Victoria Speers is an associate in the Firm's Capital Markets group in London. Victoria has experience on a range of debt transactions, including advising arrangers, sponsors, issuers and investors on securitisations including collateralised loan obligations, and asset-backed securities, as well as on regulatory and other aspects of financing matters.

Global law firm White & Case LLP has advised Alpha Bank A.E. on its sale to a consortium of funds managed by affiliates of Apollo Global Management and International Finance Corporation, a member of the World Bank Group, of a mixed pool of non-performing loans to Greek SMEs and, together with Alpha Bank's wholly-owned group company Alpha Leasing S.A., repossessed real estate assets in Greece.

"Alpha Bank's disposal of these portfolios is a positive and proactive step to reduce its balance sheet exposure to non-performing loans, and to improve its capital and liquidity position," said White & Case partner Debashis Dey, who led the Firm's deal team alongside Alpha Bank relationship partner Gavin Weir. "This is the second NPL-related transaction on which we have advised Alpha Bank in the past 12 months, and further demonstrates our capabilities in the non-performing loan sector, both in Greece and Europe generally."

As of September 30, 2018, the total on-balance sheet gross book values of the non-performing loan portfolio and the real estate portfolio were approximately €1 billion and €56 million respectively, and consideration for the disposals were agreed at €337.1 million and €51 million respectively. The disposal of the non-performing loan portfolio was completed successfully in the final week of December 2018, and the disposal of the real estate portfolio is expected to complete during 2019.

The White & Case team which advised on the transaction was led by partner Debashis Dey (Dubai & London) and counsel Claudio Medeossi (Dubai), and included associates Adam Gao and Anna Leung (both Dubai). The Firm's team worked closely with Greek law firm Koutalidis Law Firm, including partners Nikos Salakas and George Naskaris and associates Effie Papoutsi and Fani Chlampoutaki. Alpha Bank was also advised by financial adviser Citigroup Global Markets Ltd.

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Global law firm White & Case LLP has advised the Joint Bookrunners, Jefferies International Limited, Carnegie Investment Bank AB (publ) and DNB Markets, a part of DNB Bank ASA, on the completed directed share issue of approximately SEK 546 million by Oncopeptides.

The board of directors of Oncopeptides resolved on a directed share issue of 4,750,000 new shares at a subscription price of SEK 115 per share which means that the Company will receive gross proceeds of approximately SEK 546 million. The subscription price in the Issue was determined through an accelerated bookbuild procedure.

Oncopeptides is a pharmaceutical company developing drugs for the treatment of cancer. The company was established in 2000 and is based in Stockholm, Sweden.

The White & Case team which advised on the transaction was led by partner Rikard Stenberg (Stockholm) and included partner Mikko Hulkko (Helsinki), with support from associate Gustaf Wiklund (Stockholm).

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On January 24, 2019 the Italian Ministry of Economy and Finance ("MEF") published a press release announcing that the Italian government has readied a set of measures necessary to ensure full continuity for financial markets should the United Kingdom leave the European Union without a deal.

Background

In a no-deal Brexit scenario, the United Kingdom would become a third country to all intents and purposes under EU law starting from March 30, 2019. This would have disruptive effects on the services rendered by UK financial institutions currently operating in Italy under EU passporting rules and on investment and financial activities carried out by Italian firms on a cross-border basis in the UK.

For example, UK banks, insurance companies, asset managers or investment firms operating in Italy under the freedom to provide services or through local branches would no longer be allowed to carry out their business in Italy without an authorization by the competent authorities, and UK firms' access to trading venues might be discontinued.

Proposed Measures

The proposed measures aim to ensure financial stability and business continuity, as well as to safeguard depositors and investors by introducing a transition period during which UK and Italian financial services firms may continue to operate without disruption (the "Transition Period"). According to the MEF press release, the Transition Period should be similar to that provided in the draft withdrawal agreement between the United Kingdom and the European Union published in November 2018.

It may accordingly be expected that the Transition Period will last at least until the end of 2020, although this is not specified in the press release.

During the Transition Period it will be possible for financial institutions to continue to carry out their business under the current regulatory framework. This regime will apply both to UK entities operating in Italy and to Italian entities operating in the UK – as far as the Italian rules are concerned in this latter case.

With regard to trading venues, the new rules would also envisage the application of a Transition Period during which current operations may continue in accordance with the relevant EU regulatory framework. Specific provisions will be enacted in respect of Italian pension funds, allowing them to continue their investments in collective investment undertakings established in the UK during the Transition Period.

The new legislation will regulate the specific requirements that market participants will have to fulfil in order to continue to operate after the Transition Period. The goal is to introduce a reliable framework that would allow financial firms to adapt to the new institutional and operational environment following the end of the Transition Period.

Next Steps

Based on the MEF press release, the proposed measures will be introduced through an emergency governmental decree (decreto legge), the adoption of which remains subject to future Brexit developments. No draft decree has been made available yet and therefore it is not possible to fully assess the impact of the Italian rules.

The decree will have to be converted into law by the Italian Parliament within 60 days of its publication, otherwise it will become retroactively ineffective. Consequently there may be further amendments introduced by the Italian Parliament, as well as legal uncertainty arising from the possibility that the decree is not converted into law.

While the MEF clarified that the measures have been prepared in close collaboration with the regulatory authorities, the question that remains open is whether and to what extent a national transitional regime would comply with EU law, which in some sectors already regulates third country firms.

Furthermore, the possibility for each EU Member State to tailor its own post-Brexit regime might lead to a fragmentation of the EU single market in financial services. For example, other EU Member States, including France and Germany, have already published their own draft proposals for temporary regimes in the event of a hard Brexit. The German proposals seek to preserve market access for UK firms offering financial services for a transitional period – a separate client alert will follow on this topic. The French proposals seek to permit UK firms to conduct certain life-cycle events for existing legacy trades without needing to obtain local French authorization.

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© 2019 White & Case LLP

On January 23, 2019, a bill proposed by the Mexican Federal Executive branch was published in the House of Representatives Parliamentary Gazette, with the purpose to amend, add and repeal various provisions of the Retirement Savings Systems Law (the "Retirement Savings Bill").

The main purposes of the Retirement Savings Bill are: (i) to amend the corporate governance of Pension Investment Companies ("Siefores") to be replaced by Pension Investment Funds ("Fiefores"), including amendments to their shareholders structure and their operation, to improve and give flexibility to their corporate governance; (ii) to give more flexibility to the Fiefores' investment regime (e.g. the twenty percent limit to invest in foreign securities is repealed from the Law, to be now determined through enabling regulation to be issued by CONSAR, and investments in securities issued through private offerings will now be permitted, among others); (iii) to include as part of the authorized activities of Fiefores the ability to receive cash deposits for limited purposes (e.g. securities lending collateral, among others); and (iv) to establish additional incentives to promote greater value for investments in favor of workers.

Investment Regime

The Retirement Savings Bill provides that the Fiefores investment regime will be determined by the National Retirement Savings System Commission ("CONSAR"), through enabling regulation, with the prior opinion of the Ministry of Finance and Public Credit ("SHCP"), the Mexican Central Bank ("Banxico"), and of the advisory and surveillance committee of CONSAR. Consequently, the National Banking and Securities Commission would no longer participate in the decision.

The Retirement Savings Bill includes the following changes to the Fiefores' investment regime:

• Remarkably, the prohibition against investing in foreign securities other than those authorized by CONSAR in excess of 20 percent of the total assets of a Siefore is repealed from the Law, allowing the limit to be determined through enabling regulations to be issued by CONSAR;
• Fiefores will be able to invest in securities offered through private offerings, following the enabling regulation to be issued by CONSAR, with the SHCP's prior opinion, thus repealing the current statute that requires Siefores to invest only in securities issued through public offerings;
• Fiefores will be authorized to receive cash deposits in the form of collateral from their counterparties derived from repo agreements, securities lending and derivative financial instruments;
• Fiefores will be authorized to enter into securities lending and repo agreements, subject to the enabling regulation to be issued by Banxico, as well as into credits or loans, only in a creditor capacity, provided that such loans are extended to settle purchase and sale transactions of authorized instruments for Fiefores' investment, and
• Fiefores will be authorized to act as repo sellers (reportados) in repo agreements to satisfy their liquidity requirements, as well as to settle transactions in accordance with their investment regime and to grant collateral in connection with such transactions.

Transition from Investment Companies to Investment Funds

The Retirement Savings Bill provides that Siefores will be substituted by Fiefores, to be incorporated with the prior CONSAR's approval by a single founding partner, which can only be a Pension Fund Manager ("Afore"). Fiefores must be incorporated as limited liability corporations (sociedades anónimas) and registered in the National Securities Registry (no longer in the Public Registry of Commerce). The authorities granted to the Siefores' shareholders' meetings and board of directors would now be exercised by such corporate bodies at the level of the Afore that manages such Fiefores.

The Retirement Savings Bill provides that Siefores will have a 12-month period, counted from the effectiveness of the amendments under the Retirement Savings Bill, to request the authorization from CONSAR to amend their by-laws to become Fiefores. CONSAR will have a term not to exceed 12 months from the submission of the amendment request to issue its resolution.

