Global law firm White & Case LLP has advised Intesa Sanpaolo S.p.A. on a US$2.5 billion issuance of Yankee bonds under its US$50 billion Medium Term Note Programme.

The issuance consists of US$1 billion 3.375% senior notes due 2023, US$1 billion 3.875% senior notes due 2028 and US$500 million 4.375% senior notes due 2048, issued pursuant to Rule 144A under the US Securities Act.

The White & Case team which advised on the transaction was led by partners Michael Immordino (Milan & London) and Ferigo Foscari (Milan), together with associates Robert Becker, Bart Galvin, Davide Diverio and lawyer Marco Sportelli (all Milan).

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In an op-ed for The Times' legal bulletin, The Brief, London- and Brussels-based White & Case partner Jacquelyn MacLennan writes about how a new opinion could lead to greater rights for same-sex couples in the EU. The opinion comes from Melchior Wathelet, the Court of Justice's advocate-general, in a case brought by a Romanian man and his husband—a US citizen. The couple attempted to move to Romania, but the US husband was refused residence.

The couple challenged this decision before the Romanian courts, with the support of ACCEPT, Romania's leading LGBT+ rights NGO. The Romanian Constitutional Court referred the case to the EU’s Court of Justice. The advocate-general opined that all EU member states must recognize same-sex marriage for the purposes of EU immigration law if a couple is legally married. The Court of Justice will hand down what is likely to be a landmark judgment in the Spring, which it is hoped will pave the way for same-sex married couples to benefit from EU free movement rights. Click here to read more (paywall).

Global law firm White & Case LLP has advised Goldman Sachs Private Capital, as mandated lead arranger and original lender, on the facilities agreement for a term loan facility, multicurrency super senior revolving credit facility and multicurrency uncommitted accordion term loan facility, entered into by Goldman Sachs and Corsair Capital as borrower to part finance the acquisition of RGI S.p.A., an independent software developer of systems and platforms for insurers, agents, brokers and financial consultants.

The White & Case team which advised on the Italian, English and French aspects of the transaction was led by partners Michael Immordino (London & Milan), Iacopo Canino (Milan) and Ben Wilkinson (London), together with associates Stefano Bellani (Milan), Caroline Murphy (London) and Lorenzo Colombi Manzi (Milan).

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Global law firm White & Case LLP has advised J.P. Morgan as Global Co-ordinator, and Banca IMI, Santander, Banca Akros and Kommunalkredit, on a landmark project bond financing for the construction of the Superstrada Pedemontana Veneta toll road in the Veneto region of Italy.

The transaction comprises the issuance of €1.221 billion variable rate senior secured amortizing notes and €350 million step-up subordinated secured notes in an innovative "bond only" capital structure where the junior notes provide a capital cushion during the construction phase.

The road, which is scheduled to be completed in September 2020, will run for 95 km between the cities of Vicenza and Treviso. It is intended to improve connections and reduce congestion along the busy west-east axis in the north of Italy between Milan and Venice.

The transaction is the culmination of more than two years of work and represents:

• the highest value unrated project bond issued for the construction of a toll road;
• the first unrated 'greenfield' (construction phase rather than refinancing) project bond ever and the first project bond of a greenfield infrastructure in Italy; 
• the largest European project bond to be placed without European Investment Bank credit enhancement; and
• one of the first Italian project bonds issued pursuant to Legislative Decree No. 50 of April 18, 2016, part of a package of legislative reforms introduced to facilitate infrastructure investment in Italy.

The notes have been issued pursuant to Regulation S and Rule 144A under the US Securities Act and listed on the regulated market of the Irish Stock Exchange.

The White & Case team which advised on the transaction was led by partner Michael Immordino (Milan & London) and local partner Paul Alexander (Milan). A number of teams across the firm advised on bond documentation, project finance matters, derivatives, Italian securities laws and regulatory issues, including partners Ingrid York (London), Iacopo Canino (Milan), Stuart Willey (London), Gavin McLean (London) and Yoko Takagi (Madrid); associates Kamran Ahmad (London), Bob Lehner (London), Louise Ruggiero (Milan), Davide Diverio (Milan), Alexia Mordacq (Milan), Nate Crowley (London), Ahyoung Koo (London), James Read (London) and Laura Gonzalez (Madrid); and lawyers Sara Nehring (London), Ana O'Sullivan (London) and Olga Primiani (Milan).

A separate team led by counsel Claudio Medeossi (Dubai) advised Bishopsfield as Project Adviser and The Bank of New York Mellon as Trustee, Paying Agent, Escrow Agent and Security Agent, together with associates Greg Pospodinis and Adam Gao (Dubai).

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Money laundering has gone mainstream. The television drama Breaking Bad contained one of the clearest explanations of money laundering ever given. The new series McMafia has highlighted London as a hub for money laundering. The increased prominence in mainstream media reflects the priority put on money laundering by Governments and law enforcement.

A recent interview given by the Director General of the National Crime Agency ("NCA"), Lynne Owens, indicates a greater focus on money laundering investigations in relation to financial services. Ms. Owens indicated that the NCA is pursuing a case against senior bankers in relation to bribery and money laundering.¹ But what of the Financial Conduct Authority’s ("FCA") role in criminal investigations relating to money laundering? This alert discusses the increasing likelihood of the FCA prosecuting regarding money laundering failings.

The FCA – criminal enforcement

The FCA has made it clear that in addition to exercising its supervisory and civil enforcement powers in relation to those it regulates, it may use its criminal powers to prosecute firms and individuals.

The FCA will generally use its civil enforcement powers to target poor AML controls, but if failings are particularly serious or repeated, then the FCA may consider criminal enforcement appropriate.² The FCA is a designated prosecutor in relation to prescribed regulations regarding money laundering along with certain other offences. The FCA is also able to prosecute the substantive money laundering offences as a private prosecutor.³ The FCA may also refer cases of suspected money laundering to other law enforcement agencies.

Potential wide-ranging offence

There is a wide-ranging criminal offence under the money laundering regulations. The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 ("MLR 2017") came into force on 26 June 2017, replacing the Money Laundering Regulations 2007 ("MLR 2007").⁴ MLR 2017 transpose the requirements of the Fourth Money Laundering Directive into national law.

