SECTION 1: MARKET OVERVIEW
1.1 Please provide an overview of the market and
environment for cross-border financing in your
Despite gradual increases in short-term interest rates over
the past couple of years, interest rates in the US remain
relatively low. That, combined with the flexibility found in
covenant-lite loans, makes the US loan market appealing to
borrowers. The low risk of borrower default and deep supply of
loans makes the market appealing to lenders.
Financings can take many forms: the size can range from
large-cap to middle-market to small-cap; the lenders can be
traditional banks, funds, or other alternative lenders; the
loans can be widely syndicated or closely held. We continue to
see a variety of financing structures, including bank/bond,
first lien/second lien, stretch first lien, and mezzanine
financings, all of which can involve cross-border
1.2 Have there been interesting changes in the structure of
the banking sector in your jurisdiction?
Recent developments include:
Leveraged lending guidance:
In 2013, the Office of the Comptroller of the Currency of
the US Department of Treasury (OCC) issued guidance on
leveraged lending (the Guidance). The Guidance has been
interpreted to limit pro forma leverage for loans to 6.0x, and
until recently banks have viewed the Guidance as a hard rule
and restricted their lending accordingly.
In October 2017, the General Accountability Office (GAO)
stated that the Guidance was a rule under the Congressional
Review Act and thus could be reviewed by Congress, creating the
possibility of reversal. In February 2018, the head of the OCC
stated: 'I am supportive of banks doing leveraged
lending…as long as it does not impair safety and
soundness.' These statements have demonstrated to banks that
the Guidance may be looser than previously thought, and we are
already seeing increased leverage levels (eg 7.0x) becoming
more prevalent in large cap financings.
In July 2017, the Financial Services Authority (FSA) of the
UK announced concerns about the future of Libor, stating that
the 'absence of active underlying markets [for the Libor rate]
raises a serious question about the sustainability' and noting
the rate's vulnerability to misconduct. For these reasons, the
FSA has recommended that an alternative benchmark be
implemented within the next several years. Borrowers and
lenders have begun to incorporate Libor successor provisions
into new loan documentation and amendments to existing loans to
more readily allow for incorporation of a successor benchmark
once chosen by the market.
FinCen Customer Due Diligence Rule:
The Financial Crimes Enforcement Network (FinCen) issued a
new customer due diligence rule that took effect in May 2018.
The rule requires financial institutions to collect and verify
identification information for beneficial owners of legal
entity customers. Beneficial owners include certain individuals
who (a) have significant responsibility to control, manage, or
direct the entity or (b) directly or indirectly own 25% or more
of the equity interests thereof.
Determining who constitutes a legal entity customer is
fact-specific and subject to a number of exclusions, but
ultimately could include both borrowers and guarantors in any
given financing. Practically speaking, this rule will result in
increased know-your-customer (KYC) requirements as well as the
insertion of additional covenants and representations in the
loan documentation related to beneficial ownership.
SECTION 2: FINANCING STRUCTURES
2.1 What have been the key trends or developments in your
jurisdiction over the past 12 months in terms of financing
structures, deal drivers and the way borrowers and creditors
are participating in the market?
The US market continues to produce a large number of
covenant-lite, term loan B financings, often coupled with a
revolving facility. All of the structures noted in Section 1.1
are commonly utilised. In addition, non-bank lenders and direct
lenders continue to be an increasing and reliable source of
capital, both in the middle market and on second lien term
The loan market has seen increased volatility in Q3 of 2018.
As a result, arrangers have been exercising flex rights more
often and more broadly. Nevertheless, private equity sponsors
are still generally successful in negotiating for
borrower-friendly terms such as increased restricted payment
flexibility, exceptions from most favoured nation pricing
protection on incremental facilities, and asset sale prepayment
2.2 Briefly outline some recent notable transactions
involving your jurisdiction, highlighting any interesting
aspects in their structures and what they might mean for the
The J Crew transaction from late 2016 elicited renewed focus
on investment/restricted payment capacity and flexibility with
unrestricted subsidiaries. In a controversial set of
transactions, J Crew effectively transferred a significant
amount of intellectual property to an unrestricted subsidiary,
resulting in a release of security in favour of its secured
creditors. While technically compliant with the terms of the
loan documentation, this transaction has caused lenders to
narrow in on loose investment carve-outs in order to limit
unintended impacts on collateral.
SECTION 3: LEGISLATION AND POLICY
3.1 Describe the key legislation and regulatory bodies that
govern cross-border financing in your jurisdiction.
