European Union: EuroResource-Deals and Debt - July 2014

Last Updated: August 20 2014
Article by Corinne Ball

For the benefit of our clients and friends investing in European distressed opportunities, our European Network is sharing some current developments.

Recent Developments

Italy—As part of a program of economic and financial reforms recently implemented to ensure Italy's future sustainability and growth, the Italian Council of Ministers on 24 June 2014 enacted Law Decree No. 91 (the "Law Decree"), which introduces new measures, including tax provisions, aimed at facilitating access to financing by Italian companies. The principal innovations introduced by the Law Decree concern securitization and lending transactions and the debt markets. Specifically, the principal changes introduced by the Law Decree include: (i) allowing securitization vehicles incorporated under the Italian Securitization Law and Italian insurance companies (i.e., insurance companies incorporated under Italian law or authorized branches of an insurance company incorporated under the law of a non-EU member state) to lend in Italy; (ii) broadening the list of assets eligible for investments by undertakings for collective investment (organismi di investimento collettivo del risparmio); and (iii) broadening the scope of certain favorable tax rules to include (a) banks established under the laws of an EU member state, (b) insurance companies established and licensed under the laws of an EU member state, and (c) unleveraged undertakings for collective investment incorporated in an EU member state or a European Economic Area country. A detailed discussion of the Law Decree is available here.

The UK, the US and Canada—On 8 June 2014, Canadian units of Nortel Networks Corp. ("Nortel") announced that they have reached a settlement with Nortel's overseas subsidiaries regarding claims that the Canadian units siphoned off hundreds of millions of dollars from subsidiaries throughout Europe, the Middle East and Africa ("EMEA") before Nortel's 2009 bankruptcy through illegal transfer pricing agreements. The settlement comes against the backdrop of an epic dispute over how to divvy up US$7.3 billion generated by Nortel's liquidation. It does not directly impact the ongoing, closely watched cross-border litigation in which the Delaware and Ontario bankruptcy courts are deciding jointly how to split up the billions from Nortel's asset sales among its international affiliates for distribution to creditors.

However, the settlement does establish how much the EMEA claimants, who are seeking a US$2.7 billion share of the liquidation proceeds, can hope to receive from the bankruptcy estate of Nortel's Canadian debtors. The EMEA claimants settled similar claims against Nortel's US bankruptcy estate in December 2013. Described as a milestone in the case, that settlement (briefly described here) was approved by the US Bankruptcy Court in January 2014.

On 24 July 2014, Nortel's defunct US unit announced that it has settled a dispute with bondholders over how much interest they can collect on US$3.93 billion in debt issued in 2006 and 2007. The agreement was disclosed the day before the judge presiding over the US unit's bankruptcy was scheduled to hear arguments on whether any interest should be paid and, if so, at what rate. The settlement is expected to streamline remaining court battles.

Germany—On 22 May 2014, the German Federal Supreme Court (Bundesgerichtshof) ruled that an insolvency administrator was entitled to contest a debtor's prepetition repayment of a loan because the lender knew that the borrower was facing liquidity issues. The ruling is the latest in a series of judgments that allow payments made prepetition by the debtor in the ordinary course of business to be challenged and recovered by the estate. Administrators have recently made increasing use of their power to challenge ordinary-course payments to banks, suppliers or other business partners of the debtor—in many cases, several years before the debtor filed for insolvency. Under German insolvency law, a debtor's ordinary-course payments to creditors can generally be contested if they are made within three months prior to the filing of an insolvency petition, provided: (i) the debtor was unable to pay all of its current obligations; and (ii) the payee was aware of this illiquidity. Payments are not subject to challenge on these grounds if the debtor receives consideration of equal value directly in exchange (i.e., in a cash transaction).