Afores may manage more than one Fiefore, but they must manage at least one that, in addition to maintaining the purchase value of workers' savings, shall also maintain the liquidity and market risk levels to be determined by CONSAR through enabling regulation, with the prior opinion of SHCP.

Workers' Rights

The Retirement Savings Bill grants flexibility to the requirements to be complied by workers to withdraw funds from their voluntary contributions sub-accounts. Workers will be able to make withdrawals within the time periods to be determined in the offering memorandum prepared by each Fiefore, repealing the current restriction that only allows for extraordinary withdrawals every certain number of months.

Additionally, the Retirement Savings Bill provides that workers may invest in more than one Fiefore managed by their relevant Afore.

Fees

To incentivize greater returns for workers, the Retirement Savings Bill provides that Afores shall be entitled to a single fee comprised by a percentage of the assets under management, as they currently do, plus an additional component calculated over the returns received by workers above a threshold to be established by CONSAR through enabling regulation. So long as CONSAR does not determine the methodology to calculate such additional component, the payment of fees will continue to be based on a percentage of the assets under management.

Securities Deposit Institutions

The shares of Fiefores will no longer need to be deposited at securities deposit institutions, as is currently required for Siefores.

Risks Committee

The requirement for Fiefores to appoint at least one independent director is repealed, and is replaced by the obligation to appoint a non-board member independent advisor, subject to the same independence rules provided for independent directors in the Securities Market Law. Such independent advisor must participate in the Afore's investment committee and cannot be a member of the Afore's risk committee. His or her appointment will be subject to the same rules and requirements as those provided for independent directors.

The legislative process

The Retirement Savings Bill is subject to the legislative process, and must be subject to the approval of the Mexican House of Representatives and of the Senate, where it may undergo amendments, for subsequent promulgation by the President and publication at the Official Federal Gazette. In addition, several provisions of the Retirement Savings Bill will need to be detailed in enabling regulations.

Carlos Alonso Arellano, Fernando del Villar and Marie Trabulse, Legal Interns at White & Case, assisted in the development of this publication.

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© 2019 White & Case LLP

With crypto-currencies on the rise and technological developments providing great opportunities in the financial services sector, Initial Coin Offerings ("ICO") provide an innovative way of raising capital. They are particularly interesting for start-up companies as an alternative to venture capital financing. Equally, ICOs could become a novel path of financing for small and medium-sized enterprises ("SME") – an important objective of the European capital markets union. Regulators in a variety of countries have been making an effort to communicate regulatory guidance to issuers and investors and the common perception that the ICO market is unregulated no longer holds true.

What is an ICO?

ICOs are an increasingly popular method of start-ups and other companies to raise capital. Investors participate in the fundraising by transferring fiat currencies, such as US dollar ("USD"), Euro or Renminbi, or crypto-currencies, such as Bitcoin or Ether, to the issuer in exchange for digital tokens ("Tokens"). Tokens represent a holder’s right of benefit or performance vis-à-vis the issuer. Tokens may also be used (exclusively) for payment to the issuing company for its services or products. Contrary to a traditional initial public offering ("IPO"), most Tokens typically do not represent an ownership interest or dividend right in the issuer’s entity. ICO investors seek to directly benefit from the issuing company’s future business, while investors in IPOs tend to pursue a long-term interest in the value-creation of the IPO entity.

The underlying technology of the Tokens is based on blockchain (an electronic distributed and therefore generally fraud-resistant ledger, in which transactions are protocolled in a documented and reproducible way without a central authority (also referred to as distributed ledger technology - "DLT") which is maintained by a network of participants and computers. Utilizing cryptography to record transactions, blockchains process, verify and track the trade of the relevant virtual currency (Bitcoin or Ether) securely across independent network components.

Similarly to IPOs, the issuer can use the proceeds of the ICO to finance its business operations and future growth. In the event that Tokens are exchanged for other crypto-currencies, the issuing company can exchange them for fiat currencies, as required. As the features of Tokens issued in ICOs can vary widely, every Token has to be assessed individually. Tokens are typically tradable on virtual currency exchanges, creating a secondary Token market, which makes them fungible in the same way as shares.

To market an ICO, it is currently market practice that the issuing company publishes a whitepaper ("Whitepaper") on its website and certain virtual platforms (see further below under "Documentation Requirements and Liability Issues").

The international ICO market is developing rapidly. In 2016, approximately USD 94 million were raised through ICOs globally.¹ In 2017, ICOs yielded an estimated USD 6.6 billion, exceeding USD 1.7 billion in December 2017 alone.² Despite rising regulatory pressure, approximately USD 21.5 billion were raised in 2018.³ Although the second half of 2018 saw a light decline, 2019 already realised a total of USD 126.3 million through ICOs.⁴ This significant market growth and the fact that ICOs offer limited investor protection with many recorded fraudulent activities in the past have caught the attention of regulators all over the world. Many jurisdictions still rely on applying existing securities and financial market regulations to ICOs. However, efforts towards providing regulatory guidance to issuers, investors and financial markets as a whole are becoming more tangible.

To comply with regulatory requirements, potential ICO issuers should seek qualified securities’ counsel advice to conclusively analyse the applicable legal framework.

Types of Tokens

Although there is no established classification of Tokens, the categorisation introduced by the Swiss Financial Market Supervisory Authority ("FINMA") based on the economic functions of the Tokens proved to be widely accepted.⁵

• Utility Tokens: are intended to provide access to a specific application or service but are not accepted as a means of payment for other applications. The value of the service or product depends on the perception of the investor, making him comparable to a purchaser of a product or service;
• Asset Tokens (or Security Tokens): represent assets such as a debt or equity claim against the issuer as they promise the owner a share in the future profits or capital flows of the underlying company (sale of the tokens, dividends, interest). They resemble bonds, financial instruments or derivatives; and
• Payment Tokens (or Currency Tokens): represent a means of payment for goods and services and are true virtual currencies with the most prominent example being Bitcoin. The holder has no claim against the issuer.

Tokens combining several features of these different token categories are referred to as Hybrid Tokens.

Financial Regulation of ICOs and Legal Classification of Crypto-Currencies and Tokens

Applicable regulations are not necessarily limited to those of the jurisdiction governing the ICO. When marketed to investors residing or domiciled in another jurisdiction, financial regulatory rules of such jurisdiction may equally apply to the ICO. A governing law clause does not dispense the ICO issuer from compliance with such financial regulation. Publishing the Whitepaper in a certain language may already be presumed as marketing of an ICO and consequently cause regulatory exposure. For example, a Whitepaper in German is likely to be considered as targeting investors in Germany, regardless of the issuer's residence, and would consequently subject the ICO to the complete scope of German regulation. Existing investor-targeting regulation, for example in relation to market sounding, should be considered to reduce the risk of incompliance until further guidance becomes available.

Issuers of ICOs will be required to limit accessibility of ICO information and documentation to those residents of those jurisdictions that were pre-determined prior to launching the ICO based on a regulatory feasibility analysis. Failure to do so is likely to increase regulatory scrutiny by competent regulators.

Further, the regulatory status of crypto-currencies, including Tokens, largely depends on the jurisdiction of the issuance and the rights associated with the crypto-currency. The purchase of Tokens issued in connection with an ICO can be qualified as a purchase of commodities, a purchase of rights or a purchase of securities, which may ultimately subject ICOs and Whitepapers to prospectus or other disclosure requirements.

The following outlines the current regulatory environment for certain jurisdictions.

European Union

On 9 January 2019, the European Banking Authority ("EBA")⁶ and the European Securities and Markets Authority ("ESMA")⁷ published two reports providing advice on crypto-assets for the European Commission ("EC"), and ESMA further to the EU Parliament and Council. These respond to the EC's 2018 FinTech action plan⁸ request for the European Supervisory Authorities ("ESAs") to assess the suitability of the current EU regulatory framework. The definition of crypto-assets provided by EBA and ESMA includes crypto-currencies and Tokens.

ESMA's report contains the outcome of its 2018 survey, which summarises the EEA Member States' views on the qualification of a sample set of crypto-assets as financial instruments under the respective national transposition of the Markets in Financial Instruments Directive II ("MiFID II"). Where crypto-assets qualify as transferable securities, the legal framework for the regulation and supervision of financial instruments applies to crypto-assets: the Prospectus Directive, the Transparency Directive, MiFID II, the Market Abuse Directive, the Short Selling Regulation, the Central Securities Depositories Regulation and the Settlement Finality Directive. Nevertheless, ESMA recognises the existence of gaps and issues in the current regulatory framework vis-à-vis crypto-assets. Where a specific crypto-asset does not qualify as a financial instrument, no financial regulation or supervisory rules will apply leaving investors exposed to substantial risks. However, according to ESMA, all crypto-assets and related activities should be subject to Anti-Money-Laundering ("AML") provisions.⁹

In May 2018, the European Parliament approved the fifth Anti-Money Laundering Directive ("MLD5") making an initial step for a regulatory framework. The MLD5 amends the previous Anti-Money Laundering Directive ("MLD4"), inter alia, by providing a legal definition for "virtual currencies". The Member States are obliged to implement MLD5 into national law within 18 months. The MLD5 further extends the scope of application of the MLD4 to (i) "providers engaged in exchange services between virtual currencies and fiat currencies" and (ii) "custodian wallet providers". Therefore, service providers are subject to the same regulatory framework, which applies for banks and other financial institutions under this directive.