Both sets of regulations set out the requirements that those in the regulated sector (i.e. gatekeepers to the financial system including banks and auditors) need to meet in relation to controls intended to prevent their business from being used for money laundering purposes. These requirements include provisions regarding customer due diligence and policies, controls and procedures in relation to money laundering and terrorist financing. Certain firms also have additional regulatory obligations.

Both sets of regulations contain a criminal offence in relation to the breach of requirements under the regulations (the "Requirements Offence").⁵ The maximum sentence under both sets of regulations is two years and/or an unlimited fine. To date, the Requirements Offence under the MLR 2007 has rarely been pursued.

Looking to the future

Currently, the FCA does not have the power to enter into a deferred prosecution agreement ("DPA") with a corporate. Only the Crown Prosecution Service and the Serious Fraud Office are designated prosecutors for the purposes of the DPA regime. However, the inclusion of various offences under the Financial Services and Markets Act 2000 within the list of specified offences regarding a DPA has been seen as an indication that the FCA may one day gain the ability to enter into a DPA.

The list of specified offences for which a DPA is available also includes several money laundering offences, including the substantive money laundering offences, the failure to disclose in the regulated sector offence and the Requirements Offence.

If the FCA were to become a designated prosecutor for the purposes of the DPA regime, a DPA could be a useful tool for the FCA in relation to sufficiently serious failures in AML controls and a way to send a message to the market that serious failings in the AML sphere can attract serious consequences.

In the meantime, the use of available criminal prosecution powers could be the next trend in AML enforcement. Firms should bear in mind that the FCA can initiate a criminal prosecution in relation to the Requirements Offence. Firms should therefore ensure that they have appropriate systems and controls in place in order to avoid the risk of criminal or civil enforcement arising.

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¹"National Crime Agency boss Lynne Owens: ‘Organised criminals pose a greater threat than terrorists’, The Sunday Times, January 14, 2018.
² See the FCA’s Business Plan for 2017/18.
³R v Rollins [2010] UKSC 39
⁴ The MLR 2007 were effective from 15 December 2007 until 26 June 2017.
⁵ Regulation 86 of the MLR 2017 and Regulation 45 of the MLR 2007.

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The EU has added several individuals and entities to its list of persons subject to an asset freeze and travel restrictions, as part of sanctions targeting the Russian Federation, Venezuela, and the Democratic People's Republic of Korea (DPRK). It has also introduced an exception to the Russian sanctions for a chemical necessary to a joint mission of the European and Russian space agencies.

North Korea: expanded asset freeze; more restricted 'luxury goods'; four sanctioned vessels

On 8 January 2018, the EU updated its list of persons subject to an asset freeze and travel restrictions¹ in order to reflect new sanctions imposed by the United Nations Security Council (UNSC).² The Council added 16 individuals – mainly banking officials – as well as the Ministry of the People's Armed Forces to the list.

In addition to implementing UN sanctions, the EU has also adopted additional autonomous measures. On 22 January it added a further 17 individuals (several of them North Korean diplomats) who were not included in the UN Resolution, but who have nonetheless been targeted by EU sanctions for their involvement in illegal trade and sanctions evasion.³

This tightening of sanctions against the DPRK follows other recent measures taken by the EU in response to that country's nuclear weapons programme. On 13 November 2017, the Council of the EU reviewed and expanded the list of "luxury goods" subject to an import and export ban.⁴ The list has become more inclusive, and goes beyond items traditionally understood as "luxuries", covering goods such as malt beer, any household electronics worth over EUR 50, and shoes or items of clothing worth over EUR 20. Additionally, the EU Council has updated its list of sanctioned ships, following a UN resolution to designate four vessels involved in exporting restricted items from the DPRK.⁵

Venezuela: arms embargo and asset freeze

On 22 January, the Council of the EU decided to include 7 individuals holding official positions in Venezuela on the asset freeze and travel restrictions list, including the Interior Minister, the President of the Supreme Court, and the head of the National Electoral Council.⁶

This follows the adoption, in November 2017, of an arms embargo against Venezuela and of the legal framework necessary to subject individuals to sanctions, but without including targeting anyone at that time. In view of the deteriorating human rights situation in the country, the Council has now decided to expand the sanctions against the regime, and to make use of the powers it gave itself to target individuals.⁷

Russia: exception for ExoMars; addition to asset freeze

On 30 November 2017, the Council of the EU adopted an amendment to the main regulation imposing sanctions on Russia for its role in destabilising Ukraine.⁸ This creates an exception to the arms embargo against Russia for hydrazine – a chemical used in rocket fuel. This is intended to permit certain transactions concerning hydrazine, which is necessary for the flight of the ExoMars carrier module, a joint mission of the European Space Agency (ESA) and the Russian space agency Roscosmos.

On 20 November 2017, the EU added Dmitry Vladimirovich Ovsyannikov, Governor of Sevastopol, to its asset freeze list for his actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine.⁹

¹ Council Implementing Regulation (EU) 2018/12 of 8 January 2018, implementing Regulation (EU) 2017/1509 concerning restrictive measures against the Democratic People's Republic of Korea.
² UN Security Council Resolution 2397 (2017), adopted on 22 December 2017.
³ Council Implementing Regulation (EU) 2018/87 of 22 January 2018, implementing Regulation (EU) 2017/1509 concerning restrictive measures against the Democratic People's Republic of Korea.
⁴ Council Regulation (EU) 2017/2062 of 13 November 2017, amending Regulation (EU) 2017/1509 concerning restrictive measures against the Democratic People's Republic of Korea.
⁵ Council Implementing Regulation (EU) 2018/53 of 12 January 2018, implementing Regulation (EU) 2017/1509 concerning restrictive measures against the Democratic People's Republic of Korea.
⁶ Council Implementing Regulation (EU) 2018/88 of 22 January 2018, implementing Regulation (EU) 2017/2063 concerning restrictive measures in view of the situation in Venezuela.
⁷ Council Decision (CFSP) 2017/2074 of 13 November 2017, concerning restrictive measures in view of the situation in Venezuela; Council Regulation (EU) 2017/2063 of 13 November 2017, concerning restrictive measures in view of the situation in Venezuela.
⁸ Council Regulation (EU) 2017/2212 of 30 November 2017, amending Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia's actions destabilising the situation in Ukraine.
⁹ Council Implementing Regulation (EU) 2017/2153 of 20 November 2017, implementing Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine.

