Week in Review

September 17, 2018

Global Roundup

China says Washington asks to resume talks on tariff fight. Washington has invited Beijing to hold new talks on their escalating tariff dispute, the Chinese foreign ministry said on Sept. 13, ahead of a decision by President Donald J. Trump on Chinese imports. (Business Mirror)

The peso crisis in Argentina: A risk analysis. Argentina’s new currency crisis: what happened this time? Is any comparison with the previous crisis (1998 – 2002) possible? What impact could we expect in the close-term for President Mauricio Macri and the country’s political stability? (Global Risk Insights)

EU tells Britain it won’t renegotiate Brexit divorce bill. The European Union will not reconsider parts of the Brexit agreement with Britain that have already been agreed on, like the divorce bill London will have to pay, a spokesman for the bloc’s executive said on Sept. 13. (HSN)

As Brexit looms, Ireland remains a primary target for business expansion. There has been a lot of worry about Ireland’s economic future in the aftermath of United States corporate tax cuts. Ireland became a mecca for U.S. multinationals partly because of its low corporate income tax rate. Post Brexit, will the island nation still attract jobs and foreign investment? (Global Trade Magazine)

EU-U.S. expect early results in trade talks to ease tensions. The EU and U.S. will ratchet up their contacts in the coming weeks in order to improve cooperation on trade and head off risks of an escalation in the ongoing dispute. (EurActiv)

Economists bullish on global growth despite emerging market turmoil. Wall Street economists are sticking with their forecasts for the global economy to enjoy its strongest growth since the start of the decade even as emerging markets wobble and trade wars escalate. (HSN)

Portugal: Recovery and risks. Portugal has turned the page on its 2010-13 crisis and is now enjoying a job-rich economic recovery, driven by investment and exports, says the IMF in its latest annual assessment of the country’s economy. (IMF)

Large exporting countries failing to stop rampant bribery in global trade. Many of the world’s largest exporting countries are failing to punish their companies for taking part in bribery overseas. (Global Trade Review)

China puts off licenses for U.S. companies amid tariff battle. Amid a worsening tariff battle, China is putting off accepting license applications from American companies in financial services and other industries until Washington makes progress toward a settlement, a business group says. (Business Mirror)

China, tariffs and trade policy: What’s going on? If changes in trade policy have been giving you and your team whiplash lately, you’re not alone. A lot has happened recently on the global stage, and there is a lot to sift through. We compiled some of the top concerns we hear from customers. Read this summary, and consider how you will manage potential disruptions to your supply chain as developments continue to unfold. (Global Trade Magazine)

U.S.-China trade war has its seeds in the financial crisis. In many ways, the seeds of the current trade war were sown in the financial crisis. The crisis had lasting impact by accelerating China’s catch-up with the United States, undermining U.S. fiscal strength, and slowing down China’s reform and opening. (Brookings)

Are we about to face a new Asian financial crisis? Emerging market economies and their currencies have come under severe stress in recent weeks, as rising U.S. interest rates and trade fears prompt investors worldwide to shun their assets and move money to the U.S. (DW)

Can blockchain technology bring smooth seas to global shipping? There are a handful of technologies that, if widely adopted, have the potential to revolutionize how the world works. Distributed ledger technology is one such invention, and shipping is an industry that would benefit from adopting blockchain and other distributed ledger technologies. (Stratfor)

Crypto’s 80% plunge is now worse than the dot-com crash. As virtual currencies plumbed new depths on Sept. 12, the MVIS CryptoCompare Digital Assets 10 Index extended its collapse from a January high to 80%. The tumble has now surpassed the Nasdaq Composite Index’s 78% peak-to-trough decline after the dot-com bubble burst in 2000. (Bloomberg)

Ten years after Lehman’s collapse, these 10 risks could cause the next crisis. Around the world, regulators and policymakers say that measures taken in recent years have made banks safer than ever, with more capital and targeted oversight informed by mistakes made before Lehman went bust. That said, there are still plenty of potentially dangerous risks brewing in the financial system. (Quartz)




Where Does the EU Go From Here?

Chris Kuehl, Ph.D.

The history of the European Union (EU) is full of fits and starts, twists and turns. This was to be expected given the challenge of trying to get over 25 independent nations on the same page. More often than not, there has not been enough unity for the organization to accomplish even some of the minor goals. Most of the EU back story is one of squabbling over who has the power and what they plan to do with it. The crisis that gripped Greece, Spain, Portugal and other southern tier states resulted in an awkward and acrimonious rescue and bailout that Germans still resent. The immigration crisis has been like a wildfire defying containment as it has swept through the region’s politics, creating potent nationalist parties that have been upsetting the norm in every election—the latest in Sweden. It would be understandable if the powers that be were shrinking away from any of their grandiose plans and were just focused on survival, but that does not yet appear to be the case.