In a report by the Securities and Markets Stakeholder Group ("SMSG") dated 19 October 2018¹⁰, the SMSG advised ESMA that Payment/Currency Tokens should be viewed as financial instruments under MiFID II as they can be considered as investment objects. Utility Tokens, however, should only be added to the list of financial instruments if they are transferable. The report made different suggestions for Security or Asset Tokens depending on whether they are financial instruments under MiFID II and the Market Abuse Regulation and transferable security under the Prospectus Regulation. Further, the SMSG urged ESMA to clarify the definition of "commodity" in level 3 guidelines and to define the conditions when Security Tokens giving right to a commodity are to be considered MiFID II financial instruments. Lastly, the SMSG was asking ESMA to provide guidelines setting out minimum criteria for national authorities operating or wanting to operate a sandbox or innovation hub.

The EBA report provides an overview of the ambit of EU financial services law, in particular if crypto-assets qualify as financial instruments, electronic money or neither and the implications thereof. It also focusses on the secondary market (e.g. crypto exchanges). Generally, EBA's and ESMA's report concur.

Germany

In Germany, the Bundesanstalt für Finanzdienstleistungsaufsicht ("BaFin") will determine the applicability of certain national legislation including the German Banking Act (Kreditwesengesetz, "KWG"), the German Securities Prospectus Act (Wertpapierprospektgesetz, "WpPG"), the German Capital Investment Code (Kapitalanlagegesetzbuch), the German Capital Investment Act (Vermögensanlagengesetz, "VermAnlG") and the Payment Services Supervisory Act (Zahlungsdiensteaufsichtsgesetz) on an individual case-by-case basis. The application of such legislation will depend on the contractual arrangements of each ICO. Market participants providing services related to Tokens, dealing with Tokens or publicly offering Tokens must consider whether the Tokens constitute a regulated instrument under the applicable rules and legislation.¹¹

Security Tokens may, under German law, qualify as securities under the German Securities Trading Act (Wertpapierhandelsgesetz, "WpHG") and the WpPG. If the rights represented by the Tokens are comparable to shares, bonds etc., they can be considered a transferable security which is one of the characteristic features for a security. They could equally represent a capital investment under the VermAnlG, which includes "other investments" as it can be assumed that a Token promises a dividend or other kind of interest payment. Under the WpPG and the VermAnlG, the offering of both securities and capital investments requires the publication of a prospectus approved by the BaFin.¹²

By contrast, pure Utility Tokens are not regulated as financial instruments. The BaFin will first ascertain whether a token actually qualifies as a payment token or as an equity token. If the assessment is negative, BaFin classifies the token as a pure utility token and no regulatory consequences apply.

With regard to Currency Tokens such as Bitcoin, the legal classification has, until recently, been controversial in Germany as the BaFin was of the opinion that Bitcoin qualified as financial instruments within the meaning of the KWG. The categorisation of Bitcoin as a financial instrument results in additional regulatory obligations, in particular licensing requirements as Bitcoin trading is deemed to involve the conduct of banking transactions and/or the provision of financial services. If the required BaFin licence has not been obtained, this may result in a statutory offense under the KWG, which provides for fines or imprisonment for up to five years.

In its ruling of 25 September 2018, the Berlin Court of Appeal renounced this categorisation and decided that Bitcoins do not constitute financial instruments within the meaning of the KWG, and, in particular, not units of account. Due to this fact alone, the KWG was not generally applicable here.

Switzerland

In a guideline published in February 2018, FINMA outlines its approach for enquiries regarding the applicability of financial market regulation to ICOs¹³ and complements FINMA's Guidance 04/2017 published in September 2017.¹⁴ FINMA will determine the applicability of regulatory law on an individual basis, distinguishing between Payment Tokens, Utility Tokens, Asset Tokens and Hybrid Tokens depending on the underlying economic function of the token. FINMA further considers if Tokens can be classified as securities and concludes that (i) Payment Tokens/crypto-currencies will not be treated as securities; (ii) Utility Tokens will not be treated as securities if their sole purpose is to confer digital access rights to an application or service and if the Utility Token can actually be used in this way at the point of issue. However, FINMA will treat Utility Tokens as securities if they additionally or only have an investment purpose at the point of issue; and (iii) Asset Tokens are treated as securities. If FINMA classifies ICO tokens as securities, they fall under the securities regulation with all the legal consequences this entails (e.g. possible prospectus requirement).

In a report dated 14 December 2018 by the Swiss Federal Council on the legal framework for distributed ledger technology and blockchain in Switzerland, the Federal Council concludes, inter alia, that the Swiss legal framework is already suitable for dealing with business models based on DLT and blockchain and provides further advice to create the best possible framework conditions.¹⁵

United Kingdom

On 23 January 2019, the UK Financial Conduct Authority ("FCA") launched a consultation (CP19/3) on Guidance¹⁶ for market participants on the classification of crypto-assets within the regulatory perimeters, in particular the Regulated Activities Order, MiFID II, the E-Money Regulations and the Payment Services Regulations. The FCA makes suggestions regarding the categorisation of, inter alia, Exchange Tokens (no "specified investment"), Utility Tokens (no "specified investment") and Security Tokens (possibly a "specified investment" and therefore within the regulatory perimeter). The Guidance also provides model Q&A on common related questions.¹⁷

In October 2018, the UK Crypto-assets Taskforce (comprising HM Treasury ("Treasury"), the FCA and the Bank of England) already published a final report on crypto-assets and their underlying technology assessing the associated risks and potential benefits, and setting out a new path for the regulation of crypto-assets in the UK.¹⁸ The Taskforce classifies crypto-assets by reference to three broad types: (i) Exchange Tokens (crypto-currencies, e.g. Bitcoin); (ii) Security Tokens (crypto-assets falling within the definition of an existing regulated investment in the UK); and (iii) Utility Tokens. The Taskforce emphasises that each crypto-asset must be assessed on a case-by-case basis to determine whether or not its features can bring it within the scope of existing financial regulation. However, the report contains no proposals to regulate Utility Tokens or Exchange Tokens in the UK (currently unregulated). The report also reaffirms the current regulatory position in the UK that crypto-assets are not considered to be a currency or money.

France

On 12 September 2018, the French Parliament passed a new ICO legislation creating a legal framework for ICOs in France. This regulation, which has yet to be ratified by the government (and is expected to come into force around summer 2019), provides, inter alia, (i) a legal definition for Tokens and crypto-assets; (ii) an optional approval from the Autorité des Marchés Financiers (AMF) for ‘utility’ ICOs; (iii) a legal framework for crypto-asset intermediaries (exchange platforms, custodians, investment advisors, etc.); and (iv) an ad hoc tax regime for investors and ICO issuers. It also establishes the accounting rules applicable to ICO issuers, ICO investors, and more generally any company holding any kind of crypto-currency or crypto-asset. This regulation, however, will not apply to Security Tokens as under French law, these are considered to be regular financial instruments and therefore may not benefit from any provision of this regulation. These token offerings will have to comply with the regulations applicable to public offerings of securities.

Documentation Requirements and Liability Issues

Generally, transaction documentation must include all necessary information to permit an average investor to make a reasonable investment decision. The documentation must be accurate and not misleading, comprehensive and transparent. It should include a description of the issuer's business, potential risk factors as well as a description of the characteristics of the Tokens. Statements on future developments must be reasonable and the use of proceeds be disclosed. If qualified as general terms and conditions, the terms of the sales documentation must comply with specific local requirements. While initially most ICOs were marketed globally, more and more ICOs are more restrictive and are only marketed to investors in certain jurisdictions or exclude investors in certain jurisdictions.¹⁹

In addition to the laws relating to the regulation of transferable securities or capital investments (depending on the classification of the Tokens), other aspects that have to be considered in connection with an ICO and the choice of the Token include anti-money laundering and financial crime requirements (as set out in the MLD5), privacy and data protection issues (as recently introduced by the General Data Protection Regulation in the EU) as well as accounting and taxation aspects.

Whitepapers relating to many previous ICOs may not always have complied with the above standards. Transparency and comprehensiveness of a Whitepaper are currently often not examined by regulatory authorities. Risk factors, if included at all, are frequently limited to vaguely standardised descriptions of potential conflicts. It is also doubtful to what extent a reasonable investment decision can be made in the absence of (audited) historic financial information, but conversely, ICOs commonly occur in the early stages of launching a business.

