Maples Group - FUNDed - June 2022

FUNDed AN INDUSTRY NEWSLETTER FOR THE GLOBAL FUND FINANCE MARKET | JUNE 2022

GLOBAL

Market Reviews

LUXEMBOURG

Enforcement Provisions

IRELAND

Irish Collective Asset Management Vehicles

JERSEY

Jersey Limited Partnership – 2022 Amendments

What's Inside In this edition we feature:

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US Market Review ESG Trend Continues for 2022 Sukuk Issuance Using Offshore Centres

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Collateralised Fund Obligations

6

European Market Review

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Irish Collective Asset Management Vehicles

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Jersey Limited Partnership – 2022 Amendments, from a Lender's Perspective

12

Luxembourg Drafting Notes on Acceleration and Trigger Events to Enforcement Provisions

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Asia Market Review

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The Maples Group is delighted to present our June 2022 edition of FUNDed.

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US Market Review 2021 was a stellar year with huge activity across the US fund finance market and the trend has continued in the first half of 2022. There remains a huge demand for liquidity in the most common form of subscription line products, as well as a clear increase in the use of NAV, hybrid and management company level financing solutions. New and alternative lenders continue to appear in the subscription line facility arena with the existing larger lenders also expanding into the NAV and hybrid space as their knowledge of structures and investments further develop and increase in the market.

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Sponsors are demanding larger and more complex commitments from lenders, which reflects the upward trend in fund size that we were seeing at the end of 2021 – but that is not stopping fund launches by any stretch (Prequin reported the private funds market raising over US$1 trillion at the end of 2021), as subscription line facilities are as prevalent as ever, making the next deal hard to anticipate in terms of form but not in existence. Russian sanctions have not noticeably impacted deal flow to date, although we will be able to confirm our thoughts as the year progresses and in the next edition of FUNDed. As all readers will expect, the sophistication in the underlying credit agreements already addresses required action points if a sanctioned investor is identified. That investor would likely be excluded from the borrowing base of the facility in place as well as the related security package. This is, however, a developing area and is dealt with very much on the specific facts in each case and we encourage you to reach out to us should you need any assistance.

We are seeing significantly complex facilities on a crossjurisdictional basis, involving a variety of downstream security packages whether over and through aggregator vehicles, funds themselves and also investment companies.

Lenders are becoming even more familiar with the use of Cayman Islands investment vehicles that are the best and safest route for financing options through the life of a fund and post the end of the initial investment period, supported by bankruptcy ring-fencing and clear recognition and unhindered enforcement of security packages. This, coupled with sponsor guarantees, creates increased flexibility, safety and, most importantly, opportunities for all parties. These vehicles are also being used as a further alternative to the traditional subscription facility where commitments from investors exist in both equity and debt forms, driven by improved regulatory capital treatment for those investors. Investors and sponsors are also expanding into the market in place of the traditional bank lender, using golden-share and investment structures as well as joint venture strategies. Their existing knowledge of investment portfolio activities generally and forwardthinking growth strategies allow them to identify early financing opportunities.

As anticipated, ESG continues to be a focus for all parties as regulation progresses and meaningful ESG investment strategies are demanded by investors, ultimately leading to greater focus by lenders. This has created ESG benefits for sponsor groups, including cheaper financing costs and

There remains a huge demand for liquidity

longer tenor facilities where ESG compliance can be proved and maintained. The European regulations are being monitored by all players in the market and the base standards are anticipated to be mirrored and implemented in the US market in the foreseeable future. Those lenders and alternative financing parties with an eye on the ESG space already will, we anticipate, perform very well in the remaining half of 2022 and long into 2023.

As the global markets have slowed over the last month or so, we have seen a clear shift by sponsors in the formation of credit and distressed funds, suggesting their ever growing appetite to expand alternative financing options available to the market. Prequin reported over US$3 trillion of investor dry power awaiting deployment in 2021; we absolutely expect part of that to be utilised in traditional fund expansion utilising lender subscription and NAV lines, but also giving those traditional lenders a run for their money in the alternative lending space.

For further details, please contact: Tina Meigh

+1 345 814 5242 tina.meigh@maples.com

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ESG Trend Continues for 2022 Sukuk Issuance Using Offshore Centres Fitch Ratings and Refinitiv, among others, predict continued growth in Sukuk transactions in 2022, following a solid 2021 in which global outstanding Sukuk reached over US$700 billion (as reported by Fitch). One prominent trend in the Sukuk market that is expected to continue throughout 2022 is environmental, social and governance ("ESG") and the issuance of green Sukuk. We witnessed a debut issuance of sustainable Sukuk at the start of the year using a popular offshore centre.

In this Country Correspondent Report for Islamic Finance News, Manuela Belmontes discusses how the ESG Trend Continues for 2022 Sukuk Issuance Using Offshore Centres1

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ESG Trend Continues for 2022 Sukuk Issuance Using Offshore Centres (maples.com).

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Collateralised Fund Obligations While the US CLO market powers to new heights in 2021, a less prolific, but nonetheless highly interesting structured finance market segment, continues to attract attention.

Collateralised Fund Obligations ("CFOs"), which securitise interests in a diversified portfolio of private equity and hedge fund assets, share many of the hallmarks of a traditional CLO structure, while incorporating certain novel features to account for the unique nature of the collateral.

The Maples Group has received instructions on CFO structures and continues to monitor developments. Our observations are covered in an article (pages 10-11) in The CLOser

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European Market Review European fund finance followed a busy 2021 with an encouraging 2022 first half. An expanding demand for credit in the fund finance space was driven by the active market for private capital which is seeing healthy levels of sponsor-led M&A activity and new fund raisings to take advantage of perceived investment opportunities. Across the Maples Group's European offices in Jersey, Luxembourg, Ireland and London we saw an increase of around 40% in deal volume year to date versus 2021. There are still considerable funds available in the PE market to drive further M&A activity and related fund finance and we are hopeful that the strong start to 2022 continues despite the various global headwinds.

The threat of stagflation looms large. The effect of Russian sanctions is causing some banks with large Russian exposures to reduce their lending and causing funds with Russian exposures and LPs to work their way through the complex and fast changing restrictions. The conflict in Ukraine and the resultant supply chain issues and increased geo-political uncertainty remain a concern to global markets. In particular the slowdown in the capital markets, a sharp jump in yields and the potential for liquidity issues could dampen deal levels going forward and make for a volatile backdrop to the European loan market. However, despite these headwinds fund financing levels remain robust.

There has been increased institutional interest in fund financing that is uncorrelated to public fixed income strategies and due, in part, to the volatility resulting from some of the factors above as well as a floating coupon and rising interest rates, which result in institutional investors looking for alternatives to traditional fixed income products as it offers investment grade risk with relatively short term exposures. The market has continued to see growth in capital call/sub-line facilities, in particular, due to the increase in fund sizes being raised. This raises the possibility of a funding gap emerging as current lenders balance sheets may not grow at the same pace as the private capital market. It may well be that non-bank

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Fund financing levels remain robust

institutional capital is deployed to fill any gap that emerges.

We have also seen a continued increase in NAV facilities and GP financings across our offices.

ESG remains an increasingly important factor to consider in fund financings with initiatives underway to provide a greater level of reliable, comparable, consistent and in depth quantitative ESG reporting of borrowers to assist lenders due diligence. One example of which is a “harmonisation project”, which is a collaboration between the LSTA, the Alternative Credit Counsel, and PRI aiming to provide a comprehensive ESG reporting tool for borrowers.

There has been some judicial debate in two recent Cayman Islands court decisions as to whether the correct party to legal proceedings against Cayman Islands exempted limited partnerships (“ELPs”) is the general partner ("GP") of the ELP or the ELP itself. While this is a somewhat technical issue, commencing proceedings against the correct party in a manner that avoids, as far is possible, arguments that the proceedings have been commenced incorrectly will save time and cost and avoid the risk of the proceedings being dismissed on technical grounds. This can be relevant in fund financings in the drafting of credit agreements to which ELPs are a party to ensure that the bringing of proceedings against the ELP is not technically prohibited contractually and in relation to representations as to parties that legal proceedings can be commenced against. In a development that contributes to this debate, the Grand Court in Re Formation Group (Cayman) Fund I, L.P. found that: (i) both a creditor and a limited partner are able to present a winding up petition against an ELP on the same basis as if the ELP were a company; and (ii) an ELP can be named as a party to legal proceedings (i.e. it can sue or be sued).

Formation stands in contrast to the October 2021 decision in Re Padma Fund L.P. where it was held that: (i) only limited partners had standing to petition for the winding up of an ELP and had to do so pursuant to the grounds for winding up applicable to ordinary partnerships in the Partnership Act; and (ii) creditors had no standing to present a winding up petition against an ELP at all – creditors had to petition for the winding up of the GP. Further, only the GP and not the ELP itself could sue or be sued.

This leaves conflicting decisions by judges of first instance – it is not a case of Formation overruling Padma. Until there is judicial certainty (for example, a decision from the Cayman Islands Court of Appeal) or amendments to the legislation, questions of: (i) which parties can present a winding up petition against an ELP (and on what basis); and (ii) the correct party to sue or be sued on behalf of the ELP (either the ELP or GP), will remain open to argument on the facts of each case. Credit agreements with ELPs as a party should continue to be drafted to include the wording that permits any legal proceeding, claim or action against any ELP being initiated by or against the general partner of such ELP, solely for purposes of complying with the Exempted Limited Partnership Act (As Revised) of the Cayman Islands.

It has been fantastic to see in person fund finance events resume as we emerge from the COVID-19 lockdown and begin a return to normality. FFA drinks were held at The Victorian Bath House, the FFA University took place virtually with an in-person drinks party afterwards and a NexGen London Workshop & Networking event was held; all great successes and very well attended by fund finance market participants. The next event to look forward to is the Fund Finance Association European Conference in London on 28 June 2022.

For further details, please contact: Jonathan Caulton

+44 20 7466 1612 jonathan.caulton@maples.com

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Irish Collective Asset-Management Vehicles In the global fund finance market, where the fund vehicle of choice is typically a limited partnership, the Irish collective asset-management vehicle, more commonly known as the ICAV, is often misunderstood.

With the continued growth of the fund finance market in Ireland, particularly in the subscription line financing space, it has become more commonplace to see ICAVs as part of such financings. As the Irish fund vehicle of choice in this market, this article seeks to summarise its key features (by way of comparison with a limited partnership vehicle) and to serve as a reminder of some of the practical considerations for transaction documentation and management, especially for lead counsel jurisdictions.

What is an ICAV? The ICAV is a bespoke corporate structure with its own legislative framework called the Irish Collective Assetmanagement Vehicles Act, 2015 (the "ICAV Act") which is regulated by the Central Bank of Ireland. It has a separate legal personality with an Instrument of Incorporation as its constitutional document (instead of a limited partnership agreement for the limited partnership).

ICAVs are established as segregated cell entities, which may be either a single fund or an umbrella fund with multiple

sub-fund. If an umbrella fund, it will have segregated liability between sub-funds. Segregation of liability means that the assets of one sub-fund cannot be used to satisfy another sub-fund's liabilities and vice versa. Though this principle is enshrined in Irish law (Section 35 of the ICAV Act), it is market practice to include segregated liability clauses in the financing documents to which the ICAV is a party, particularly where such documents are governed by laws other than Irish law. This language usually adheres to the letter of the law so is rarely contentious.

How is an ICAV structured?

The ICAV acts through its board of directors. However, the directors of an ICAV will always delegate some of their functions and responsibilities to certain fund service providers. These would comprise the AIFM, the Administrator and the Depositary. Equally, the AIFM may delegate some of its inherited responsibilities to the investment manager and others.

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Who can make capital calls?

This is a fundamental question in the context of subscription-line financings where an ICAV is the borrower with the key takeaway being that it is never a 'one-size fits all'. Depending on the extent of the delegated duties, the right to call for capital from investors may reside with the directors of the ICAV. However, more often than not, the directors will delegate that responsibility to the AIFM who may in turn sub-delegate the right to call for capital to, or even share that right with, the investment manager. And not forgetting the administrator, whose role is typically an operational one to process and register the subscriptions, be wary of assuming that it has no rights in relation to the capital calls as it may well do.

The net effect is that lender's counsel must always carefully perform due diligence on the ICAV fund formation documentation as well as the subscription agreements (which are the equivalent of the limited partnership agreement for the limited partnership) in order to verify which entity actually makes the subscription calls on behalf of the ICAV. This will in turn inform the drafting of the capital call-related representations and undertakings in the facility agreement as well as determining the nature and scope of the security package which the lender needs to take.

Given the potential involvement of the various fund service providers in the right to call capital, a feature of Irish security packages in a typical ICAV subscription line financing is the requirement for side letters to be provided by the AIFM and / or the investment manager in favour of the lender. The purpose of these side letters is, among other things, for the fund service providers to acknowledge the creation of security in favour of the lender and undertake to comply with the lender's instructions in an enforcement scenario.

This creates an important contractual nexus between the lender and the relevant fund service providers as the typical market position in Ireland is not to have the AIFM, and certainly not the investment manager, as party to the facility agreement or the security package.

Can an ICAV give a guarantee?

An ICAV, as a regulated fund and the subject of the Central Bank of Ireland's AIF Rulebook, is prohibited from acting as a guarantor on behalf of a third party, which includes another sub-fund within the same umbrella structure. The term 'guarantor' is not defined, but in practical terms, it is understood to mean that regulated funds, though they can guarantee and secure their own obligations and those of their wholly-owned subsidiaries, they cannot guarantee or give security for the obligations of any third party. There is no wriggle room on this as this is a position enshrined in law.

This guarantee restriction is important in the context of transactions where an Irish ICAV is acting as a feeder fund to a third-party master fund as part of a wider structure and where the Irish feeder is not the borrower. In such circumstances, a cascading pledge arrangement, with which practitioners in the Irish market are very familiar, can be put in place. In this arrangement, the ICAV feeder creates security in favour of the master fund in respect of its own capital commitment to the master fund and the master fund makes an onward assignment of that security interest to the lender. It is effectively using a series of security assignments to indirectly assign the ICAV feeder fund interests to the lender. This alternative approach to the guarantee or third-party security is now a widely accepted practice in subscription line financing involving ICAVs. Though the ICAV vehicle is a very different structure from the more familiar Cayman Islands and Luxembourg limited partnerships used in the fund finance market, it is nevertheless a very robust structure with built-in legal protections which make it attractive as a vehicle of choice in its own right. As with any financing, if a thorough fund formation due diligence is conducted at the outset of a transaction, the finance documentation can be readily tailored to make it fit for an ICAV subscription line financing, keeping the emphasis and focus on the main commercial terms.

For further details, please contact: Elizabeth Bradley

+353 1 619 2737 elizabeth.bradley@maples.com

Sarah Francis

+353 1 619 2753 sarah.francis@maples.com

Alma O'Sullivan

+353 1 619 2055 alma.osullivan@maples.com

Vanessa Lawlor

+353 1 619 7005 vanessa.lawlor@maples.com

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Jersey Limited Partnership – 2022 Amendments from a Lender's Perspective Jersey limited partnerships ("Jersey LPs"), governed by the Limited Partnerships (Jersey) Law 1994 (the "LP Law"), have long been popular with both fund managers and lenders to fund structures. This year will see the most major updates to the LP Law (the "2022 Amendments") since it came into force nearly 30 years ago.

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The 2022 Amendments, expected to come into force in Q3 this year, aim to retain (and in some cases enhance) the flexibility offered by the current regime, while modernising the LP Law to ensure that the Jersey LP remains an internationally competitive product.

These amendments should make it easier for limited partners to approve actions being taken in respect of a Jersey LP. We can see potential benefits to lenders following on from this, in being able to reasonably require more extensive condition precedent corporate authorities.

In this article, we highlight a few of the changes that will be of interest to lenders to structures that use Jersey LPs.

Conclusion

Third Party Rights The 2022 Amendments will put on a statutory footing the ability for third parties to benefit from and enforce rights in limited partnership agreements ("LPAs") without being a party to the LPA. The 2022 Amendments will also restrict any amendments being made to such third-party rights without the consent of the relevant third party.

These amendments will give useful comfort to lenders seeking to include negative controls in an LPA.

Investor Claw-Back The 2022 Amendments enhance the rights to recall from limited partners distributions of returned contributions.

Under the LP Law, there is currently a six-month limit, running from the date of payment, for clawing back payments made to limited partners, if the Jersey LP was insolvent when the payment was made.

The 2022 Amendments will permit LPAs to include longer claw-back periods, overriding the statutory time limit, and potentially increasing amounts available to creditors of insolvent Jersey LPs.

Winding Up The 2022 Amendments will modernise the winding up, termination and dissolution of Jersey LPs, introducing a simpler and more certain process.

Expanded Safe Harbours The statutory 'safe harbour' provisions (decisions which can be made by limited partners without losing limited liability) of the LP Law will be augmented by the 2022 Amendments, both to expand current safe harbours and include additional provisions.

One of the principal reasons lenders have confidence in financing Jersey LP structures is, as previously reported in this publication, the creditor-friendly Jersey security interests law.

This will continue to be the case after the 2022 Amendments come into force, and lenders should also look to take advantage of the greater flexibility of terms which will be permissible to include in an LPA, to ensure they can benefit from enhanced contractual rights against a Jersey LP structure and its investors.

Maples Group Jersey The Maples Group Jersey team has been at the centre of recent developments in the investment fund and funds finance spheres. The specialist team in Jersey includes partners Mark Crichton, Paul Burton, Tim Morgan and Simon Hopwood (with Simon being an active participant of the working party, which considered the 2022 Amendments).

For further details, please contact:

Mark Crichton

+44 1534 671 323 mark.crichton@maples.com

Paul Burton

+44 1534 671 312 paul.burton@maples.com

Tim Morgan

+44 1534 671 325 tim.morgan@maples.com

Simon Hopwood

+44 1534 671 314 simon.hopwood@maples.com

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Luxembourg Inspired Drafting Notes on Acceleration and Trigger Events to Enforcement Provisions The Luxembourg law security package most often implemented in the context of fund finance deals covers claims corresponding to: (i) the amounts committed by limited partners for investment in the fund pursuant to their subscription agreements; and (ii) the amounts credited to the fund's account(s) into which the proceeds are paid from the capital calls the fund issues to its limited partners.

These claims constitute the 'collateral' that the fund typically pledges in favour of lenders in connection with its external financing and falls within the scope of the Luxembourg law of 5 August 2005 on financial collateral arrangements (the "Collateral Law"), which embodies the Luxembourg legislature's implementation of the Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements (the "Directive").

By now, it is well known among Luxembourg practitioners and finance lawyers around the world that the innovations introduced by the Collateral Law dramatically increased commercial creditors' enthusiasm for taking security governed by Luxembourg law in connection with commercial credit agreements and loan facilities, which are typically governed by the laws of jurisdictions other than Luxembourg. This results from the intention of the legislator

to establish a creditor-friendly regime, taking advantage of the flexibility granted by the Directive to the Member States in doing so.

A key (and probably the most often cited) innovation was the manner in which the Collateral Law gives creditors the assurance that security granted to them pursuant to the Collateral Law is bankruptcy remoteness as a matter of Luxembourg law.

Although discussed less, another significant innovation introduced by the Collateral Law relates to the broad contractual freedom it has afforded security grantors and takers to determine trigger events permitting enforcement under their security agreements. Such freedom is worthy of mention as it has had the effect of facilitating the implementation of fund financing transactions.

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Trigger Events Under Civil Law Prior to the Implementation of the Collateral Law As a starting point, it is reminded that a pledge (gage) constitutes the granting of security over real (in rem) assets and, as such, is considered to be accessory to the underlying claims it secures².

Prior to the introduction of the Collateral Law, the pledge, tracking the underlying and secured obligations, could only be enforced following a breach of such secured obligations and the acceleration of the underlying debt. In other words, the collateral taker would not necessarily be permitted to enforce the pledge in circumstances where the underlying obligations had not first become due and payable. From a practical perspective, in the context of financing schemes, security rights would only be enforceable following an enforcement event generally defined as "Event of Default" which had itself triggered the acceleration of the secured obligations.

While conditioning enforcement on two elements (namely the existence of default and underlying payment obligations being due and payable (whether by reason of acceleration or otherwise)) may perhaps seem logical in some circumstances, it proved to be a burdensome constraint (and thus, a hindrance) in the context of sophisticated financing transactions.

Such constraint is not necessarily always ideal from the perspective of the creditor. For instance, in case the occurrence of the event of default results, as in most cases, from an otherwise comprised financial situation of the obligor's group, the debt may not necessarily be repaid, regardless of whether it is accelerated. In fact, were a pledgee / collateral taker to accelerate in an attempt to satisfy the aforementioned conditions, it could, in certain circumstances, have the nefarious effect of leading to deeply adverse consequences for the pledgee / collateral taker or other secured parties, involved in the transaction by triggering insolvency for some, or even all, guarantors or obligors in the transaction. Even with the bankruptcy remoteness afforded to pledges under the Collateral Law, the opening of insolvency proceedings (whether abroad or even in Luxembourg) could unnecessarily complicate, jeopardise or, even worse, prevent a timely and swift enforcement of security interests.

Likewise, a requirement for a pledgee / collateral taker to accelerate payment obligations following an event of default

for the purpose of enforcing the pledge is potentially very problematic for the obligor’s group. Indeed, the creditor, following the occurrence of an event of default, seeking to temporarily exercise some of the rights under the security documents that are not irrevocable (freezing / blocking the pledged collateral accounts, sending capital call notices to investors in case of failure by the fund and its general partner to do so, etc.) would be left with no other option but to accelerate the underlying obligations, leaving the obligors to face the ensuing cascade of (potentially severely) disruptive consequences on their business affairs.

Luxembourg's Innovative Implementation of the Directive Through the Collateral Law Looking at the text of the Directive, we can see that it aligns with the traditional approach described above such that a security holder's ability to enforce necessarily consists of a default by the debtor of the underlying / secured obligations of a kind that concerns a failure to pay obligations that are due and payable. This is apparent when we consider the meaning that the Directive gives to "enforcement event" which is stated to mean "an event of default or any similar event as agreed between the parties on the occurrence of which, under the terms of a financial collateral arrangement or by operation of law, the collateral taker is entitled to realise or appropriate financial collateral or a close-out netting provision comes into effect"³.

While the Directive's use of the words "any similar event" appear to have left little room to deviate from requiring the double condition, a review of the corresponding text in the Collateral Law transposing the Directive suggests that the Luxembourg legislator decided to alleviate the necessary connection between a default of the underlying payment obligations and enforcement of the security interest.

Notably, the Collateral Law did not transcribe word for word the Directive's definition of "enforcement event" and opted instead to define it as "an event of default or any event⁴ as agreed between the parties on the occurrence of which, under the terms of a financial collateral arrangement or the relevant financial obligation agreement or by operation of law, the collateral taker is entitled to realise or appropriate financial collateral or a close-out netting provision comes into effect".

Relative to the Directive, the Collateral Law's simple exclusion of the word 'similar' in its definition of enforcement event provides enhanced contractual freedom to parties to Luxembourg law governed security agreements

This fundamental tenet is equally true for all pledges whether created pursuant to the Luxembourg civil code (Code Civil), the commercial code (Code de Commerce) or under the Collateral Law. 3 The term "enforcement event" means an event of default or any similar event as agreed between the parties on the occurrence of which, under the terms of a financial collateral arrangement or by operation of law, the collateral taker is entitled to realise or appropriate financial collateral or a close-out netting provision comes into effect.

4 Words in the cited definitions for enforcement event are emphasised merely for the purpose of the discussion and are not actually highlighted in the text of the Directive or of the Collateral Law. 2

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by eliminating the requirement for payment obligations to be due and payable (whether by acceleration or otherwise) as a prerequisite to enforcement. This has been confirmed by case law⁵.

Case Law Confirmation It is perhaps not surprising that the change that the Collateral Law introduced with respect to enforcement would be a source of discussion and even controversy within the Luxembourg community of legal scholars, practitioners and the judiciary.

The issue was not merely a formalistic concern about breaking with a longstanding traditional approach to enforcement, it was also practical in nature. For example, if a security taker is authorised to enforce the pledge prior to acceleration of the secured obligations, the question of the security taker's permitted possible uses of the proceeds following its realisation of the pledged assets comes to the fore. Absent any due and payable obligations against which the proceeds may be applied in or towards, the question arises as to whether in such circumstances the collateral taker would be obliged to transfer back immediately the proceeds of the enforcement to the collateral provider or run the risk of liability towards the security grantor, a scenario which would effectively put an end-run on the apparent freedom bestowed upon the security holder by the Collateral Law⁶. This apparent paradox results in part from the Collateral Law's silence in relation to this specific topic.

It appears that this observation was shared by the legislator, as a draft bill of law, amending the Collateral Law, has been filed in parliament⁷ (the “Draft Bill”). This Draft Bill, in its current early version, seeks to address the above.

Relying on a review and analysis of legislative preparations leading to the Collateral Law in 2005, the Luxembourg judiciary has⁸ satisfied itself with the Collateral Law as currently in effect and confirmed that a security holder can lawfully enforce the pledge upon the occurrence of any contractually agreed trigger event by holding that: (i) such enforcements cannot be challenged in court prior to the completion of the appropriation process; and (ii) any pre-emptive measures seeking to hinder or prevent enforcement should be dismissed in favour of court proceedings at a later time when such controversies are properly ripe for resolution.

From a practical perspective, the judiciary's holdings are understandable given that by the time the pledged assets have been realised with the proceeds having been collected by the security holder, the underlying secured obligations will most likely have become due and payable (whether in full or in part), thereby allowing the security holder to apply such proceeds in accordance with the relevant provisions of the facility or credit agreement. For its part, the Luxembourg Conseil d'Etat has arrived at the same conclusion through an analysis that is based on the Collateral Law's association of financial collateral arrangements with the principles of financial guaranties (garanties financières) rather than with those of sureties (sûretés)⁹.

Such a dissociation between successive steps (enforcement on the one hand, and application of the proceeds of realisation towards the secured obligations on the other hand) should not be construed as a conceptual issue that would prevent the collateral taker from safely and legally exercising its right to enforce the pledge upon the applicable trigger event having occurred. From a theoretical perspective, the pledge remains necessarily accessory to the underlying secured obligations10. This approach has been confirmed by case law. As an illustration of such accessory nature, the Tribunal d'Arrondissement de et à Luxembourg, (15° Ch.), ruled on 29 January 2014 that a pledge agreement could be enforced in case of failure by the borrowers to repay upon maturity of the debt, even though such event was not expressly listed as an enforcement event in the pledge agreement.

The Draft Bill As hinted above, the Draft Bill includes some amendments that are precisely meant to clarify this matter. The first amendment will consist in adding even more flexibility to the definition of Enforcement Event in the Collateral Law. The currently contemplated change could be translated in English as follows: "an event of default or any event whatsoever as agreed between the parties on the occurrence of which, under the terms of a financial collateral arrangement or the relevant financial obligation agreement or by operation of law, the collateral taker is entitled to realise or appropriate financial collateral or a close-out netting provision comes into effect". Such change is, from our perspective, more of a clarification meant to confirm that the interpretation of the Collateral Law by case law is indeed in line with the intention of the legislator.

See decisions mentioned in article cited in FN11. (under a créance de restitution owed to the collateral provider), obligation of similar nature as the obligation that would bear upon the collateral taker following enforcement of the pledge, realisation of the pledged assets and application of proceeds, in respect of any surplus corresponding to the amount exceeding the secured obligations then outstanding and payable. ⁷ Draft N° 7933, lodged on 20 December 2021 8 In line with the intention expressed by the legislator in parliamentary works seeking to consecrate the unassailability of the financial collateral arrangements and the effect of their enforcements.

