128 Search Results

June 26, 2020 |
Best Lawyers in Germany 2021 Recognizes 19 Gibson Dunn Attorneys

Best Lawyers in Germany 2021 has recognized 19 Gibson Dunn attorneys as leading lawyers in their respective practice areas. Frankfurt attorneys recognized include: Alexander Klein – Banking and Finance Law; Jens-Olrik Murach – Competition/Antitrust Law, and Litigation; Dirk Oberbracht – Corporate Law, Mergers and Acquisitions Law, and Private Equity Law; Wilhelm Reinhardt – Corporate Law, and Mergers and Acquisitions Law; Sebastian Schoon – Banking and Finance Law; and Finn Zeidler – Arbitration and Mediation, Criminal Defense, and Litigation. Munich attorneys recognized include: Silke Beiter – Corporate Governance and Compliance Practice; Peter Decker – Banking & Finance, Private Equity Law, and Real Estate Law; Lutz Englisch – Corporate Governance and Compliance Practice, Corporate Law, Mergers and Acquisitions Law, and Private Equity Law; Ralf van Ermingen-Marbach – Criminal Tax Practice; Birgit Friedl – Restructuring and Insolvency Law; Ferdinand Fromholzer – Corporate Law, Mergers and Acquisitions Law, and Private Equity Law; Kai Gesing – Litigation; Markus Nauheim – Arbitration and Mediation, Corporate Law, Litigation, and Mergers and Acquisitions Law; Markus Rieder – Arbitration and Mediation, Corporate Governance and Compliance Practice, International Arbitration, and Litigation; Hans Martin Schmid – Real Estate Law; Benno Schwarz – Corporate Governance and Compliance Practice, Corporate Law, Criminal Defense, and Mergers and Acquisitions Law; Michael Walther – Competition/Antitrust Law; and Mark Zimmer – Corporate Governance and Compliance Practice, Criminal Defense, Labor and Employment, and Litigation. The list was published on June 26, 2020.

June 25, 2020 |
Best Lawyers in France 2021 Recognizes 17 Gibson Dunn Attorneys

Best Lawyers in France 2021 recognized 17 Gibson Dunn attorneys and named Gibson Dunn the Insolvency and Reorganization Law “Law Firm of the Year.” The partners highlighted, with their respective practice areas, include: Nicolas Autet – Public Law, and Regulatory Practice; Ahmed Baladi – Information Technology Law, Intellectual Property Law, Privacy and Data Security Law, Technology Law, and Telecommunications Law; Nicolas Baverez – Administrative Law, Public Law, and Regulatory Practice; Maïwenn Béas – Administrative Law, and Public Law; Amanda Bevan-de Bernède – Banking and Finance Law, and Investment; Eric Bouffard – International Arbitration; Bertrand Delaunay – Mergers and Acquisitions Law, and Private Equity Law; Jérôme Delaurière – Tax Law; Jean-Pierre Farges – Arbitration and Mediation, Banking and Finance Law, Insolvency and Reorganization Law, and Litigation; Pierre-Emmanuel Fender – Insolvency and Reorganization Law, and Litigation; Benoît Fleury – Corporate Law, and Insolvency and Reorganization Law; Bernard Grinspan – Corporate Law, and Information Technology Law; Ariel Harroch – Corporate Law, Mergers and Acquisitions Law, Private Equity Law, and Tax Law; Patrick Ledoux – Corporate Law; Vera Lukic – Information Technology Law, Privacy and Data Security Law, and Technology Law; Judith Raoul-Bardy – Corporate Law; and Jean-Philippe Robé – Banking and Finance Law, and Corporate Law. The list was published on June 25, 2020.

June 24, 2020 |
Barbara Becker and Linda Curtis Named IFLR1000 Women Leaders for 2020

New York partner Barbara Becker and Los Angeles partner Linda Curtis were named among the IFLR1000 Women Leaders for 2020, featuring “the leading female transactional lawyers in the world.” The guide was published June 18, 2020. Barbara Becker is Co-Chair of Gibson Dunn’s Mergers and Acquisitions Practice Group.  She advises companies on all significant business and legal issues, including mergers and acquisitions (including domestic and cross-border), spin-offs, joint ventures and general corporate matters. She also advises boards of directors and special committees of public companies. Linda Curtis is Co-Chair of the firm’s Global Finance Practice Group.  Her practice focuses on all aspects of corporate finance, including leveraged financings, with a specific focus on acquisition financings. She also represents clients in debt capital markets transactions and other secured and unsecured senior, mezzanine and subordinated financings, and has experience in real estate financings and debt restructurings.  Her clients include private equity firms, commercial lending institutions and public and private companies in a variety of industries.

June 12, 2020 |
Best Lawyers in the United Kingdom 2021 Recognizes 12 Gibson Dunn Attorneys

Best Lawyers in the United Kingdom 2021 has recognized 12 Gibson Dunn attorneys as leading lawyers in their respective practice areas: Cyrus Benson – International Arbitration; Thomas Budd – Real Estate Finance; Gregory Campbell – Private Equity Law; James Cox – Employment Law; Patrick Doris – International Arbitration; Charlie Geffen – Mergers and Acquisitions Law, and Private Equity Law; Penny Madden – International Arbitration; Mitri Najjar – Corporate Law; Philip Rocher – Litigation; Alan Samson – Financial Services, Real Estate Finance, and Real Estate Law; Jeffrey Sullivan – International Arbitration; and Steve Thierbach – Capital Markets Law. The list was published on June 9, 2020.

June 9, 2020 |
Practical advice for company directors facing a liquidity crunch

Hong Kong partner Michael Nicklin, Singapore partner Jamie Thomas, and Hong Kong partners Paul Boltz and Scott Jalowayski are the authors of "Practical advice for company directors facing a liquidity crunch," [PDF] published by International Financial Law Review on May 26, 2020.

May 27, 2020 |
Gibson Dunn Adds Aly Kassam as Finance Partner in Dubai

Gibson, Dunn & Crutcher LLP is pleased to announce that Aly Kassam has rejoined the firm’s Dubai office.  Kassam, formerly with Latham & Watkins LLP, will continue to focus on cross-border banking and finance transactions, including both conventional and Islamic financing, restructuring and other transaction financing matters. “We are pleased to welcome Aly back to the firm,” said Ken Doran, Chairman and Managing Partner of Gibson Dunn.  “His experience working in the Gulf region, coupled with his knowledge of the market and our clients, will complement our Dubai team’s strong M&A and private equity platform.  In addition, as an English and Hong Kong qualified solicitor, Aly will add depth to our finance and restructuring practices in London, Singapore and Hong Kong.” “Aly will be an important addition to the Dubai office, as we continue to help our private equity and corporate clients navigate a wide range of debt and capital financing and restructuring needs,” said Hardeep Plahe, Partner in Charge of the Dubai office.  “As a former Gibson Dunn associate, Aly is well known in our Dubai office, and we know he will be an excellent fit.” “I’m excited to return to the Gibson Dunn family,” said Kassam.  “The firm has an excellent reputation in the market, and I look forward to enhancing the firm’s capabilities in the conventional and Islamic financing and restructuring space.” About Aly Kassam Kassam regularly advises clients on cross-border banking and finance transactions, particularly in the areas of leveraged finance, corporate acquisition finance, Islamic finance, syndicated lending, special situations lending and restructuring.  He has substantial experience in a wide range of debt capital structures, including senior/mezzanine, bank/bond and bridge financing; first lien and second lien special situation loans; and asset-backed loans.  He also advises both borrowers, including private equity funds and their portfolio companies, and lenders in Europe, Asia and in the Middle East. Before joining Gibson Dunn, Kassam served as a counsel at Latham & Watkins LLP.  He was also an associate at Gibson, Dunn & Crutcher in Dubai from 2015 to 2017.  He previously practiced with Kirkland & Ellis and Clifford Chance in Hong Kong and London. Kassam received his law degree with honours from the University of Oxford in 2006 and his Post-Graduate Diploma in Legal Practice from The College of Law in 2007.  He is also an English and Hong Kong qualified solicitor.

May 5, 2020 |
Debt Buybacks: Opportunities and Considerations for Private Equity Investors in Asia Pacific

Click for PDF As the COVID-19 global pandemic continues to devastate economies, trading prices for many bank loans have fallen significantly.  Private equity sponsors are looking at debt buybacks as a potential opportunity to de-lever their portfolio companies at a significant discount.  This client alert highlights some of the critical issues for private equity sponsors when considering these opportunities. Debt Buybacks: Loan Documentation in the Asia-Pacific Region Compared to the US and European markets, it is much harder to make generalisations about loan documentation in the Asia-Pacific region as many countries within the region have distinct approaches to loan documentation.  However, it is fair to say that where the loan documents contemplate debt buybacks at all they most typically follow (with a few negotiated points) the Loan Market Association ("LMA") options of permitting debt buybacks by the borrower provided that specific processes and conditions are followed (and by sponsors and affiliates subject to disenfranchisement provisions (discussed below)).  There are exceptions to this, particularly in the context of US-style Term Loan B facilities which typically permit debt buybacks subject to certain conditions and similar Dutch auction processes; however, they also often allow open market purchases without prescription as to the process.  Additionally, there are many loan agreements in the Asia-Pacific region that do not contemplate debt buybacks at all.  The LMA's standard form also provides an option for debt buybacks to be expressly prohibited, but this is rarely seen in practice. Liquidity Considerations  When considering debt buybacks, a threshold issue to address is who will purchase the debt and how will they fund the purchase.  For borrowers (or other companies within the borrowing group) considering a debt buyback, they must first be comfortable that they have sufficient liquidity to continue to meet their debts as they fall due after giving effect to the cash outlay required to effect the purchase.  Where there would be insufficient liquidity, sponsors can consider either funding the purchase through the injection of new equity or subordinated debt or making the purchase directly themselves, through an affiliate or an unrestricted subsidiary. We have also seen purchases of unfunded commitments where the purchaser is paid to assume the unfunded commitments (note that the LMA standard form does not provide an option for the purchase of revolving loans or other unfunded commitments).  These situations require special consideration as they can create additional issues; for example, whether the purchaser is sufficiently credit-worthy to fund future drawdowns, and in the case of buybacks by the sponsor, the potential conflicts for sponsor directors of whether to drawdown on such facilities where it would be prudent for the company to do so but there is a significant risk that the sponsor would not make a full recovery.  In some purchases of unfunded commitments, sponsors/companies have used the proceeds received by them for the purchase to fund further buybacks of funded debt. LMA Debt Buyback Processes  Where debt buybacks by a member of the group are to be permitted, the LMA has proposed certain conditions that must be satisfied before the borrower can effect a debt buyback.  These conditions are:

(i)    the borrower makes the purchase (often negotiated to include other members of the restricted group);

(ii)   the consideration for the purchase is below par;

(iii)  no default is continuing at the time of the purchase (sometimes this standard is negotiated to event of default);

(iv)  the consideration is funded from retained excess cash (with an option to restrict this to the immediately preceding financial year), or new equity/subordinated debt (this condition is often negotiated also to permit funding from (a) excluded disposal proceeds, excluded insurance proceeds, excluded acquisition proceeds and excluded IPO proceeds; (b) permitted financial indebtedness; (c) cumulative retained cash; (d) any overfunding amounts; and (e) cash and cash equivalents to the extent that it could be used to fund certain (highly negotiated) permitted payments); and

(v)  the purchase is implemented using either the solicitation process or the open order process.

The solicitation process provides for the parent to approach all of the relevant term loan lenders to enable them to offer to sell an amount of their participation to the relevant borrower.  Any lender wishing to sell provides details of the amount of the participation that they want to sell and the price at which they are willing to sell.  The parent has no obligation to accept any of the offers from the lenders. However, if it agrees to any such proposals, it must do so in inverse order of the price offered (with the lowest price being accepted first). If two or more offers to sell a particular term facility at the same price are received, such offers may only be accepted on a pro rata basis. The open order process provides for the parent (on behalf of the relevant borrower) setting out to each of the lenders of a particular facility the aggregate amount of such facility it is willing to purchase and the price at which it is willing to buy.  The lenders then notify the parent if they are willing to sell on such terms.  If the aggregate amount which lenders are willing to sell exceeds the aggregate amount that the parent had notified the relevant borrower it was willing to purchase, then such offers shall be accepted on a pro rata basis. In respect of a debt purchase transaction complying with the LMA conditions:

(i)    the relevant portion of the term loan to which it relates are extinguished, and any related repayment instalments will be reduced pro rata accordingly;

(ii)   the borrower shall be deemed to be a permitted transferee;

(iii)  the extinguishment of any portion of any such loan shall not constitute a prepayment of the facilities;

(iv)   no member of the group shall be in breach of the general undertakings as a result of such purchase;

(v)    the provisions relating to sharing among the finance parties shall not apply; and

(vi)   no amendment or waiver approved by the requisite lenders before the extinguishment shall be affected by such extinguishment.