Unfortunately, at present there is no established case law available in respect of inaccurate, incomplete or misleading ICO documentation. This may change as a result of recent investigations or when investors are seeking damages for ICO investment losses. In April 2019, a first landmark decision on fraudulent ICOs is expected in the US after the ruling of a district court applying US securities law to the ICO in question.

Under German law, any shortcomings in the documentation of an ICO may result in the potential prospectus liability pursuant to § 311 German Civil Code.

ICOs for SME Financing

According to Eurostat, SME are referred to as the backbone of the European economy, providing a potential source for jobs and economic growth. In 2017, SME in the EU-28 non-financial business sector accounted for almost all EU-28 non-financial business sector enterprises (99.8 %), two-thirds of total EU-28 employment (66.4 %) and slightly less than three-fifths (56.8 %) of the value added generated by the non-financial business sector.²⁰

However, due to the increase of borrowing costs caused by Basel III and the lack of transparency, this form of financing has become increasingly less attractive. At the same time, it is often not viable for SME to access the debt capital market at economically justifiable conditions, as the entry costs and continuing costs are relatively high compared to the (sometimes) little capital raised.

ICOs may offer a range of benefits, which are particularly attractive for SME²¹:

• Low cost by efficiency savings: absence of intermediation and efficiency gains from the use of blockchains and automation and lower regulatory requirements.
• Flexibility, speed and liquidity: possibility to invest in fractions of Tokens only, speed of execution thanks to the use of blockchain and DLT and almost immediate liquidity as Tokens issued can be traded instantaneously.
• Unlimited investor pool: even small retail investors may invest, thereby providing greater diversity and heterogeneity of investors.
• No risk of dilution: an ICO issuer does not share equity ownership or control in their company.

Unfortunately, these important benefits of ICOs are facing several disadvantages:

• Regulatory uncertainty and arbitrage: differing regulatory frameworks depending on the jurisdiction(s) involved and possible absence of supervision, which may be exploited.
• Absence of disclosure requirements: information asymmetries due to the absence of or differing disclosure requirements.
• Lack of consumer and investor protection: risks associated with ICOs difficult to gauge for retail investors and legal uncertainty around compensation rights.
• High fraud risk.

In order to become a sustainable alternative to traditional bank lending for SME financing purpose, it seems vital to create a robust regulatory and supervisory framework.

Regulatory Sandboxes and Innovation Hubs

In response to the criticism towards legislators and regulators for not keeping pace with industry practices and initiatives, regulators in several countries have opted to create "innovation facilitators" in the form of regulatory sandboxes and innovation hubs enabling potential providers to develop their business models and testing the boundaries of the law in a supervised environment.

Regulatory sandboxes and innovation hubs differ in their scope. An innovation hub is likely to be integrated within the supervisory authority responding to enquiries made by potential operators to what extent potential new products or services meet regulatory requirements and consumer protection expectations. Regulatory sandboxes go further and allow operators to offer a new product or service to actual consumers by ensuring compliance with consumer protection rules.

On 7 January 2019, the Joint Committee of ESAs published a report on sandboxes and innovation hubs.²² In the report, the ESAs analyse the innovation facilitators established to date within the EU. The ESAs also set out ‘best practices’ regarding the design and operation of innovation facilitators, informed by the results of their analysis and the experiences of the national competent authorities in running them. Further, options for future EU-level work on innovation facilitators are being discussed.

Conclusion and Outlook

ICOs offer an attractive alternative to raise capital, in particular for SME as faster financing at lower costs with a more diverse investor base is possible. Although the majority of countries still have no specific ICO regulation in place, blockchain technology does not release users from the need to comply with the existing regulatory framework. However, recent developments indicate that the assumption of some market participants that ICOs were entirely unregulated is misleading. Some countries are acting as pioneers for the implementation of ICO regulations pathing the way to a more regulated approach to this new financing technique, e.g. Malta, Liechtenstein and France where legislation regarding ICO regulation is under way. With the global nature of ICO issues, the co-operation at international level to prevent regulatory arbitrage and to provide sufficient investor protection is vital in the elaboration of a legal framework.

A "new coin on the block"?

There may, however, be a safer trend in sight. The "new coin on the block" are stablecoins. Stablecoins are crypto-assets whose prices are linked to a stable value like fiat currencies (e.g. USD, EUR) or commodities (e.g. gold). To avoid the volatility of most crypto-currencies, their value is fixed in relation to their underlying asset while thereby offering many of the transactional benefits of digital assets with enhanced stability. In this way, stablecoins offer a bridge between the traditional financial markets and the emerging opportunities offered by crypto-currency technologies. Despite its potential attractiveness, the question about legal certainty remains the same.

An interesting time lies ahead. Regulators and legislators now have to collaborate closely to establish a framework, which allows both for the creation of new forms of financing methods, particularly for SME, without at the same time neglecting consumer protection issues. Initiatives such as the recent ESMA, EBA and ESA reports as well as recommendations by the Financial Action Task Force are important stepping stones towards a sound legal framework regulating ICOs and crypto-assets.

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¹https://www.coinschedule.com/stats.html?year=2016
² https://www.coinschedule.com/stats.html?year=2017
³https://www.coinschedule.com/stats.html?year=2018
⁴https://www.coinschedule.com/stats.html?year=2019
⁵ See SMSG Advice to ESMA, Own Initiative Report on Initial Coin Offerings and Crypto-Assets, 19 October 2018, available at: https://www.esma.europa.eu/sites/default/files/library/esma22-106-1338_smsg_advice_-_report_on_icos_and_crypto-assets.pdf
⁶https://eba.europa.eu/documents/10180/2545547/EBA+Report+on+crypto+assets.pdf
⁷https://www.esma.europa.eu/sites/default/files/library/esma50-157-1391_crypto_advice.pdf
⁸ https://ec.europa.eu/info/publications/180308-action-plan-fintech_en
⁹ For a more detailed analysis of the EBA and ESMA reports, see the White & Case Client Alert: Cryptoassets and ICOs: EU Regulators Show their Hand, available at: https://www.whitecase.com/sites/whitecase/files/files/download/publications/cryptoassets-icos-eu-regulators.pdf
¹⁰ SMSG Advice to ESMA, Own Initiative Report on Initial Coin Offerings and Crypto-Assets, 19 October 2018, available at: https://www.esma.europa.eu/sites/default/files/library/esma22-106-1338_smsg_advice_-_report_on_icos_and_crypto-assets.pdf
¹¹ BaFin: "Hinweisschreiben, WA 11-QB 4100-2017/0010", 20 February 2018, available at: https://www.bafin.de/SharedDocs/Downloads/DE/Merkblatt/WA/dl_hinweisschreiben_einordnung_ICOs.html
¹² As recently confirmed in the reply by the German Government to an official inquiry (Drucksache 19/6975, 14 January 2019), available at: http://dip21.bundestag.de/dip21/btd/19/069/1906975.pdf
¹³ Swiss Financial Market Supervisory Authority: "Guidelines for enquiries regarding the regulatory framework for initial coin offering (ICOs)", 16 February 2018, available at https://www.finma.ch/de/news/2018/02/20180216-mm-ico-wegleitung/
¹⁴ Swiss Financial Market Supervisory Authority: "Guidance 04/2017: Regulatory Treatment of Initial Coin Offerings", 29 September 2017, available at: https://www.finma.ch/en/~/media/finma/dokumente/dokumentencenter/myfinma/4dokumentation/finma-aufsichtsmitteilungen/20170929-finma-aufsichtsmitteilung-04-2017.pdf
¹⁵ https://www.newsd.admin.ch/newsd/message/attachments/55153.pdf
¹⁶ FCA Guidance on Cryptoassets, available at: https://www.fca.org.uk/publication/consultation/cp19-03.pdf
¹⁷ For more information on the Guidance, see the White & Case Client Alert: ICOs and Security Tokens: FCA Consults on Crypto Guidance available at: https://www.whitecase.com/publications/alert/icos-and-security-tokens-fca-consults-crypto-guidance
¹⁸ Cryptoassets Taskforce: final report, available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/752070/cryptoassets_taskforce_fi nal_report_final_web.pdf
¹⁹ An overview is available online at: https://www.smithandcrown.com/icos/
²⁰ Annual Report on European SMEs 2017/2018, available at: https://ec.europa.eu/growth/smes/business-friendly-environment/performance-review_en#annual-report
²¹ As set out in OECD report on Initial Coin Offerings (ICOs) for SME Financing, published on 15 January 2019, available at: http://www.oecd.org/finance/ICOs-for-SME-Financing.pdf
²² Fintech: Regulatory Sandboxes and Innovation Hubs, available at: https://eba.europa.eu/documents/10180/2545547/JC+2018+74+Joint+Report+on+Regulatory+Sandboxes+and+Innovation+Hubs.pdf

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2019 White & Case LLP

European Leveraged Finance Alert Series: Issue 1, 2019

New Polish laws, effective 1 January 2019, have reformed the tax treatment of a number of different taxable business activities. In particular, the Ministry of Finance has addressed the considerable uncertainty surrounding Poland's current withholding tax regime. For issuers who can meet the relevant requirements, direct issuances by Polish entities are now possible without withholding, so long as the legal requirements are met, eliminating the need for structuring using finance company structures. While the laws bring welcome certainty to bond issuers, the reforms also strengthen anti-avoidance rules, and questions remain about the treatment of structures that pre-exist the new reforms.

