Ireland: Guide To Banking And Finance In Ireland 2019

Last Updated: 24 January 2019
Article by Peter O'Brien and Ross Forde

1. Loan Market Panorama

1.1 The Impact of Recent Economic Cycles and the Regulatory Environment

The availability of credit continued to increase in 2018, particularly for businesses engaged in commercial real estate. The source of this credit, however, has shifted away from solely traditional lenders to a mixture of banks, mezzanine lenders and non-bank lenders. After the financial crisis, increased regulatory pressure on banks as a whole to deleverage and reduce their loan books left a liquidity gap in the market, which non-bank lenders took advantage of.

The most significant effect on the Irish loan market will undoubtedly be Brexit. It is impossible to predict exactly how the loan market in Ireland will be affected by the planned exit of the UK from the EU. A potential loss of "passporting" rights arising from Brexit does raise concern for lenders based in the UK, but many have opened or are in the process of opening branches in Ireland to avail of the "passporting" advantages within the EU.

Another interesting development is the growing adoption of Irish law as the governing law of international finance contracts in preference to English law.

1.2 The High-yield Market

Irish entities in various industry sectors may be involved in high-yield bond transactions, often as borrowers and guarantors, and in certain circumstances as high-yield bond issuers.

Irish incorporated special purpose vehicles (SPVs), often referred to as "Section 110 companies", are normally used as high-yield bond issuers in certain European high-yield transactions, often to avoid covenant breaches or local law restrictions on guarantees of securities. Section 110 companies are named as such because Section 110 of the Taxes Consolidation Act 1997 provides for special tax treatment for "qualifying companies". Favourable tax laws allow these structures to be, in most cases, tax neutral (with no annual minimum profit or "spread" required at the SPV level) and a "quoted eurobond" exemption, together with numerous double taxation treaties, allows interest on securities to be paid gross. A minimal share capital requirement makes incorporating an Irish SPV an easy process.

European high-yield bonds are normally marketed as private placements, primarily to attract US investor interest as well as participation from European investors. Such transactions are usually led through London or the USA and so New York law or English law are typically the governing laws of such transactions. To the best of our knowledge, no high-yield bonds have been governed by Irish law to date.

Whereas lenders in loan financings would tend to be traditional banks and other financial institutions, investors in high-yield bonds would typically be institutional investors (including investment banks, insurance companies, pension funds, hedge funds, investment managers and mutual funds) looking for higher rates of return.

1.3 Alternative Credit Providers

There has been a continued increase in the prominence of alternative credit providers in the Irish market since the financial crisis. The alternative credit providers group include a diverse collection of direct lenders, debt funds and debt arms of hedge funds and buy-out houses. This selection allows borrowers to be more selective when choosing lenders and results in more liquidity as well as more competitive pricing and terms.

1.4 Evolution of Banking and Finance Techniques

There was a continued growth in the asset-based lending market in Ireland during 2018. With Brexit fast approaching and the need for more commercial and residential properties in Ireland (particularly in Dublin), this form of finance has benefited borrowers, with competitive pricing, but also lenders, by offering a lower credit risk. With increased regulation for lenders (for example, the capital requirements regulations), some lenders consider this a sensible form of lending from the perspective of capital adequacy.

Real Estate Investment Trusts (REITs) are recognised as important vehicles for property investment in over 30 jurisdictions throughout the world. Since the enactment of the Finance Act 2013, Irish incorporated REITs can be listed on the main market of a recognised stock exchange in an EU Member State and have the effect of attracting fresh capital into the Irish property market.

1.5 Recent or Expected Legal, Tax, Regulatory or Other Developments

There is nothing of fundamental significance; however, certain lenders have a new reporting obligation to the Central Bank of Ireland (the "Central Bank") pursuant to the Credit Reporting Act 2013 (the "Act"), in order to enable the Central Bank to maintain a Central Credit Register (the "Register"). The Register is intended to ensure transparency and diligence in lending. Both consumers and lenders have access to a credit report, which gives a snapshot of a consumer's lending position at any given time. Phase 1 of implementing the Register began on 30 June 2017; from this date, information on all consumer loans of EUR500 or more is to be sub- mitted to the Register. Phase 2 of implementing the Register will focus on business lending and began on 31 March 2018. The Act applies to both regulated and unregulated lenders.

