedings in order to obtain the sale of the asset and only then use the proceeds as repayment of the secured debt.

Despite this prohibition, RDL 5/2005 allows for the direct sale or appropriation of the pledged assets. However, this exception only applies to guarantees in favor of financial institutions, as defined in Directive 2006/48 of the European Parliament and of the Council of 14 June 2006 relating to the taking and pursuit of credit institutions, and the pledge assets must be cash, marketable securities or other financial instruments.

Ten: The Catalonian Regulation

To the extent the pledged assets are located in Catalonia, the Catalonian Civil Code applies (Act 5/2006, of 10 May of the Fifth Book of the Civil Code of Catalonia), regarding in rem securities. The regulations in Catalonia entail numerous differences with the regulations of the Spanish Civil Code. The most notable one, in the case of share pledge of companies domiciled in Catalonia, is the general prohibition on granting more than one pledge over the same asset, unless the pledge is granted in favor of the same lenders and the security is distributed among the different facilities.

The consequence of this prohibition is that all lenders must participate in all the different facilities. If they do not, which is generally the case, there arises a problem when enforcing the pledge, as each lender can enforce the entirety of the pledge. In other words, each lender will have the right to execute the pledge for the full amount on a first come first serve basis.

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A decade on from the credit crunch, state-aided banks are still vulnerable. Systemic stability is top priority. The gravity of balance sheet management will continue to weigh heavily for the foreseeable future.

 

State-aided banks are a fertile source of deal flow. Institutions continue to deleverage balance sheets and dispose of non-core businesses, while governments seek privatisation. But make no mistake — deals are hard fought, with risk allocation needing to be carefully managed at every turn.

Outlook

Key reasons for high-activity levels:

• The state heads for the door: Governments are ready to offload stakes to recoup public funds
• Accounting MOT drives disposals: IFRS 9 has lifted the bonnet on balance sheets
• Financial sponsor appetite: Attractive returns, and banks need new money

Current market

Upward, significant

We are seeing

• Balance sheet management remaining the top priority:
  • Ongoing NPL management and disposals
  • Rationalisation of business portfolios through continuing non-core disposal programmes
• Retail bank consolidation, especially across Western and Central Europe:
  • Cutting costs through operational efficiencies
  • Exploiting economies of scale and scope
  • Spreading fixed costs across larger expense bases
  • Widening customer catchment and deepening existing business relationships by mirroring customer footprints

Key drivers

• Governments are keen to offload state-owned stakes in banks bailed out during and in the aftermath of the global financial crisis
• Increased accounting pressure from IFRS 9 to deleverage NPLs and other non-core financial assets
• State-owned/backed banks continue to face profit-depletion through public and private litigation relating to legacy conduct issues
• High levels of US and Western European financial sponsor engagement in stressed and distressed M&A — sponsors are able to secure high returns in a low interest rate environment

Challenges

• Non-core sale strategies are under pressure:
  • Prudential regulators maintain high thresholds to be convinced of a potential buyer's ability to ensure stability for the relevant asset and for the wider domestic banking system
  • Inconsistency between antitrust imperatives (i.e. market competition) and prudential regulatory imperatives (i.e. financial market stability)
  • Financial sponsors driving a hard bargain to extract buyer-friendly deal protections
  • Certain assets are simply too large or systemically important to attract multiple suitors
  • Rising litigation risk — 'private' litigation from market participants' reaction to government action, as well as 'public' litigation from inconsistency of application of new Member State regulatory reforms
• Regulatory landscape continues to change and evolve, both at Member State-level (e.g., Greece's proposed 'state-wide bad bank') and EU level (e.g., European Commission's March 2018 proposals for tackling high NPL ratios)

Trends to watch

• Structural weaknesses in bank operating models (e.g., high NPL levels, cost inefficiency and over-banking), particularly across Greece, Italy, Spain and Portugal, continuing to drive disposal programmes
• Continued development of NPL securitisations
• Damage to buyer sentiment by inconsistent application of national and supranational legislation across the EU

Publicly reported deals & situations

NPL management & disposals

• Ongoing:
  • Permanent TSB: Disposal process for "Glas" portfolio (June 2018)
  • Piraeus Bank: New 3-year balance sheet restructuring project (May 2018)
  • Ulster Bank: Disposal process for €1.6bn of Irish mortgages (May 2018)
  • Alpha Bank: Disposal process for "Venus" portfolio (February 2018)
  • NBG: Disposal process for "Earth" portfolio (January 2018)
• Completed:
  • Lloyds: Disposal of £4.3bn of Irish residential mortgages (May 2018)
  • Piraeus Bank: Disposal of €1.45bn corporate NPE portfolio (May 2018)
  • AIB: Disposal of €1.1bn of NPLs (April 2018)
  • UniCredit: Disposal of exposure to €16.2bn "Fino" NPL portfolio (February 2018)
  • Piraeus Bank: Disposal of €200m of Romanian-originated NPLs (January 2018)
  • Alpha Bank: Disposal of €380m of Romanian wholesale NPLs (January 2018)
  • Hellenic Bank: Disposal of €145m of NPLs (January 2018)
  • Monte dei Paschi: Disposal of €25bn of NPLs (January 2018)

Regulatory "shifting sands"