The LMA debt buyback provisions are drafted widely and apply not only to purchases by way of assignment or transfer but also to sub-participations and any other agreement or arrangement having an economic effect substantially similar to a sub-participation.  This is to safeguard against such methods being employed to circumvent restrictions relating to assignments or transfers. There are also obligations on any sponsor affiliate who enters into a debt purchase transaction (whether as the direct purchaser of the loan or as a participant) to notify the agent by no later than 5.00 pm on the business day following entry into such transaction.  The agent is then obliged to disclose this to the other lenders. Tax  Depending on the jurisdiction, extinguishment of debt can create taxable income on the amount of the cancellation of debt.  For this reason, sponsors often negotiate for debt buybacks to be permitted by any member of the group (rather than only the relevant borrower).  Tax advice should be obtained before entering into a debt buyback to address this and other issues such as ensuring that the lender is in a favourable tax jurisdiction for withholding tax purposes. Disenfranchisement  Where the loan documentation contemplates debt buyback transactions, purchases by the sponsor are typically permitted without following the solicitation or open order processes but subject to certain conditions.  These include:
  • in determining whether any applicable lender thresholds have been met to approve any consent, waiver, amendment or other vote under the finance documents the commitment of the sponsor shall be deemed to be zero and the sponsor shall be deemed not to be a lender;
  • the sponsor shall not attend or participate in any lender meeting or conference call or be entitled to receive any such agenda or minutes of such meeting or call unless the agent otherwise agrees; and
  • in its capacity as a lender the sponsor shall not be entitled to receive any report or other documents prepared on behalf of or at the instructions of the agent or any lenders.
These conditions also apply to affiliates (broadly defined) of the sponsor unless they have been established for at least [6] months solely for the purpose of making, purchasing or investing in loans or debt securities and are managed or controlled independently from all other trusts, funds or other entities managed or controlled by the sponsor.  Sponsors will typically expressly carve-out any existing affiliated bona-fide credit funds.  Again, the drafting is broad to also capture transactions effected by way of sub-participation and any other agreement or arrangement having an economic effect substantially similar to a sub-participation.  Typically in the Asia-Pacific region there is no cap on the amount of the commitments which can be held by the sponsor or its affiliates. An exception to this is found in US-style term loan B facilities which typically have caps of 20-30% of the term loan commitments. The disenfranchisement provisions can typically be amended with majority lender consent (66.66% in most deals in the Asia-Pacific region) and in some cases we have seen sponsors purchase a majority stake but require the selling lenders to consent to the removal of such restrictions as a condition precedent to the buyback becoming effective.  In such circumstances the sponsor then has the ability to strip the covenants and, depending on the documentation, may have the ability to restructure its acquired debt as super-priority.  Equitable Subordination Sponsors should also consider whether there is a risk that the purchased debt could be subject to equitable subordination.  Equitable subordination is a doctrine that enables the court to lower the priority of a creditor claim to that of equity.  It can have the effect of converting certain senior secured claims into claims that rank pari passu with other unsecured claims (or in some jurisdictions even behind unsecured creditor claims and treated as equity). It is not a universal doctrine; for example, there is no doctrine of equitable subordination under English, Hong Kong or Singapore law and often where the doctrine does exist it is used sparingly by the courts and cases often have elements of inequitable conduct, breach of fiduciary duty, fraud, illegality or undercapitalisation.  However, this is not always the case and in some jurisdictions all shareholder loans are automatically ranked behind all unsecured creditor claims. Regulatory Issues  Another issue to be considered on a case-by-case basis is whether there are any applicable regulatory issues; for example, is the potential purchaser required to be a licensed lender under applicable laws and regulations?  Similarly, consideration should be given to whether any rules relating to material nonpublic information, insider trading or analogous rules apply – typically, in the case of loans (as opposed to bonds) they do not apply; however, this should be confirmed before entering into the transaction. Equity Cure  How debt buybacks impact the financial covenants turns on the drafting in the loan document and the purchaser.  Typically, intra-restricted group debt is excluded from the covenant calculations, but if the debt is purchased by an affiliate outside of the restricted group it will not benefit in this way.  In many loan agreements in Asia, equity cures can be added to EBITDA.  In these cases, can a debt purchase by the sponsor be contributed to the borrower and added to EBITDA? In some cases it can but more often the equity contribution must be received in cash – in which case the sponsor can contribute the cash to the borrower group to increase EBITDA and the borrower or another member of the restricted group can effect the debt buyback.  In such circumstances, can the borrower also claim the benefit of the reduction in debt thereby gaining a double benefit?  Often there are restrictions around this. However, it is not unusual that the cure amount added to EBITDA cannot be used to reduce net debt with respect to the test period in which the cure was made but may be included in subsequent test periods. During the great recession where the agreements typically didn't contemplate debt buybacks there were examples of some very aggressive positions taken by sponsors, including where they: (i) contributed the purchase price to the group which was deemed to be added to EBITDA as a cure amount; (ii) deducted the face amount of the debt purchased from net debt; and (iii) the amount of the discount to face value being added back to EBITDA as a one-off item to obtain a triple benefit for covenant purposes. Key issues to consider when the Loan Agreement is silent on Debt Buybacks  Where the loan agreement is silent on debt buybacks, in addition to the liquidity, tax, equitable subordination and regulatory issues, it is necessary to consider a number of other issues. First, is the proposed purchaser a permitted transferee? Careful analysis of the loan document and the specific facts regarding the potential purchaser are required here as to the scope of permitted transferees.  In the Asia-Pacific region, in many cases, even where the loan agreement does not follow the LMA, the permitted transferee language tracks the LMA position and permits transfers to "another bank or financial institution or to a trust, fund or other entity which is regularly engaged in or established for the purpose of making, purchasing or investing in loans, securities or other financial assets".  This is extremely wide and from an English law perspective a relatively low threshold to meet.  In fact, even where the language is limited to “another bank or financial institution”, under English law this is still a relatively low bar as the Court of Appeal decision in The Argo Fund Ltd v Essar Steel [2006] held that “the terms ‘financial institution’ meant an entity having a legally recognised form or being, which carried on its business in accordance with the laws of its place of creation and whose business concerned commercial finance”.  In a number of jurisdictions in Asia-Pacific such as Hong Kong, Singapore and Australia this may be persuasive; however, this must always be considered in the context of the applicable governing law of the loan agreement. Second, if the potential purchaser is a permitted transferee, whether there are any other contractual restrictions in the finance documents; for example, the holding company undertaking in the loan agreement or where the debt will not be extinguished, restrictions in the intercreditor agreement requiring such debt to be unsecured and subordinated? Third, does the buyback constitute a prepayment?  Where the debt is purchased by an entity other than the borrower (another member of the group or a sponsor affiliate) the debt will clearly continue to exist and the purchase cannot be characterised as a prepayment.  However, the position may be less clear where the buyback is by the borrower of its own debt.  Again, this needs to be considered under the applicable governing law.  From an English law perspective there is case law that a party cannot contract with itself (as it cannot sue itself) and is argued that by extension, a party cannot owe a debt to itself and therefore a buyback by the borrower may cause the debt to be automatically extinguished.  This position is not settled under English law in the loan buyback context. Section 61 of the Bills of Exchange Act 1882 states “When the acceptor of a bill is or becomes the holder of it at or after its maturity, in his own right, the bill is discharged”. This provides an argument that an unmatured debt can be held by that debtor.  However, it is fair to say that the more widely held market view is that under English law a buyback by the borrower of its own debt triggers an automatic extinguishment.  The relevance of this issue is that if the extinguishment constitutes a prepayment, the provisions relating to prepayments would apply and the sharing among finance parties provisions would also likely apply.  Whether such an extinguishment could be recharacterised as prepayment has not been settled as a matter of English law.  However, the more widely held market view is that under English law, the extinguishment resulting from a borrower buyback would not constitute a prepayment. Therefore the prepayment provisions should not apply. If the buyback is by the borrower and the debt extinguished, then the borrower is not a lender and would have no right to vote or receive information.  However, if the buyback is by another member of the group or an affiliate and the debt is not waived or forgiven then, typically, absent any contractual disenfranchisement, the purchaser will be able to vote, attend lender meetings and receive lender information on the same basis as it would if it was an unrelated party. Where there are contractual impediments to a debt buyback in a loan agreement which is otherwise silent on debt buybacks (for example, the potential purchaser not being a permitted transferee), it may be possible to structure around such restrictions through a sub-participation, total return swap or similar arrangement.  Note, however, that while it may be possible to confer voting discretion on the sub-participant, such methods will not usually assist the borrower from a financial covenant perspective. How We Can Help Reviewing the finance documents to understand the potential options available to buyback debt is a complicated task.  Each case will need to be examined based on the particular facts and the specific drafting (or lack of drafting on the issue) in the finance documents.  We have extensive experience in guiding sponsors and their portfolio companies through successful debt buybacks both in circumstances where there are processes prescribed by the finance documents and where the finance documents do not contemplate debt buybacks at all.  Gibson Dunn's global finance team is available to answer your questions and assist in evaluating your finance documents to identify any potential issues and work with you on the best strategy to address them. ____________________________ Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Global Finance or Private Equity practice groups, or the authors: Michael Nicklin – Hong Kong (+852 2214 3809, mnicklin@gibsondunn.com) Jamie Thomas – Singapore (+65 6507.3609, jthomas@gibsondunn.com)   © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.  

April 23, 2020 |
COVID-19: Further Developments on the UK Financial Conduct Authority’s Expectations of Solo-Regulated Firms

Click for PDF In light of the significant impact of COVID-19, the UK Financial Conduct Authority (“FCA”), like many other regulatory authorities globally, has introduced a number of temporary measures impacting financial services firms.  As can be seen even over the course of the last week, the FCA has made further announcements which:

  1. are targeted at ensuring the financial resilience of solo-regulated firms;
  2. reduce certain short-term burdens placed on firms by permitting extensions for regulatory return filings; and
  3. clarify the FCA’s expectations regarding the use of electronic signatures.
This client alert provides an overview of the impact of these announcements on FCA solo-regulated firms. FCA’s expectations relating to the financial resilience of firms The FCA has updated its statement on its expectations of the financial resilience of FCA solo-regulated firms given the COVID-19 pandemic. The FCA has stressed the importance of the role played by firms prudentially regulated by it in supporting the functioning of the economy.  It emphasised that firms should meet this responsibility by planning ahead and ensuring the sound management of their financial resources. This should, in part, be achieved through taking appropriate steps to conserve capital and plan for how to meet potential demands on liquidity (see the FCA website). Capital and liquidity buffers The FCA flagged that firms that have been set capital and liquidity buffers can use them to support the continuation of the firm’s activities (albeit that the firm should contact the FCA if it is planning to draw down such a buffer). Wind-down plans Wind-down plans should consider the impact of COVID-19 and, should a firm need to wind-down, the firm should consider how to do so in an orderly way and take steps to reduce harm to both consumers and the market. Firms concerned that they will be unable to meet their capital requirements or debts as they fall due should contact the FCA with their plan for the immediate period ahead, as should firms whose wind-down plans have identified material execution risks. Discretionary distributions of capital The FCA adds a note of caution to firms considering whether to make a discretionary distribution of capital to fund a share buy-back, fund a dividend, upstream cash or meet a variable remuneration decision. It expects firms and their boards to satisfy themselves that each distribution is prudent given market circumstances and consistent with their risk appetite. The FCA specifically states that it would not expect firms to distribute capital that could credibly be required to absorb losses over the coming period. Whilst this announcement is unlikely to be particularly controversial, it should give firms food for thought, particularly those considering taking steps such as those referred to above (for example, funding a dividend out of a discretionary distribution of capital). A key message to be drawn out from the announcement relates to firms being proactive in their communications with the regulator, for example (as noted above), where a firm is concerned that it will be unable to meet its capital requirements. FCA grants extension for regulatory return filings The FCA has extended submission deadlines for a number of regulatory returns. Certain returns have been given a 1-month extension and others a 2-month extension. This applies for submissions which are due up to and including 30 June 2020. Returns not specifically referred to by the FCA in its announcement do not have an extended deadline. By way of an example, if a return is due on 22 May 2020 but a 2-month extension has been granted for this particular type of return, the submission will need to be completed by 22 July 2020. The FCA has noted that if the extended deadline date falls on a weekend, the submission is instead due the following working day. The table below details the full list of extensions granted.
1 month extension 2 month extension
  • COR001A (Own funds)
  • COR001B (COREP Leverage Ratio)
  • COR002 (COREP LE)
  • COR003 (COREP NSFR)
  • COR005 (Asset Encumbrance)
  • FRP001 (FINREP)
  • FSA004 (Breakdown of Credit Risk Data)
  • FSA005 (Market Risk)
  • FSA007 (Operational Risk)
  • FSA008 (Large Exposures)
  • FSA014 (Forecast Data from Firms)
  • FSA017 (Interest rate gap report)
  • FSA018 (UK integrated group - Large Exposures (UK integrated group))
  • FSA019 (Pillar 2 Information)
  • FSA055 (Systems and Controls Questionnaire)
  • REP005 (High Earners Report)
  • RMA-D2 (Financial Resources)
  • FIN-A (annual report and accounts)
  • Annual financial reports (as required under Disclosure Guidance and Transparency Rules)
  • Credit union complaints return (CREDS 9 Annex 1R)
  • Complaints return (DISP Annex 1R)
  • Claims management companies complaints return (DISP 1 Annex 1AB)
This announcement also follows the FCA’s statement that it is allowing fund managers an additional two months to publish their annual reports. This is one of several instances in which the FCA has exercised supervisory flexibility specifically in a fund management context over the course of the last month (further details are available here).  This flexibility does not, however, extend as far as changing the usual deadlines for reporting transparency information to the FCA under the AIFMD Level 2 Regulation (Regulation 231/2013/EU). FCA expectations regarding wet ink signatures The FCA has also recently released a statement on its expectations (or lack of) with regard to wet ink signatures. In relation to agreements, the FCA has emphasised that its rules do not explicitly require wet ink signatures. Likewise, the rules do not generally prevent the use of electronic signatures. The position ultimately comes down to a matter of law, which should be considered before use of electronic signatures (see our signing checklist, available here). Firms should, nonetheless, consider related requirements under the FCA Handbook. For example, firms should consider the client’s best interests rule (COBS 2.1.1R) and the fair, clear and not misleading rule (COBS 4.2.1R) to ensure that, when a client electronically signs a document, this does not make it more difficult for the client to understand what they are agreeing to.  For FCA forms, the FCA has provided that firms may use electronic signatures.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak.  For additional information, please contact your usual contacts or any member of the Firm’s Coronavirus (COVID-19) Response Team or the following authors: Authors: Michelle Kirschner, Martin Coombes and Chris Hickey © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 22, 2020 |
COVID-19: Update on UK Financial Support Measures