New Exemption for 20% Polish Withholding Tax

On 1 January 2019, Poland enacted a new tax regime that introduced sweeping changes in a number of areas. Most importantly for international bond issuances, these new laws provide a framework for Polish issuers to issue international bonds directly with no obligation for issuers and agents to collect Polish withholding tax ("WHT") and a Polish income tax exemption for interest paid to non-Polish tax residents.1 The bonds may be issued by either Polish joint-stock companies (Spółka Akcyjna (S.A.)) or limited liability companies (Spółka z ograniczoną odpowiedzialnością (sp. z o. o.)).

In order to qualify for such beneficial treatment:

• The bonds must be issued in 2019 or later and have at least a one-year maturity;
• The bonds must be admitted to an EU regulated market (such as the main markets of the Luxembourg or Irish Stock Exchanges, which we would expect to qualify, or an alternative trading system, as defined in the Act on Trading Securities of 29 July 2005, in Poland or in a country that is a party to a double taxation treaty with Poland).2 The bonds must be listed and admitted to trading by the first interest payment date;
• Polish and non-Polish corporate or individual tax residents may be bondholders; however, only non-Polish tax residents can benefit from an income tax exemption (other than non-Polish tax residents who, on the day on which income is received, are entities affiliated with the issuer of the bonds and hold, directly or indirectly, together with other affiliated entities, more than 10% of the nominal value of such bonds);
• The remitter (issuer or agent) is released from the obligation to collect WHT in Poland regarding a particular issuance of bonds (which covers payments to Polish and non-Polish tax-residents), on the condition that the issuer:
  • informs related parties of the conditions under which an income tax exemption applies; and
  • no later than the day when the first interest or discount on the bonds are paid, the issuer submits a statement to the Polish tax authorities that the issuer has exercised due care in informing related parties about the conditions of the income tax exemption related to those entities (such statement can be submitted only once for a given series of bonds).

Previous Approach to Withholding Tax

Before the changes to the law, Polish companies issuing bonds directly would be required to pay 20% WHT on any interest payments to non-Polish bondholders. To structure around this requirement, the Polish company ("PolCo" in the below diagram) would typically set up a finance company ("FinCo") in a jurisdiction that did not apply withholding tax to payments of interest. FinCo would issue bonds to non-Polish bondholders with payment for the bonds made to FinCo, which would then transfer the funds to PolCo in the form of intercompany loans or bonds. Payments of interest and re-payments of principal would be made via back-to-back payments to FinCo on such intercompany loans and then paid onward to bondholders.

So long as FinCo was a resident of an EU country or a country that signed a double tax treaty with Poland with an exemption applicable to interest payments, and had satisfied the necessary Polish conditions and formalities, the practice was that interest was paid from Poland to FinCo (as shown below) without Polish WHT (FinCo has offer located in Sweden or Luxembourg). This structure could reduce the WHT payable significantly (from the original 20% to 5% or a full exemption), making issuing bonds a viable option for Polish companies. However, legislative reforms, such as the July 2016 amendments to the Tax Ordinance Act, instituting the General Anti-Avoidance Rule ("GAAR"), gave the Ministry of Finance the right to reject any structure or arrangement where tax savings were the primary purpose. This meant that from 2016, even though the Polish tax authorities did not explicitly reject these structures, those structures were under considerable doubt, unless significant investments and other actions were taken. This uncertainty had a dampening effect on both the ability of Polish issuers to issue bonds and cast doubt on existing structures as the legislation did not "grandfather" in existing structures.

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Anti-avoidance Rules Also Strengthened

In exchange for clarity on Polish direct issuances, the Polish government has strengthened the 2016 GAAR regulations with the incorporation of both fiscal and custodial penalties and additions to the list of factors the tax authorities consider when scrutinising a transaction. The list of factors under the GAAR regulations now include: an unjustified division of operations; the use of intermediaries despite a lack of economic or commercial grounds for their presence; and the creation of an entity which does not conduct actual business activity. These additions enlarge the number of pre-existing transactions that the tax authorities are entitled to review.

If Polish tax authorities find a GAAR violation, they are now permitted to impose greater fiscal and even custodial penalties. The fiscal penalties are calculated as a percentage of the unjustified tax benefit, and Polish tax authorities are able to impose, among others, penalties ranging from 10% to 40% of the unjustified tax benefit.

Effect on Existing Structures

The new tax regulations do not "grandfather" existing structures (subject to some limited transitional measures that may apply, as detailed below). Given that the new tax regime also includes stricter penalties for structures that GAAR considers "artificial," we would advise analysing all existing structures where a bond has been issued by an issuer with substantial Polish operations to determine whether there are any concerns under GAAR.

Real Financial Centre

To address GAAR concerns where bonds have been issued by a FinCo and then on-lent to other Polish group companies, issuers can consider whether it is appropriate to add substance to the FinCo by endowing it with staff, assets and capabilities sufficient to allocate economic risk to the FinCo. It is essential to emphasise that a non-Polish SPV created specifically for the purpose of transferring proceeds from the bond issuance to the Polish operation in a "back-to-back" mechanism would be insufficient. The FinCo undertaking real financial activities with its own assets and personnel will be key to determining whether the FinCo would qualify as a real financial centre.

Refinancing

So long as there are good economic reasons, as opposed to just tax savings, bond issuers can consider refinancing as a means of complying with the new GAAR requirements and benefitting from the new tax reforms.

An issuer could refinance its existing bonds using bank loans from financial institutions, as most of Poland's double taxation treaties include a 0% withholding tax rate on payments of interest to banks. As bank loans to non-financial institutions (for example, to funds) may not be covered, we believe that refinancing via a bond structure that complies with the new Polish tax law exemption may be more straightforward for large international refinancings where issuers would like to access non-bank investors.

Transitional Provisions of the 2019 Tax Reforms

Certain bond issuers may benefit from transitional provisions incorporated in the 2019 tax reforms. These transitional provisions provide relief for Polish companies regarding their bond structures with non-Polish FinCos, which allows them to pay a lump sum 3% WHT instead of the standard 20% WHT. The new tax reform establishes a comprehensive list of additional requirements which include, among others: (1) the Polish issuer's loan or issue of bonds to the FinCo has a repayment day or maturity date no shorter than one year; (2) the Polish issuer and the FinCo are affiliated entities as defined by Polish law; and (3) there is a legal basis for the exchange of tax information between Poland and the FinCo's tax residence. We believe that these requirements, and others, could significantly limit the number of issuers able to benefit from this transitional provision; so each situation should be analysed on a case-by-case basis.

Conclusion

Overall, we believe the long-awaited new tax reforms bring much-needed certainty. In the period after the 2016 reforms, Polish companies considering new international bond issues were faced with a large number of unpalatable risks. These new reforms now provide Polish companies with a clear and regulatory compliant means to once again issue bonds internationally. However, questions still remain about the treatment of existing structures. The introduction of new penalties under GAAR means that the Polish tax authorities continue to look carefully at structures they consider artificial or created for tax avoidance purposes.

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¹ Payment of interest on bonds issued by Polish issuers or discount on bonds are treated as Polish source income; with the issuer or its agent obliged to pay WHT, subject to applicable WHT relief under the EU Interest-Royalty Directive or double taxation treaties.
² The requirement to list on an EU-regulated market at closing would represent a change to market practice for most European high-yield issuers, who tend to choose exchange regulated markets, such as the Global Exchange Market (GEM), Euro MTF or The International Stock Exchange, but we believe that that transaction parties should be able to comply with the requirements without major increased costs or timing implications.

Search for other issues in the European Leveraged Finance Alert Series

Nico Nalbantian (White & Case, Associate, London) contributed to the development of this publication.

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2019 White & Case LLP

Global law firm White & Case LLP has advised the Qatar Investment Authority (QIA), the sovereign wealth fund of the State of Qatar, on a US$200 million investment in Airtel Africa through a primary equity issuance in the company.

The proceeds will be used to further reduce Airtel Africa's existing net debt. Airtel Africa Ltd is a pan-African telecommunications company with operations in 14 countries across Africa.

The White & Case team which advised on the transaction was led by partners Ian Bagshaw and Emmie Jones (both London), with support from partners Hannah Field-Lowes, Gilles Teerlinck (both London), Genevra Forwood (Brussels) and Michiel Visser (New York), and associates Craig Fagan and Joseph Carroll (both London).

Press contact
For more information, please speak to your local media contact.

The Lawyer magazine has named White & Case partner Gareth Eagles (London) to its 2019 "Hot 100" list of top lawyers working in the United Kingdom.

Compiled in association with AlixPartners and LexisNexis, The Lawyer's Hot 100 "gathers together the standout lawyers in the UK over the past year – the most daring, innovative and creative lawyers from in-house, private practice and the Bar," according to The Lawyer. "All those on the 2019 list are shaping the legal profession right now; though many already have a distinguished career behind them, no one is included because of past glories."

