Selected financing topics

Session Co-Chairs

Jean-Philippe Jacob YARDS, Paris

Mercedes Rodriguez Giavarini Mitrani Caballero & Ruiz Moreno, Buenos Aires; Latin American Regional Forum Liaison Officer, IBA Closely Held and Growing Business Enterprises Committee

Table Moderators

Christian Becker Görg, Munich

Bjarte Bogstad Bull & Co, Oslo

Caroline Conrad-Behr Conrad & Partner, Baden

Gabor Damjanovic Forgo Damjanovic & Partner, Budapest

Pierre-Alexandre Degehet Bonn Steichen & Partners, Luxembourg City

Dinka Kovačević Kovačević Prpić Simeunović, Zagreb

David O’Donnell Mason Hayes & Curran, Dublin

Ehsan Shirzadi Loyens & Loeff, Amsterdam

Mark van Casteren Huygens Quantitative Tax Consulting, Amsterdam

Robert Wintgens Hamelink van der Tooren, Amsterdam

Helge-Torsten Wöhlert Hueking Kühn Lüer Wojtek, Munich

Introduction

The conference’s second interactive workshop touched on selected financing topics, which were discussed in separate tables led by moderators. Each table worked on different questions around the selected topic and drew conclusions which were then shared with the entire audience. The following matters were discussed and presented:

Alternate forms of financing I: fintech, crowdfunding and lending, and cryptocurrencies – what are the latest developments and the legal implications for closely held enterprises?

This table discussed the reasons and advantages for a small or medium-sized enterprise (SME) to choose a crowdfunding strategy versus a classic bank loan option and looked at whether crowdfunding platforms are regulated as banks in each jurisidiction. Participants also discussed other common financing options for SMEs in their countries as well as the advantages of ‘equity kickers’ (convertible loans/option loan) against crowd-investing; specific regulation on initial cost of ownership (ICO); and ‘licence fintech’. The group closed on the obstacles of a real estate crowdfunding, particularly for foreigners.

Alternative forms of financing II: loans with profit participation, convertible loans, options and other hybrid instruments – what are the latest terms and structures, and the legal implications for closely held enterprises?

Different types of alternative financing forms with profit and/or equity exposure were discussed at this table, focusing on primary drivers behind these alternative financing forms, taxation on the gain/loss of debt capital and equity, and how this compares to taxation of employee options (eg compensation for less than market value salary). Participants also discussed public grant programmes and other issues affecting the use of alternative financing; trends as to preferred terms and structures for the different alternative forms of financing (with profit/equity exposure), and how these vary depending on the size and nature of the business. Finally, the group shared the advice they would give to a closely held client in relation to the above substitutes to alternative financing and the most important issues to consider when advising the client ‘lender’ to the closely held business.

Alternative forms of financing III: asset-based lending, factoring, leasing and other asset-based finance - what are the latest trends and structures, and the legal implications for closely held enterprises?

This table discussed the latest updates on using technology and innovation in the factoring and asset-based lending (ABL) industries, the kind of requests people were seeing from borrowers in terms of refinance, pay off, exit or asset purchase. They discussed the impact of environmental, social and governance (ESG) factors; new initiatives in the market; the increase in greens bonds; and the impact of global supply chain issues in different sectors. The impact of inflation and price increases was reviewed in addition to changes in payment terms and the deal activity over past year in general. To conclude, participants discussed new opportunities coming up, particularly in the field of energy.

New players as alternatives to banks: VCs and other non-bank players – what are the terms they want?

This table discussed various issues on venture capital (VC), such as the different role of assessing entry into share capital of a start-up. Examples of this included whether they want to be associated to the project and under which conditions, and the intention to be involved in day-to-day business or to become just a financial partner. The table exchanged views on the human factor’s role in the VC financing, the typical stake/range stake that the VC requires in the share capital and whether it is influencing the required conditions. Participants asked whether VCs are only focused on investment return, or do they want to be part of the governance; the potential influence of VC in the business development of the start up and the factors influencing the most in terms of success; the conditions for a VC to enter; and, more importantly, the degree of high value of the VC. The group concluded with a discussion on the power of negotiations of the startup versus the VC.

The rise of the regulator: what does this mean for the lending landscape?

This group discussed each jurisdiction’s regulation on the lending of money by a business (through a bank or an alternative lender) to a business, different approaches to the regulation of lending across the European Union, whether a lender is required to be licensed by the local regulatory authority, and the broad consequences of regulation and regulatory intervention. They exchanged views on the types of alternative lenders/funders to banks that come across in each country (direct lending funds, direct lending platforms, crowd funders etc) and whether it is easy for investors to invest in alternative lenders/funders. One question asked was: ‘Is the government and the regulator in each country facilitating alternative sources of funding to traditional bank lending?’ As some companies are looking to circumvent traditional funding models by issuing tokens, participants discussed their experience of raising funding through token offerings.