Click for PDF In our client alert of 27 March 2020, we provided an overview of the financial support made available by the UK Government to: (i) investment grade businesses through the Covid Corporate Finance Facility (the “CCFF”); and (ii) small and medium sized enterprises (“SMEs”) through the Coronavirus Business Interruption Loan Scheme (the “CBILS”).  In our client alert of 6 April 2020, we gave a brief overview of the measures that have been taken in the UK to support businesses and highlighted in that alert that the CBILS was being extended to larger business with an annual revenue of between £45 million and £500 million. In this client alert we summarise: (i) the announcement of details on the Coronavirus Large Business Interruption Loan Scheme (the “CLBILS”); and (ii) the announcement of a new funding scheme for innovative companies that are facing financing difficulties due to the COVID-19 pandemic (the “Innovation and Development Scheme”). See also the Gibson Dunn Coronavirus (COVID-19) Resource Centre for more resources on the response to COVID-19. Background to the CLBILS Design Flaws with the CBILS and Pressure from Industry Whilst the UK Government announced a package of measures worth approximately £330 billion in mid-March 2020, in recent days, the UK Government has come under pressure to ensure that all UK businesses are able to access the financial and liquidity support measures that have been made available. As at close of business on 13 April 2020, UK Finance (the industry body for the banking and finance sector in the UK) reported that of 28,461 applications made to lenders to access the CBILS, only 6,016 loans had been approved with total lending reaching £1.1 billion. Further, it has become clear that the CCFF would only be available to a select number of investment grade companies in the UK that already had a commercial paper issuance programme or those that would otherwise meet the criteria for such a programme. Criticism of the CBILS have been growing since its launch. Industry bodies, including the British Private Equity and Venture Capital Association (the “BVCA”) have been reporting a number of structural issues with the scheme that meant large business and portfolio companies of private equity firms were not able to access much needed financial support. This is supported by the views of our private equity clients, whose portfolio companies have encountered difficulties in accessing the scheme. Some of the issues identified have been:

  • Process and Timing: Difficulties with access to the scheme and the process for approving applications has had a significant impact on the liquidity position of a number of companies.
  • Eligibility Criteria:
    • Companies and industry bodies have been reporting that banks are only lending to those companies that are credit-worthy with a strong balance sheet (i.e. those companies with retained profits/equity capital and low leverage). This is because lenders retain a 20% exposure to loans advanced under the CBILS. This has prevented many venture capital backed companies and innovative tech and healthcare companies that are not typically profitable from accessing much-needed financial support.
    • Importantly for our clients, guidance from the British Business Bank to lenders also provided that companies that are majority-owned by a private equity firm would not be eligible to participate in the CBILS in circumstances where additional equity funding is available to be provided by the private equity firm.
    • Lenders have also been aggregating the annual revenues of private equity firm’s majority-owned portfolio companies to determine whether a single portfolio company is eligible for a CBILS loan, which had the effect of excluding the large majority of portfolio companies backed by mid to large-cap private equity firms (estimated by the BVCA to be 750+ companies).
  • Level of Funding: When the CLBILS was initially announced on 3 April 2020, it was suggested that the scheme would provide £25 million of funding to businesses with an annual revenue of between £45 million and £500 million. For larger companies with an annual revenue of £500 million, a loan of £25 million would represent just over half of a business’ revenue for a month. The concern expressed is that if the current low levels of economic activity prevail for a significant period into the summer months, the loans available would not provide a sufficient liquidity buffer, even with the other support measures available, to prevent many companies from going out of business.
In the context of the growing criticism of the design flaws with the CBILS and the lack of access to the CCFF, the UK Government was forced to act by launching: (i) the CLBILS to provide genuine support to the majority of medium to large-sized UK businesses, and (ii) the Innovation and Development Scheme to support innovative development and research companies, including those backed by venture capital firms. Regulatory Pressure On 15 April 2020, the Financial Conduct Authority (FCA) published a “Dear CEO” letter setting out its expectations of banks, in relation to lending to SMEs. In the letter to banks, the FCA reminded them that the priority is ensuring that the benefit of the package of measures introduced by the Government, including the CBILS, is passed through to businesses as soon as possible. The FCA also highlighted that responsibility for these specific lending activities should be allocated to one or more Senior Managers. In the letter, the FCA also stated that a new small business unit has been established. This will, amongst other things, gather intelligence about the treatment of SMEs during the crisis. There is, therefore, a clear prospect of future enforcement action being taken by the FCA against banks where it does not consider that its expectations have been met. The pressure on commercial lending institutions to deliver the UK Government’s schemes and provide access to liquidity has, therefore, been increasing. The Coronavirus Large Business Interruption Loan Scheme On 3 April 2020, the UK Chancellor of the Exchequer, Rishi Sunak MP, announced that support would be provided to larger businesses in the UK (i.e. those with an annual revenue of in excess of £45 million) through the CLBILS. There followed an announcement on 16 April 2020, which set out the scope of the CLBILS, a scope broader than that initially announced on 3 April 2020. The UK Government has sought to design the CLBILS to support those businesses that hitherto had been unable to access funding through the CBILS or that had been ineligible to obtain funding through the CCFF. The CLBILS launched on Monday, 20 April 2020, and the key details of the scheme are as follows:
  • Businesses with UK-based business activity and annual revenue of more than £45 million are eligible.
  • Businesses with an annual revenue of between £45 million and £250 million will be able to access to up to £25 million of loans and businesses with an annual revenue of more than £250 million will have access to up to £50 million of loans.
  • The UK Government will guarantee 80% of each loan but unlike the CBILS, the UK Government will not cover the first twelve months of interest.
  • The business needs to have a borrowing proposal which the lender would consider viable, that will enable the business to trade out of any short-term to medium-term difficulty caused by the COVID-19 pandemic.
  • The business should be able to self-certify that it has been adversely impacted by the COVID-19 pandemic.
  • The business should not have received a facility under the CCFF.
  • Majority-owned portfolio companies of private equity firms will now be able to access the scheme following updated guidance to lenders, as such companies’ annual revenues will be assessed on a standalone basis (i.e. there will be no grouping of all of a private equity firm’s portfolio companies’ annual revenues).
  • Personal guarantees will not be permitted for loans of up to £250,000.
  • The scheme will be available through a series of accredited lenders, that will be listed on the British Business Bank website.
  • Credit institutions, insurers, reinsurers, building societies, public sector bodies, grant-funded further education establishments and state-funded schools are not eligible to participate in the scheme.
As a result of pressure from UK-businesses, the CLBILS appears to address some of the key issues relating to eligibility and levels of funding that had been identified with the CBILS. Large businesses now have access to up to £50 million of funding (depending on annual revenues) and companies that are not eligible to access the CCFF may still able to access the loans under the CLBILS. Importantly for the private equity industry, it also appears as though revenue-grouping for portfolio companies has been abolished together with the exclusion from the schemes of companies that are majority-owned by private equity firms. However, one key point to note is that it appears as though businesses will need to still be credit-worthy with a viable business plan to access finance under the CLBILS. The decision on credit-worthiness remains in the hands of a business’ lenders and so businesses which maintain a high leverage levels may continue to be excluded. The Innovation and Development Scheme On 20 April 2020, the Chancellor of the Exchequer announced the establishment of a new Future Fund to support the UK’s innovative businesses currently affected by the Covid-19 pandemic, together with other measures to support businesses driving innovation in the UK. In total, the package announced represents £1.25 billion of additional funding through: (i) a £500 million investment fund for high-growth companies impacted by the Covid-19 pandemic, delivered in partnership between UK Government and the private-sector (the “Future Fund”); and (ii) £750 million of grants and loans to SMEs focussing on research and development. The Future Fund In an unprecedented step, the Future Fund will make convertible loans of between £125,000 and £5 million available to high-growth innovative businesses in the UK. The Fund will be delivered by the British Business Bank and will provide UK-based companies with funding from the UK Government. Private investors will be obliged to match the UK Government funding amount for companies to participate. These loans will automatically convert into equity on the company’s next qualifying funding round, or at the end of the loan if they are not repaid, meaning the UK Government will become a shareholder in these companies. To be eligible, a business must be an unlisted UK registered company that has previously raised at least £250,000 in equity investment from third party investors in the last five years. The UK Government has also published a term sheet which sets out the terms of the convertible loans provided under the Future Fund here. The UK Government’s initial commitment to the Future Fund will be £250 million, with the Future Fund due to open for applications in May 2020 and run until September 2020. The UK Government has announced that it will keep the scale of its investment in the Future Fund under review. Grants and Loans for Research and Development £750 million of targeted support will be made available for research and development intensive SMEs. The grants and loans will be provided through existing schemes of the UK’s national innovation agency, Innovate UK. Innovate UK, will accelerate up to £200 million of grant and loan payments for its 2,500 existing Innovate UK customers on an opt-in basis. An extra £550 million will also be made available to increase support for existing customers and £175,000 of support will be offered to around 1,200 firms not currently in receipt of Innovate UK funding. It has been announced that the first payments will be made by mid-May. Conclusions We are in unprecedented times in the United Kingdom, as is the case for many leading economies globally. The UK State (and accordingly, the UK taxpayer) is being asked to underwrite British business for it to survive during the COVID-19 pandemic. The UK Government is having to make policy announcements an almost daily basis in a very fluid situation and then rush to provide guidance and infrastructure for policy to be delivered. This has led to much criticism but the new measures appear to be designed to plug the design flaws in the initial schemes that were adopted in the early days of the developing COVID-19 crisis. However, it remains to be seen whether the new schemes and updated guidance will enable lenders to speed up processes for approving loans and funding businesses at a time when the liquidity squeeze is being keenly felt. Central to the loan approval processes is the issue that the UK Government is guaranteeing only 80% of the exposure for lenders under the schemes with 20% of the residual risk carried by commercial lenders. In the current economic environment and prevailing macro-economic uncertainty, some lenders are discouraged from approving the loans under the schemes where they carry such residual risk. It is considered likely that further measures may need to be enacted, including having the UK Government or the Bank of England step in to guarantee 100% of the loans issued under the schemes to enable lenders to have the confidence in lending to British business. In these unprecedented times, it will remain to be seen whether further unprecedented measures are needed or whether the UK Government’s latest schemes will provide sufficient funding and liquidity for UK Business to survive what is fast-turning into a global economic crisis.
This client update was prepared by Tom Budd, Greg Campbell, Michelle Kirschner, Mark Sperotto, Attila Borsos, Amar Madhani and Martin Coombes. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak.  For additional information, please contact your usual contacts or any member of the Firm’s Coronavirus (COVID-19) Response Team. In the UK, the contact details of the authors and other key practice group lawyers are as follows: The Authors: Thomas M. Budd – London, Finance (+44 (0)20 7071 4234, tbudd@gibsondunn.com) Gregory A. Campbell – London, Restructuring and Finance (+44 (0)20 7071 4236, gcampbell@gibsondunn.com) Michelle M. Kirschner – London, Financial Institutions (+44 (0)20 7071 4212, mkirschner@gibsondunn.com) Mark Sperotto – London, Private Equity (+44 (0)20 7071 4291, msperotto@gibsondunn.com) Attila Borsos – Brussels, Antitrust (+32 2 554 72 11, aborsos@gibsondunn.com) Amar Madhani – London, Private Equity and Real Estate (+44 (0)20 7071 4229, amadhani@gibsondunn.com) Martin Coombes – London, Financial Institutions (+44 (0)20 7071 4258, mcoombes@gibsondunn.com) London Key Contacts: Sandy Bhogal – London, Tax (+44 (0)20 7071 4266, sbhogal@gibsondunn.com) Thomas M. Budd – London, Finance (+44 (0)20 7071 4234, tbudd@gibsondunn.com) James A. Cox – London, Employment (+44 (0)20 7071 4250, jcox@gibsondunn.com) Patrick Doris – London, Litigation & Data Protection (+44 (0)20 7071 4276, pdoris@gibsondunn.com) Ben Fryer – London, Tax (+44 (0)20 7071 4232, bfryer@gibsondunn.com) Christopher Haynes – London, Corporate (+44 (0)20 7071 4238, chaynes@gibsondunn.com) James R. Howe – London, Private Equity (+44 (0)20 7071 4214, jhowe@gibsondunn.com) Anna Howell – London, Energy, Oil & Gas (+44 (0)20 7070 9241, ahowell@gibsondunn.com) Charles Falconer, QC – London, Litigation (+44 (0)20 7071 4270, cfalconer@gibsondunn.com) Jeremy Kenley – London, M&A, Private Equity & Real Estate (+44 (0)20 7071 4255, jkenley@gibsondunn.com) Penny Madden, QC – London, Arbitration (+44 (0)20 7071 4226, pamadden@gibsondunn.com) Ali Nikpay – London, Antitrust (+44 (0)20 7071 4273, anikpay@gibsondunn.com) Philip Rocher – London, Litigation (+44 (0)20 7071 4202, procher@gibsondunn.com) Selina S. Sagayam – London, Corporate (+44 (0)20 7071 4264, ssagayam@gibsondunn.com) Alan A. Samson - London, Real Estate & Real Estate Finance (+44 (0)20 7071 4222, asamson@gibsondunn.com) Jeffrey M. Trinklein – London, Tax (+44 (0)20 7071 4264, jtrinklein@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 13, 2020 |
Best Lawyers in Singapore 2021 Recognizes Five Gibson Dunn Attorneys

Best Lawyers in Singapore 2021 has recognized five Gibson Dunn attorneys as leading lawyers in their respective practice areas: Troy Doyle – Insolvency and Reorganization Law; Jai Pathak – Banking and Finance and Mergers and Acquisitions Law; Brad Roach– Energy Law and Mergers and Acquisitions Law; Saptak SantraBanking and Finance and Energy Law; and Jamie Thomas – Banking and Finance. The guide was published April 9, 2020.