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

Global law firm White & Case LLP has advised the Fosun International Ltd and Beijing Sanyuan Foods Co., Ltd consortium on the financing of its acquisition of St Hubert, a French company in the vegetable fats sector, from European investment fund Montagu Private Equity.

Fosun International Ltd is a privately owned Chinese conglomerate. Beijing Sanyuan Foods Co., Ltd is a Chinese agribusiness company that specializes in dairy products.

In 2012, White & Case also advised the banks on the financing of Montagu Private Equity's acquisition of St Hubert.

The White & Case team in Paris which advised on the transaction was led by partner Denise Diallo with support from associates Roman Picherack, Lycia Alderin, Marie-Alix Charvin, Laure Elbaze and Michel Courtois.

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With miserable Christmas trading figures exacerbating an already challenging climate for UK retailers, a growing number of companies are turning to company voluntary arrangements ("CVAs") as a possible source of respite. Most commonly used by retailers and other UK companies to impose improved lease terms on their landlords, CVAs look set to come back into fashion.

Market Backdrop

The exponential growth of online shopping, continued Brexit uncertainty and a drop in overall discretionary consumer spending¹ appear to be creating a perfect storm for "bricks and mortar" retailers. With the odd notable exception, the UK retail market remains a very difficult place to operate at present. Retailers are discovering that a number of their high street sites are simply no longer viable to operate; certainly not at current rents and lease terms. 2017 saw the first increase for 5 years in the number of UK retailers falling into administration, with the number of larger retailers in administration also up from the previous year².

Largescale CVAs for retailers have been relatively uncommon over the past few years, and retailers that have attempted them, such as BHS, have not always had a happy ending, But given current market conditions, and the fact that reduced footfall is requiring retailers to find ways of cutting costs in order to stay afloat, it will be important for distressed companies, investors and landlords all to remind themselves about CVAs, how they operate, and their impact on stakeholders.

CVAs – a Refresher

A CVA is a compromise or arrangement between a company and its creditors, given effect under the Insolvency Act 1986. Although not the most common restructuring tool in the UK, they are often considered when a company has a large number of lease liabilities which it needs to restructure.

CVAs are voted on and bind all unsecured creditors of a company (with the exception of secured creditors who do not consent). They are supervised by an insolvency practitioner, but there are no costly court hearings (as are required by a scheme of arrangement), and the CVA is seen as more "acceptable" by many (although perhaps not by landlords) than a formal administration or liquidation process.

The directors of the company, along with their advisers, will draw up a proposal for the restructuring to be given effect by the CVA (commonly a resetting of lease terms), by reference to independent valuation evidence so as to ensure fairness. All creditors then vote together to elect to approve or reject the proposal – there is no concept of different "classes of creditors", as there is in a scheme of arrangement. However, different groups of creditors can be treated differently under a CVA. Often, CVAs will categorise creditors, such as landlords, into several different groups.

Different Treatment

There is no hard and fast rule as to how creditors must be treated in a CVA, and each proposal will be tailored to the specific needs of the company in question. But based on recent practice, landlords and leases are commonly split into 3 different categories under a CVA. At its most straightforward, the category split could look like this:

• Group A – profitable stores – leases left intact, at current rents, or subject only to minor amendment.
• Group B – marginal stores – have substantial renegotiation of the leases, including sizeable rent reductions.
• Group C – unprofitable stores – these will be closed, and the premised returned to the landlords, albeit preferably with some agreement in terms of compensation/retention of rent by the landlords.

A structure along these lines, with a "green/amber/red" approach to the lease portfolio, is contemplated under the CVA currently awaiting approval by the creditors of Byron Hamburgers Limited ("Byron"). As part of a proposed restructuring to facilitate new investment in the Byron business, the 76 leasehold sites occupied by Byron have been split into 3 categories. The majority, 51, are Category 1 sites where the leases are proposed to be maintained at current rents. 5 Category 2 leases are considered viable, but at a reduced rent, with landlords taking a c.33% haircut. The final 20 Category 3 sites have a proposed 45% haircut, which is only guaranteed for 6 months. That 6 month period is intended to buy Byron time to agree a longer term outcome for any future trading of the Byron business from those leases.

CVA voting

Unlike for schemes of arrangement or voting among lenders and bondholders in capital restructurings, the company will not commonly seek to "lock up" or otherwise seek comfort from creditors that the voting threshold will be achieved before launching the CVA: the first landlords are likely to be aware of a proposal is when it is formally launched by the company.

In order for the CVA to be successful, it must be approved by a majority in number and 75% by value³ of the creditors voting at the creditors’ meeting to consider the CVA proposal. That approval binds all creditors of the company in the CVA. Provided that the company adheres to the terms of the CVA, the arrangements with landlords are amended to reflect the terms of the CVA, and there is no ability for landlords to forfeit leases or take proceedings against the company on the basis of the previous lease terms. Any other recourse that the landlord may have had, such as to a rent deposit or against a guarantor, is also subject to the terms of the CVA.

Although in the past it was common to hold physical meetings for creditors to vote on a CVA proposal, more recently (and particularly with recent legislative amendments to facilitate electronic voting) the practice tends to be for votes to be solicited by email or online, so that in practice the company is likely to know well in advance whether it is going to achieve the necessary thresholds.

Challenge to a CVA

Once approved by creditors, the only challenge to the CVA is an application to court within 28 days of the creditors’ meeting on the basis of "unfair prejudice" or "material irregularity". Both types of challenge are rare. Material irregularity connotes some type of "procedural" error – e.g. no notice of the meeting having been given to a number of substantial creditors. It is not usually sufficient that a single creditor did not receive notice.

"Unfair prejudice" is the more substantive form of challenge, and, if a challenge is brought on this ground, the court will consider whether any creditor or group of creditors has been unfairly prejudiced by the CVA. It is a high threshold to meet, as courts are generally supportive of a restructuring that has been agreed by a requisite number of the company’s creditors.

Courts will typically consider any unfair prejudice application by considering the CVA proposal on both a "horizontal" and "vertical" basis. "Horizontal" meaning that landlords must be treated fairly as amongst themselves (i.e. landlords with equivalent quality of leases should receive equivalent treatment), and "vertical" meaning that the landlords must receive a better return than they would have done if the company had immediately been placed in administration (intended to save a

business) or liquidation (the death knell for a company). Given the usual outcome for creditors on a retail insolvency, and provided the company and its advisers have taken care to establish a level playing field as between individual landlords, this should be relatively straightforward to achieve.