Getting your business bank debt ready – how to act for borrowers when seeking bank funding 

At this table, participants commented on the main reasons close companies resort to bank financing, the different types of bank financing options available in each jurisdiction (and their advantages and disadvantages) and how lawyers can help clients to determine whether a bank loan is the best financing option available. Finally, they reviewed recent trends with respect to banking requirements for small companies seeking bank financing and discussed the impact of ESG on bank financing from a borrower’s perspective.

Advantages and disadvantages of debt and equity financing

This group focused on clients’ preference, debt or equity, and whether this preference varies by sectors. Rising interest rates drive transactions to be equity-driven, but what are the interest rates and interest rate expectations in each region, and how do participants see this phenomenon? It was stated that loans are being replaced by equity in certain cases (again, due to the rising interest rates), and participants discussed this trend in their region, alongside other relevant current issues (eg supply chain issues, Russia’s invasion of Ukraine). The group concluded by touching on exit strategies.

Restructuring (eg debt equity swap) and refinancing – key issues to consider and the traps to avoid

Against the background of two current crises – the Covid-19 pandemic, which is still affecting the supply chain for many companies, and the Russia-Ukraine war – this group discussed whether their firms had distressed matters on the table and which restructuring measures they were discussing, planning or implementing in those matters. Example measures included: standstill, prolongation, increase or reduction of interest, refinancing, sale of assets, injection of further equity by current or new investors and debt equity swap. The group commented on the main challenges in these restructuring processes, and the contributions made by their current shareholders. The table reviewed the role of state aid programmes (short time work/rescue umbrellas) and the use of tools under the new pre-insolvency restructuring framework implemented in national laws. Finally, participants discussed new players for distressed financing/distressed situations.

Due diligence and the role of lawyers in various types of financing: opinions and counsel reports (reliance versus release letters)

Considering that financing parties (and nowadays warranty and indemnity (W&I) insurances) regularly demand to be provided with the due diligence (DD) report, the table discussed whether lawyers are protected in their jurisdictions against their and other third-party claims by including in the DD report that the issuer accepts no duty of care/no liability in connection with the DD report to any persons other than the addressee. They asked whether it makes a difference in each jurisdiction if the report is handed over to a third party prior to completion or post completion. They discussed non-reliance letters and exchanged views on protection against third party claims by a non-reliance letter, if the letter is qualified as being (1) general terms and conditions or (2) individually negotiated. In general, to which extent are lawyers able to exclude liability in a non-reliance letter in their jurisdiction and which extent would they deem to be market standard? Are limitations included as to the DD report in non-reliance letters? The group also discussed whether they perceive it as market-standard to issue reliance letters for vendor DDs, whether a reliance letter covered by professional insurance in each jurisdiction and whether lawyers generally charge special fees for the issuance of a reliance letter.

How to consider the tax and commercial implications of different forms of financing in order to optimise the financing of the business

At this table, participants discussed how closely held businesses are typically financed in their jurisdiction; the main reasons for closely held businesses to choose a certain form of financing; tax efficiency as a relevant factor; and how international tax developments affect the way closely held businesses are financed. They reviewed the relationship between the risks involved in a certain way of financing and the associated benefits of such form of financing, and whether intra-group debt financing is used for financing a closely held business. Finally, they discussed which elements are typically considered if funding is provided to the company under a private guarantee of the company’s owner and how funding is used for the repatriation of cash to the company’s owner and what are the typical considerations that lawyers should take into account.

The impact of recent Russian sanctions on lenders and financings

This group touched on the sanctions against Russia that could impact lenders and financings. Here, they predominantly discussed the impact of the sanctions on international (non-Russian) banks, and the consequences to lenders and financial markets of asset freezes, closing down subsidiary branches in Russia and, in turn, closing foreign subsidiaries of Russian companies. The significant increase of inflation and dramatically rising energy prices could be seen as the second round of effects of the sanctions. The group discussed how this effects lenders and financings, how companies should deal with closely held (non-Russian) companies in which sanctioned persons/entities hold directly or indirectly a minority share, and what would happen if an investor/lender becomes subject to sanctions. Finally, they responded to the question of how sanctions interact with the contractual provisions that commonly appear in loan facility agreements and, regarding new loan transactions, the key provisions in the loan documentation to think about in light of sanctions.