April 8, 2020 |
Strategies for Private Equity Investing in a Distressed Environment

Click for PDF “In a crisis, be aware of the danger--but recognize the opportunity.” – John F. Kennedy. As the tragic and unprecedented consequences of the COVID-19 pandemic have demonstrated, we are certainly experiencing a crisis. For private equity funds, the current environment—while providing unprecedented challenges for many portfolio companies—will also provide some unique investment opportunities to acquire both distressed assets and assets of distressed sellers. In a distressed context, there are four principal strategies to achieve ownership:

  • a negotiated distressed sale conducted outside of a formal insolvency process,
  • a negotiated sale through a pre-packaged insolvency procedure, such as a scheme of arrangement,
  • a purchase out of a judicial insolvency process, such as a scheme of arrangement, administration or liquidation, and
  • a loan to own strategic purchase of debt with a view to obtaining control.
This article discusses these strategies below, and introduces the key issues, opportunities and obstacles associated with each of them. Negotiated Deals The path of a negotiated distressed acquisition will, in large part, necessarily be determined by the extent of the distress. For example, the company’s ability to meet impending debt service obligations, its compliance with financial covenants and other debt financing obligations, liquidity and whether the company is actually or about to become insolvent, will all impact the timing and nature of the transaction. The more the process is rushed to meet fixed deadlines, the less likely potential investors will be able to conduct full due diligence, although key risks still need to be assessed such as termination rights on a change of control for material contracts. The identity of the distressed parties is also obviously critical -- is it the seller which is distressed, the target or both? Where the seller is in financial distress, the lack of typical warranty protection should be considered as any warranties given by the seller will likely be of little real value. In this context, both warranty and indemnity insurance and escrow arrangements should be considered. Depending on the level of distress and the distressed seller’s need for liquidity, it may not, however, accept significant holdbacks through escrow arrangements. Furthermore, in the context of a distressed seller, buyers must also consider the risk that the transaction is vulnerable to challenge as an unlawful preference, fraudulent conveyance, a transaction at an undervalue or analogous equitable challenge, depending on the jurisdiction. In this context, where the asset has a market value, ensuring that the price paid was at least the market value and otherwise the best price reasonably obtainable by the seller for the asset at the time of the sale in the prevailing market conditions and other relevant circumstances should mitigate this risk. Methods most often used to evidence this by a seller include running a competitive sale process and/or obtaining a fairness opinion from a financial advisor. Also to the extent that there are business separation issues where the target will need transitional support and/or services from the seller, buyers again need to be mindful of this where the seller is in financial distress. This is because the seller may no longer exist to provide such support or services following the closing of the deal. Financing acquisitions with debt in the current environment will be challenging. However, where the proceeds of the sale are insufficient to repay the target’s lenders in full, they may be prepared to ‘roll their debt’ into a new structure where the private equity sponsor is providing additional liquidity that enhances their chances of maximizing recovery. A debt roll will usually require the consent of all of the existing lenders. However, the availability of this approach turns very much on the drafting of the relevant debt documents. There may be creative alternatives around any obstacles presented by the debt documents such as structural adjustments (where certain otherwise unanimous lender matters have a lower approval threshold) and yank-the-bank provisions (entitling the borrower to prepay or replace at par a non-consenting lender). In addition to the foregoing there may be alternative levers to pull such as the threat of a covenant strip to bring hold-outs into line. Failing this, it may be possible, subject to achieving the relevant thresholds (typically 75% or more in value and a majority in number of the lenders), to use an insolvency process such as a scheme of arrangement to compel all of the existing lenders to roll the debt into a new structure. Pre-Packaged Insolvency Sale A pre-packaged insolvency sale involves the target company’s creditors agreeing on a plan to sell the company or its assets and then immediately filing the plan with the relevant bankruptcy court in order to implement it. The availability of pre-packaged insolvency sales and the applicable rules vary from jurisdiction to jurisdiction. However, they typically have the following characteristics:
  • there is no risk of a challenge to the transaction as a preference or a transaction at an undervalue,
  • it is a negotiated sale process where the sale will be pre-agreed with the administrator and any due diligence will need to be carried out before the pre-pack is implemented,
  • the sale can be effected as a sale of shares or of key assets,
  • there will be no transitional support or services from the seller,
  • insolvency lawyers will need to be involved early in the process, and
  • junior creditors may or may not be able to prevent the insolvency procedure depending on where the value breaks (that is, if the value from the sale is such that there would be insufficient proceeds to repay any class of creditors, that class will be ‘out of the money’ and unable to block the process – however they may seek to dispute the valuation).
The timing for the process will depend on the rules for the relevant insolvency procedure. As such, an important threshold question is whether the company either has sufficient liquidity during this process or is able to obtain additional financing. It is also worth noting that some governments (including the United Kingdom and Australia) have in the last week proposed temporary changes to certain relevant insolvency related laws to allow, among other things, directors of a company to continue trading without incurring liability for wrongful/insolvent trading. If adopted, these modifications would presumably lessen the urgency directors in such jurisdictions may feel to sell assets or the whole company to address a downturn in the company’s performance or liquidity. This may, in turn, slow down any discussions with creditors and private equity investors about pursuing a pre-packaged insolvency sale or other alternative. Fire Sale Where a company is already in a formal insolvency process, there may be an opportunity to purchase the assets from the relevant provisional liquidator or similar insolvency professional. Insolvency procedures are generally seen as value destructive to the business as key contracts will typically automatically terminate and goodwill is eroded. As with a pre-packaged sale, the applicable rules and procedures vary from jurisdiction to jurisdiction. There is no risk of challenge to the transaction as a preference or a transaction at an undervalue. Timing will often be driven by the pace of value deterioration of the business. Loan to Own Loan to own strategies involve investors acquiring secured debt of the target at a discount to par with a plan to convert the debt to equity either consensually, through a security enforcement (if all stakeholders agree), or through a formal insolvency procedure which binds all creditors and removes any risk of a challenge to the transaction as a preference or transaction at an undervalue. There will be essentially no diligence in these transactions other than publicly available information and information which has been provided to the lenders under the financing documents. In the loan to own context, understanding the capital structure of the target company and the terms of its debt financing, including the rights of each class of creditors, is critical to identifying a clear path to obtain the desired level of equity interest through the financing documents. This is so regardless of whether there will be a security enforcement or formal insolvency procedure. Key items in this analysis include voting thresholds, the terms of any intercreditor agreement and who can direct enforcement and the rights to release the claims of other creditors under guarantees and security. Prior to acquiring the secured debt of a target company, loan to own investors will have formed a view as to what constitutes the ‘fulcrum credit’. The ‘fulcrum credit’ is the amount and type of debt most likely to be converted into equity through the process. Such investors will frequently seek to acquire -- either alone or together with investors pursuing similar strategies -- a blocking stake in the fulcrum credit so that its vote is required to be obtained in connection with any decisions to be made under the financing documentation. They will also want to understand the creditor composition. Understanding the creditor composition is important because lenders in the same class of debt frequently have different interests. For example, a lender who was an original lender and made the loan at par will have a very different view on what would be a positive outcome compared to a lender who acquired the debt in the secondary market at a deep discount to par, say, 20 cents on the dollar. Similarly, the interests of lenders will vary if they are hedging counterparties with the debtor or they also have debt at other levels of the capital structure. For example, where the value breaks in the senior debt (i.e., there is insufficient value to repay the senior lenders in full), a lender with a small position in the senior debt may want to try to block an enforcement of the debt security if it has a much larger position in a junior class of the debt which is ‘out of the money’ in the hope that the business will improve over time. The timing of loan to own transactions is very much deal specific. Conclusion While the circumstances occasioned by the COVID-19 virus have resulted in crisis, the crisis may give rise to opportunities to assist ailing businesses through the distressed investment and acquisition frameworks described above. The issues raised in any distressed acquisition are myriad and complex. However, the methods used are tried and tested. The key points investors must keep in mind when determining the path most likely to succeed include, among other things, the following:

-control of process;

-timing and extent of remaining business liquidity;

-structure of financing, composition of creditors and detailed terms;

-structure of proposed investment, whether statutory or asset sale;

-publicity and public perception; and

-scope of transaction and whether liabilities are comprehensively resolved.

As such, investors would do well to communicate with counsel early in the process to assist in analyzing the best path forward. _________________________________________________________________ Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 pandemic. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team, the Gibson Dunn lawyer with whom you usually work in the firm’s Global Finance or Private Equity practice groups, or the authors in Hong Kong: Michael Nicklin (+852 2214 3809, mnicklin@gibsondunn.com) Paul Boltz (+852 2214 3723, pboltz@gibsondunn.com) Scott Jalowayski (+852 2214 3727, sjalowayski@gibsondunn.com) Brian Schwarzwalder (+852 2214 3712, bschwarzwalder@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 7, 2020 |
COVID-19: Key Issues for Private Credit and Special Situation Investors in Asia-Pacific

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Each economic downturn creates opportunities and challenges in the credit markets for private credit and special situation investors, and this is especially true in the Asia-Pacific region today as it was impacted by the COVID-19 virus much sooner than the rest of the world.

The opportunity arises from the fact that lending in Asia-Pacific has historically been driven, to a large extent, by banks and, as borrowers’ revenues plunge, a significant number of them will have to look to private credit to refinance their existing amortising bank debt.  The ability of private credit investors to deliver greater flexibility than typically seen with financings from banks, with bespoke solutions including non-amortising, PIK or pay-if-you-can financings, will be a huge differentiator.  Additionally, the amount of defaulted debt in the market is likely to increase dramatically, providing opportunities for investors to make returns through a variety of strategies including loan-to-own, debt-for-equity swaps, negotiated distressed sales (no formal insolvency process), negotiated sales through a pre-packaged insolvency procedure and purchases out of an insolvency process. Of course, the challenge stems from the exact same circumstances, namely, that the virus has had (and will continue to have for some time) a dramatic adverse impact on the creditworthiness and viability of many existing portfolio companies of private credit investors.  Addressing this challenge requires a thoughtful and thorough top-down review of each company’s situation in terms of its business performance, obligations under its financing agreements and options for moving forward. Key areas on which private credit investors should focus are as follows:

I.  Information

Knowledge is indeed power when it comes to distressed borrowers, and all private credit investors should be engaged in a dialogue with their portfolio companies to understand (as fully as they can) the impact of the virus on each company, its business, financial condition and prospects and the mitigation actions being taken.  Many borrowers will willingly engage with their lenders and provide this information after an informal conversation.  There will, however, be some which do not want to provide such information, particularly while management is still assessing its options.

Information Checklist

The facility agreement will typically require the borrower to provide:

  • financial statements;
  • a budget;
  • presentations by senior management;
  • copies of documents dispatched to the shareholders or creditors of any group company;
  • details of material litigation, judgements and any termination events occurring under any material contracts;
  • information regarding the security and compliance with the security documents; and
  • such other information regarding the financial condition, assets and operations of the group as well as any amplification or explanation of any item in the financial statements, budgets or other material provided by any obligor.

Additionally, if a default is continuing (sometimes this standard is an event of default), the facility agreement will typically require the borrower:

i.

to permit the agent and/or security agent and/or accountants or other professional advisors free access at all reasonable times and on reasonable notice at the risk and cost of the Obligor or Company to the premises, assets, books, accounts and records of each member of the Group; and

ii. to allow the lender or their agent(s) to meet and discuss matters with senior management.
If the borrower is not forthcoming the lender should make a formal request for information under these provisions (through the agent where relevant).

Outside of an event of default, borrowers will typically seek to materially comply with these provisions to avoid triggering an event of default.  However, where an event of default is continuing and unwaived, the borrower may feel less compelled to comply as the consequence of failing to do so is just another event of default.  Therefore, the relationship between lender and borrower is important in this regard.

Understanding the issues facing the borrower over the next 12+ months is critical.

