European Union: EuroResource - Deals and Debt - August 2012

Recent Developments

The UK—On 26 July 2012, the UK Pensions Regulator issued a statement on financial support directions ("FSDs") with the intention of providing further guidance regarding the circumstances in which it will issue an FSD after a company has been placed into administration.

Following the October 2011 rulings in Lehman Brothers and Nortel Networks (Bloom v. The Pensions Regulator [2011] EWCA CIB 1124), an FSD issued before a company goes into administration will rank as a general unsecured debt, whereas an FSD issued post-administration will rank as an expense of the administration. An FSD issued after administration will therefore be discharged from floating (not fixed) charge realizations and will rank above payment of the administrator's own remuneration. The priority of FSDs over floating charge holders could have a material impact on the return to secured creditors, particularly where there are few or no fixed charged assets.

The current ranking of FSDs issued after administration is of great concern to insolvency practitioners and lenders. In response to these concerns, the Pensions Regulator has stated that it has no intention of deliberately delaying the issue of an FSD until a company goes into administration and to therefore take advantage of post-insolvency priority ranking. Further, the Pensions Regulator has stated that in most circumstances it will not object to an application issued by an administrator to reorder the statutory order of priorities so that the payment of the administrator's own reasonable remuneration will rank ahead of an FSD. The Regulator also advised that in the forthcoming appeal to the UK Supreme Court on this issue (scheduled to be heard on 14 May 2013), it will argue that an FSD issued after administration is a provable debt which will rank as a general unsecured debt as an alternative to an administration expense. Whilst the statement is welcomed, it is unlikely to provide the certainty stakeholders are seeking and which they hope the Supreme Court will deliver in respect of the Lehman Brothers and Nortel Networks appeal.

France—On 25 July 2012, the French Government unveiled a program to support France's automobile industry. The purpose of the program is to boost employment in the industry and support purchases of greener, less-polluting cars. Pursuant to the program, existing subsidies for the acquisition of electric vehicles will be increased to a maximum of €7,000 and existing subsidies for the acquisition of hybrid vehicles will be doubled to a maximum of €4,000. The rebates will be financed by an increased tax on polluting vehicles. The French Government will also redeploy several hundred million euros to manufacturers that invest in green technology. The program was prompted by PSA Peugeot Citroën's plan to lay off 8,000 employees in France. The French automobile-manufacturing industry currently employs 800,000 persons, 30 percent fewer than a decade ago. The French Government's move also reflects the importance of the automotive sector in the EU economy. According to the European Commission, the EU is the world's largest producer of motor vehicles, with 18 million vehicles manufactured annually. The EU automobile industry accounts for approximately 12 million jobs. The industry is the EU's largest private investor in R&D (€20 billion per year) and accounts for 20 percent of the EU's steel production and 36 percent of the aluminum production.

France—The second interim Finance law for 2012 introduces material changes to the tax treatment of financial support granted to distressed subsidiaries. Historically, parent companies providing financial support to distressed subsidiaries could use various tools. In the case of debt forgiveness, the parent company was able to recognize a tax-deductible loss up to the amount of the negative equity of the subsidiary (the excess of the forgiven debt over the negative equity, if any, treated as additional basis in the subsidiary's shares), while the subsidiary recognized taxable income. Alternatively, the parent company could inject additional equity into the subsidiary. At the parent level, such an injection was treated in full as additional basis in the subsidiary's shares and was therefore nondeductible, whereas the equity injection was not taxable at the level of the subsidiary.

Under the new law, subsidies and debt waivers are no longer tax deductible except if they are granted within the scope of a conciliation agreement approved by the French bankruptcy court or in the course of safeguard, reorganization or liquidation proceedings pursuant to French bankruptcy laws. In case one of these exceptions applies, the parent company is still entitled to deduct the debt waiver up to the amount of the negative equity of the distressed subsidiary. Where the legislation initially proposed by the French Government also provided that equity injections by a parent company would be taxable at the level of the distressed subsidiary to the extent they did not exceed the subsidiary's negative equity, this proposed provision was omitted from the final legislation, and equity injections remain tax neutral at the level of the distressed subsidiary. However, to avoid abusive schemes, the new law provides that the parent company may not realize a tax-deductible loss if it sells the subsidiary's newly issued shares.

Newsworthy

Jones Day acted as tax counsel to Blackstone Group LP ("Blackstone") in connection with the acquisition of substantially all of the logistics assets of French real estate investment trust Gecina SA ("Gecina") for €203 million. The portfolio includes 28 assets, all located in France, and represents nearly all of Gecina's remaining logistics holdings. Gecina, which has seen its rental income fall 5.6 percent since last June, is close to its goal of selling €1.2 billion in assets this year to focus on its office portfolio, France's largest. Blackstone is a US-based alternative asset management and financial services company that specializes in private equity, real estate and credit and marketable alternative investment strategies, as well as financial advisory services. Most of Blackstone's real estate holdings are malls, hotels and housing, but the firm has been building a logistics platform, spending more than $3.1 billion over the past six months to add industrial warehouse space.

Jones Day is advising Paris-based Veolia Environnement SA ("Veolia") in connection with the sale of its North American solid waste business, Veolia Environmental Services Solid Waste, Inc. to Star Atlantic Waste Holdings, LP, a US infrastructure private equity fund. Veolia's US solid waste operations include 29 landfills, 72 collection operations, 17 recycling facilities and 43 transfer stations, most east of the Mississippi River. The transaction, valued at $1.909 billion, is Veolia's second largest divestiture.

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