Included in the "Dealmakers" category, Eagles has "successfully carved out a niche as the go-to lawyer in the private debt space, a fast-growing area in the leveraged finance sector,"The Lawyer reported in its profile of Eagles. "Through a long list of deals he has done for non-bank lenders such as GSO, he has gained a reputation for reinventing and shaping the private credit market for large-cap and upper-mid-market transactions."

Eagles' practice focuses on international leveraged finance, direct lending and financial restructurings. Offering clients a global perspective, Eagles is based in the United Kingdom, but he has also worked in Singapore and New York. He is a member of the Editorial Board of Butterworths Journal of International Banking and Financial Law and is also a member of the Documentation Committee of the Loan Market Association.

Global law firm White & Case LLP has advised China Molybdenum Co., Ltd. (China Molybdenum) on its issuance of unrated US$300 million 5.48 percent guaranteed bonds due 2022.

China Molybdenum is a leading global diversified mining conglomerate principally engaged in the mining and processing, smelting and deep processing of non-ferrous metals and minerals including copper, cobalt, molybdenum, tungsten, niobium and phosphate.

The joint global coordinators, joint lead managers and joint bookrunners for the issuance are Standard Chartered Bank, Industrial Bank Co., Ltd., Hong Kong Branch, China Everbright Bank, Hong Kong Branch, China Minsheng Banking Corp., Ltd., Hong Kong Branch and Ping An of China Securities (Hong Kong) Company Limited.

The bonds were issued by CMOC Capital Limited, a wholly owned subsidiary of China Molybdenum, and guaranteed by China Molybdenum. The net proceeds will be used for general corporate purposes, including refinancing of certain existing debt of China Molybdenum and its subsidiaries. The bonds are listed for trading on the Hong Kong Stock Exchange.

"We have advised long-standing client, China Molybdenum, on its debut offshore bond offering," said Beijing-based White & Case partner David Li, who co-led the Firm's deal team. "The level of investor interest in this issuance demonstrates market recognition of China Molybdenum's strategy and operational efficiency in the global mining and metals sector."

Hong Kong-based White & Case partner Jessica Zhou, who co-led the Firm's deal team, said: "This transaction demonstrates our ability to provide effective and efficient services to high-caliber clients in their important, milestone transactions."

The White & Case team which advised on the transaction was co-led by partners David Li (Beijing) and Jessica Zhou (Hong Kong) and included partners Kaya Proudian (Singapore) and Catherine Tsang (Hong Kong), with support from associates Enlin Jiang (Hong Kong), June Chun and Mengbi Xu (both Beijing) and Christina Lui (Singapore).

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LatinFinance magazine named three transactions on which White & Case advised among its "Deals of the Year" in its 2018 LatinFinance Deals of the Year Awards, presented January 31.

The Deals of the Year Awards "recognize this year's top transactions and success stories from Latin America and the Caribbean," according to LatinFinance. The winning deals on which White & Case advised were:

Restructuring of the Year: Oi S.A.
White & Case acted as global counsel for Oi S.A., one of Brazil's largest integrated telecommunications enterprises, in restructuring nearly US$20 billion in debt governed by a variety of Brazilian, US, English and Portuguese laws—the largest bankruptcy ever in Latin America.

Financing Innovation of the Year: Centrais Elétricas de Sergipe S.A.
White & Case represented Goldman Sachs & Co. LLC, Inter-American Investment Corp., International Finance Corp. and Swiss Export Risk Insurance on the structuring of the financing for the design, construction and operation of Centrais Elétricas de Sergipe S.A. (CELSE), the project company's 1,516 MW thermoelectric power plant and related liquefied natural gas (LNG) receiving and gas transportation infrastructure in Brazil. At approximately BRL 5 billion (US$1.8 billion), it was the largest LNG-to-power financing in Latin America to date.

Syndicated Loan of the Year: Petrobras
White & Case represented Petroleo Brasileiro S.A.-Petrobras (Petrobras) and its subsidiary Petrobras Global Trading B.V. (PGT) on a US$4.35 billion revolving credit facility provided by a syndicate of seventeen international banks to PGT and guaranteed by Petrobras. BNP Paribas Securities Corp., Citigroup Global Markets Inc., Credit Agricole Corporate and Investment Bank and Mizuho Bank, Ltd. were the joint bookrunners and joint lead arrangers.

These awards reinforce the continued strength of our platform in Latin America and our remarkable transactions during the year.

Murad advises national and international corporates on complex national and international M&A-transactions and joint ventures as well as on German stock corporation, take-over and related capital market law and corporate governance matters. Moreover, he specializes on corporate litigation matters, i.e. post-M&A disputes. Murad regularly advises German medium-sized and DAX-companies on international investments and transactions, in particular in the Middle East and foreign investors and investors from the Middle East on business activities and investments in Germany and Europe. Murad is admitted to the German bar since 2008 and has worked inter alia in New York, Los Angeles and Abu Dhabi.

After the shock of the financial crisis a decade ago, a new landscape emerged across debt markets and has continued to mature and develop over the past decade

A boom in M&A activity over the past three years has boosted the market, with the volume of leveraged buyouts (LBOs) reaching levels seen pre-crisis—alongside the debt needed to fund the deals.

Investors, far from eschewing the riskier end of the lending spectrum, have been tempted up the yield curve, seeking out higher returns than those on offer in safer markets where quantitative easing has depressed yields. Encouraged by investors' desire for yield, riskier issuers/borrowers have started to demand looser terms on loans, knowing that investors, needing to deploy capital in competitive markets for deal allocations, would be more likely to accept.

For the moment, leveraged loans are in the ascendancy over high yield bonds, but large M&A deals in 2018 needed both sets of instruments to get across the line, with high yield bonds often required for that extra layer of debt. In addition, the continued growth of direct lending helped to provide financing packages that may not have been available in the syndicated or high yield markets. All the while, a backdrop of infrequent corporate defaults—assisted by low base rates—has comforted markets. Some pushback on pricing by investors was met by issuers, then reversed as the need for yield rebounded. In particular this year, investors have welcomed the return of syndicated debt instruments—2018 was a record year for collateralised loan obligations (CLO), with CLO markets breaking new issuance records in both the United States and Europe.

_74%
The percentage of the European leveraged finance market accounted for by leveraged loans in 2018

In the aftermath of the financial crisis, low interest rates and quantitative easing (QE) squeezed fixed income investment portfolios to their thinnest margins in developed markets in recent years. In the United States, ten-year treasury yields fell to record lows of 1.4 per cent in 2016. A year earlier, German bunds, alongside government debt from some of their European neighbours, were trading at negative yields.

Major institutional investors such as pension funds and insurers — traditionally the main customers in sovereign and investment-grade markets—needed to move further down the credit curve to find satisfactory returns. Once on the fringes, the leveraged finance market is now a mainstay of many investors' portfolios. New buyers, sellers and advisers have made their way onto the field and the global market has doubled from US$1.2 trillion (in 2008) to more than US$2.4 trillion (in 2018), according to a report from the Bank of International Settlements.

_81%
The proportion of institutional loans in Europe accounted for by "cov-lite" deals in 2018

The rise of loans and cov-lite deals

In the five years since the first White & Case leveraged debt outlook was published, investor interest has skewed towards the leveraged loan market, which has increased its market share against high yield bonds. For example, the percentage of the European leveraged finance market accounted for by loans grew from 54 per cent in 2014 to 74 per cent by 2018.

In addition, borrowers have had greater sway in setting market terms, which has led to an overwhelming number of so-called "cov-lite" loan deals — i.e., those with a lack of financial maintenance covenants. Lenders today have less bargaining power as they embrace greater risk in search of higher yield, with covenant and security protection often being weakened. The cov-lite phenomenon was imported from the US to Europe, which historically had much stricter terms. The cov-lite term once meant to indicate an outlier in Europe has now become the norm. Cov-lite accounted for 81 per cent of institutional loans in 2018 in Europe.

One of the key changes is that financial maintenance covenants for European borrowers, once a staple in the sector, now appear only once in every five issuances. This means lenders increasingly do not have the default triggers related to operational underperformance which signals a potential problem with the borrower's ability to pay and this may delay an inevitable debt restructuring.

What a difference a decade makes

Fears that the market would be unable to absorb debt maturity walls have so far turned out to be baseless. While at the start of 2009, in the US, the sector faced a wall of debt that would mature by the end of 2015 totalling US$1.4 trillion; some five years later, after lenders and borrowers met in the market to refinance ahead of this deadline, this 'wall' had been reduced to approximately US$350 billion according to Fitch—meaning the 2015 deadline passed without incident.

Overall, markets have matured and become established. In the past, when shocks hit, markets would shut down for three to six months. These days, they are less reactive to perceived crises and have been able to maintain stability. For example, despite the upheaval and political uncertainty wrought by Brexit, the UK dentist chain My Dentist was able to issue a GBP bond within a month of the UK's unexpected decision to leave the EU.