Regulatory bodies and laws governing financings in the US
- Federal Reserve System: The central bank
of the US, responsible for, among other things, regulating
certain financial institutions and financial activities.
- Securities and Exchange Commission (SEC):
Regulates the securities markets and supervises the
participants therein, including investment advisors and
- OCC: Supervises all national banks and
federal savings associations.
- State regulators: Each state has its own
regulatory agencies tasked with overseeing financial markets
and the participants therein.
- Dodd-Frank Wall Street Reform and Consumer
Protection Act: A 2010 federal law regulating banks and the
financial industry as a whole.
- Securities Exchange Act: A 1934 law
governing securities transactions.
- Uniform Commercial Code: A law adopted by
each state (with certain state-specific variations) that
governs the creation, perfection and priority of security
interests in the US.
In addition, while not a regulatory body, the Loan
Syndications and Trading Association (LSTA) is a non-profit
organisation that works to develop policies and guidelines,
promote equitable market principles, and prepare standard
documentation for the US syndicated loan market.
3.2 Have there been any recent changes to legislation or
regulations that may impact the cross-border financing market
or availability of funding in your jurisdiction?
See Section 1.2.
In addition, the US administers a variety of sanctions
programs which are subject to ongoing update. To the extent a
US financing involves a company with operations in any country
subject to US sanctions programs, borrowers should expect a
more stringent KYC process as well as narrowly-tailored
covenants and representations and warranties related to use of
proceeds and sanctions/anti-corruption.
3.3 Are there any rules, legislation or policy frameworks
under discussion that may impact lenders or borrowers involved
in cross-border financing in your jurisdiction? How can market
See Section 1.2.
SECTION 4: LOCAL MARKET NORMS
4.1 Are there frequently asked questions from new market
entrants or often overlooked areas from parties involved in
cross-border financings in your jurisdiction?
In the leveraged buyout context, parties should be cognisant
of the nuances of US acquisition agreements and their impact on
financing terms and process. Two notable examples are
Xerox provisions: These are provisions that
are inserted into the remedies, venue, waiver of jury trial,
third-party beneficiaries and amendments sections of a purchase
agreement, intended to limit the recourse a seller may have
against the buyer's financing sources. Xerox provisions are
commonplace in the US market and so US lenders will expect
these, even in non-US purchase agreements, if there is a US
Certain funds: The certain funds concept,
while typical in Europe, is relatively uncommon in the US
market. Lenders who primarily participate in the US market may
be unfamiliar with the differences in process and documentation
required in a certain funds deal. If you plan to have a US
financing in connection with a certain funds-style acquisition,
you should raise this with your financing sources as early as
possible to ensure a smooth process.
4.2 Please describe any common mistakes or misconceptions
that exist about the financing market in your
Many of the relevant laws are state law, not federal law,
and thus are not uniform across the US. In addition, lenders
often assume that in order to file a UCC-1 financing statement
in the US against a non-US loan party, such filing must be made
in Washington, DC. In reality, the rule is a bit more nuanced
and the correct jurisdiction may be elsewhere. As such, local
counsel should be engaged in each individual state where a loan
party is located, as well as in the state whose law governs the
Moreover, on cross-border financings, non-US banks may
request US legal opinions consistent with what is regularly
provided in their non-US jurisdiction, including opinions on
choice of law, submission to jurisdiction and stamp duty. These
are not common in US opinion practice, and due to the
aforementioned nuances in state laws can often necessitate US
local counsel in the states of organisation of the relevant US
4.3 Are there any classes of assets over which security
cannot be taken or regulations specific to your jurisdiction
governing the taking of security over certain classes of assets
that lenders should be aware of?
There are a few classes of assets for which there are
regulatory, contractual or other legal restrictions on granting
security, such as certain equipment leases, margin stock,
assets of gaming companies, and governmental licences.
Beyond formal legal restrictions, there are assets with
respect to which the creation and/or perfection of a security
interest is not market, usually as a result of burdensome
perfection requirements or negative financial consequences.
Some examples include motor vehicles, certain intent to use
trademarks, and real property located in a flood zone. The most
prevalent example is with respect to certain non-US
subsidiaries of a US entity, and US subsidiaries that hold no
substantial assets other than equity and/or debt of non-US
subsidiaries. There can be material tax consequences under
Section 956 of the US Internal Revenue Code if these entities
provide guarantees or security in support of an obligation of a
US entity, or if more than 65% of the equity interests of any
such entity are pledged as collateral for the obligations of a
4.4 What measures should be taken to best prepare for your
local market norms?