Fundamental checklist of questions for borrowers include:

  • Are they facing liquidity issues?
  • Critically, can they pay their debts as they fall due?
  • Are there undrawn committed facilities in place and will these be available?
  • Can they service the debt, including interest?
  • Are they projecting breaches of financial covenants and if so, which ones and when?
  • If they have equity cure rights, do they intend to exercise them?
  • Are they subject to or anticipating material litigation arising from the impact of the virus for breaches of contract or the exercise of a termination right of a material contract?
  • Do they have material claims to make against suppliers, which failed to deliver, that may help mitigate?
  • Do they have an impending maturity with few if any refinancing options?
  • Are any insolvency-related issues likely to arise?

To further flush this information out, the facility agreement also typically requires the borrower to promptly, upon request, deliver to the agent a certificate signed by two of its directors certifying that no default is continuing (or if a default is continuing, what steps, if any, are being taken to remedy it).

While there is also an obligation on the borrower to proactively notify the agent of any default (or sometimes event of default) promptly upon becoming aware of its occurrence, management will have some discretion in making this determination and may take the position that there is no default, or at least there’s a defensible position that is the case.  However, if two directors are required to certify that there is no default, the potential liability for fraud may concentrate the minds of directors in determining whether the issue at hand amounts to a default.  Again, in some circumstances the borrower may feel less inclined to comply with such request if an event of default is continuing and unwaived.

II.  Liquidity

There are five principal ways of increasing term liquidity outside of improved business performance:

i.

stretching creditors through payment deferrals – this approach typically is likely to be only a very short-term fix;

ii.

raising new equity (often shareholders will want to negotiate a holistic solution with the lender before committing to inject new funds even if there are permissive equity cure rights);

iii.

cost cutting;

iv.

selling assets; and/or

v.

drawdown existing facilities (notwithstanding the increased interest cost of doing so) and/or incurring new debt.

With respect to payment deferrals, in addition to deferrals to trade creditors, we are seeing borrowers selecting the maximum length of interest periods and requesting amendments to change cash pay interest to payment in kind (or deferred interest that accrues but is not capitalised).  Where there is amortising debt, we are also seeing borrowers requesting relief from repayment obligations.  Similarly, some borrowers are concerned that their accountants will not be able to complete the audit in the time specified in the facilities agreement for delivery of audited financial statements, which in turn may impact the ability to calculate excess cashflow and make any required mandatory prepayment from such excess cashflow within the prescribed time.  In such cases, borrowers are also seeking relief of such mandatory prepayments from excess cashflow (a number of borrowers that do not have an issue with the timing or calculation of excess cashflow but project liquidity issues arising from COVID-19 are also seeking relief from such mandatory prepayment obligations).

In the context of incurring additional debt, check to see if the facility agreement has undrawn committed facilities.  If so, the question of whether a default is continuing is extremely pertinent as the lender can refuse to fund new advances if a default is continuing or the repeating representations are not true (sometimes qualified by materiality).  Where a default is continuing, the lenders will then be faced with a judgement as to whether the borrower will meaningfully benefit from additional liquidity or if it is preferable to simply refuse to fund. In the case of incremental or accordion facilities (and in a minority of deals, other baskets of permitted indebtedness which can benefit from pari passu security), whether lenders are prepared to commit to funding will be very fact and circumstance specific.  Outside of this, the scope for the borrower to incur additional debt in most traditional facilities in Asia-Pacific is very limited (even more so where such debt is to be secured, even on a junior basis).  An exception to this might be in the context of non-recourse receivables financing, but this will be subject to a cap.  The borrower may also consider selling material assets (including by sale and leaseback), but subject to some de-minimis thresholds, the proceeds from any such sale will be subject to mandatory prepayment requirements and so may have limited value from a liquidity perspective absent a waiver.

III.  Fatal Flaw Review

Most prudent lenders, faced with an extremely volatile economic environment as we have today, will be looking to conduct what are known as “fatal flaw reviews” of the financing documents of potentially defaulting borrowers.  Parties may wish to avoid a default from occurring by anticipating in advance what potential defaults there may be.  The fatal flaw report will identify the scope, ranking and effectiveness of the guarantee and security package and identify deficiencies and other issues.

Fatal flaw report will report on, among other things:

  • material risks that the guarantees and security may not be valid, may not have the ranking originally contemplated, may be subject to challenge or may have timing constraints to their enforcement (especially in some jurisdictions where for example some kind of court order or auction process is required prior to enforcement/sale of secured assets);
  • assets of the group which are not subject to valid and effective security;
  • immediate steps that the lender can take to perfect unperfected security interests and otherwise improve its position with respect to the guarantees and security;
  • whether there is an ability to appoint a receiver and control any restructuring process (in a worst case scenario); and
  • an enforcement roadmap.
These reports will also identify strengths and weaknesses in the intercreditor agreement where relevant which impact negotiating leverage.  In addition, the reports may extend wider and report on potentially troublesome drafting in the facility agreement which could provide arguments for the borrower to push back on the lender’s exercise of its rights so that the lender fully understands its position. A fatal flaw review will typically be conducted by counsel who did not work on the original transaction on the basis that “a fresh set of eyes is better” and they may be more likely to candidly identify drafting or other issues and flag them. Lenders should ideally conduct the fatal flaw review ahead of a default.  Borrowers are subject to further assurance provisions which lenders can rely on to the extent they require cooperation from the borrower and failure to comply by the borrower will trigger a default.  However, once an event of default is continuing and unwaived, some borrowers will be reluctant to cooperate with the lender to improve the lender’s position with respect to enforcement as they will see this as reducing their negotiating leverage. By failing to comply, they are merely adding an additional event of default but not increasing the lender’s right to take action.  Additionally, conducting the review ahead of a default enables the lender to consider addressing the identified issues in any waiver, amendment or standstill which may be requested by the borrower.

IV.  Key Provisions to Check for Defaults and Events of Default

Hand in hand with preparing a comprehensive fatal flaw review, understanding whether a default or event of default is continuing is obviously imperative from the lender’s perspective.  The representations and warranties, information undertakings (discussed above), financial covenants, positive and negative undertakings, material contracts, taxes and the events of default themselves need to be examined.

A.  Representations and Warranties

The representations and warranties in a facility agreement serve two primary purposes:

i.

to flush out information regarding the portfolio company where the consequence of a breach is an event of default; and

ii.

to serve as a drawstop on new utilisations of the facilities.

A number of typical representations and warranties should be given consideration in the context of COVID-19 (there may also be other deal-specific representations which need to be reviewed). First, consider the second limb of the “No Default” representation, which is a look forward to defaults or termination events under other agreements (not the finance documents) and is typically subject to a “Material Adverse Effect” qualification.  This representation could be relevant where a company’s performance under a “material contract” is adversely affected by COVID-19 or a counterparty breaches such a contract.  In addition, where a company has contracts which would reach this threshold of materiality, there is often an additional “Material Contracts” representation which should be reviewed. Second, some facilities in Asia-Pacific contain the material adverse change representation which is included in the Loan Market Association’s leveraged standard form.  It provides that “Since the date of the most recent financial statements delivered pursuant to Clause 25.1 (Financial statements) there has been no material adverse change in the assets, business or financial condition of the Parent or the [Restricted] Group [or the Group].”  It should be noted that this representation does not relate to the performance of the business since the closing of the loan facility, but rather since the date of the most recent financial statements.  Clearly the impact of COVID-19 virus will represent a material adverse change in the business and/or financial condition of many borrowers since the date of their most recently delivered financial statements.  Equally importantly, the term “material adverse change” is not the negotiated, defined “Material Adverse Effect” standard but is a looser term.  This representation could therefore potentially be triggered even where the borrower is projecting compliance with its financial covenants. Third, the “No Proceedings” representations which relate to litigation and judgments should be reviewed.  Invariably, some companies will be subject to litigation resulting from their failure to perform under their contracts, and it is likely that many parties will assert that COVID-19 is a force majeure event such that noncompliance with their contractual obligations was beyond their control and not actionable as a breach of contract.  All of this could result in many businesses becoming tangled in complex and protracted litigation even when they intended to fulfill their obligations. It is also recommended to look at the “Insolvency” representation.  This representation is linked to the insolvency-related events of default and discussed below. It should be noted that many of the representations repeat automatically and are deemed to be made on each interest payment date, the date of each utilisation request and the date of each utilisation.

B.  Financial Covenants and Rating Requirements

Financial covenants often appear to be one of the easier items to be reviewed as one expects that a breach would be clearly shown in the calculations and confirmed in the compliance certificate.  However, this is not always the case.  In fact, it is not uncommon that borrowers calculate covenants without carefully ensuring conformity with the relevant definitions.  Additionally, borrowers may take an aggressive interpretation of certain addbacks which may be contemplated.  For example, we have heard reports of some borrowers contemplating adjusting EBITDA for both costs and losses arising from COVID-19.  Similarly, there are some reports of borrowers contemplating including the impact of COVID-19 as an “exceptional item”.  The financial statements (which should be prepared in accordance with the accounting principles as applied to the original financial statements provided at the time the facility agreement was entered into) and compliance certificate therefore warrant additional scrutiny.  Also, as mentioned above, the borrower can be required to provide further amplifications and explanations if the situation demands it.

If a financial covenant breach is likely to occur, or has occurred, it is also important to understand whether the shareholder has any rights to cure the breach.  If there is such a right, careful consideration needs to be given to the parameters of the equity cure provisions which typically, but not always, apply to all of the covenants. For example, can the cure be used preemptively and subsequently be designated as a cure amount?  Some shareholders will opt to provide the equity cure at the same time they deliver the compliance certificate so that they are effectively never in breach.  However, others will use the additional 15-20 business-day grace period typically provided.  For those who wait, the next question is whether a default continues during that cure period.

Other key questions to analyse in the context of an equity cure are the following:

  • How is the cure actually implemented?  Under many facilities in the Asia-Pacific region, sponsors are able to add cure amounts to EBITDA which obviously brings with it a multiplier effect, as opposed to being required to use such amount to make an actual prepayment to reduce debt (which is typically the case in Australia, outside of Term Loan Bs, for example).  Similarly, where adding the cure amount to EBITDA is not permitted, under some facility agreements such cash is allowed to be retained by the portfolio company (thereby reducing net debt to the extent it remains in the company, rather than being required to be prepaid).  Also, where a prepayment of the cure amount is required, the facility agreement may not obligate the company to use 100% of the cure amount for this purpose.
  • What are the limits on the cure?  For example, how many cures are permitted over the life of the facilities (typically 4-5)?  Are over-cures permitted (often they are)?  Are cures permitted in successive quarters?  Where the cure amount is applied to EBITDA, does this carry over for the next three financial quarters (almost always it does)?
  • Is there a mulligan?  The true “mulligan” – taken from the golfing world – provides that an initial breach of the financial covenants is not a default unless the same test is breached on the subsequent test date.  In the Asia-Pacific region, true mulligans are fairly rare.  It is common, however, to see a deemed cure which provides that where there is an initial breach, it is deemed to have been remedied if the borrower is in compliance on the subsequent test date and the lenders have not accelerated the loans.  In this scenario, where there is a projected single-quarter blip in performance, some borrowers might look to the lender syndicate to see if they have relationship lenders with blocking stakes (typically 33.35% or more in the Asia-Pacific region) which agree to prevent an acceleration event from occurring, but more often borrowers in this situation will seek a waiver or a covenant reset.

Finally, check if there are any rating requirements in the agreement as a number of borrowers have been, or will be, downgraded in the current climate.

C.  Undertakings

The information undertakings have largely been covered above.  However, it is worth considering the impact of COVID-19 on the ability of borrowers to deliver their audited financial statements in a timely manner.  The degree to which this is a problem will obviously be affected by the timing of the end of the financial year for the relevant group together with the ability of the auditors to complete their work in light of the current restrictions.

Also, remember to bear in mind the impact of any unforeseen non-business days being declared in connection with a national state of emergency right now when determining the timing of any deliverables.  In addition, notice and grace periods are typically defined by reference to business days.

Finally, if the borrower is listed on any stock exchange, check to see if there are any new emergency measures in place to assist with the difficulties of publishing timely results and dispatching annual reports.  Note that such measures should not affect a lender’s contractual rights under a loan agreement, but this is an additional consideration in the current climate and this may be a sensible time generally to consider re-examining time frames with the borrower for delivery of financial statements, professional or technical reports or certificates to avoid the need to seek ongoing waivers on an ad hoc basis.

D.  Material Contracts

Not all groups have material contracts, but where they do, often they will be subject to a specific undertaking within the facility agreement.  Where relevant, this undertaking needs to be carefully considered as the threshold for a breach of this undertaking varies significantly from transaction to transaction.  In addition, the latest country-specific emergency measures being implemented may need to be assessed if there is a potential breach of contract with a causal link to the virus.

E.  Payment of Taxes

We have heard reports of companies planning to defer payments of taxes, even where the applicable deadlines prescribed by law have not been extended.  This approach needs to be considered on a deal-by-deal basis to determine whether a breach will occur as a result of such delay when the amount is not in dispute.  However, conserving cash in the business in the expectation of the relevant governments providing additional time for tax payments may well be viewed positively by a lender in the current environment.

F.  Events of Default

1.  Insolvency/Insolvency Proceedings/Creditors Process

These events of default speak for themselves and are unlikely to be the first breach of the facilities for a company.  However, they warrant consideration and attention because, among other things, the threshold for insolvency varies from jurisdiction to jurisdiction as do the duties of the directors.

The Asia Pacific Loan Marketing Association (APLMA) formulation of the “insolvency” event of default comprises several trigger events, where the materialisation of just one (naturally, the lowest common denominator) sounds the alarm, including a balance sheet insolvency test, i.e., that assets are less than actual and contingent liabilities.  This calculation is usually on an individual-company (rather than consolidated) basis, meaning just one company within a corporate group could trigger a default.