• European Commission: Proposed new measures to address EU NPLs (March 2018)
• Bank of Greece: Proposed creation of a "state-wide bad bank" to oversee NPL management across all Greek banks (March 2018)
• European Parliament: Adoption of a non-binding resolution for a review of EU bank state-aid rules (March 2018)

Exit strategies — many under pressure, but some silver linings

• Under pressure:
  • UK government's RBS sell-down: UK Government Investments sold down 7.7% of RBS amidst heavy Labour criticism over considerable losses to UK taxpayers (June 2018)
  • NBG's Ethniki General Insurance: EXIN Financial Services' failure to obtain consent from the Bank of Greece and competition approvals for its proposed acquisition (March 2018)
  • NBG's Banca Romaneasca: National Bank of Romania's rejection of OTP Bank's proposed acquisition of a 99.28% stake (March 2018)
  • Bankia: Spanish government's proposed sale of its 60% stake by end-2019 has resulted in a permanent overhang on Bankia's share price, compounding troubles of retaining staff (given salary and bonus caps) and customers (amidst market uncertainties) (March 2018)
  • Commerzbank: Potential merger counterparts for Commerzbank have been rumoured to include Deutsche Bank, UBS, Crédit Agricole, UniCredit and BNP Paribas. However, no deal has materialised yet (September 2017 – March 2018)
  • HSH Nordbank: Hamburg and Schleswig-Holstein's disposal took place on the last day of the European Commission's deadline for privatisation (February 2018)
  • Rosevrobank: EBRD's accelerated disposal of its 11% stake after its loss of 11.75% of Promsvyazbank, following Central Bank of Russia's 2017 bail-out (January 2018)
• Silver linings:
  • Arion Bank IPO: Dual-listing on Nasdaq Iceland and Nasdaq Stockholm (June 2018)

Perception of inconsistent EU government/regulator approach

• Perception of government interventionism:
  • UK government: Vote against proposal to give RBS investors more control over executive compensation (May 2018)
  • Italian government: Provided a guarantee for Monte dei Paschi's issue of €750m of 10-year Tier 2 bonds (January 2018)
• Perception of regulator interventionism:
  • Bank of England: Proposals to require UK banks to publicly reveal resolution regimes (June 2018)
  • ECB: Controlled collapse of ABLV Bank (February 2018)
  • European Commission: In-depth investigation into Banka Slovenije's proposed pre-sale restructuring of Nova Ljubljanska Banka (January 2018)
  • Comisión Nacional del Mercado de Valores: Bankia – Banco Mare Nostrum merger (January 2018)
• Perception of leniency:
  • UK FCA: Refusal to publish report on the RBS's controversial treatment of troubled SMEs (February 2018)
  • EBA: Issue of voluntary standard data templates for use in EU NPL transactions (February 2018)
  • European Commission: Rejection of European Parliament's request to investigate the sale of financial products by Banco Espírito Santo (January 2018)

PE seeking to extract buyer-friendly deal terms

• Lone Star: Secured back-stop guarantees from Fundo de Resolução in connection with its acquisition of 75% of Novo Banco in October 2017. Novo Banco's FY2017 €1.4bn net loss resulted in Fundo de Resolução paying €791.7m under the guarantees (March 2018)
• Cerberus and J. C. Flowers: Consortium acquisition of HSH Nordbank, which required €6bn of HSH Nordbank's NPLs to be carved out into a separate vehicle (February 2018)
• Pollen Street Capital and BC Partners: Backed Shawbrook's acquisition of RBS's portfolio of Channel Island business loans for £50m less than the auction price (January 2018)

Heightened risk of 'public' and 'private' litigation

• Private:
  • RBS: UK Court of Appeal's dismissal of Property Alliance Group landmark £30m swaps mis-selling case against RBS (March 2018)
  • Novo Banco: Pimco's damages claim seeking compensation from alleged insider trading of Novo Banco bonds (February 2018)
• Public:
  • RBS: US$4.9bn settlement with the US DoJ concerning US loan mis-selling allegations (May 2018)
  • Deutsche Bank Securities: US$4.5m settlement with the US SEC concerning alleged misleading of clients on CMBS transactions (February 2018)
  • RBS: UK BEIS's probe into RBS's possible improper profiteering from UK government's Enterprise Finance Guarantee Scheme (January 2018)

Non-core disposals

• Novo Banco: Disposal of 90% of Banco Internacional de Cabo Verde (May 2018)
• UniCredit: Disposal of 10% of Bank of Valleta (April 2018)
• Intesa Sanpaolo: Disposal of Veneto Banka (April 2018)
• Eurobank: Disposal of Bancpost, ERB Retail Services and ERB Leasing (April 2018)
• Piraeus Bank: Disposal of Piraeus Bank Romania and ongoing open e-auctions of repossessed real estate assets (January – March 2018)
• Deutsche Bank: Disposal of its Cayman Islands and Channel Islands banking and custody business and Private & Commercial Client Portugal (February – March 2018)
• NBG: Disposal of Banka NBG Albania (February 2018)
• RBS: Disposal of offshore operations of its Lombard leasing unit and 280 Bishopsgate London HQ (January – February 2018)

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Financial institutions M&A: Sector trends

^* Source: CBRE (April 2018).
^** Source: ABI (January 2018).
^*** Source: White & Case LLP acted on this transaction.

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