The corporate lending market in Ireland continues to be particularly active in the real estate (investment and development), pharma and technological sectors – all of these being significant drivers of the Irish economy. Much of the lending in terms of volume tends to be to the small to medium-sized enterprise (SME) sector.
Currently market conditions are positive, albeit that the impending departure of the United Kingdom from the European Union (Brexit) has created a great deal of uncertainty in the economy. As with a number of other EU Member States, there is an oversupply of credit to meet available demand. In addition to banks, there are a number of venture capital and private equity credit providers. There are also a number of bespoke lenders providing SME finance in the property development sector. The recently enhanced competition in the Irish lending market has contributed to a 'covenant-lite' environment and somewhat increased bargaining power for borrowers. Therefore, if a credit proposition is favourable, there is a very healthy market for debt finance. However, the challenge at the moment is matching the amount of available credit to sound investment opportunities.
Currently deal activity is most active in the real estate sector. Regulated financial institutions have, since the financial crisis, sold large loan portfolios in response to regulatory requirements to consolidate their balance sheets. The number of portfolio sales by Irish licensed banks has greatly increased recently (including non-performing loans (NPLs). Over time, portfolio sales have introduced to the Irish debt market a large number of US and UK private equity funds that have since established a very significant presence. There has been, therefore, a good supply of substantial property-based financings (including bank and mezzanine financing of property development groups). There is also a steady flow of aircraft finance work in Ireland, with a number of leading global aircraft leasing firms headquartered in Ireland.
Syndicated lending occurs in Ireland, but this tends to be in deals towards the larger end of the corporate spectrum and is the exception rather than the rule. For large financings, structures commonly used involve senior and mezzanine finance models (often with a regulated institution providing senior finance and private equity the mezzanine piece), or fund structures. These include investment companies, and Irish collective asset-management vehicles – a bespoke statutory corporate fund tailor-made for tax-transparent fund strategies.
Loan Market Association (LMA) documentation is commonly used in large to medium-sized transactions. Irish law firms that are players in the commercial loan space are used to adapting the LMA to Irish requirements. Ireland is a common law jurisdiction with a long and close common history with the United Kingdom, and, therefore, the LMA is easily adapted to meet particular Irish law requirements.
Irish and EU banks continue to be the main players in all sectors, but increasingly, alternative finance providers such as private equity houses, fund lending structures and asset managers play an ever more significant role. Specialist lending vehicles structured as qualifying investor alternative investment funds (QIAIFs) regulated by the Central Bank of Ireland are becoming more commonly used. EU-sourced funding plays a significant role too, in particular the Irish Structural Investment Fund (ISIF), often partnering with other credit providers in projects that are suitable for ISIF's portfolio. There is a limited peer-to-peer and crowdfunding market in Ireland. This is an area that will likely be subject to regulation quite soon.
Notable recent deals include the acquisition by Avolon (a major Irish-based aircraft lessor) of CIT Group's aircraft leasing business. This US$10.38 billion deal was one of the largest transactions of its kind during 2017 and involved a syndicated term loan, intergroup financing and equity investment, and a US$3 billion private placement.
Overall trends include increasing competition on the lender side with more alternative lenders entering the market to fund large and medium-sized deals. This is has led to a covenant-lite environment. Real estate still leads the way, in particular, with development deals to provide office space and housing in large urban centres.
II LEGAL AND REGULATORY DEVELOPMENTS
The key legal and regulatory development in the area of secured lending has been as the coming into effect, in June 2015, of the Companies Act 2014 (CA 2014). This substantially removed from security registration requirements many types of financial asset (such as bank accounts and units in collective investment schemes). This is to reflect the intent of the EU financial collateral regime. However, CA 2014 requires urgent amendment to bring charges over shares in non-Irish companies outside the scope of the registration regime. This issue has now been addressed in amending legislation affecting a number of 'running repairs' to CA 2014. It also changed procedures for registering security introducing a one and two-stage process and electronic filing. CA 2014 also ironed out some difficulties in predecessor legislation dealing with the whitewash of financial assistance transactions and connected party security.
III TAX CONSIDERATIONS
There is a general trend internationally and in the Irish market in which investors are allocating capital to the origination of loans as an asset class. The structures being utilised in an Irish context typically involve the use of an Irish investment vehicle such as the Irish 'Section 110 company' (that is a company that meets the conditions set out in the Section 110 Taxes Consolidation Act 1997 for the tax treatment therein) and QIAIFs. The Central Bank of Ireland recently relaxed the rules on loan origination by QIAIFs. The borrowers are typically based in Ireland, Europe and the United States, and investors include EU and US investment firms and sovereign wealth funds.
The key Irish tax considerations that impact loan transactions principally relate to the following.
i Deductibility of interest
Interest payable by an Irish corporate borrower is deductible as a trading expense, as a charge on income or as a deduction against rental income for a property rental business. While there is generally no relief for interest on money used to acquire general investments (apart from certain shares and realty) a deduction is given for interest payable by a Section 110 company provided that, where the interest is profit dependent, it is paid to an Irish-resident lender or is subject to tax in an EU or treaty state or is paid on a quoted Eurobond. Special rules apply to related party debt. Recent changes to the Section 110 company regime have restricted deductibility where a company holds assets that derive their value from Irish land unless they are held as part of a CLO, CMBS/RMBS or loan origination transaction and certain conditions are met.
ii Withholding taxes
Irish-source interest on loans of more than one year is subject to withholding at a rate of 20 per cent unless an exemption applies. Perhaps the most common exemptions in the secured lending context are for payments to the following types of lender: Irish banks and Irish branches of EU-regulated banks, companies resident in an EU or treaty state and Irish Section 110 companies. LMA standard loan documentation includes 'qualifying lender' provisions. The effect of these provisions is that, if withholding tax applies to any interest payments, the borrower does not have to compensate the lender by increasing those payments ('gross up') unless the lender is a 'qualifying lender', as defined, on the date they became a party to the loan agreement. The definition of 'qualifying lender' is drafted to reflect the conditions for the many exemptions from Irish withholding tax in the Irish tax legislation. As a result, the day-one risk of withholding is placed on the lender whereas any change of law risk is taken by the borrower.
iii Stamp duty
There is typically no stamp duty on the making of a loan or on any security for the loan. Stamp duty can apply on the transfer of the loan where it contains certain equity-like features (e.g., convertible into Irish shares), but if the loan is sold in the ordinary course of business of either the vendor or the purchaser, then no stamp duty should apply.
iv Foreign Account Tax Compliance Act and Common Reporting Standard
FATCA and CRS have been implemented in Ireland by regulations. Both require reporting of investors by Irish 'financial institutions' (which generally includes funds and investment vehicles) unless the investors are themselves financial institutions in participating states. In our experience, the impact of Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) on the structuring of secured lending transactions has been limited. There are typically mutual obligations to provide information to enable the parties to comply with their FATCA and CRS reporting obligations, if any.
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Originally published in The Law Reviews
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