Parties contemplating a CVA should also be aware that all unsecured creditors receive a vote in the process, even if their own liabilities are not being restructured. So creditors such as HMRC and the Pension Protection Fund (the "PPF") need to be factored in to the voting: they may well have their own requirements (not necessarily purely commercial) that may form conditions to any support of the CVA.

Practical Examples

Conclusion

Although a CVA will not be relevant in all circumstances, UK retailers in particular, as well as other UK businesses with large lease portfolios such as hotel businesses and car park operators, may well be advised to consider a CVA as a potential option to right-size their leases and help with liquidity and overall profitability. Already in 2018 Byron has launched a CVA, and there is increasing speculation that large retailers such as House of Fraser and New Look may follow suit.

Corporates, landlords and lenders could all benefit from taking a look at their own businesses and customers and consider whether a CVA may be a potential solution (for a company) or a potential problem (for a landlord).

Click here to download PDF.

¹ British Retail Consortium-KPMG Retail Sales Monitor figures recorded a decline in non-food retail sales of 2.1% over the 12 months to October 2017.
² The Telegraph, 8 January 2018: "Retail casualties rise for the first time in five years".
³ Note that this does not require an absolute majority of 75%; rather 75% of those who vote on the proposal. It should be noted also that, to the extent there are "connected" creditors – e.g. directors, shareholders, intra-group companies – an additional threshold must be met; 50% by value of the "unconnected" creditors voting on the CVA must also vote in favour.

Jennifer McMahon, a Professional Support Lawyer at White & Case, assisted in the development of this publication.

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

Bitcoin and other cryptocurrencies remain hot topics among investors, but recent regulatory rulings have contributed to big price drops and raised questions about their long-term viability. South Korea, one of the largest hubs for cryptocurrency activity, announced that it would ban all anonymous cryptocurrency transactions and require banks to tie real names to all trading. The ban attempts to prevent cryptocurrencies from being used as money laundering fronts and a way to dodge taxes.

London-based White & Case partner Jonathan Pickworth said: "Blocks on cryptocurrency transfers are symptomatic of an increasing focus on money-laundering by the authorities and, consequently, financial institutions. Digital currencies are an attractive vehicle for financial crime because of their relative opacity which tends to make it easier to launder huge sums of money around the cryptosphere without detection." Click here to read more (paywall).

Global law firm White & Case LLP has strengthened its Global Banking Practice with the arrival of Alessandro (Alex) Nolet as a new partner in Milan.

"Our leading Italian banking team provides clients with an integrated Italian, English and US law service, and in the past three years has advised on around 25 bank finance deals with a value of nearly €24 billion," said White & Case partner Eric Leicht, Head of the Global Banking Practice. "Alex adds additional depth to our team in Milan and brings a practice that broadens the range of financing services we provide our clients."

Nolet, who joins the Firm's Global Banking practice and is qualified to practice in Italy, England and Wales and Hong Kong, focuses on international finance and restructuring. He advises lenders, corporates and private equity firms on a broad range of debt instruments, including a variety of loan facilities, high yield bonds and related derivatives. Nolet has more than 13 years of experience and joins White & Case from Cleary Gottlieb, where he was a senior attorney from 2015, and from 2014 was based in Hong Kong where he helped build the firm's Asia-Pacific finance practice.

"Alex is a very versatile finance lawyer with extensive experience across a variety of banking, leveraged finance, private placement and restructuring transactions," said Michael Immordino, White & Case Executive Partner in the Milan office. "His arrival will provide us with greater capacity in Italy on English law-governed Italian deals, and further strengthen our relationships with international and Italian banks, financial institutions, alternative credit funds and private equity firms."

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87%

The rise in leveraged loan value in 2017 compared to 2016

 

While geopolitical risks dominated headlines in 2017, the European leveraged debt market did its best to ignore the vagaries of Brexit negotiations, the unpredictable Trump Administration and a spate of continental elections. Instead, issuers took advantage of attractive market conditions, while investors continued their search for higher yielding assets as the European Central Bank (ECB) continued to put money into the system with interest rates hovering at zero.

While election victories for moderate candidates in France and the Netherlands brought greater stability to the continent, the most important incentive may have been the improving global economic picture.

Europe continued its strong recovery, with the International Monetary Fund's (IMF) November Regional Economic Outlook showing that the continent had become an engine of global trade. According to the IMF, the euro area economy is on track to grow at its fastest pace in a decade this year, with real gross domestic product (GDP) forecast at 2.2 percent— substantially higher than the 1.7 percent estimates made in the spring. The EU economy was expected to outstrip expectations with robust growth of 2.4 percent in 2017, up from 1.7 percent in 2016. However, unlike in the past, the ECB is holding fire, and interest rates are not expected to increase until mid-2019. This is in contrast to the UK and US, which have both begun a slow and steady path back to what may be recognised as monetary normalcy.

Meanwhile, US GDP expanded at a 3.1 percent rate in the second quarter, having dipped in the first quarter, and at 3.2 percent in the July to September period, beating analyst expectations of 2.5 percent.

The US and European markets continue to converge. Europe has adopted many of the same practices as the US in terms of leveraged loan market practice, execution and documentation.

 

Up, up and away

Issuance across both the leveraged loan and high yield bond markets got off to a strong start, and the momentum continued through the majority of 2017.

While initial predictions for 2017 were for a swing to the term loan B leveraged loan market, as the year began high yield proved to be a resilient product choice. Leveraged loan deals reached €282 billion in 2017, topping the €151 billion posted in 2016. It was a similar story for high yield bonds, which saw issuance at €114 billion, surpassing the 2016 figure of €86 billion.

While loans kept pace through the year, high yield activity reduced somewhat in the third quarter. However, the pause was temporary and attributed to market participants catching their breath and preparing for the next wave of transactions in the fourth quarter.

Markets benefitted from a decent pipeline of leveraged buyout (LBO) deals, but there were not enough event-driven deals to meet demand. As with last year, the real impetus was re-pricings and refinancings, as companies looked to lock in funding and push out maturities. These accounted for 55 percent of leveraged loan issuance by value, while 45 percent emanated from new money. This represented an increase from last year's figures where the refinancing component comprised 51 percent of the total tally and a substantial jump from the 38 percent reported in 2015.