2.  Cessation of Business

This event of default in its widest form includes any member of the group suspending or ceasing to carry on (or threatening to suspend or cease to carry on) all or a material part of its business.  However, it is frequently negotiated to apply to the group taken as a whole actually ceasing to carry on all or substantially all of its business, which clearly limits its usefulness significantly.

3.  Audit Qualification

Often in facilities in the Asia-Pacific region, an event of default occurs if the auditors qualify their report either on a going-concern basis or owing to a failure to disclose information.  In the aftermath of the last financial crisis, there was much debate around whether a projected breach of a financial covenant which is noted in the auditors’ report amounts to a qualification – thus causing an event of default ahead of any actual breach of covenant.  In most cases, the conclusion was that for a simple projected financial covenant default, the auditors do not “qualify” their report but include an “emphasis of matter”.  The emphasis of matter is a paragraph, which highlights a matter that in the auditor’s opinion is of fundamental importance to a reader’s understanding of the financial report but which falls short of the technical standard of an auditor qualification.  However, although this has been the general conclusion in the case of projected breaches, it should be confirmed on a case-by-case basis with the relevant professionals in the local jurisdiction.

4.  Litigation & Material Judgments

As discussed above, the impact of COVID-19 will inevitably be the cause of some contractual breaches, which will result in litigation and judgments, and therefore needs to be considered here.

5.  Material Adverse Effect

Loan facilities in the Asia-Pacific region often have a catchall material adverse effect event of default (MAC clause).  It is intended to catch unforeseen risks after signing.  This entire provision needs to be considered carefully as it is often highly negotiated.  At one end of the spectrum it can be a highly subjective standard of whether a material adverse effect has occurred or is reasonably likely (in the reasonable opinion of the majority lenders) in the context of a very wide definition including the “prospects” of any group company or the ability of any company to perform any of its obligations under the financing documents.  At the other end of the spectrum it can be a completely objective standard where the material adverse effect relates only to the ability of the obligors (taken as a whole) to perform their payment obligations under the financing documents and must have actually occurred.  There is relatively little precedent case law on enforcing MAC clauses in finance documents (and such cases tend to be very fact specific) and it is generally accepted that there is a high barrier for successfully using a MAC clause.

After an event of default has occurred

In typical facilities in the Asia-Pacific region, the occurrence of an event of default which is continuing and unwaived typically gives rise to the following:

  • right of the majority lenders – typically 66.66% of the total commitments – to take any actions under the acceleration provisions, including cancelling all commitments, making all obligations under the financing immediately due and payable or placing them on demand and exercising any rights, remedies or powers under any of the finance documents or instructing the security trustee to do so;
  • where there is a margin ratchet, this usually is adjusted to the highest step on the ratchet for so long as the event of default is continuing;
  • where there is any payment default, default interest will become payable (typically on the overdue amount only);
  • where there are undrawn commitments, this will be a drawstop event entitling the lenders to refuse to fund – this may also apply to rollover loans under the revolving facility though sometimes the drawstop threshold for this is set at acceleration event;
  • where the borrower has consent rights to assignments, transfers and voting subparticipations (or similar), these typically fall away on an event of default (sometimes limited to payment and insolvency related events of default – and often any restriction on transfers to competitors of the borrower survive); and
  • a default could cause a domino effect of cross-default under other agreements.

V.  Reservation of Rights

Where a lender becomes aware of an event of default, unless it has already decided to take actions to accelerate the debt and enforce its security, one of the first steps it will usually take is to send a “reservation of rights” letter to the borrower.

Lenders should be aware, however, that such a letter does not necessarily do what it says on the tin.  In other words, the statements and actions of the lender may override such reservation of rights letter and waive such rights through promissory estoppel or waiver by election.  Similarly, although almost all facilities agreements contain a “no waiver” clause, English caselaw provides that these clauses may be defeated and overridden by promissory estoppel or waiver by election.  Even where the agreement requires any waiver to be in writing, courts may infer a waiver by words or actions.  Lenders therefore must proceed with caution in this regard to ensure they do not inadvertently waive any rights.

VI.  Waiver Requests

For a borrower with a projected one-off financial covenant or other breach, it may seek a simple waiver of that breach.  The level of lender consent required can range from majority (typically 66.66%), super-majority (typically 75-90%) in the Asia Pacific region or all lender consent, depending on the nature of the waiver request.  Items such as a waiver of a financial covenant breach will typically require majority lender consent.

When considering waiver requests, lenders should consider whether the waiver should be conditional and, if so, what conditions should apply – this is necessarily fact specific.  In addition to a waiver fee, commonly seen conditions include:

i.

enhanced reporting obligations including additional financial information and delivery of expert reports by a specified date;

ii.

addressing any issues raised in the fatal flaw review, including regarding perfection of security and taking additional guarantees and security;

iii.

if the borrower has promised to take certain actions (for example to reduce costs), a condition that such actions are taken within a prescribed time period;

iv.

unless it is a permanent waiver of a provision, the date on which the waiver will cease to apply and the provision will become effective again; and

v.

in some jurisdictions, a solvency certificate.  Additionally, the lender may include some of the conditions to amendments referred to below.  Further, in all relevant cases lenders should ensure that other financial creditors have waived their rights arising from the issue at hand (including through a cross-default) to ensure that the lender has not waived its rights at a time when other financial creditors have not also waived their rights – this applies equally to amendments.

VII.  Amendments

Where a borrower encounters an issue, which it sees as a longer term issue, it may seek an amendment to the financing documents.  Like a waiver, the relevant lender consent threshold will be dependent on the nature of the waiver request.  The conditions applicable to the amendment will be fact specific and, in addition to those mentioned in the waiver section above and an amendment fee, may include, among others, additional restrictions/prohibitions on undertakings governing mergers, acquisitions, joint ventures, disposals, loans or credit, financial indebtedness, a negative pledge, no guarantees or indemnities, limited or no dividends and share redemption (or other cash out such as vendor loans or other debt structurally or contractually subordinated), and cash management.

Similarly, if there are specific actions that the group has said it plans to take (or has agreed to take), such as non-core asset, company or business disposals or the implementation of a restructuring plan, further covenants around these (with appropriate deadlines for milestones to be achieved) should be considered.  Also, in the context of resetting financial covenants, lenders should take particular care around the definitions to ensure that only addbacks which remain appropriate in the circumstances remain, so that a more accurate reflection of the financial health of the group can be measured through the financial covenants.

VIII.  Standstill/Forbearance

In circumstances where an event of default is continuing and a restructuring is being contemplated, it is common for the financial creditors of the group to enter into a standstill or forbearance agreement.  Standstill or forbearance agreements are bespoke agreements under which the financial creditors of the group agree to “freeze their rights” for a short period of time (typically between one and three months) and maintain their Day 1 positions by keeping their debt at drawn level (or otherwise be treated equally with respect to repayments).

There are a vast number of considerations when negotiating standstill/forbearance agreements which due to their bespoke nature are beyond the scope of this article.  However, key points include:

i.

all creditors should be treated equally under the agreement and share the risks and, where there are shortfalls, the costs;

ii.

all financial creditors should be included and bound by the agreement and there should be restrictions on transfers of debt unless the transferee agrees to be bound by the terms of the standstill/forbearance agreement;

iii.

Day 1 positions should be maintained;

iv.

suspension of rights such as acceleration, demand enforcement of any of the debt or security (including crystallisation of floating charges), exercise any rights of attachment or set off, sue or commence litigation in respect of the debt, petition for the insolvency of any obligor etc. (but note that the defaults are not waived, but the rights arising from the default are suspended for the standstill period);

v.

maintenance of credit lines and replacement loans for maturing contingent obligations;

vi.

“new money” priority and economic terms;

vii.

covenants (very bespoke and including delivery of professionals’ reports (such as accountants) and additional financial information within a specified timeframe and deadlines for other key milestones) by each obligor;

viii.

costs and expenses to be paid by the obligors; and

ix.

confirmation of guarantees and security.

IX.  Syndicated and Club Facilities

In financings with multiple lenders it will be critical to understand the composition of the lender group, what their stakes are (do they have blocking or majority lender stakes) and what their respective interests and objectives are as they may not be aligned (for example, they may have purchased the debt at a different price, have hedging obligations which are significantly in or out of the money or have debt in another level of the capital structure).

Also, in terms of different interests, it will be critical to understand whether there are disenfranchisement provisions for lenders which are within the group (or shareholders or affiliates of the group), as otherwise there could be a risk of such persons acquiring a blocking stake which would prevent the lenders taking many actions including acceleration which typically requires majority lender consent.

How We Can Help

Reviewing facility agreements and the guarantee and security package and conducting an in-depth analysis of the current and future impact of COVID-19 on your borrowing groups are necessarily complex tasks, and there is no one-size-fits-all answer.  Each case will need to be examined based on the particular facts and the specific drafting of the finance documents.  Gibson Dunn’s global finance team is available to answer your questions and assist in evaluating your finance documents to identify any potential issues and work with you on the best strategy to address them.

_________________________________________________________________ Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 pandemic. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team, the Gibson Dunn lawyer with whom you usually work in the firm’s Global Finance practice group, or the authors: Michael Nicklin – Hong Kong (+852 2214 3809, mnicklin@gibsondunn.com) Jamie Thomas – Singapore (+65 6507.3609, jthomas@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 4, 2020 |
Coronavirus: Time for Private Equity to Have a Financing Check-up

Click for PDF With confirmed cases of COVID-19 now in more than 50 countries and the death toll rising almost daily, experts are predicting that the situation will get significantly worse before it gets better.  Concerns over the impact of the virus have caused significant volatility in the stock markets over the last week and the potential scale of the impact across a very wide range of industries is just beginning to be realized.  Therefore for private equity sponsors now is the time to be checking their financing documents to fully understand how COVID-19 might have an impact on the operations and financial results of their portfolio companies and their ability to remain in compliance. Key areas of focus for private equity sponsors include the following:

