Banking & Finance 2022 - Law And Practice
|04 November 2022
|Finance and Banking, Corporate/Commercial Law, Charges, Mortgages, Indemnities, Financial Services, Corporate and Company Law
|David O'Mahony and Conor Lynch
1. LOAN MARKET PANORAMA
1.1 Impact of the Regulatory Environment and Economic Cycles
Lending activity has continued to operate at a high level across all industries this year. Following the significant decline in real estate finance activity as a result of the pandemic during 2021, there has been a strong resurgence with this area returning to pre-pandemic levels. Overall, the confidence in availability of capital and appetite to support Irish businesses that was evident in 2021 has continued. This is despite the presence of several macro-economic challenges, such as COVID-19, the unfolding Ukrainian crisis, global supply chain uncertainties and inflationary pressure.
However, some uncertainty has developed in the lending market as it remains to be seen how significant of an effect expected European Central Bank interest rate hikes, aimed at easing inflation, will have on the lending market. Additionally, a majority of banks expect inflation will negatively impact their strategy moving forward towards 2023. Borrowers have been preparing for pending inflationary pressure with certain borrowers seeking increases to and additional working capital facilities.
As the impact of Brexit continues to be monitored, it is clear that no significant changes have been caused in the Irish loan market, with Ireland still having close economic and political ties to the United Kingdom.
Positive consequences of Brexit for the Irish loan market include a noticeable increase in Irish law being the governing law for international finance transactions and, in particular, in relation to project financing. As well as this, large international banks operating in Ireland including AIB, BOI, Barclays, Bank of America, Citibank and others have boosted their balance sheets by as much as EUR200 billion since the Brexit referendum, second only to Germany in terms of the value of assets that were moved from UK to EU banks post-Brexit.
1.2 Impact of the COVID-19 Pandemic
The COVID-19 pandemic had a very significant impact on the loan market in Ireland. Initially, the pandemic caused immediate cashflow and liquidity issues for borrowers in certain industries. Certain of these borrowers were quick to act to utilise headroom under their existing facilities, exercise accordion and extension options together with seeking uplifts to existing credit lines. Conversely, borrowers in certain other industries have exceeded performance expectations during the pandemic and, as a result, some borrowers have entered into refinancings or negotiating more favourable terms with their existing lenders.
The COVID-19 pandemic had a particularly significant impact on SMEs and retail customers. In response, the Banking and Payments Federation of Ireland (BPFI) announced on behalf of certain retail banks, non-bank lenders and credit servicing firms that a six-month payment break was to be made available to certain mortgage holders, personal borrowers and SMEs.
Following this payment break, the focus shifted to putting supports in place for customers coming off payment breaks, with an emphasis on active lender-borrower engagement and tailored solutions to reflect individual circumstances. Such supports included the publication of a BPFI guide for SMEs outlining the supports available to them as they work towards recovery post COVID-19, and the implementation of the government backed Credit Guarentee Scheme. This scheme offered a partial government guarantee (80%) to participating lenders against losses on qualifying finance agreements to eligible SMEs, small mid-caps and primary producers.
As of the of 1 July 2022, this Credit Guarantee Scheme has been replaced by the COVID-19 Loan Scheme. This new scheme will provide access to low cost loans between EUR25,000 and EUR1.5 million over terms of one to six years to SMEs and other businesses. Credit will be available without security where the loan amount is less than EUR500,000 and the finance will typically feature a lower interest rate than other comparable lending in the market. Additionally, up to 30% of new loans under the scheme may be allowed for refinancing of existing short-term credit.
Changes as a Result of COVID-19
On 1 August 2020, the Companies (Miscellaneous Provisions) (COVID-19) Bill 2020 was signed into law. The Bill makes temporary amendments to the Companies Act 2014 and the Industrial and Provident Societies Acts 1893-2018 to address issues arising as a result of COVID-19.