Investor appetite was reflected in the strong demand for the Italian telecom group Wind Tre's issue, which was the largest refinancing transaction of the year. It came to the market with €7.3 billion worth of high yield senior secured notes and €3.4 billion worth of loans.

Leveraged loans retain the crown

As in the past couple of years, leveraged loans have trumped high yield bonds, although bonds fought back toward the year end. Loans comprised 71 percent of leveraged debt issuance in 2017 while high yield bonds accounted for 29 percent, according to Debtwire research. This was partly driven by the buoyant demand for collateralised loan obligations (CLO), which not only offer better risk-adjusted returns than other fixed income strategies but whose floating rate notes offer protection against a rising rate environment. Borrowers have tended to prefer leveraged loan structures because they do not require public reporting and often are cheaper to repay in an exit scenario, even though their covenant protection may be tighter in certain areas.

Creditflux data showed that European CLO issuance jumped to €7.7 billion in the fourth quarter of 2017—up 54 percent for the same period in 2016. Refinancings and re-sets, which were the main factors, amounted to €2.1 billion and €2.4 billion respectively, during the quarter. Re-set volume for 2017 came in at €13.8 billion, while refinancings stood at €11.4 billion.

71%

The proportion of leveraged loan issuance in 2017

55%

The percentage of leveraged loans accounting for refinancing in 2017—up from 51 percent in 2016

 

US issuers continue to cross pond

Another significant trend is the steady march of US borrowers crossing the Atlantic to diversify their investor base and take advantage of the lower borrowing costs available in the European market. The migration started around two years ago, and reverse Yankee loans have continued their upward climb, reaching €24.8 billion while corresponding bond issuance was €13.2 billion. This represents a year-on-year increase of 116 percent for reverse Yankee loan issuance and 43 percent for reverse Yankee bond issuance. As an example, in September, data centre operator Equinix tapped into the market for €1 billion after initially seeking €250 million.

Come together

Meanwhile, the US and European markets continue to converge. Europe has adopted many of the same practices as the US in terms of leveraged loan market practice, execution and documentation.

The spotlight increasingly has been turned on the so-called 'cov-lite' structures (loans that have bond-like incurrence covenants, rather than traditional and more restrictive maintenance covenants). Over the past three years, they have become incorporated into the European fabric, as the market has deepened with a broader and more diverse issuer as well as investor base. For more on cov-lite structures, see Lite for life.

Moreover, loan investors have become more open to looser covenants in exchange for higher returns (in relation to other asset classes) since the ECB launched its corporate-sector purchase programme last May in an attempt to revive inflation. This only served to dampen investment in corporate debt, while the quantitative easing programme introduced in March 2015 has kept government bond yields depressed.

Although there has been some disquiet over this type of documentation, low default levels and accelerating global growth have helped ease concerns. Equally as important, the average leverage on new leveraged loan deals remains below the pre-crisis peak, while the average equity contribution in buyouts is higher than the roughly 40 percent seen between 2013 and 2015. Both factors act as positive forces on recovery rates. In addition, supply-and-demand dynamics, not changes in credit quality, are the main underlying forces, as sponsors and companies are pushing for similar terms they had been receiving from issuing high yield bonds in the post-crisis resurgence of the loan market.

However, there are still some distinct differences between the two regions. The covenant quality protection is somewhat tighter in Europe than in the US, while European leveraged loan borrowers want greater control and are imposing tougher restrictions on which investors can hold debt in portfolio companies. This is typically to prevent distressed or similar investors purchasing debt in a workout. The US, by contrast, is more borrower friendly and the restrictions on the transferability of debt are typically less stringent.

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European leveraged debt lifts off

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© 2018 White & Case LLP

39%

The rise on the value of term loan B issuance compared to 2016

 

As the asset class has grown in popularity, the average leveraged loan size in Europe has leapt up. In 2017, it grew to €782 million—up from €705 million in 2016 and €586 million in 2015.

On the refinancing front, one of the more notable deals was the aforementioned WindTre deal. As for M&A-inspired transactions that grabbed the headlines, one standout was UK Micro Focus International's €7.86 billion issuance that backed its acquisition of Hewlett Packard Enterprise's software business.

The continued popularity of cov-lite deals reflects the shifting balance of power between borrowers and lenders in an era of looser monetary policy and lower interest rates.

 

Issuers vs investors

To date, the flex activity—when pricing on a leveraged loan is cut or increased during the syndication process, depending on investor demand—demonstrates that this is very much an issuers' and sponsors' market. In 2017, downward flexes have outpaced investor-friendly upward flexes by a ratio of nearly 5:1 and in the fourth quarter by 7:1. Moreover, borrowers seem to have the technical upper hand due to the absence of original issue discounts and benchmark floors that have moved lower.

Against this competitive backdrop, it is no surprise that spreads and yields have tightened across the asset classes. The average weighted margin for first-lien institutional loans stooped to their lowest levels in several years at 346 bps versus 414 bps in 2016. The same descent occurred in yield-to-maturity, which came in at 4.3 percent in 2017. The spreads widened in the third quarter, with prices firming to 370 bps up from 355 bps in the second quarter, before tightening to 322 bps in the fourth quarter.

As in the underlying loan market, CLO spreads have come under pressure across the stack in each quarter this year. CLO AAA spreads tightened to an average of 77 bps in the fourth quarter of 2017, ranging from 72 bps to 85 bps on individual deals. Spreads on the other liability tranches have followed a similar trend, reaching their lowest level of the year in the fourth quarter, with AA tranches averaging 123 bps most recently and BB tranches at 510 bps.

Risk and refinancing revival

The search for yield has also meant a shift towards riskier credits, with 62 percent of leveraged loans which are rated B+ and below compared to 53 percent last year. It is a similar development on the bond side, with 43 percent of rated credits at B+ or lower, up from 30 percent a year ago.

Term loan B (TLB) has also gained a wide following, with issuance of €92.6 billion in 2017 exceeding the €55.1 billion worth of deals done in 2016. TLB cov-lite have been a particular favourite, with €74.1 billion coming onto the market, a substantial hike from the €29.4 billion seen last year.