However, the market did experience a hiatus in the final days of 2018, as the US high yield market saw no issuance in the whole of December for the first time in a decade. This pause was broken in the US in early January, with the sale of a US$750 million bond by US gas pipeline company Targa, which sits at the riskier end of the credit spectrum. The deal was so popular, in fact, that the issuer added an extra maturity tranche and doubled the amount issued. In Europe, while there were some early-year deal launches, the market had a relatively slow start to 2019, though a pipeline of deals, including M&A, is beginning to emerge.

FULL MAGAZINE
Ten years on: The surprising resilience of European leveraged finance

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_28%
The fall in leveraged loan value in 2017 compared to 2018

_{€71.2 billion}
The value of high yield bond issuance in 2018—down 37 per cent compared to 2017

From protectionism to trade wars to uncertainty over Brexit, 2018 was characterised by uncertainty and volatility. All the while, a divergence in policy between the world's major economies caused lenders and borrowers to sit up and pay attention. In Europe, the UK's withdrawal from the EU, concerns over a new government in Italy, disruption and protests in France and the rise of populism in a number of EU states took the shine off what had been set to be a bumper year in the leveraged debt market. In addition, growth forecasts for the EU fell in 2018. The European Commission estimated the eurozone would grow by 2.1 per cent in 2018, down from the 2.4 per cent growth recorded in 2017. In a report in July, the Commission estimated that growth in 2019 would fall to 2 per cent.

The story in the US has been a different one, with a central bank determined to stop the economy from overheating. Despite having a similar growth rate to Europe in 2017, the world's largest economy looked set to finish 2018 on a 3 per cent increase. This upturn took place despite four interest rate hikes from the Fed, with much of the momentum coming at the end of the year.

Meanwhile, regulators on both sides of the Atlantic have begun sounding the alarm on the amount of leverage in the market. While some observers think there will be intervention, it seems that most believe that regulators may be content to wait for nature to take its course, with a substantial blow-up being enough of a trigger to all market participants to dial down the level of gearing that will be used going forward. This has all led to a change in the dynamics of the market.

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A key driver of the downturn was the fall in refinancing activity, as many issuers had completed deals in 2017 and thus did not need to return to the market in 2018

_{€27.2 billion}
The value of new issuance of CLOs in Europe in 2018—a new post-crisis record

Slowing down but not stopping

The leveraged finance market started 2018 at a feverish pace but slowed down considerably in H2. Overall, European leveraged loan issuance was down 28 per cent year- on-year to €202.5 billion. Meanwhile, high yield bond issuance dropped to €71.2 billion—down 37 per cent compared to the previous year. While the leveraged loan pullback is, perhaps, a correction on the meteoric rise of the instrument, the decline of high yield issuance reflected the continued migration of high yield issuers and new deals to cov-lite loans and direct lending. At €71.2 billion, the volume of high yield issuance for 2018 was way off the €113.9 billion issued in 2017.

A key driver of the downturn was the fall in refinancing activity, as many issuers had completed deals in 2017 and thus did not need to return to the market in 2018. This resulted in high yield bond refinancing activity dropping by 47 per cent year-on-year to €36.8 billion.

At the start of 2017, US interest rates were at just 0.75 per cent. In that year, borrowers in both the US and Europe rushed to market, eager to refinance debt. In 2017, €153.8 billion in leveraged loan refinancing was pushed through in Europe. This helped volume beat previous record levels. However, the story was beginning to change by the end of the year, as the US federal funds rate reached 1.5 per cent. A further 25 basis points was added the following March. As 2018 ended, rates hit 2.5 per cent. This continued increase in the cost of borrowing translated into a 44 per cent drop in leveraged loan refinancing in Europe in 2018—down to €86.7 billion— compared to a year earlier.

However, outside of the refinancing context, the European market benefitted from a number of public-to-private deals and an increase in corporate and sponsor activity—45 per cent of the leveraged loan issuance was used for leveraged buyouts (LBOs) and acquisition activity compared with only 26 per cent for refinancings. There was a spate of bumper deals, including Advent's acquisition of Zentiva and Carlyle's purchase of AkzoNobel—both carried out alongside large institutional investors. For more on LBO activity, see page 9.

The slowdown in the second half of 2018 was more pronounced in light of a bumper first quarter, which saw some 'jumbo' M&A deals that required significant financing from all corners of the debt markets. Despite some predicting 2018 to be an 'all-time high' for M&A, the winds of uncertainty blew through markets, leaving sponsors and other potential acquirers opting to wait for calmer waters. While 2018 did not match the heights of 2017, there needs to be some perspective— overall issuance was still up on issuance in 2016.

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The split between leveraged loans and high yield bonds skewed in favour of loans in 2018. Loans accounted for 74 per cent of European leveraged finance in 2018, according to Debtwire research

Loans in the ascendancy again

As noted above, the split between leveraged loans and high yield bonds skewed in favour of loans in 2018. Loans accounted for 74 per cent of European leveraged finance in 2018, according to Debtwire research. Compare that with a more even split in 2014, when 54 per cent of European issuance was leveraged loans and the rest composed of high yield bonds.

Rising interest rates have been one of the main factors driving investors towards loans, given their floating-rate basis (compared to high yield's typical fixed rate basis), which protects investors when central banks hike. In June, the US Federal Reserve announced its seventh interest rate hike since 2015, with a further two rises in both of the following two quarters. In the UK, the Bank of England increased rates to 0.75 per cent (their highest level since March 2009) in August, after an initial 25 basis-point hike in June.

The uptick in loan pricing has been one of the reasons for investors to favour loans. With the gap between bonds and loans narrowing, the potentially looser cov-lite loan terms, as well as more favourable financing features such as control of transfer, the soft-call protection of a loan compared to the hard-call protection of a bond and the non-public nature of loans have enhanced the attractiveness of the loan product. Additionally, loans can be quicker to bring to market and close, and do not require a detailed offering memorandum, which permits a lower outlay on costs and fees.

The growing division between the two parts of the leveraged debt market was also driven by the demand for collateralised debt obligations (CLO). The growth of CLOs has been a decisive factor in the growth of leveraged loans since CLOs favour floating rate products. In Europe, the CLO market set a new post-crisis record, with €27.2 billion of new issuance in 2018, up from €20.1 billion in 2017. The trend for reset/ refinance transactions also continued in 2018, driven by competitive pricing, with a further €18 billion of issuance.

FULL MAGAZINE
Ten years on: The surprising resilience of European leveraged finance

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2019 White & Case LLP

_37%
The rise in loans backing LBOs in 2018 compared to 2017

Loans backing LBOs have driven the market in Europe this year, with volumes reaching €56.5 billion, up 37 per cent from €41.3 billion in 2017. By the middle of 2018, total loans in the US breached US$100 billion, up a third on the same period a year earlier. Encouraging signals from the Federal Reserve, which said it was comfortable with the level of risk banks were taking when financing LBOs, helped bring megadeals to the fore. Even in October, when markets had slowed down slightly, KKR's US$5.6 billion buyout of Envision Healthcare Corp. added to the large deals in 2018.

This was also the case for high yield bonds. Bonds backing LBOs accounted for €10.5 billion of new issuance in Europe in 2018, up from just €2.2 billion in 2017. One major addition to this high yield bond pile was Spanish company Cirsa Gaming's €1.56 issuance backing its buyout by Blackstone. Another was the €1.3 billion bond issued by CVC in October for its majority take- private of the Italian pharmaceutical group Recordati.

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As the volume levels dropped from a bumper 2017, borrowers still found an eager market as lenders remained hungry for yield

Still an issuer's market

As the volume levels dropped from a bumper 2017, borrowers still found an eager market as lenders remained hungry for yield. However, perhaps due to the number of deals seeking to borrow from the market, there was a pushback from lenders in early summer, pushing up pricing by between 25 and 50 basis points. Some borrowers—and their backers—had to decide whether to compromise on terms or pay a little more for flexibility. By the end of the summer, though, the power had shifted back to the issuers, with downward flexes returning as the norm. In September, downward flexes outpaced those moving upward by seven to zero. Notably some of the deals that flexed in September were jumbo loans such as Akzo Nobel, with lenders still keen to stay with the market.

The record amount of dry powder in private equity coffers looking to be put to work—estimated to be approximately US$1.14 trillion by Moody's Investor Services—combined with an increasingly sophisticated set of debt and credit investors who have become used to cov-lite terms, suggests a market likely to continue favouring borrowers/issuers for some time to come. In the US, for example, Bloomberg reported that some US$4.9 billion was repriced in October of 2018, as issuers demanded better deals from lenders in the year's leanest month for issuance so far.

This supply/demand imbalance meant looser terms, and better pricing for borrowers was on offer in the loan market than for the high yield bond market. Meanwhile, the search for yield means that these same investors are willing to move towards riskier credits. In Q3 alone, 59 per cent of European loans were rated B+ or below. Meanwhile, high yield bonds rated B+ or below accounted for 46 per cent of total European issuance in the same period.

