Star legal writers: banking

Oil prices and how banks reward their staff: topics from two of our star legal writers in the banking sector.

Dentons: Financing of North Sea oil and gas – a restructuring and insolvency perspective

By Byron Nurse and Humphrey Douglas

Until recently, there was little call for restructuring and turnaround specialists in the UK to focus on the oil and gas industry. That has now undoubtedly changed.  In the second half of 2014, Brent crude prices fell from over US$100 a barrel to around US$50, and although prices have since stabilised (currently near the US$60 mark), aå low price environment in the medium term seems likely. That is not bad news for all in the oil and gas industry. But for upstream operators focusing on exploration and production in the North Sea, it presents undoubted challenges, despite the tax concessions George Osborne announced in the March 2015 Budget. Byron Nurse and Humphrey Douglas consider some of the key questions those financing them are likely to be asking.

How sensitive is the company’s business to a low oil price?

While a low oil price is a global phenomenon, the risk of distress in the North Sea industry is compounded by at least two other factors:

The North Sea is a mature production area in which costs of extraction are high and getting higher, compounded by stringent decommissioning security requirements.

Upstream activity in the North Sea is no longer dominated by the largest international players. A raft of M&A activity has seen many fields owned by relatively small, independent operators. They may be more sensitive than larger companies to adverse market conditions.

A creditor needs to consider not only its customer’s own operations and cashflows, but the extent to which it relies on other companies that may be facing distress. The second half of 2014 saw a marked rise in insolvencies of UK-based oil and gas servicing companies.

How tight are the company’s financing terms?

Even a business adversely affected by the current market conditions may have a low risk of imminent default if it has agreed favourable financing terms. This is likely to benefit larger companies, particularly those that have had access to the debt capital markets. Bond covenants are often “incurrence” rather than “maintenance” in nature. This means they are not tested periodically, but only when the borrower takes a voluntary action, such as incurring new debt or selling an asset.

“All oil in UK territorial waters and the UK continental shelf belongs to the Crown until it reaches the well head”

By contrast, many oil and gas companies operating in the North Sea obtain their debt primarily from reserve based lending (RBL) facilities. Under RBL facilities, the amount of debt available at any time is based on the net present value of proven (and sometime also probable) undeveloped reserves in the relevant field(s), up to a maximum facility amount. The value of this “borrowing base” is recalculated periodically, typically twice a year. For a fully drawn borrower, a significant oil price drop is therefore likely to trigger a significant loan repayment obligation once that price change flows through into the borrowing base.

What are the company’s key assets and are they effectively secured?

All oil in UK territorial waters and the UK continental shelf belongs to the Crown until it reaches the well head. (In contrast, US oil companies own, and their lenders can therefore take security over, hydrocarbons before extraction.) So, the majority of the company’s value is…

Stewarts Law: Bonuses in the spotlight: caps and clawbacks

By Richard Nicolle

The way in which banks and other financial services businesses reward their staff has come under intense scrutiny in the wake of the 2008 global financial crisis. There has been widespread criticism of the City’s ‘bonus culture’ for its role in encouraging excessive risk-taking and promoting short-term gain over long-term sustainability. Against this backdrop, the last few years have seen wide-ranging reforms to the regulation of the financial services industry and, in particular, to the salary and bonuses paid by banks and other financial services businesses. This article looks at two current issues in this respect: bonus caps and bonus clawback.

Bonus caps

Major reforms to EU legislation relating to the financial services industry were introduced by the Capital Requirements Regulation and the CRD IV Directive, known collectively as ‘CRD IV’. In the UK, the practical details of CRDIV are set out in the revised SYSC Remuneration Code.

CRD IV applies directly to banks, building societies and certain investment firms. Among other things, it contains provisions relating to remuneration and bonuses paid by such businesses. In particular, it limits the amount of variable remuneration (i.e. bonuses) that employees can receive in proportion to their fixed salary. CRD IV provides that, in general, bonuses should be capped at the equivalent of one year’s basic salary, but allows member states to increase the cap to the equivalent of two years’ basic salary where shareholder approval is obtained. The relevant regulators in the UK, the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA), have said that they will allow the cap to be increased to the equivalent of two years’ basic salary with shareholder consent.

“We are likely to see further restrictions on ‘golden hellos’ in the future”

CRD IV also affects fixed or guaranteed bonuses. Essentially, it provides that such bonuses should not form part of employees’ prospective pay plans on the basis that they are ‘not consistent with sound risk management or the pay-for-performance principle’. However, there is an exception to this general prohibition for new employees in their first year of employment, provided that the employer has a sound and strong capital base. So, for the time being, it remains permissible for businesses in the financial services sector to use guaranteed first-year bonuses as a means of attracting talent.

So-called ‘golden hellos’ are also impacted by CRD IV. These are remuneration packages provided by employers to new employers relating to compensation or buy-out in respect of previous employment. They are common in situations where, for example, an employee stands to lose large amounts of deferred and/or unvested compensation (e.g. long-term incentive payments and stock options) by virtue of leaving one business to join another. CRD IV does not prohibit ‘golden hellos’, although it states that they ‘must align with the long-term interests of the institution including retention, deferral, performance and clawback arrangements’. Recent FCA and PRA proposals highlight a concern that ‘golden hellos’ can be used to insulate individuals against the risk of downward adjustments in previous awards and, therefore, might encourage them to change jobs to effectively ‘wipe the slate clean’. Consequently, we are likely to see further restrictions on ‘golden hellos’ in the future.

The CRD IV bonus cap has not been welcomed universally. Indeed, there were initial concerns that businesses would try to circumvent it by various means, including…

Ones to watch

Arendt & Medernach

‘Fund financing: an ever-growing demand from fund managers’

While the fund financing market is already well tested in the US, an increasing number of European financial institutions have created/developed a line of business to respond to an ever-growing demand of bridge financing from fund managers, in private equity transactions mainly.

Gateley

‘How high is high-net-worth?’

26, 27, 46, 47, 52 and 58 proved to be particularly lucky for some at the beginning of 2016. Two lucky winners are set to share the record Lotto jackpot  of £66,070,646 jackpot. Individually they have become the Lotto’s biggest ever winners, each collecting £33,035,323.

But lottery winners aside, what exactly qualifies as a high-net-worth individual?

Shoosmiths

‘Mid-market corporate finance – a look ahead at 2016’

2015 saw a year of growth – after a quietly confident start, the market gained momentum following the election and growth across the sectors continued into the fourth quarter.

This article from Shoosmiths looks at developments in law and regulation which we expect to impact lenders in the year ahead.

Wragge Lawrence Graham & Co

‘Changes to the AIM rules for companies’

On 22 December 2015, the London Stock Exchange published AIM Notice 43 setting out changes to the ‘AIM Rules for Companies’.

The changes to the AIM Rules took effect on 1 January 2016 and principally affect cash shells and investing companies. The changes are likely to result in a decline in the number of cash shell listings on AIM.