Although refinancing has been the most popular theme, M&A volume has also been supportive, with healthy deal flows that have already exceeded last year's level— jumbo loans have been a major feature of 2017. This is reflected in Debtwire's figures, which show that leveraged loans emanating from M&A activity (excluding LBOs) were worth €35.7 billion in 2017 compared to the €16.8 billion in 2016. Meanwhile, high yield bond issuance for M&A (excluding LBOs) was €7.8 billion, up from €4.7 billion last year.

Research from Debtwire also found that the average total adjusted leverage ratio for the deals it analysed was 5.3x, while M&A transactions came in at 5.8x. On a net adjusted level, leverage averaged 4.9x overall and 5.6x for M&A deals. This is in line with the ECB guidance, issued earlier in the year, which stated that leverage ratios should not exceed six times.

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European leveraged debt lifts off

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Although there will be turbulence next year, the big difference is the improved global economic picture. This is reflected in the IMF's November report, which raised growth forecasts to 3.6 percent this year and 3.7 percent in 2018.

 

The momentum is set to continue into 2018, although the dynamics could change on the back of rising interest rates in the US and UK. The steady stream of refinancings could ebb, although the European loan market is expected to remain an attractive market because the ECB has no plans to raise interest rates until mid-2019. It is gradually halving its monthly bond buying programme to €30 billion, which means there will still be plenty of liquidity in the system.

Solid fundamentals

However, any slowdown in refinancing is likely to be offset by a robust pipeline of M&A deal flow; strong CLO demand; broad investor appetite for leveraged loans; and a positive macroeconomic outlook across most of Europe, according to a report from Moody's released in November. In addition, the liquidity profile in the EMEA non-investment-grade universe should be solid next year, while the European default rate is likely to stay below 2 percent. This is due to improving credit quality, positive economic fundamentals and industry outlooks. Other contributing factors include low refinancing risks, stability in commodity prices and a relatively low high-yield spread. There may be defaults, but they will be isolated and occur among companies vulnerable to event risks or in weak sectors.

Market participants are also optimistic on the outlook for both US and European high yield debt due to an improving global economy, which has increased the likelihood of more upgrades than downgrades in ratings.

New rules

Regulations could take their toll, especially the ECB's guidance on leveraged transactions, which is being introduced to rein in risky bank lending and is similar to the US Leveraged Lending Guidelines introduced in 2013. While some details are clear, including the definition of leveraged transactions as all types of loans or credit exposure with leverage of more than four times total debt to EBITDA, many questions are still outstanding. The most notable are the definition of total debt and the impact of the regulation on acquisition finance and banks' internal systems due to the introduction of a stricter 90-day limit for syndicating deals.

In addition, concerns persist over the statement that highly leveraged loans with leverage of six times total debt to EBITDA should remain exceptional, because many loans could fall into this category without further clarification.

One of the main issues is that the rules could create an uneven playing field in the leveraged finance space. For example, European central banks may put their own spin on the interpretation and implementation, while a disproportionately large number of higher leveraged transactions could be undertaken by banks not governed by the ECB's guidance. These range from institutions that do not participate in the Single Supervisory Mechanism (SSM) to those that are not regarded as 'significant' by the ECB and non-bank lenders. If this scenario materialises, it is unclear how regulators and supervisors will react. However, it is unlikely that the ECB would expand the number of institutions it regulates.

An optimistic outlook

Although there could be political headwinds next year, the big difference is the improved global economic picture. This is reflected in the IMF's October report, which raised forecasts for global growth to 3.6 percent this year and 3.7 percent emerging Asia, emerging Europe and Russia.

The picture has not been this positive in Europe for ten years. Leveraged loans and high yield bonds will also benefit from strong investor appetite, low default rates, improved industry outlooks and a relatively low high yield spread.

Demand is expected to remain firm for loans, as the Federal Reserve lifts interest rates further and central banks begin winding down stimulus. However, in the US, all eyes will be on the possible repeal of the US Leveraged Lending Guidelines, which were implemented in 2013 to curb systematic risk in the banking sector by limiting their ability to underwrite highly leveraged loans. Yet this did not dampen investor appetite, and there is a view that relaxing the regulations could shift underwriting volume back to the investment banks, which potentially could lead to larger M&A-related loans.

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European leveraged debt lifts off

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© 2018 White & Case LLP

Loans and high yield bonds make a comeback as economic vitality breeds confidence among investors and issuers

Global law firm White & Case LLP has advised Esselunga S.p.A. on its debut €1 billion Eurobond issuance in two tranches to institutional investors.

The first tranche of notes has an aggregate principal amount of €500 million, maturity at 2023 and a 0.875% coupon. The second tranche has an aggregate principal amount of €500 million, maturity at 2027 and a 1.875% coupon. The offering was made pursuant to Rule 144A and Regulation S under the Securities Act. The notes will be listed on the Luxembourg Stock Exchange.

The White & Case team which advised on the Italian and English law aspects of the transaction was led by partners Michael Immordino (Milan & London) and Ferigo Foscari (Milan), together with associates Alessandro Picchi and Louise Ruggiero and lawyer Charles English (all Milan). Pirola Pennuto Zei & Associati partners Francesco Mantegazza and Roberta Pirola advised Esselunga on tax aspects.

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Global law firm White & Case LLP has advised Gamenet Group S.p.A. on its initial public offering on the STAR Segment of the Milan Stock Exchange of 34.8 percent of the company's ordinary shares.

Gamenet Group S.p.A. is one of the leading gaming operators in the regulated gaming sector in Italy. The company's selling shareholder is TCP Lux Eurinvest S.à r.l., which is controlled by Trilantic Capital Partners IV Europe.

Banca IMI, Credit Suisse and UniCredit Corporate & Investment Banking acted as joint global coordinators and joint bookrunners. Banca Akros acted as co-lead manager.

The White & Case team which advised on the transaction was led by partners Michael Immordino (London & Milan) and Ferigo Foscari (Milan), together with associates Piero de Mattia, Robert Becker, Alessandro Picchi, Fabrizia Faggiano, Nghiem Nguyen, Lorenzo Colombi Manzi and lawyer Alessandro Piga (all Milan).

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Global law firm White & Case LLP has advised Banca Farmafactoring S.p.A. on the issuance of €200 million floating rate notes due 2020, pursuant to Regulation S under the Securities Act.

