PDI Seoul Forum: Europe’s legal progress encourages Asian LPs

Laws within the continental mainland have caught up with the more creditor-friendly regimes in the US and UK, a development that could comfort LPs committing to European direct lending.

As Korean investors pivot to European direct lending, the biggest question investors have is around jurisdictional issues, one mid-market lender said at the inaugural PDI Seoul Forum.

The focus comes as multiple Korean insurance investors said at the event that safety is of the utmost importance. One of the key aspects of vetting a manager, Lotte Non-Life Insurance Company head of alternative investment management Janghwan Lee said, was ensuring they have strong workout capabilities and have shown an ability to make solid recoveries on defaulted loans.

Jurisdictional issues have been at the heart of educating investors on European direct lending, Pemberton Asset Management’s head of Asia Pacific business development, Shintaro Mori, said. If a deal in Spain runs into trouble, how will a credit manager deal with that situation versus, say, a transaction that goes sideways in Germany?

Symon Drake-Brockman, managing partner of the firm, pointed to a growing trend in Europe that is seeing insolvency and bankruptcy proceedings move closer to a debtor-in-possession model, akin to the US’s Chapter 11 bankruptcy and the UK’s scheme of arrangement processes.

The trend within Europe has been shifting for a number of years now with European countries significantly expanding creditor rights in a way that arguably offers more protection and, in the process, European law has moved – at least conceptually – to facilitate a business reinventing itself rather than a liquidation, an analysis of insolvency laws shows.

In Germany’s 2012 insolvency law reform, the law was altered to allow for a temporary creditors’ committee that must include secured creditors at the opening of insolvency proceedings at a time when many key decisions are made at the onset of the case, according to a primer by Noerr.

In the process, debtors gained additional protections. Balanced with the extra ability for creditors to flex their muscle, this allows a business a better chance of surviving. A business with its doors open offers a better chance of recovery than a liquidation of assets at fire-sale prices.

Germany, one of the bright spots for private debt, has seen some notable successes with large cases that opted to restructure in Germany rather than in the UK using its scheme of arrangement, like that of German real estate behemoth IVG Immobilien in 2014, according to Law Business Research.

Further, the country has introduced tweaks to the law including addressing the issue of clawbacks.

Spain, one of the “wine-drinking countries” that some lenders find riskier than “beer-drinking counties”, has taken steps in recent years to make its restructuring process favour reorganisations over liquidations, including incentives to provide debtor-in-possession financing, according to materials prepared by Latham & Watkins.

The reforms received a vote of confidence when Abengoa, a large Spanish energy company, chose Spanish insolvency proceedings over the UK scheme of arrangement. Abengoa completed its restructuring in March 2017, through which the company reduced its €20 billion of indebtedness.

Certainly, IVG Immobilien and Abengoa are large-cap situations that normally would fall outside of the realm of private debt lenders, though facilitating a fresh start for such large multinational corporations can provide a modicum of comfort for LPs putting money with European direct lenders.