Financial Covenants/Equity Cure/Covenant Reset

In most markets in the Asia-Pacific region, leveraged facilities typically still have two or three maintenance financial covenants.  Given the myriad of ways that a public health emergency like COVID-19 can affect businesses, and the scale of the impact, it seems inevitable that the virus will cause some companies to breach these financial covenants.  The threshold questions then become which covenants will be breached, when will they be breached and what steps can sponsors take to address the problem. It should be noted that Australia is an exception to the foregoing, with a significant number of unitranche financings that only contain a single leverage covenant and increasingly Term Loan B structures.  Moreover, in the US and Europe Term Loan B structures with only a single springing leverage covenant for the benefit of the revolving lenders are commonplace.  Sponsors should be aware, however, that even in Term Loan B structures, a precipitous fall in EBITDA could mean that some companies become more reliant on their revolving facilities, thereby pushing them above the springing test threshold.           Business Interruption Insurance In determining whether a covenant breach is likely, it is worth first carefully considering whether there is business interruption insurance in place that will cover the losses incurred by a portfolio company.  While proceeds of business interruption insurance can typically be added to EBITDA for purposes of calculating compliance with the maintenance covenants, whether a particular policy covers business interruption resulting from COVID-19 will be very much fact-specific and turn on its exact language.  Many property insurance policies cover business interruption, but coverage for such loss often requires “direct physical loss or damage” which in many cases will not apply.  Also, to the extent that business interruption insurance coverage is available, the EBITDA definition needs to be carefully reviewed to see whether amounts claimed can be included (more typical) or whether the insurance proceeds have to be actually received by the group in order to be included in EBITDA (which could create a timing issue).           Scrubbing the Definitions - Restructuring Initiatives/Other Add-backs Upon initially concluding that a covenant breach is projected, the sponsor, the CFO of the portfolio company and their counsel should “scrub” the definitions to ensure that all available add-backs, synergies and initiatives, and the pro forma effect of each of them, have been properly included in the calculations.  Thought should also be given to commencing certain planned initiatives and actions ahead of schedule to take advantage of the pro forma effect.           Prepayments to Avoid the Breach In some circumstances, it may be possible to fix a potential covenant breach with a prepayment.  For example, a well-timed voluntary prepayment of an amortizing facility made from cash on hand now, could, in addition to reducing leverage, potentially avoid a breach of the debt service cover ratio in the subsequent three quarters (often with a dollar-for-dollar reduction in debt service).  Similarly, where sponsors have flexibility to apply mandatory prepayments first against amortizing debt, we have in the past seen sponsors use proceeds from disposals which have not yet been reinvested (or to specifically dispose of assets) in order to reduce both leverage and debt service.           Additional Preemptive Equity Typically sponsors always have the ability to inject additional capital into a portfolio company’s business (by way of equity or subordinated debt), which would reduce net debt regardless of whether a prepayment is made.  Nonetheless, this is not the typical approach for sponsors facing a prospective financial covenant breach unless the amount injected can be subsequently designated as a “cure amount” and there is additional benefit to injecting it earlier (for example, to fix a clean-down issue (as discussed below) or to avoid a mandatory prepayment if that is required under the equity cure). Sponsors are then broadly faced with either (i) using the equity cure; (ii) asking for a waiver or (iii) negotiating a covenant reset/broader amendment or refinancing.           Equity Cure Typically sponsors can “cure” financial covenant breaches within 15-20 business days of the date on which a compliance certificate is required to be delivered by the portfolio company to its lenders.  Careful consideration needs to be given to the parameters of the equity cure provisions (which typically, but not always, apply to all of the covenants). For example, can the cure be used preemptively and subsequently be designated as a cure amount?  Some sponsors will opt to provide the equity cure at the same time they deliver the compliance certificate so that they are effectively never in breach.  However, others will use the additional 15-20 business day grace period so that they are not making a call on their investors sooner than is necessary.  For those who wait, the next question is whether a default continues during that cure period.  If so, for most sponsors the issue that arises is whether or not their portfolio company needs to draw on any of the facilities during this time, as a continuing default would typically be a drawstop (except for rollover advances).  Therefore careful planning around this approach is required. Other key questions to analyze in the context of an equity cure are:
  • How is the cure actually implemented?  Under many facilities in the Asia-Pacific region, sponsors are able to add cure amounts to EBITDA which obviously brings with it a multiplier effect, as opposed to being required to use such amount to make an actual prepayment to reduce debt (which is typically the case in Australia, outside of Term Loan Bs, for example).  Similarly, where adding the cure amount to EBITDA is not permitted, under some facility agreements such cash is allowed to be retained by the portfolio company (thereby reducing net debt to the extent it remains in the company, rather than being required to be prepaid).  Also, where a prepayment of the cure amount is required, the facility agreement may not obligate the company to use 100% of the cure amount for this purpose.
  • What are the limits on the cure?  For example, how many cures are permitted over the life of the facilities (typically 4-5)?  Are over-cures permitted (often they are)?  Are cures permitted in successive quarters?  Where the cure amount is applied to EBITDA, does this carry over for the next three financial quarters (almost always it does)?
  • Is there a mulligan?  The true “mulligan” – taken from the golfing world – provides that an initial breach of the financial covenants is not a default unless the same test is breached on the subsequent test date.  In the Asia-Pacific region, true mulligans are fairly rare.  It is common, however, to see a deemed cure which provides that where there is an initial breach, it is deemed to have been remedied if the portfolio company is in compliance on the subsequent test date and the lenders have not accelerated the loans.  In this scenario, where there is a projected single-quarter blip in performance, some sponsors might look to the lender syndicate to see if they have relationship lenders with blocking stakes (typically 33.34% or more in the Asia-Pacific region) who agree to prevent an acceleration event from occurring, but more often sponsors in this situation will seek a waiver or a covenant reset.
          Covenant Waiver For sponsors with a projected one-off financial covenant breach, they may seek a simple waiver of that breach.  In the Asia-Pacific region, the waiver will typically require 66 2/3% of the lenders to consent to the waiver and a waiver fee would typically be paid.           Covenant Reset Where a sponsor is projecting more than a one-off problem with the financial covenants, it is more typical that it would seek to reset the covenants to re-establish sufficient headroom.  This approach is obviously a more protracted process than a one-time waiver as the lenders will need to get comfortable with an updated plan and financial model, and often involves a broader negotiation as some lenders may request changes to provisions such as amortization, excess cashflow sweep and pricing.  They will also expect an amendment fee.  Like a waiver, typically in the Asia-Pacific region 66 2/3% of the lenders would be required to reset the covenants.  The sponsors may or may not negotiate the covenant reset in conjunction with an agreement to inject more equity into the portfolio company.  Of course, they are more likely to agree to inject additional equity as part of the covenant reset if there is an underlying, fundamental issue with the company’s performance rather than it simply being adversely affected by what are hopefully near-term situations such as COVID-19. In the latter case, sponsors may also proactively consider a broader “amend and extend” or refinancing of the facilities to fix the covenant issues and address any other issues such as impending maturities or a need for more flexibility in certain areas.

Clean-Down

Depending on the nature of the portfolio company’s business, some facilities will have “clean-down” requirements on their revolving facilities (seen in a minority of sponsor deals).  These provisions require cash drawings under the revolving and ancillary facilities to be reduced to an agreed amount (sometimes zero), either physically or net of cash and cash equivalents for a short period of time (typically 1-5 consecutive business days) in a year with a short period of time (say, 1 month) between clean-downs.  Clean-downs are designed to demonstrate that the revolving facilities are not being used for permanent debt.  Where there is an ability to utilize the revolving facility for permanent debt such as acquisitions, joint ventures or capital expenditures, the drawings of such amounts would necessarily need to be excluded from any clean-down. COVID-19 is likely to mean that some companies are more reliant on their revolving facilities than usual and may struggle to meet their clean-down obligations.  In this type of circumstance, in addition to waivers of the requirement, we have seen sponsors in the past preemptively inject equity into the company to fix the clean-down issue.  In turn, the sponsors can subsequently designate the same proceeds as cure amounts to equity cure a covenant breach some quarters later.

Representations and Warranties

The representations and warranties in a facility agreement serve two primary purposes: (i) to flush out information regarding the portfolio company where the consequence of a breach is an Event of Default; and (ii) to serve as a drawstop on new utilizations of the facilities. A number of typical representations and warranties should be given consideration in the context of COVID-19 (there may also be other deal-specific representations which need to be reviewed).  First, the second limb of the “No Default” representation, which is a look-forward to defaults or termination events under other agreements (not the finance documents) and is typically subject to a “Material Adverse Effect” qualification.  This representation could be relevant where a company’s performance under a “material contract” is adversely affected by COVID-19 or a counterparty breaches such a contract.  In addition, where a company has contracts which would reach this threshold of materiality, there is often an additional “Material Contracts” representation which should be reviewed. Second, sponsors must check whether their facility agreement contains a particularly troublesome material adverse change representation which is included in the LMA’s leveraged standard form.  It provides that “Since the date of the most recent financial statements delivered pursuant to Clause 25.1 (Financial statements) there has been no material adverse change in the assets, business or financial condition of the Parent or the [Restricted] Group [or the Group].”  This provision is a tripwire and should never be accepted by sponsors, although it is in a number of facility agreements in the market.  This frequently misunderstood representation does not relate to the performance of the business since the closing of the loan facility, but rather since the date of the most recent financial statements and, equally importantly, is not the negotiated, defined “Material Adverse Effect” standard but is tied to the looser term “material adverse change.”  The tripwire here is that the portfolio company could be performing well above both its business plan and financial model but has a temporary but material dip in performance which can result in a performance breach despite the fact that it is in compliance with its covenants. Third, the “No Proceedings” representations which relate to litigation and judgments should be reviewed.  Invariably, some companies will be subject to litigation resulting from their failure to perform under their contracts, and it is likely that many parties will assert that COVID-19 is a force majeure event such that noncompliance with their contractual obligations was beyond their control and not actionable as a breach of contract.  All of this could result in many businesses becoming tangled in complex and protracted litigation even when they intended to fulfill their obligations. Finally, it is recommended to look at the “Insolvency” representation.  This representation is linked to the insolvency-related events of default and discussed below.

Reporting Obligations

Reporting obligations to lenders vary from facility to facility but, in addition to financial information, typically include matters relating to litigation, judgements and, where relevant, material contracts as well as the catch all of whatever else is requested by a finance party.  Sponsors are well-advised to discuss early and often with the management of their portfolio companies as to what, how and when information will be disclosed to lenders, particularly in light of the highly evolving nature of COVID-19 and its potential effect on businesses.

Events of Default

          Insolvency/Insolvency Proceedings/Creditors Process These events of default speak for themselves and are unlikely to be the first breach of the facilities for a portfolio company that is seriously adversely affected by COVID-19.  Nonetheless, they warrant consideration and attention because, among other things, the threshold for insolvency varies from jurisdiction to jurisdiction as do the duties of the directors.           Audit Qualification Most traditional leveraged facilities in the Asia-Pacific region contain an event of default if the auditors qualify their report either on a going concern basis or a failure to disclose information.  In the aftermath of the last financial crisis, there was much debate around whether a projected breach of a financial covenant which is noted in the auditors’ report amounts to a qualification – thus causing an event of default ahead of any actual breach of covenant.  In most cases, the conclusion was that for a simple projected financial covenant default, the auditors do not “qualify” their report but include an “emphasis of matter”.  The emphasis of matter is a paragraph which highlights a matter that in the auditor’s opinion is of fundamental importance to a reader’s understanding of the financial report but which falls short of the technical standard of an auditor qualification.  However, although this has been the general conclusion in the case of projected breaches, it should be confirmed on a case-by-case basis with the relevant professionals in the local jurisdiction.           Litigation & Material Judgments As discussed above, the impact of COVID-19 will inevitably be the cause of some contractual breaches which will result in litigation and judgments and need to be considered here.           Material Adverse Effect Most traditional leveraged facilities in the Asia-Pacific region have a catch all Material Adverse Effect event of default.  Sponsors in a reasonably strong negotiating position will negotiate the definition of “Material Adverse Effect” aggressively so that it is very limited and does not include the LMA formulation, which includes a look-forward on the ability to comply with financial covenants and/other obligations.  Also, this event of default is typically negotiated to be an objective test – rather than the subjective “which the Majority Lenders reasonably believe….” construct of the LMA.  Unfortunately, there are examples in the Asia-Pacific region that follow the LMA formulation.  On the other hand, if this definition and event of default are correctly negotiated, while it may be scrutinized, in the absence of any other “black and white” events of default having occurred (such as a financial covenant breach), most lenders would be unlikely to rely solely on a Material Adverse Effect event of default in order to take any acceleration actions.

How We Can Help

Reviewing facility agreements and conducting an in-depth analysis of the current and future impact of COVID-19 on portfolio companies is necessarily a complex task, and there is no one-size-fits-all answer.  Each case will need to be examined based on the particular facts and the specific drafting of the finance documents.  Our global finance team is available to answer your questions and assist in evaluating your finance documents to identify any potential issues and work with you on the best strategy to address them.
Gibson Dunn's lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work in the firm's Global Finance or Private Equity practice groups, or the author: Michael Nicklin - Hong Kong (+852 2214 3809, mnicklin@gibsondunn.com) Jamie Thomas - Singapore (+65 6507.3609, jthomas@gibsondunn.com) Please also feel free to contact any of the following practice members and leaders: Global Finance Group: Michael Nicklin - Hong Kong (+852 2214 3809, mnicklin@gibsondunn.com) Jamie Thomas - Singapore (+65 6507.3609, jthomas@gibsondunn.com) Private Equity Group: Paul Boltz - Hong Kong (+852 2214 3723, pboltz@gibsondunn.com) Scott Jalowayski - Hong Kong (+852 2214 3727, sjalowayski@gibsondunn.com) Brian Schwarzwalder - Hong Kong (+852 2214 3712, bschwarzwalder@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 21, 2020 |
Gibson Dunn Ranked in Legal 500 Asia Pacific 2020

Gibson Dunn has been recognized in 15 categories in the 2020 edition of The Legal 500 Asia Pacific.  The Singapore office was ranked in the following Foreign Firms categories: Banking and Finance, Corporate and M&A, Energy and Restructuring.  The Hong Kong office was ranked in the Antitrust and Competition, Banking & Finance, Corporate (including M&A), Investment Funds, Private Equity, Projects and Energy, and Regulatory: Anti-Corruption and Compliance categories.  The Beijing office was ranked in the Corporate (including M&A): Foreign Firms category. Additionally, the firm was ranked for its work in India, Indonesia and the Philippines.  Brad Roach was named as a Leading Lawyer in the Singapore: Energy – Foreign Firms and Indonesia: Foreign Firms categories;Kelly Austin was named as a Leading Lawyer in the Hong Kong: Regulatory: Anti-Corruption and Compliance category; Michael Nicklin was named as a Leading Lawyer in the Hong Kong: Banking & Finance category; Scott Jalowayskiand Brian Schwarzwalder were named as Leading Lawyers in the Hong Kong: Private Equity category; Sébastien Evrard was named as a Leading Lawyer in the Hong Kong Antitrust and Competition category; Troy Doyle was named as a Leading Lawyer in the Singapore: Restructuring & Insolvency – Foreign Firms category; and John Fadelyand Albert Cho were named as Leading Lawyers in the Hong Kong: Investment Funds category.  Youjung Byon has also been named as a Rising Star for Hong Kong: Investment Funds. The rankings were published on January 16, 2020. Gibson Dunn’s Singapore lawyers deliver exceptional service to our international clients doing business in the region and our Asia-based clients with respect to their international matters. Our lawyers have lived and worked extensively in the region and possess U.S., English, Singapore and Indian law qualifications and experience.  Furthermore, having been awarded a Qualifying Foreign Law Practice (QFLP) license by the Singapore Ministry of Law in 2013, we are one of the few firms that are able to provide our clients with local Singapore law advice in permitted areas. Gibson, Dunn & Crutcher’s Hong Kong office provides an extensive range of U.S., Hong Kong and English legal advice to global and Asia-based clients.  We offer our clients all the advantages of deep local expertise combined with the strengths of a global firm.  Our Hong Kong lawyers handle some of the most challenging and complex transactions and regulatory matters across Asia. Gibson, Dunn & Crutcher’s Beijing office is dedicated to servicing the needs of our clients establishing operations and doing business in China and those of our Chinese clients in their international transactions.  The Beijing office works closely with lawyers in our Hong Kong office, enabling us to provide Hong Kong law capability where relevant.