The Notes are listed on the Regulated Market of the Irish Stock Exchange and the issuance represents the first unrated floating rate note issued by a bank on the European market.

Banca Farmafactoring is the leader in Italy in the factoring market, specializing in the management and without-recourse factoring of receivables issued by suppliers of the Italian National Health Service and Public Administration. Banca Farmafactoring Banking Group is active in Italy, Spain, Portugal, Poland, Czech Republic, Slovak Republic and Greece.

The White & Case team which advised on the Italian and English law aspects of the transaction was led by partners Michael Immordino (Milan & London) and Ferigo Foscari (Milan), and local partner Paul Alexander (Milan), together with associate Davide Diverio and lawyer Olga Primiani (both Milan).

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Global law firm White & Case LLP continues to strengthen its Global Commercial Litigation Practice by appointing Hannah Field-Lowes as a new partner in London. Field-Lowes joins White & Case from Weil, Gotshal & Manges, where she was co-head of the International Dispute Resolution department in London. Hannah also played key roles in the firm's diversity efforts as Vice-Chair of the Weil Global Diversity Committee and Head of London Diversity and Inclusion Committee.

"Hannah's appointment strengthens our disputes capabilities in London, as we grow the practice globally in line with our 2020 vision," said White & Case partner Glenn Kurtz, Head of the Global Commercial Litigation Practice. "Hannah's extensive experience advising on complex cross-border disputes reinforces our commitment to providing our clients with the strategic counsel and execution they require."

Field-Lowes has represented clients in contentious matters across the private equity, financial and technology industries. As previously, her practice at White & Case will focus on managing financial, intellectual property, shareholder and general commercial disputes, particularly breaches of contract, misrepresentation, jurisdictional issues, regulatory investigations and contentious tax matters.

"Hannah's wealth of experience advising multinational companies in complicated shareholder and M&A disputes, technology and tax litigation will enhance our existing offering to our private equity and technology clients when they engage in strategically important litigation", said White & Case partner Charles Balmain, Regional Section Head, EMEA Disputes.

Oliver Brettle, London-based member of the Firm's Executive Committee, said: "London's status as a global financial centre and the need for expertise in English law as it applies to cross-border dispute resolution, are key reasons why the expansion of our disputes practice globally, and in London in particular, is a crucial part of the Firm's 2020 strategy."

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The UK Government has continued to develop the UK's existing anti-money laundering ("AML") framework, both in response to EU driven initiatives, but also as part of its own national strategy. The Criminal Finances Act 2017¹ ("CFA") has significantly bolstered the UK regime and reformed the suspicious activity report ("SAR") regime to allow for the voluntary sharing of information in connection with suspicions of money laundering in the regulated sector², which may then lead to the filing of a joint SAR (or 'Super-SAR') with the National Crime Agency ("NCA") and potentially provide more useful intelligence to the NCA. This alert discusses the introduction of Super-SARs via a case study.

Background

The volume of SARs filed in the UK has been increasing year-on-year. The NCA's 2017 SARs Annual Report states that the NCA received 419,451 SARs between October 2015 and September 2016. There are concerns that the volume of SARs has become unmanageable and that a large number of "defensive" SARs are being filed, which have little utility for the NCA, but are a product of the current framework under the Proceeds of Crime Act 2002 ("POCA"). The UK Government is considering further amendments to the current POCA regime³, but in the meantime, the new Super-SAR regime is a mechanism for consolidated reports to be made to the NCA. This will allow the NCA to examine several stages of a money laundering scheme without extensive cross-referencing. The Super-SAR regime is expected to facilitate the sharing of information within the Joint Money Laundering and Intelligence Taskforce ("JMLIT"), a partnership that has been set up between certain firms in the financial sector and UK law enforcement. JMLIT has been seen as a success.

The New Regime

The existing 'failure to disclose' offences under POCA remain in place under the new regime.⁴ These offences impose obligations on firms in the regulated sector ("Regulated Firms"), their employees and their nominated officers (i.e. those nominated to receive internal reports such as the Money Laundering Reporting Officer "MLRO") to make an internal or external disclosure in certain circumstances. The rationale for these offences, and related legislative AML requirements for Regulated Firms, is that those in the regulated sector are gatekeepers to the financial system and are therefore required to protect it.

The CFA amends POCA⁵ to set out procedures for: (i) submitting a disclosure request to a Regulated Firm ("Disclosure Request"); (ii) responding to a Disclosure Request; and (iii) submitting a report to the NCA jointly with another Regulated Firm i.e. a Super-SAR.⁶ The new regime is complicated and the drafting within the amended sections of POCA is not clear.

Submitting a Disclosure Request

A Disclosure Request can only be made by either an NCA authorised officer, or by a regulated firm⁷ (a "Requesting Firm").⁸ The recipient of the Disclosure Request must also be a firm that is carrying on a business in the regulated sector as a relevant undertaking (the "Recipient").⁹

All Disclosure Requests must contain the following:¹⁰

1. A statement that the request is made in connection with a suspicion that a person is engaged in money laundering and identify the person suspected (if known);

2. A description of the information that is sought from the Recipient; and

3. Identify the person or persons to whom it is requested that the information is disclosed.

Additionally, where the Disclosure Request is made by a Requesting Firm, rather than the NCA, it must also:¹¹

4. Set out the grounds for the suspicion that a person is engaged in money laundering; and

5. Provide such other information as the person making the Disclosure Request thinks appropriate for the purposes of enabling the Recipient to determine whether the information requested ought to be disclosed.

Where a Disclosure Request is made by a Requesting Firm, they must also make a notification to the NCA (the "Required Notification"),¹² which discharges the Requesting Firm's disclosure obligations under section 330 and the nominated officer's obligations under 331 POCA.¹³

This Required Notification to the NCA must:¹⁴ (a) state that a Disclosure Request has been made; (b) specify the firm to whom the Disclosure Request was made; (c) identify any persons (if known) suspected of being engaged in money laundering, in connection with the Disclosure Request; (d) provide all such other information as would be required for making a disclosure to the NCA in filing a traditional SAR¹⁵, in particular, the information which forms the basis for such knowledge or suspicion, and the whereabouts of the laundered property (if known).¹⁶

Responding to a Disclosure Request

Having received a Disclosure Request, the question for the Recipient is whether or not to disclose information, as the regime is voluntary rather than mandatory. The Recipient may disclose information, if the following conditions are met:¹⁷

1. Condition 1 is that:

(a) the Recipient is a Regulated Firm;

(b) the information on which the disclosure is based came to the Recipient in carrying on that regulated business; and

(c) the person (or persons) to whom the information is to be disclosed is also a Regulated Firm.