Jean-Claude Juncker, the president of the European Commission, has once again broached the idea of making the euro a global reserve currency that could rival and even replace the dollar. This is not the first time such a plan has been hatched. From the very start of the euro, there were those who pictured it playing this role. Over the years, there has been too much instability in Europe and with the value of the currency.

The rest of the world has been reluctant to abandon the dollar. There has been concern that the European Central Bank (ECB) would focus too much on domestic issues and would refuse positions called for by a global role. Some of that thinking may have started to shift. Part of this is due to the way the ECB has managed the euro over the last few years—more attuned to the global value than before.

A bigger motivation is eroding faith in the U.S. and the dollar. The policies of the Trump administration have been shocking and baffling to the rest of the world as suddenly the champion of free trade has become isolationist and protectionist and overly hostile to the global institutions the U.S. established in the first place. The world knows full well that Trump will not be in office forever and he may be gone in two years. The bigger issue is that some 30% to 40% of the public still supports the world view that President Trump represents. It may be years before the U.S. returns to its old patterns. It is even possible they will never return at all.

What does a world look like with the euro as a rival reserve currency? It has deep implications for the U.S.—especially as long as those in power in this country insist on pretending that debts and deficits can expand indefinitely. The prime reason the U.S. can get away with its mounting debt burden is the dollar is the world’s reserve currency. Every other nation essentially has a built-in limiting factor when it runs deficits and builds debt. It has to finance shortfalls with its reserves. That means having something to sell to accumulate dollars. When there is a financial crisis, the value of their bonds will weaken. It then gets harder and harder to accumulate enough reserves to pay off the profligacy. Not so in the U.S.—we can simply print more money. Not literally of course, but the Treasury can always sell U.S. debt and get a good price given the status of the dollar. The U.S. runs a real risk of having far too much debt service, but it doesn’t face the limits that others face—as long as the dollar is the undisputed global reserve.

Europe would have some of that advantage should the euro gain status, but there will be those same limitations. The most vexing issue is that a reserve currency trends towards high value. That creates a situation where the European currency is much stronger than it has been at intervals. This is good news for those nations that do a lot of importing, but is not so good for those that rely on exports as most of the EU nations do. Germany has been cool towards the idea of the euro as a reserve currency as their economy is over 50% dependent on exports, but the bulk of that trade is with other EU members so there is some hope Germany would consider supporting the notion.




Filing Insolvency Claims as Joint Creditors?

Filing claims under senior facilities agreements with parallel debt structure

  • The German Federal Court of Justice confirms the option of filing claims to the insolvency table as joint creditors.
  • The security agent can file the parallel debt in addition to each creditor's claim to the insolvency table and accept payments from collateral and the insolvency quota for all creditors.
  • The security agent and all lenders together are joint creditors. In relation to each other, the lenders are not joint creditors but rather individual creditors.
  • The security agent files a claim in the comprehensive amount of the outstanding claims, including interest accrued up to the date on which insolvency proceedings are opened and expenses, mentioning the collateral as subject to a right to separate satisfaction. Each individual lender claims the repayment amount due to it plus interest.

Parallel debt structure as basis for filing claims in insolvency proceedings

In (internationally) syndicated loan contracts, it is standard procedure that the borrowers not only place themselves under an obligation towards the individual lenders to repay the loaned amount, but also establish an independent (abstract) debt, also known as "parallel debt," by submitting an abstract acknowledgement of debt to an appointed security agent. This is done to make the lenders' individual claims more tradable and to transfer the collateral only to the security agent, which holds it in trust for the lenders.

The parallel debt always equals the total amount of all of the lenders' secured claims. Thus, payments by the borrower to the lenders automatically reduce the amount of the parallel debt. It is contractually agreed that payments toward the parallel debt also have the corresponding effect on the individual lenders' claims. This means that the parallel debt does not constitute a duplication of actual claims.

Relationship of the individual lenders' claims to the parallel debt

Syndicated loan contracts often stipulate that the rights and obligations of the individual lenders are independently established and exist independently from each other. Thus, in relation to each other, the lenders are not joint creditors but individual creditors.

Due to the structure of the parallel debt, the security agent and all of the other lenders together are joint creditors. Not only all lenders taken together but also the security agent can demand repayment of all outstanding claims, but the borrower is only obliged to perform once (Section 428 German Civil Code).