It makes provision in respect of business solvency by increasing the period of examinership to 150 days and increasing the threshold at which a company is deemed unable to pay its debts to EUR50,000. The Bill also allows for documents which are required to be executed under seal to be executed in counterpart, as well as certain flexibilities around the holding of creditor and shareholder meetings, including annual general meetings (AGMs) of Irish companies, by electronic or hybrid means. These measures have since been extended and are now due to remain in place until 31 December 2022, with a possibility for further extension by way of government order.
1.3 The High-Yield Market
Irish entities in various industry sectors may be involved in high-yield bond transactions, often as borrowers and guarantors, and in certain circumstances as high-yield bond issuers.
Irish incorporated special purpose vehicles (SPVs), often referred to as "Section 110 companies", are normally used as high-yield bond issuers in certain European high-yield transactions, often to avoid covenant breaches or local law restrictions on guarantees of securities. Section 110 companies are named as such because Section 110 of the Taxes Consolidation Act 1997 allows for special tax treatment for "qualifying companies".
Favourable tax laws allow these structures to be, in most cases, tax neutral (with no annual minimum profit or "spread" required at the SPV level) and a "quoted eurobond" exemption. This, together with numerous double taxation treaties, allows interest on securities to be paid gross. A minimal share capital requirement makes incorporating an Irish SPV an easy and attractive process.
European High-Yield Bonds
European high-yield bonds are normally marketed as private placements, primarily to attract US investor interest as well as participation from European investors. These transactions are usually led through London or the USA, and New York law or English law are typically the governing laws of such transactions. The authors are unaware of any high-yield bonds which have been governed by Irish law to date.
Whereas lenders in loan financings would tend to be traditional banks and other financial institutions, investors in high-yield bonds would typically be institutional investors (including investment banks, insurance companies, pension funds, hedge funds, investment managers and mutual funds) looking for higher rates of return through more aggressive lending practices.
1.4 Alternative Credit Providers
There has been a continued increase in the prominence of alternative credit providers in the Irish market since the financial crisis. The market share of new lending attributed to alternative lenders has increased from 3% in 2018 to 13% in 2021. Non-bank lending is currently concentrated in the buy-to-let and refinance segments of the market, when compared to lending by retail banks. The alternative credit providers group include a diverse collection of direct lenders, debt funds and debt arms of hedge funds and buyout houses. This allows borrowers to be more selective when choosing lenders and results in greater liquidity as well as more competitive pricing and terms.
1.5 Banking and Finance Techniques
In recent years, there has been a continued growth in the asset-based lending market. This has been particularly noticeable in the commercial and residential property development industries, especially in Dublin. Asset-based lending has benefited both lenders and borrowers through reduced credit risk and competitive pricing.
Irish-incorporated real estate investment trusts (REITs) can be listed on the main market of a recognised stock exchange of any EU member state, which has had the effect of attracting fresh capital into the Irish property market. There has also been a recent trend of advancing unsecured debt to REITs, which improves their balance sheet strength. To accommodate this, lenders have been making use of covenant packages which limit the amount of secured debt a REIT can issue.
After the economic crash in 2008, there was a noticeable increase in the use in invoice discounting as a financing tool. The Irish Asset and Invoice Finance Association anticipates that Irish businesses will repeat this trend as the economy continues its recovery from the effects of the pandemic.
1.6 Legal, Tax, Regulatory or Other Developments
The effectiveness of contractual automatic crystallisation clauses appears to have been affirmed in a High Court case from November 2020. In Latzur Ltd (in receivership) v Companies Act 2014  IEHC 592, the High Court held that "there is no rule of law precluding parties to a debenture creating a floating charge agreeing, as a matter of contract, that the floating charge will crystallise on the happening of an event, or a particular step taken by the chargee". It also confirmed that while a crystallised floating charge will de-crystallise during an examinership in order to allow the statutory scheme to operate, once the examinership period of protection ceases without the court having approved proposals for the survival of the company, the charge will re-crystallise once again.
In recent years, there has been a push towards the filing and maintaining of beneficial ownership details for certain entities and arrangements. This is driven by EU anti-money laundering directives that have been transposed into Irish law by way of regulations.
- The Central Register of Beneficial...
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