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Following a collapse in issuance after the crisis, the post-crisis CLO 2.0 has found favour again. CLOs reached a new post-crisis record, with €27.3 billion issued in 2018

CLOs are go

Liquidity in the market has been given an additional boost through the resurgence of the CLO market.

Following a collapse in issuance after the crisis, the post-crisis CLO 2.0 has found favour again. CLOs reached a new post-crisis record, with €27.2 billion issued in 2018. As well as new issues, the trend for reset/refinance transactions also continued in 2018, driven by competitive pricing, with a further €16.1 billion of issuance.

Due to the increased presence of CLOs in the market, banks are able to syndicate deals widely and hold less on their balance sheets, enabling a greater volume of deals to be done. While still only at half the volumes seen before the financial crisis, these structured instruments are finding increasing favour with investors. New US CLO issuance was a record US$150 billion in 2018, surpassing the previous US$124.1 billion high set in 2014.

Although a much bigger market in the US, CLOs in Europe seem set to grow as investors' hunt for yield continues, thereby increasing the demand for additional paper from borrowers. Default rates for CLOs continue to be low, as diversification within each CLO should dampen the risk of default in a market stress scenario.

Moreover, the growth of CLOs has contributed heavily to the overwhelming preference for loans over bonds. CLOs only invest in floating rate instruments, which means that loans would be their preferred investment.

A corollary effect of the emergence of CLOs is the increased demand for floating rate bonds (even though overall issuance of HY bonds has diminished) since CLOs often retain some space in their portfolios for a limited number of floating rate bonds. A typical European CLO usually has a maximum bucket of 30 per cent for high yield.

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The rise of direct lending

Direct lending funds have emerged in Europe and the US to provide financing to the smallest SMEs and even larger mid-market companies. Direct lenders are often able to offer a bespoke financing package that may not be available in the syndicated loan or high yield markets. From less than €8 billion raised in 2013 by nine such funds, some €32.5 billion flooded in from investors in 2017, filling 25 vehicles in Europe. Volumes in 2018 reached only €22 billion in 19 funds, as those raising capital took a break to allocate their assets.

Where once these managers traditionally stuck to US$100 million deals or below, larger funds are able to offer more substantial loans, with single funds offering US$500 million or more on an increasing basis. This is mainly due to the amount of capital they have to deploy. Ares, one of the largest managers in the sector, closed the largest fund of its type in the past 18 months in Europe at €6.5 billion. Intermediate Capital Group was not far behind with a €5.2 billion close.

Some of these managers seek a single layer of debt or unitranche. Ares struck one of the largest deals in this sector in 2018, with a €364 million loan to UK veterinary group VetPartners, which was also topped up with an equity stake. This funded a management buyout (MBO), although the company was scooped up by private equity giant BC Partners just a few months later. The secondary buyout has been a theme for direct lenders. Some five of the top-ten deals in the past year have funded such acquisitions, with just one refinancing, one MBO and three LBOs being funded by unitranche lenders.

Since 2007, these funds’ assets under management grew from approximately US$200 billion to close to US$650 billion by the end of 2017, according to Preqin. With such huge amounts of dry powder, it is likely that more of these buyout deals in 2019 will involve direct and unitranche lenders, who have the money already on tap, rather than by new capital raisings in uncertain political and economic territory.

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Sector watch

In 2018 in Europe, services (€21 billion), industrials products and services (€18 billion), and consumer: foods (€16 billion) were the top-three sectors, accounting for around 27 per cent of leveraged loan issuance.

On the high yield side, services (€8 billion), last year's top sector financial services (€7 billion) and energy (€6.5 billion) were out in front. Financial services tops the list by number of deals, with 29.

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Acquisitions and LBO financing will continue to account for a large share of issuance in 2019. Corporate portfolio management and a surfeit of dry powder at PE funds may well keep the leveraged debt market going.

As noted in the report, times have changed, and 2018 has seen a different dynamic than in the previous two years. The rise in US interest rates has had a significant impact on the market, with the move from bonds to loans speeding up and the pace of refinancing activity slowing markedly.

In addition to those shifting dynamics, macroeconomic and political factors such as Brexit, further interest rate rises and continued volatility in a number of EU markets could all have a bearing on the market and drive its development for the year ahead. While it's difficult to chart an exact course, there are several tendencies that may play out and, indeed, possibly co-exist in 2019.

A deep and mature market

While economic volatility and events such as Brexit could hurt issuance levels, the market has evolved in the past decade into a robust and diversified market that caters to the needs of a variety of lenders and borrowers. There are more products and more options available than ever before, and it is difficult to predict which of those will be in the ascendancy in 2019.

Acquisition and LBO financing should continue to account for a large share of issuances in 2019; most issuers that want to refinance have already done so. A strong M&A pipeline, corporate portfolio management in response to changing economic times and a surfeit of dry powder at private equity funds may well keep the leveraged debt market going. Meanwhile, demand from investors will likely sustain the issuance for the foreseeable future.

The renewed growth of CLOs also look set to keep refreshing bank balance sheets as investors seek yield. This should ensure the flow of capital continues until interest rate increases hit underlying issuers and potentially cause investors to return to safe havens.

And if interest rates stabilise, demand for fixed rate instruments could begin to reassert itself and we could find bonds coming to the fore once again.

A test for funding providers

The broadening of the leveraged finance market to include asset managers and other debt providers has been a notable development in the post-crisis world. They have stepped into the breach at times when banks have been in retreat, succeeded in gathering assets and become a key part of the lending ecosystem—but that is only half the battle. As a relatively new phenomenon, certainly at such scale, direct lenders and relevant debt providers have not been tested in a true market downturn. That test may emerge in 2019.

With billions in capital to put to work, they have entered deals at pace and often with high leverage levels. Should the market hiccup or hit a severe correction, many investors in these funds may find their holdings with lower recoveries than other leveraged finance sectors.

Watch for defaults

One development that has the potential to destabilise the market would be a marked increase in default rates. The continued supremacy of cov-lite could be delaying defaults and shielding poor credits.

So far, the story has been that if the covenant is not there to breach, there is no danger of default. With interest rates as low as they have been, it has been hard for companies to run into difficulties outside of a liquidity crisis, as there are no covenants that give lenders an early trigger. However, should economic conditions worsen or interest rates rise further, default rates could spike.

It may take just a couple of distressed situations in which a lender loses its investment to shake investor confidence in the burgeoning new market. This could have a knock-on effect for those accepting the looser terms in the term loan B market.

The Bank of England Financial Policy Committee has expressed concern about the rapid growth of leveraged loans and pointed out just how far lending terms had loosened in the UK, with maintenance covenants currently featuring in only approximately 20 per cent of loans versus close to 100 per cent in 2010. The IMF is the latest to voice its concern: "With interest rates extremely low for years and with ample money flowing through the financial system, yield-hungry investors are tolerating ever-higher levels of risk and betting on financial instruments that, in less speculative times, they might sensibly shun."

With a more diverse range of financial products, it is less clear where the risk in the market ultimately lies. We saw with the US sub-prime crisis that risk in the market can be concentrated in unexpected locations. As investors have been chasing yield for the past decade, an unexpected downturn in the leveraged finance market could ricochet into other areas and compound any slowdowns.

With so many factors in play, market participants will be reluctant to make any hard and fast predictions for 2019. However, if history is any guide, the market is likely to continue to evolve to meet the needs of issuers and borrowers and, macroeconomic shocks aside, will continue to offer a wide range of options for all participants.

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White & Case partners Colin Chang and Jeremy Duffy discuss how the European leveraged finance market has changed over the past 12 months and what lies ahead for 2019.

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Ten years on: The surprising resilience of European leveraged finance

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
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Thierry Nkiliyehe is an associate in the Firm's Capital Markets group in Paris.

Prior to joining White & Case in 2018, Thierry acquired experience in several investment banks and asset management companies in Paris.

Thierry advises both issuers and underwriters in debt and equity capital markets transactions. His experience includes initial public offerings (IPOs), debt securities under Euro Medium Term Note (EMTN) programmes, standalone issues and convertible and exchangeable bonds.

Global law firm White & Case LLP has advised Termocandelaria Power Ltd. (TPL), the fourth largest electric power generation company in Colombia and the largest non-hydro generator in the country, in connection with its inaugural issuance of 7.875% notes due 2029 in an aggregate principal amount of US$410 million in a Rule 144A/Regulation S offering.

TPL has 1283 MW of installed capacity between the Termobarranquilla and Termocandelaria gas-fired power plants located on the Atlantic Coast of Colombia.

The notes were guaranteed by Termocandelaria S.C.A. E.S.P., Energy Projects Leasing Co., Los Amigos Leasing Company Ltd. and Termobarranquilla S.A. E.S.P. (the latter on a limited basis). This was the first corporate high-yield notes offering in Latin America in 2019 and the first Rule 144A/Regulation S issuance by a Colombian thermal generator.

The White & Case team that advised on the transaction was led by partners John Guzman and Sean Goldstein, and included associates Mariana Seixas, Carlos de la Cruz and Amaury Boscio.  

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