Stapling key to Iceland restructuring first

Author: Danielle Myles | Published: 28 Sep 2010
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The first of Iceland’s nationalised banks to be restructured has used an innovative depository unit scheme and tax structuring to meet the demands of its international creditors.

Straumur Burdaras, once the country’s biggest investment bank, has now received court approval for its €2.3 billion composition agreement. And the key to closing the deal was stapling the reissued debt and equity securities.

Iceland’s laws were reviewed to prepare for the reorganisation of its four state-rescued banks, as recognised in IFLR’s restructuring category in its awards earlier this year. But Straumur’s two biggest difficulties - its predominately international creditor-base and some peculiar tax consequences - were outside the ambit of those changes.

“Part of the challenge is you are dealing with a situation where the legal infrastructure wasn’t designed for events of this scale,” said Richard Brown, a partner at Hogan Lovells who acted for the bank.

Stapling the securities, however, addressed these two issues by allowing creditors to trade them internationally as well as optimizing their tax benefits.

The securities’ tradability on the Euroclear and Clearstream clearing systems was a priority. But this was hamstrung by requirements in Straumur’s company articles’ about the securities being traded separately.

Stapling them, however, allowed the bank to convert the securities into depository units, hold those units in a newly created unit depository based in the Netherlands, which then issued the units to the composition creditors.

"The depositary unit structure allowed the stapling of the shares and bonds to be effected, while also giving creditors a security that was tradable on the clearing systems," said Lee Squires, an associate at Hogan Lovells in London.

The other benefit of stapling was to overcome shortcomings with the country’s simplistic tax regime. On their own, the (non-interest bearing) debt securities may have attracted an arm’s length rate of interest for tax purposes.

Stapling the securities ensured the debt would be treated as equity for tax purposes, and that the more attractive dividend withholding tax rate will be applied.

But the main concern of international creditors could not be solved through stapling. Being part of Iceland’s first bank restructure after the country’s debt crisis created a degree of hesitancy.

“We had to implement something that internationally would look familiar,” Brown said. The composition agreement being similar to a scheme of arrangement helped ease some of these concerns.

Some have hailed Straumur’s restructuring as a blueprint for the three Icelandic banks which remain in state-hands. But Brown doesn’t believe this is the case.

He pointed out that Straumur’s management was retained and played an integral role in the restructuring, and that its banking operations were fundamentally different.

“The other three are much more complicated in terms of scale and retail deposits, and will take a long time to restructure,” said Brown. “They are very different beasts.”

Hogan Lovells acted for Straumur Burdaras and Bingham McCutchen represented the creditors committee.

See also

Europe awards: restructuring