2. Condition 2 is that:

(a) an NCA authorised officer has requested the Recipient to make the disclosure; or

(b) the person to whom the information is to be disclosed (or at least one of them) has requested the Recipient to do so.

3. Condition 3 is that, before the Recipient makes the disclosure, the Required Notification, as described above, has been made to the NCA.

4. Condition 4 is that the Recipient must be satisfied that the disclosure will or may assist in determining any matter in connection with a suspicion that a person is engaged in money laundering.

POCA now states that a voluntary disclosure made in good faith by a Regulated Firm does not breach an obligation of confidence owed by the person making the disclosure, or any other restriction on the disclosure of information, however imposed.¹⁸ However, a relevant disclosure may not include information obtained from a UK law enforcement agency, unless that agency consents to the disclosure.¹⁹

Making a Super-SAR

Following the disclosure of information by the Recipient in response to a Disclosure Request, the Recipient and the Requesting Firm may decide to produce a joint disclosure report (i.e. a Super-SAR). A joint disclosure report is²⁰:

1. A report to an NCA authorised officer;

2. Made jointly by the Recipient and the Requesting Firm (as defined above and potentially with others to which the Recipient has disclosed information);

3. Prepared after the making of a disclosure by the Recipient to the Requesting Firm, as described above;

4. Sent before the end of the 'applicable period', which means before the expiry of: (1) a period specified by the NCA if it made the request; or (2) 84 days from the day on which the Required Notification to the NCA was made; ²¹ and

5. A report which satisfies the following content requirements:²² (a) explaining the extent to which there are continuing grounds to suspect that a person has been engaged in money laundering;

(b) identifying that person;

(c) setting out the grounds for the suspicion; and

(d) providing any other relevant information.

Implications

As discussed above, the new information sharing scheme was introduced with the aim of improving the provision of SAR intelligence by providing consolidated information to the NCA. It remains to be seen how effective this will be in practice:

• The new provisions, absent regulatory guidance, are voluntary and there is no legal obligation for Regulated Firms to make Disclosure Requests or submit Super-SARs. From a practical perspective, the POCA SARs regime is already onerous for Regulated Firms. The new legislative provisions add to the list of points for Regulated Firms to consider in this context.
• The new provisions are complex and not user-friendly.
• There are concerns that the sharing of information under the new regime may have data protection implications.
• In practice, the initial use of the Super-SARs regime may be driven by JMLIT, absent regulatory guidance applicable to non-members of JMLIT. It will be interesting to see if future NCA SARs Annual Reports summarise how many Super-SARs have actually been filed.

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¹ For more detail on other aspects of the Criminal Finances Act 2017, see the White & Case Alert: Facilitating tax evasion: how to avoid being unwittingly caught by the Criminal Finances Act 2017.
² As defined by Schedule 9 of POCA, per section 339ZG(9) POCA.
³ United Kingdom Anti-Corruption Strategy 2017-2022.
⁴ Sections 330 and 331 of POCA.
⁵ Section 11 of the CFA inserts new sections 339ZB to 339ZG into POCA.
⁶ This alert focuses on money laundering, but the CFA has also made corresponding amendments to the counter-financing of terrorism framework under the Terrorism Act 2000. See sections 21CA to 21CF of the Terrorism Act 2000.
⁷ Or "persons" where a joint request is made.
⁸ Sections 339ZB(2)(c) and 339ZB(3) POCA.
⁹ Section 339ZB(2)(a) POCA.
¹⁰ Section 339ZC(1) POCA.
¹¹ Section 339ZC(2) POCA.
¹² Section 339ZC(3)(b) POCA.
¹³ Section 339ZD(2) POCA – though note the limitations within section 339ZE POCA.
¹⁴ Section 339ZC(5) POCA.
¹⁵ Under section 330 POCA.
¹⁶ Sections 339ZC(5) and 330 POCA.
¹⁷ Section 399ZB(2) to (5) POCA.
¹⁸ Section 339ZF(1) POCA.
¹⁹ Section 339ZF(2) POCA.
²⁰ Section 399ZD(4) POCA.
²¹ Section 339ZD(6) POCA.
²² Section 339ZD(5) POCA.

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

In its full-year League Tables for 2017, Bloomberg has ranked White & Case the number 1 law firm for advising on equity offerings and IPO transactions in the EMEA (Europe, the Middle East and Africa) region. Specifically, Bloomberg ranked White & Case:

• #1 for EMEA Equity Offerings, Manager Advisor, by deal count
• #1 for EMEA Equity Offerings, Issuer Advisor, by deal count
• #1 for EMEA IPO, Manager Advisor, by deal count
• #1 for EMEA IPO, Issuer Advisor, by deal count

Bloomberg's recognition of White & Case's top ranking follows a record 2017 for EMEA IPO activity at White & Case.

White & Case has also ranked number 1 for EMEA equity offerings and EMEA IPOs for the cumulative period 2014–2017.

"The firm has undertaken a deliberate program of strategic expansion of its equity capital markets capabilities over the past years," says Philippe Herbelin, head of the Firm's Capital Markets Practice in EMEA. "We have expanded our teams in the UK, France, Germany, Italy, Spain, the Nordics, Egypt, United Arab Emirates and the wider region in recent years and have become market leaders in these countries. Our 2017 performance proves that it was a thoughtful investment."

In 2017 the White & Case team advised on a full spectrum of Equity Capital Markets transactions ranging from IPOs (including SEC-registered IPOs), all forms of secondary offerings (including ABBs, block trades, rights offerings, fully marketed offerings and PIPEs) and equity-linked offerings. The Firm advised clients from 21 EMEA countries on 88 transactions listed on 19 EMEA stock exchanges, raising approximately US$37 billion.

"Our experience spans PE exits, privatizations, various forms of capital increases and an increasing number of cross-border equity offerings," says Michael Immordino, Partner in the Firm's Capital Markets Practice. "Our heritage, scale, complimentary full service product offering, US/English law bench and extensive European network make us ideally placed to service our clients' needs."