In its judgment of 22 May 2014 (and in prior judgments), the Bundesgerichtshof ruled that an insolvency administrator may also challenge a debtor's ordinary-course payments if such payments were made with the intent to disadvantage other creditors. The court's ruling was premised on a provision in German insolvency law that authorizes avoidance of prepetition payments made within 10 years prior to the filing of an insolvency petition if the debtor acted with the intent to disadvantage creditors and if the payee was aware of the debtor's intent. A debtor is generally deemed to act with the intent to disadvantage other creditors if the debtor is illiquid at the time the contested payment was made. A payee is deemed to be aware of this intent if the payee was aware of the debtor's illiquidity at the time of the payment. A payee's knowledge is presumed where the debtor and the payee have agreed on a deferral of payments or where the debtor is in default on its obligations to the payee.

The Association of German Industry ("BDI") and the Association of German Trade ("ZDH") published a joint paper at the end of 2013 raising concerns against the recent rulings of the Bundesgerichtshof. The BDI and the ZDH have also called for the legislature to amend the law to restrict challenges to ordinary-course payments. The German Minister of Justice has indicated that this issue is under review, but the Ministry has not yet made any specific proposals to amend the law.

Global—Developments in the Argentine debt saga have intensified. Argentina is trying to avoid a default that could occur on 30 July 2014, the end of a grace period on a payment that was technically missed on 30 June 2014.

On 29 June 2014, investment firms that hold restructured euro-denominated bonds issued by the Republic of Argentina filed a petition in the US District Court for the Southern District of New York seeking a ruling that foreign banks which process interest payments on such bonds are outside the jurisdiction of US courts. The investment firms contend that the euro-denominated bonds are governed by the laws of England and Wales and asked the court to clarify that prior injunctions restricting payment on Argentina's restructured debt do not apply to foreign banks processing such bonds.

On 7 July 2014, a team of negotiators from the Republic of Argentina met with court-appointed mediator Daniel Pollack to discuss the nation's standoff with holdout bondholders and establish the groundwork for future meetings.

On the same day, Argentina's Ministry of Economy and Public Finance issued a statement claiming that US District Court Judge Thomas P. Griesa did not have the authority to block the payment of more than US$500 million to exchange bondholders, and that the Bank of New York Mellon Corp. ("BNY Mellon") would be violating its obligations as trustee if it returned the money. On 27 June 2014, Judge Griesa stated that Argentina's payments to exchange bondholders were "disruptive" and ruled that anyone who attempts to do so will be held in contempt. According to Argentina, Judge Griesa exceeded his jurisdiction because the relevant bonds were issued under UK law and denominated in euros, and the holders have an absolute and unconditional right to the payments deposited with BNY Mellon.

On 21 July 2014, Argentina filed pleadings in support of BNY Mellon's petition in the US Court of Appeals for the Second Circuit for an order lifting Judge Griesa's ban on the nation's payments to exchange bondholders. Argentina also called for Judge Griesa to deny a request by holdout bondholders for a declaration that an earlier injunction applies to bonds governed by Argentine law.

At a hearing held on 22 July 2014, Judge Griesa pleaded with both sides to reach a settlement of the dispute before the expiration of the grace period. A default by Argentina, Judge Griesa stated, would be "the worst thing" because "[n]ot vultures, but real people will be hurt."


Jones Day is acting as tax counsel to GTECH in connection with its acquisition of International Game Technology ("IGT") for US$6.4 billion, comprising US$4.7 billion in cash and stock and the assumption of US$1.7 billion in net debt. The transaction will create the world's leading end-to-end gaming company, uniquely positioned to capitalize on opportunities in global gaming market segments. Under the terms of the transaction, IGT and GTECH will combine under a newly formed holding company organized in the United Kingdom.

Jones Day advised Hansteen Holdings PLC ("Hansteen") in connection with the acquisition of a €176 million (US$239.8 million) credit facility secured by a portfolio of light industrial parks in the Netherlands owned by Lancelot Land BV ("Lancelot"). The loan was acquired at a discount to par in two separate trades with Italian financial services company UniCredit Group ("UniCredit") and Dutch financial services company ING Group ("ING"). Following a restructuring of the loan and the associated swaps with JPMorgan Chase and UniCredit, the counterparties, Hansteen agreed with Lancelot to acquire the assets for approximately €106 million (US$44.3 million) utilizing a new €60 million (US$81.7 million) loan facility arranged by ING. 

Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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