Buying and selling debt

Transcription

1 FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE, MINING AND COMMODITIES TRANSPORT TECHNOLOGY AND INNOVATION PHARMACEUTICALS AND LIFE SCIENCES Buying and selling debt Trends from around the world 5 November 2012

2 Who made the discovery which has most deeply affected the fortunes of the human race? The man who first discovered that a debt is a saleable commodity. (American Bankruptcy Law Journal, 2007) 2

3 Key Themes in the Market Single trades vs portfolio sales Yield play vs asset play Key issues 3

4 The Australian Experience Dr David Goldman, Partner Sydney

5 Single trades Growing secondary market in debt in Australia Single trades are the largest part of secondary market in Australia Large & mature market in Europe Insider trading Must not trade bonds/debentures with inside information But no regulation of loans not a security covered by Aust provisions (Div 3, Part 7.10 Corporations Act 2001) Process Sale process is very structured and straightforward Terms you would expect for any sale/purchase Some elements to reflect nature of asset being sold/purchased (i.e. debt) Be careful a trade is usually by phone! Ensure you have all internal approvals in place and are ready to trade Written confirmation follows the trade Price Timing LMA terms 5

6 Portfolio sales Groups of loans Performing loans par deals e.g. Macquarie s 2009 $1bn acquisition of Ford s motor vehicle finance portfolio (75k cars) e.g. Macquarie s 2009/2010 acquisition of Ford s floor plan finance portfolio Non-performing loans distressed deals e.g. BoSI, BoQ, Suncorp portfolios e.g. Smaller bespoke portfolios Key issue price Large bid/ask spread in distressed portfolio sales to date E.g. BoQ $230m commercial property loan book Market in Australia largely focussed on distressed real estate European market not so narrow Warranties Due diligence 6

7 Yield play vs Asset play Yield/arbitrage Opportunistic - buy cheap, sell for more Increasingly seeing bounce strategies Loan (not bond) trading Asset loan to own 2 strategies Recapitalise in existing structure Debt for equity swap Common in both Aust & Europe Feasibility - largely driven by tax New structure - pre-pack sale Far more common in UK ( Insolvency brothel of Europe ) Controversial practice in Australia 7

8 Key Issues Borrower s consent needed to assign debt? First issue that should be checked as part of DD In absence of formal consent, sub-participation can pass the economic benefit of the loan When writing loans Reducing scope/need for borrower consent will promote liquidity in secondary market e.g. European approach deemed consent if borrower does not object within x days Be careful with confidentiality provisions Process often takes longer than market timelines indicate E.g. T+10 business days to complete is often T+60 Portfolio sales Market does not like selling on non-standard documents 8

9 The German Experience Dr Rüdiger Litten, Partner Frankfurt

10 The German NPL Market of the last 12 years 2000: no market 2004/5: opening of floodgates several multi billion deals 2006/7: sharp decline 2012: few large portfolio deals; fair number of small and medium sized deals 10

11 Why? First years of the century: German national character prevails (do it big, or do nothing!) Today: Reasons for selling debt: NPL volume increased because of financial crisis (PWC estimate: EUR 196bn) Upcoming changes in regulatory capital (Basel III) Certain banks in trouble Reasons for not selling debt Government support for moderate run-off Pricing gap Reputational risks 11

12 Who sells German NPLs? German lending market rests on 3 equally sized pillars: Public banks Cooperative banks Private banks Predominantly private banks sell onto the market And recently: Bundesbank (Lehman legacy) 12

13 Who buys German NPLs? 2005: all big investment banks (Deutsche Bank, Goldman Sachs, JP Morgan, Morgan Stanley, Merrill Lynch, Lehman Brothers, CSFB); and opportunity funds (Lone Star, Fortress, Cerberus) 2012:funds (Blackstone, Lone Star, Colony Capital, Pimco) 13

14 Who services German NPLs? Some funds have their own exclusive servicers (Lone Star > Hudson Advisors) Otherwise: diversified specialised servicer industry (Immofori, SGK, Hatfield Philipps, Lohnbach) 14

15 How are German NPLs (typically) sold? Vendor due diligence 2-stage auction process investors submit price indication on basis of info memo (and legal documentation) purchaser due diligence in data room; binding offer asset deal by way of sub-participation, assignment or assumption of contract; or share deal: outright sale and transfer or spin-off pursuant to Transformation Act 15

16 What are the (legal) challenges? Banking secrecy & data protection Banking licence requirement Transfer of employees ( 613a BGB) True sale > insolvency remoteness Transfer of collateral > mortgages > refinancing register 16

17 How is the outlook? Gradually increasing offering Small to medium sized portfolios Mostly real estate, but also consumer and corporate loans 17

18 The Canadian Experience Tony Reyes, Partner Toronto

19 Portfolio sales Portfolio sales in Canada not common except in restructuring of financial institutions: have been more common in U.S. due to regional lenders and different regulatory regime portfolios are packaged for maximum realizations by type and by performing vs. non-performing 19

20 Single trades Single trades more common in Canada. Three general types: take-out financing for fatigued lenders debtor-in-possession financing in formal restructurings buying for control or blocking position 20

21 Take-out financing Take-out financing is done in a variety of ways (some of which involve the sale/purchase of debt instruments): factoring of receivables. Receivables of debtor company are sold and title to receivables passes to financing party. A specialized type of lending. sale of high-yield bonds or debentures in the public market. Subject to securities laws and disclosure (prospectus) requirements. Often contain an equity component or conversion feature. sale of indebtedness and security. Can occur where traditional lender will exit for a sale price that is usually a portion of the face value of the loan. Sells position and assigns the benefit of the security. The debtor will normally agree (if this is required) since it is a take-out of an unfriendly lender. Not as common as it was in the past. asset-based loans, usually on current assets (accounts receivable and inventory). U.S. styled loans, with heavy documentation and frequent audit and monitoring. Fee-intensive and quite expensive in interest/fee terms. fixed asset security, for bricks and mortar types of collateral. 21

22 Debtor-in-possession financing has been recognized in Canada for some years. Was formalized by statutory amendments in will prime all security and government receivables, with very specific and limited exceptions. current case before Supreme Court of Canada regarding pension deficiencies. yields are high, and terms are tight. Can include profit-sharing or equity kickers. 22

23 Purchases for control position or blocking position, or for yield investor may acquire secured or unsecured debt for leverage or control / yield. secured debt may be acquired from lender, or from public market if available. unsecured debt is a riskier acquisition. May (or may not) have blocking position due to voting requirements under Canadian insolvency statutes. specialized investors will acquire claims of creditors for cents on the dollar. Requires insight or just good luck. Unlike the trading of bonds, this appears to be under the regulatory radar. 23

24 The United Kingdom Experience

25 The Middle East Experience Patrick Bourke, Partner Dubai

26 What we can offer Experience of an international legal practice with a specialist distressed debt team. Strong relationships with financial institutions and investors on the buy and sell side. Familiarity with standard LMA (English law) and LSTA (New York law) debt trading terms. Advice on single asset trades and non-performing loan portfolio trades. 26

27 Disclaimer The purpose of this presentation is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Norton Rose on the points of law discussed. No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any constituent part of Norton Rose Group (whether or not such individual is described as a partner ) accepts or assumes responsibility, or has any liability, to any person in respect of this presentation. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of, as the case may be, Norton Rose LLP or Norton Rose Australia or Norton Rose Canada LLP or Norton Rose South Africa (incorporated as Deneys Reitz Inc) or of one of their respective affiliates. 27

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