December 9, 2019 |
Best Lawyers Recognizes Three Gibson Dunn Attorneys in Brazil

Best Lawyers named three Gibson Dunn attorneys to the 2020 edition of Best Lawyers in Brazil. The publication recognized São Paulo partner Lisa Alfaro for Corporate and M&A Law, New York partner Jose Fernandez for Energy Law, and São Paulo of counsel Fernando Almeida for Banking and Finance Law. The list was published on December 6, 2019. Lisa Alfaro is the partner in charge of the São Paulo office and is also Co-Chair of the Latin America Practice Group. She has advised U.S. and multi-national companies on their most significant and critical matters, including corporate transactions, corporate compliance and investigations. She also represents developers, investment banks, private funds, Fortune 100 companies, state owned entities and investors in the U.S. and Brazil. Jose Fernandez has substantial experience in the telecommunications, energy, water, banking and consumer industries. His clients have included major multinational companies, financial institutions and private equity groups, as well as nearly a dozen foreign governments looking to attract foreign investors. He has also successfully advised U.S. and European companies involved in disputes in developing countries. In addition, he is Co-Chair of Gibson Dunn’s Latin America Practice Group. Fernando Almeida has extensive experience advising major international and Brazilian investment banks, corporations and private equity investors in a wide range of cross-border transactions involving Brazil. He has represented various issuers and underwriters in cross-border public and private offerings of equity and debt securities, as well as in private placements and bank financings.  He also has significant experience advising foreign investors in the acquisition of, and joint venture formation with, Brazilian public and private companies, and serves as counsel to Brazilian companies in cross-border business combinations.

September 24, 2019 |
UK Supreme Court Decides Suspending UK Parliament Was Unlawful

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  1. The UK’s highest court has today ruled (here) that Prime Minister Boris Johnson’s decision to suspend (or “prorogue”) Parliament for five weeks, from September 9, 2019 until October 14, 2019, was unlawful. The Supreme Court, sitting with eleven justices instead of the usual five, unanimously found “that the decision to advise Her Majesty to prorogue Parliament was unlawful because it had the effect of frustrating or preventing the ability of Parliament to carry out its constitutional functions without reasonable justification”. It is a well-established constitutional convention that the Queen is obliged to follow the Prime Minister’s advice.
  2. The landmark Supreme Court ruling dealt with two appeals, one from businesswoman Gina Miller and the other from the UK Government. Mrs Miller was appealing a decision of the English Divisional Court that the prorogation was “purely political” and not a matter for the courts. The UK Government was appealing a ruling of Scotland’s Court of Session that the suspension was “unlawful” and had been used to “stymie” Parliament. A link to the full judgment is here.
  3. A key question before the Court, therefore, was whether the lawfulness of the Prime Minister’s advice to Her Majesty was “justiciable”, i.e. whether the court had a right to review that decision or whether it was purely a political matter. The Court held that the advice was justiciable: “The courts have exercised a supervisory jurisdiction over the lawfulness of acts of the Government for centuries”.
  4. The next question was on the constitutional limits of the power to prorogue. The Court decided that prorogation would be unlawful if it had the effect of “frustrating or preventing, without reasonable justification, the ability of Parliament to carry out its constitutional functions as a legislature and as the body responsible for the supervision of the executive”. The Court stated that it was not concerned with the Prime Minister’s motive; the key concern was whether there was good reason for the Prime Minister to prorogue as he did.
  5. The subsequent question related to the effect of the prorogation. The Supreme Court held that the decision to prorogue Parliament prevented Parliament from carrying out its constitutional role of holding the government to account and that, in the “quite exceptional” surrounding circumstances, it is “especially important that he [the Prime Minister] be ready to face the House of Commons.” The Court held that it was “impossible for us to conclude, on the evidence which has been put before us, that there was any reason – let alone a good reason – to advise Her Majesty to prorogue Parliament for five weeks”.
  6. The final question was on the legal effect of that finding and what remedies the Court should grant. The Court declared that as the advice was unlawful, the prorogation was unlawful, null and of no effect; Parliament had not been prorogued.
  7. The Supreme Court’s judgment further explained that “as Parliament is not prorogued, it is for Parliament to decide what to do next.” Almost immediately after judgment was handed down, it was announced that both the House of Commons and House of Lords will resume sitting tomorrow, Wednesday September 25, 2019. Prime Minister’s Questions – usually scheduled for each Wednesday that Parliament is in session – will not take place due to notice requirements.
  8. The UK Government has pledged to “respect” the judgment and the Prime Minister plans to return to the UK from New York, where he is due to address the U.N. General Assembly.
  9. Shortly before Parliament was prorogued, a new law was passed requiring the Prime Minister to seek an extension to the current October 31 deadline for the UK to leave the EU unless Parliament agreed otherwise (European Union (Withdrawal) (No. 2) Act 2019). The Government has asserted that this legislation is defective and continues to insist that the UK will leave the EU on October 31, 2019. The Supreme Court’s judgment does not directly affect the position in respect of the October 31 deadline.

This client alert was prepared by Patrick Doris, Anne MacPherson, Charlie Geffen, Ali Nikpay and Ryan Whelan in London.

We have a working group in London (led by Patrick Doris, Charlie Geffen, Ali Nikpay and Selina Sagayam) addressing Brexit related issues.  Please feel free to contact any member of the working group or any of the other lawyers mentioned below.

Ali Nikpay – Antitrust ANikpay@gibsondunn.com Tel: 020 7071 4273

Charlie Geffen – Corporate CGeffen@gibsondunn.com Tel: 020 7071 4225

Sandy Bhogal – Tax SBhogal@gibsondunn.com Tel: 020 7071 4266

Philip Rocher – Litigation PRocher@gibsondunn.com Tel: 020 7071 4202

Jeffrey M. Trinklein – Tax JTrinklein@gibsondunn.com Tel: 020 7071 4224

Patrick Doris – Litigation; Data Protection PDoris@gibsondunn.com Tel:  020 7071 4276

Alan Samson – Real Estate ASamson@gibsondunn.com Tel:  020 7071 4222

Penny Madden QC – Arbitration PMadden@gibsondunn.com Tel:  020 7071 4226

Selina Sagayam – Corporate SSagayam@gibsondunn.com Tel:  020 7071 4263

Thomas M. Budd – Finance TBudd@gibsondunn.com Tel:  020 7071 4234

James A. Cox – Employment; Data Protection JCox@gibsondunn.com Tel: 020 7071 4250

Gregory A. Campbell – Restructuring GCampbell@gibsondunn.com Tel:  020 7071 4236

© 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 26, 2019 |
New UK Prime Minister – what has happened?

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  1. Boris Johnson has won the Conservative leadership race and is the new Prime Minister of the UK. Having been supported by a majority of Conservative MPs, this week the former mayor of London won a 66% share (92,153 votes) in the ballot of Conservative party members. Although there is some criticism of the fact that the new Prime Minister has been elected by such a narrow constituency, it is the case that most political parties in the UK now select their leaders by way of a members ballot.
  2. As things stand, the UK is due to leave the European Union (EU) at 23:00 GMT on 31 October 2019. Boris Johnson’s new Cabinet, and the 17 related departures, has set a new tone of determination to leave the EU by that date with or without a deal – “no ifs or buts”. Although only 12 of the 31 members of the new Cabinet originally voted to leave the EU, these “Brexiteer” MPs now dominate the senior Cabinet positions. The newly elected President of the European Commission, Ursula von der Leyen, has however indicated she is willing to support another extension to Brexit talks.
  3. In Parliament the Conservatives govern in alliance with the Northern Irish DUP and can only stay in power with the support of the House of Commons. Following defections earlier in the year and the recent suspension of a Conservative MP facing criminal charges, the Government now has an overall working majority of only two MPs (and if, as expected, the Conservatives lose a by-election on 1 August, the Government’s working majority will fall to one). A number of the members of Prime Minister May’s Government who resigned before Boris Johnson took office have made it clear that they will do everything they can to prevent the UK leaving without a deal including voting against the Government. There is therefore a heightened prospect of a general election. This theory is supported by the appointment as Special Adviser to the Prime Minister of political strategist Dominic Cummings who was the chief architect of the campaign to leave the EU in 2016.
  4. There has been some debate about whether the new Prime Minister would prorogue Parliament (effectively suspending it) to prevent it stopping a no deal Brexit. That would undoubtedly trigger a constitutional crisis but, despite the rhetoric, it feels like an unlikely outcome. Indeed Parliament recently passed a vote to block that happening.
  5. It is difficult to tell where the mood of the House of Commons is today compared to earlier in the year when Prime Minister May’s deal was voted down three times. Since then both the Conservative and Labour parties suffered significant losses in the EU election in May. The new Brexit Party which campaigned to leave made significant gains, as did the Liberal Democrats who have a clear policy to remain in the EU. The opinion polls suggest that, if an election was called today, no party would gain overall control of the House of Commons. It is just possible, however, that some MPs on both sides of the House who previously voted against the May deal would now support something similar, particularly to avoid a no-deal exit from the EU.
  6. It may be the case that Boris Johnson, who led the campaign to leave the EU, is the last chance those supporting Brexit have to get Brexit through Parliament. If he fails then either a second referendum or a general election will probably follow. It is not clear what the result of a second referendum would be but it is likely that Labour, the Liberal Democrats and the SNP would all campaign to remain.
  7. The EU has consistently said that it will not reopen Prime Minister May’s Withdrawal Agreement although the non-binding political declaration is open to negotiation. The so-called “Irish backstop” remains the most contentious issue. The backstop is intended to guarantee no hard border between Ireland and Northern Ireland but Boris Johnson is concerned it could “trap” the UK in a customs union with the EU. Boris Johnson claims that technology and “trusted trader schemes” means that checks can be made without the need for a hard border. Others, including the EU, remain to be convinced.
  8. Parliament has now gone into recess until 3 September 2019 and then, mid-September, there will be another Parliamentary break for the two week party conference season. The Conservative Party Conference on 29 September – a month before the UK’s scheduled exit from the EU - will be a key political moment for the new Prime Minister to report back to the party supporters who elected him.
  9. Finally, it is not clear what “no deal” really means. Even if the UK leaves without adopting the current Withdrawal Agreement, it is likely that a series of “mini deals” would be put in place to cover security, air traffic control, etc. A new trading agreement would then still need to be negotiated to establish the ongoing EU-UK relationship. And the issue of the Northern Irish border will still need to be resolved.

This client alert was prepared by Charlie Geffen, Ali Nikpay and Anne MacPherson in London.

We have a working group in London (led by Patrick Doris, Charlie Geffen, Ali Nikpay and Selina Sagayam) addressing Brexit related issues.  Please feel free to contact any member of the working group or any of the other lawyers mentioned below.

Ali Nikpay – Antitrust ANikpay@gibsondunn.com Tel: 020 7071 4273

Charlie Geffen – Corporate CGeffen@gibsondunn.com Tel: 020 7071 4225

Sandy Bhogal – Tax SBhogal@gibsondunn.com Tel: 020 7071 4266

Philip Rocher – Litigation PRocher@gibsondunn.com Tel: 020 7071 4202

Jeffrey M. Trinklein – Tax JTrinklein@gibsondunn.com Tel: 020 7071 4224

Patrick Doris – Litigation; Data Protection PDoris@gibsondunn.com Tel:  020 7071 4276

Alan Samson – Real Estate ASamson@gibsondunn.com Tel:  020 7071 4222

Penny Madden QC – Arbitration PMadden@gibsondunn.com Tel:  020 7071 4226

Selina Sagayam – Corporate SSagayam@gibsondunn.com Tel:  020 7071 4263

Thomas M. Budd – Finance TBudd@gibsondunn.com Tel:  020 7071 4234

James A. Cox – Employment; Data Protection JCox@gibsondunn.com Tel: 020 7071 4250

Gregory A. Campbell – Restructuring GCampbell@gibsondunn.com Tel:  020 7071 4236

© 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 24, 2019 |
Linda Curtis and Barbara Becker Named IFLR1000 Women Leaders for 2019

New York partner Barbara Becker and Los Angeles partner Linda Curtis were named among the IFLR1000 Women Leaders, featuring 300 female attorneys that “are working at the top of their professions in their jurisdictions.” The guide will be published July 31, 2019. Linda Curtis is Co-Chair of the firm’s Global Finance Practice Group.  Her practice focuses on all aspects of corporate finance, including leveraged financings, with a specific focus on acquisition financings. She also represents clients in debt capital markets transactions and other secured and unsecured senior, mezzanine and subordinated financings, and has experience in real estate financings and debt restructurings.  Her clients include private equity firms, commercial lending institutions and public and private companies in a variety of industries. Barbara Becker is Co-Chair of Gibson Dunn’s Mergers and Acquisitions Practice Group.  She advises companies on all significant business and legal issues, including mergers and acquisitions (including domestic and cross-border), spin-offs, joint ventures and general corporate matters. She also advises boards of directors and special committees of public companies.

June 28, 2019 |
Best Lawyers in the United Kingdom 2020 Recognizes 11 Gibson Dunn Partners

Best Lawyers in the United Kingdom 2020 has recognized 11 Gibson Dunn partners as leading lawyers in their respective practice areas: Cyrus Benson – International Arbitration; Thomas Budd – Real Estate Finance; James Cox – Employment Law; Patrick Doris – International Arbitration; Charlie Geffen – Private Equity Law; Penny Madden – International Arbitration; Mitri Najjar – Corporate Law; Philip Rocher – Litigation; Alan Samson – Finance Services, Real Estate Finance and Real Estate Law; Jeffrey Sullivan – International Arbitration; and Steve Thierbach – Capital Markets Law. The list was published on June 28, 2019.