2. Authorisation

2.1 Requirements for Authorisation to Provide Financing to a Company

The Central Bank of Ireland is responsible for prudential regulation and supervision of credit and financial institu- tions. Wholesale lending to companies generally does not require authorisation, provided the lender does not take de- posits, carries on investment services or provides services to consumers. Traditional banks, those which create securities and fall within the definition of a banking business, are re- quired to hold a banking licence.

A bank authorised in another EEA member state (the home state) can passport its services through establishing a branch in Ireland, or by providing its services in Ireland (the host state) on a cross-border basis.

3. Structuring and Documentation Considerations

3.1 Restrictions on Foreign Lenders Granting Loans

There are no restrictions on foreign lenders from granting loans in Ireland. However, there are restrictions on lending to consumers and mortgage lending.

3.2 Restrictions on Foreign Lenders Granting Security

There are no restrictions on granting security or guarantees to foreign lenders, save where such restrictions are contained in the chargors/guarantors constitutional documents.

3.3 Restrictions and Controls on Foreign Currency Exchange

There are no restrictions, controls or other concerns regard- ing foreign currency exchange, save that a person (legal or natural) shall not operate as a Bureau de Change Business in the absence of an authorisation from the Central Bank of Ireland under Part V of the Central Bank Act 1997 (as amended from time to time).

3.4 Restrictions on the Borrower's Use of Proceeds

Generally the borrower is required to use the proceeds from loans or debt securities for the "purpose" as set out in the relevant credit agreement. If a borrower uses the proceeds of financing for any purpose other than that set out in the credit agreement, this would result in an event of default (however so defined), allowing the lenders to accelerate any outstanding loans and terminate unused commitments (and, if necessary, to enforce any available collateral).

3.5 Agent and Trust Concepts

The agent concept is well recognised and established in Ire- land. In a syndicated loan arrangement (of which there is more frequency in the market), the borrower usually grants a mandate to a "lead bank", which then arranges for a syndi- cate of banks to be set up to provide the necessary finance to the borrower. The liability of the agent is usually limited by the underlying documentation appointing the agent.

The concept of a trust (and trusts created under the law of another jurisdiction) is also recognised in Ireland. A security trustee can enforce its rights in the courts in Ireland, usually in accordance with the terms of the relevant security docu- ment. However, the rights of the security trustee may also be subject to legislative or other public policy considerations.

3.6 Loan Transfer Mechanisms

Secured debt is traded in Ireland, usually by means of assign- ment, transfer or novation. An assignment of security should be notified to the security provider (or in accordance with the terms of the underlying security document). A transfer or novation can be effected with the security provider as a party to the transfer or novation. In the case of a trans- fer or novation, appropriate registrations should be carried out in the Irish Companies Registration Office and/or Land Registry/Registry of Deeds (as applicable). Typically, Loan Market Association standard documentation is relied on, which contains standard language in relation to novations and transfers.

3.7 Debt Buy-back

This will depend on what is commercially agreed between the lender(s), borrower(s) or sponsor(s), but there is no ex- press restriction under Irish law to agree terms relating to the buy-back of debt.

3.8 Public Acquisition Finance

Certain funds provisions in credit agreements originate from the requirements of the Irish Takeover Rules which governs the takeover of any public limited company incorporated in Ireland. The Irish Takeover Rules requires that a bidder must announce a bid only after ensuring that it can fulfil in full any cash consideration (if any is offered) and after taking all reasonable measures to secure the implementation of any other type of consideration. A financial adviser also must stand behind any bid and confirm that the relevant bidder has certain funds – ie, that the funding will be available on the completion of the acquisition of the securities to pay the full amount due. This position must be confirmed in the Rule 2.5 announcement and the offer document.

Certain funds provisions are specifically negotiated for the relevant public acquisition finance transaction and tend not to be standard provisions contained in other acquisition fi- nance transactions. Whether short or long form documenta- tion is to be used will normally depend on the credit require- ments of the relevant lenders. Although the main provisions of the finance documents are set out in the offer document, such details are not required to be publicly filed or registered in Ireland.

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