Problems with filing the parallel debt

If the borrower or guarantor becomes insolvent, the question arises as to whether not only the security agent can register the parallel debt, but also the individual lenders can register their outstanding claims. This is often desired to ensure that the claims are easily tradable even after insolvency proceedings have been opened and to have the advantage of an enforceable claim in the event of a possible sale.

However, in actual practice, the actions taken by insolvency administrators and insolvency courts can vary. Problems can arise due to the seeming duplication of the claims caused by the parallel debt because the IT systems used for the insolvency table cannot deal with joint creditors. However, a new decision by the German Federal Court of Justice (judgment dated 5 July 2018 – IX ZR 167/15) has now confirmed the option of filing claims as joint creditors.

Details of filing claims

The decision by the Federal Court of Justice has now clarified that, if a borrower or guarantor becomes insolvent, claims not only can, but also should be, filed for each lender separately and also for the security agent. The parties can also be represented according to the general rules. It is often the case that the loan documents provide for a power of attorney for the security agent to represent the lenders. Since the documents are usually very extensive and the proof of representation required by courts is usually not sufficient, in a practical sense, it is necessary to procure powers of attorney (sometimes notarized) that explicitly include the right to file claims in order to avoid disputes in individual cases.

When a security agent files the parallel debt, such claim includes the total amount of all outstanding claims, including interest, up to the date on which insolvency proceedings are opened. In addition, the security agent can file its expenses if the debtor in question is to bear them according to the contract or applicable law, e.g., after a default. Examples of this include the expense of enforcing a right (in the amount of the legally permissible fees) or the remuneration of the security agent. As the holder of the collateral, the security agent also claims separate satisfaction. Whatever collateral has not already been reported to the insolvency administrator in advance must be listed in the filing documents.

Each lender files a claim in its own name for the amount to which it is entitled including interest accrued up to the date on which insolvency proceedings are opened.

The lenders' claims are correctly listed in the insolvency table unconditionally and as joint creditors with the security agent. Such agent's claim is listed under the condition of a shortfall after security proceeds (due to the existing right of separate satisfaction).

In the event of joint creditors, the debtor can repay any of the individual creditors at its own discretion (Section 428 German Civil Code). However, it is usually stipulated in the loan contract that, if the borrower or a guarantor becomes insolvent, the insolvency quota can only be paid to the security agent. Having received such payment, the security agent distributes it to the lenders, just as it does when it disburses the proceeds of collateral.

Dr. Thomas Hoffmann, Dr. Andrea Braun and Isabel Giancristofano, of Noerr LLP, specialize in international insolvency and restructuring cases.

Reprinted with permission.


Election Calendar

Swaziland, House of Assembly, Sept. 30

Brazil, President, Chamber of Deputies, Oct. 7; Oct. 28, second round, if needed

Bosnia and Herzegovina, President, House of Representatives, House of Peoples, Oct. 7

Latvia, Parliament, Oct. 7

Sao Tome and Principe, National Assembly, Oct. 7

Cameroon, President, Oct. 7

Luxembourg, Chamber of Deputies, Oct. 14

Afghanistan, House of People, Oct. 20

Georgia, President, Oct. 28


Impersonation Fraud Makes Inroads in the UK


Although it may be late payments that grab headlines in the U.K., the fact remains that small- and mid-sized entities (SMEs) also have to grapple with fraud. Among those struggles is dealing with impersonation fraud, or business email compromise scams. By now, the process may seem familiar. Fraudsters impersonate a trusted email account, supplier, or business relationship in order to dupe companies to part with their funds.

A Lloyd’s Bank survey estimates that impersonation fraud touches 500,000 businesses and costs them an average of £27,000. This fraud, too, is up 58% year-over-year. Only 20% of those hit by fraud “think twice” about reconsidering and re-examining business requests and 37% say they have no security precautions in place.

Those who might consider themselves tech savvy are not impervious to the scams. Of the 1,500 SME professionals surveyed, 12% of Millennials have been preyed upon by impersonation fraud, or know someone who has.

Other types of fraud are also gaining traction. As we note in this week’s report, ghost employees, according to the Society for Human Resource Management, can—and have—been haunting firms. No mere specter, they can wreak thousands (in some cases millions) of dollars worth of havoc to a company.

Ghost employees are either dead people living on via the corporate world’s payroll, former employees that are still alive or employees that never were—they are still getting paid in all of these cases.

Reprinted with permission.



Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations