Greek tragedy averted
In summer 2015, Piraeus Bank, Greece’s largest lender by assets, needed to raise €4.9bn. In common with other large lenders in the country, it had failed the European authorities’ stress tests. It had to meet tough new capital requirement targets or face being wound up.
Piraeus’s wish was to launch a debt-for-equity swap. However, EU rules dictated that since many of the bonds were held by retail investors, the bank needed to put together an approved prospectus — which can take months to prepare. It was a luxury Piraeus could not afford. Indeed, since its largest competitors wanted to launch similar swaps and Piraeus needed to raise more capital than they did, it had to move fast.
“Had we come to market late, investor appetite for Greek bank shares might have been exhausted,” says Mei Lian, a partner at Shearman & Sterling, which acted for Piraeus Bank.
Lawyers at Shearmans and Allen & Overy, which acted for the investment banks appointed by Piraeus, including Deutsche Bank, UBS and Credit Suisse, examined the EU Prospectus Directive, which dictated the content and process for getting a prospectus approved. They identified that the requirement only applied to an offer of “transferable” securities.
“We looked at the situation with fresh eyes,” says Tom Grant, a partner at Allen & Overy. “We found an innovative way of buying time so that the commercial objectives of the client to go to market immediately and compliance with the legal regime could both be achieved.”
Allen & Overy came up with the idea for a holding instrument — a non-transferable receipt — which circumnavigated the legal obstacles that were delaying the swap, allowing the offer to proceed without delay.
“The novel structure enabled Piraeus to give investors the option to participate in the equity capital-raising at a future date without the requirement for a prospectus to be published at launch. This allowed the bank to launch the exchange offers well in advance of the actual equity capital-raising exercise,” Mr Grant says.
The offer was made to bondholders in October 2015 and settled in December. It allowed the bank to raise €600m in capital by converting existing liabilities into new equity. Moreover, it meant €2.7bn of state aid could be granted to Piraeus Bank. As a result, Piraeus avoided resolution (a process of managed failure) and with it the risk of contagion across the Greek economy.
In spring last year, the authorities in India decided to levy a tax on international funds holding Indian securities, which would have made investors liable for $6bn across the industry. Three years previously, the country’s high court had suggested this “minimum alternative tax” could apply to foreign portfolio investors, when the tax had been intended to be domestic only.
“It came as a surprise to many people,” says Nick Skerrett, head of contentious tax at law firm Simmons & Simmons. Moreover, the tax authorities wanted to apply it retrospectively for up to seven years. There was little hope of a swift judicial resolution. “Tax litigation in India is notorious for being slow and unreliable,” Mr Skerrett says. It can take up to 20 years.
Simmons hired a London-based Indian barrister and together they initiated judicial review proceedings in the Castleton case, the source of the “rogue” ruling, as Simmons calls it. Mr Skerrett then put together a group of supporters, including industry associations, asset managers and banks, to fund the action and share the costs. The original verdict was eventually overturned.
In September 2015, the government issued a circular against the tax authority directing that the minimum alternative tax should not be applied to foreign portfolio investors. Simmons then secured a supreme court order binding the government to its stated position.
“Our approach reduced the litigation timetable from 20 years to less than 12 months,” Mr Skerrett says.
“Moreover, by reducing the litigation stages to one hearing and sharing the costs among multiple parties we were able to reduce everyone’s individual budgets.”