Security and perfection rules differ widely among states and
market standards vary based on the size of the transaction, the
industry of the debtor, the structure of the loan and the
composition of the lender group. As such, lenders and borrowers
alike should consult appropriate US counsel as early as
possible in the financing process.
In addition, there is often a distinction in approach to
security in bond financings, where a collateral agent/trustee
will not exercise discretion in making exceptions to the
security package or granting deadline extensions. Therefore,
careful consideration should be given when negotiating the
terms for security on bond financings, particularly on
cross-border transactions that may involve more complex
SECTION 5: PRACTICAL LEGAL CONSIDERATIONS
5.1 Briefly explain (i) the typical security package
available at closing and (ii) any downstream, upstream and
cross-stream guarantees available in your jurisdiction, in each
case, with reference to any specific restrictions or
The typical security package consists of substantially all
personal property, subject to certain exceptions (as briefly
discussed in Section 4.3 above). Owned real estate and
leaseholds over a certain threshold may be included as
Security interests in personal property can be granted in
one universal security document. However, ancillary filings,
notices and other documentation or actions may be required to
perfect the security interest in certain assets, such as US
federally registered intellectual property, deposit accounts
and certificated equity interests. The requirements to grant a
security interest in real property vary from state to state,
but generally speaking at a minimum a mortgage or deed of trust
will be needed.
The US does not have explicit financial assistance or
corporate benefit laws. Downstream guarantees are generally
unrestricted. Upstream and cross-stream guarantees are
extremely common, but you must consider the facts of the
transaction to ensure they are permissible under state law.
Ultimately, guarantees will be subject to bankruptcy and
fraudulent conveyance laws, as well as certain limitations
(including with respect to certain swap obligations).
5.2 Are there any specific issues or challenges creditors
should be mindful of regarding an insolvency or restructuring
situation? Have there been any major judicial changes to the
insolvency system (or related judicial decisions) in your
jurisdiction recently? How long does an enforcement process
The federal insolvency regime is the US Bankruptcy Code (the
Code). The two types of bankruptcy cases most typically
applicable to debtors in the leveraged loan markets are (a) a
liquidation under Chapter 7 of the Code and (b) a
reorganisation under Chapter 11 of the Code.
Commencement of a bankruptcy case creates an automatic stay
against any creditor's enforcement, repossession or collection
actions against the debtor or the debtor's property, regardless
of whether such creditor is secured or unsecured. The
bankruptcy court has broad power, and could set aside transfers
that the debtor made when insolvent, or that were made within a
certain period prior to the bankruptcy case being commenced.
Additionally, security interests that are unperfected at the
time the bankruptcy case is commenced could be invalidated.
There is no hard rule for how long a bankruptcy case will
last – it depends on a number of factors including
whether the case is brought under Chapter 7 or Chapter 11, the
size of the debtor, the number of creditors, and the competing
SECTION 6: OUTLOOK
What are your market outlook predictions for the next 12
months in cross-border financing in your jurisdiction?
Barring any market or global disruptions, we expect that we
will continue to see active and borrower-friendly debt markets
in the US. Interest rates remain relatively low, providing
opportunity for refinancings, and private equity sponsors and
borrowers continue to push the envelope for favourable terms.
We expect continued convergence of terms in bank debt
financings and bond issuances, as well as more consistency in
provisions in US deals and cross-border matters. Finally, we
envision the continued and increased use of alternative lending
products, including unitranche and privately placed facilities,
in order to offload market and syndication risk.
Partner, Latham & Watkins
Washington, DC, US
T: +1 (202) 637 3372
F: +1 (202) 637 2201
Scott Forchheimer is the local chair of the finance
department in the Washington DC office of Latham &
Watkins and is a member of the banking and private
equity finance practices. Scott has represented
borrowers and private equity firms in secured lending
and other financing transactions, including acquisition
financings, cash-flow and asset-based loans,
subordinated debt facilities and secured bond
offerings. In addition, he has worked for a variety of
clients on matters involving secured finance issues and
general corporate issues.
Jennifer M Kent
Associate, Latham & Watkins
Washington, DC, US
T: +1 (202) 637 2302
F: +1 (202) 637 2201
Jennifer Kent is an associate in the Washington DC
office of Latham & Watkins and is a member of the
finance department and the banking and private equity
finance practices. Her practice focuses on representing
private equity firms and private and public company
borrowers in domestic and cross-border secured lending
and other financing transactions, including acquisition
financings, cash-flow and asset-based loans,
subordinated debt facilities, and secured bond