April-13-2016 in Banking & Financial Services
The financial downturn of recent years was an opportunity for Ireland’s financial institutions to re-set their balance sheets, selling non-performing loans and property assets amounting to tens of billions of euro. Many of the acquirers were private equity funds who were new investors in the Irish market. With the market now moving into a new phase, some investors are formulating their exit strategies. Success depends on three key factors:
- ensuring capacity to sell
- preparing for sale
- avoiding post-disposal commitments
In the first of a three-part series on successful disposal, we outline the key prerequisites for ensuring capacity to sell.
Ensuring capacity/ability to sell what was purchased
Loan and debt acquisition documentation needs to be re-checked carefully prior to disposal.
Key steps include:
- Assess the efficacy of the debt acquisition/participation agreements and associated security transfer/assignment documentation.
- Reconcile facility and security documentation listed in debt sale and security transfer documentation against that actually received.
- Identify any post-completion agreed deliverables and ensure these are satisfied.
Check the registration of ownership of security
Check all registration requirements of transferred security have been completed in the Companies Registration Office (would stream line process but not essential) and in particular the PRA. The recent case of Kavanagh and Bank of Scotland plc V McLaughlin & anor [2015] IESC 27 underlines the importance of registering ownership of security over Land Registry titled property.
If there is no express contractual power to sell in the charge document in order to rely on the power of sale under the Registration of Title Act 1964, you must be the registered owner of the charge - hence the importance of completing registration in the Land Registry which is very significant in particular in the context of asset sales.
Re-check assignability and freedom to transfer loans
Re-check assignability and freedom to transfer loans as part of a portfolio loan sale process as the loans will have previously been transferred, any restrictions on assignment may have already been dealt with.
However, any prospective vendor is well advised to conduct a full evaluation in order to identify issues. The review should include, but not be limited to the following:
- Part of the debt purchased may have been participated rather than transferred – meaning only the economic benefit was transferred while the legal ownership remained with the original owner. Unless the legal ownership has transferred in the meantime, a further participation will be required to sell on, necessitating the cooperation of the original vendor. Advance diligence of the original loan purchase documentation is required to clarify the position.
- Where the assignability in the original facility and/or security documentation was restricted to lending institutions only, if prospective purchasers are special purpose vehicles set up for their low tax or tax neutral status and are not financial institutions, a further participation of the loan may be necessary. Consideration should be given to reviewing the loan acquisition documentation to ensure this was anticipated and the Vendor (legal owner of the debt) is bound to cooperate.
- If assignability is subject to the consent of the borrowers that was acquired on acquisition of the loans, and if the loans are being amended and restated before selling on the debt, then this would be an opportunity to negotiate freedom of assignability into both the facility and security documentation.
In part two of this three-part series, Michael Hanley outlineS the key points to consider in preparing for sale.
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