9 Cf. Renforcer la sécurité juridique de la réalisation des garanties financières : l’appel à la loi », Daniel Boone & David Maria, ACE n° 09 – novembre 2010 10 In support of this "La réalisation du gage", Alex Schmitt, Le gage de la loi du 5 août 2005 sur les contrats de garantie financière, Anthemis 2021 5 6

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The other change is to add a new paragraph whereby it will be expressly stated that, when the relevant financial obligations (i.e. the secured obligations) are not payable upon the occurrence of one of the enforcement events agreed between the parties, the proceeds of realisation shall, unless otherwise provided for, be applied towards the discharge of the relevant financial obligations.

Drafting Considerations In light of the Collateral Law's innovations with respect to security enforcement, it is worth highlighting a few important considerations in relation to drafting security agreements under the Collateral Law. Given that the parties to the financial collateral arrangement may freely determine the circumstances which may constitute trigger events authorising the collateral taker to enforce, particular attention should be paid to ensure that their agreement encompasses events of default as defined in the main finance documents, and in particular, the credit or facility agreement.

According to market practice, the 'any events' (as referred to in the Collateral Law in addition to 'event of default') to be defined as Events of Default will typically consist of defaults on a financial covenant or failure to maintain financial ratios, defaults on non-financial covenants (e.g. CIMA registration, maintaining the centre of main interests in the jurisdiction of incorporation for general partners), defaults by major investors on their obligations, uncured key person events, cross-defaults and even events external to the parties (e.g. hostile takeovers, attachment and seizure attempts or litigation steps taken by third-party creditors, changes of control in an obligor's capital structure of ownership), or the adoption of decisions deemed to have a material adverse effect on the security holder's rights (e.g. amendments to the fund / organisational documents, as well as material misrepresentations)11. Of course, with respect to the security grantor, it will be in its interest to avoid the inclusion of non-material matters within the definition of Events of Default when negotiating the terms of the financial collateral arrangements, since should any of these occur, there will be a risk of triggering enforcement regardless of the status of the underlying payment obligations and, notably, of the absence of a breach thereof.

Finally, when reviewing the terms of the main finance documents (particularly those of the credit or facility agreement), the security taker will want to ensure that any sections listing the Events of Default specify that enforcement following an Event of Default (at least in relation to the Luxembourg law-governed security documents) is not conditioned on or otherwise subordinate to the prior acceleration of the secured obligations.

Typically, this protection for the security holder can be addressed in the section providing for remedies upon an Event of Default which specifies the conditions (e.g. the suspension or termination of lenders' commitments, acceleration whereby all amounts outstanding or accrued that comprise the underlying obligations (principal and interests)) to be satisfied in order for the secured parties to exercise their enforcement options. In order to facilitate the security taker's ability to enforce swiftly or otherwise elect to exercise its rights under the security documents without undue delay, it is furthermore preferable to ensure that the exercise of enforcement rights under security documents governed by the Collateral Law be exempted from satisfying additional burdensome procedural obligations (e.g. the sending of notices to the obligors or their agent) that are not required by the Collateral Law even though they may often be included in the remedies section of credit or facility agreements for reasons that do not concern Luxembourg.

Once the Draft Bill enters into force, and depending on the provisions of the version that shall be adopted, it is likely that additional wording would need to be inserted in the Luxembourg security documents to mirror the amended legal provisions and take advantage thereof (in particular to depart contractually from the default legal provision according to which the proceeds of realisation should be applied against the relevant financial obligations).

To be continued.

For further details, please contact: Arnaud Arrecgros

+352 28 55 12 41 arnaud.arrecgros@maples.com

11 In support of this : Le gage sur instruments financiers en droit luxembourgeois, Jacques Graas, RTDF N°3 – 2012; Renforcer la sécurité juridique de la réalisation des garanties financières : l’appel à la loi », Daniel Boone & David Maria, ACE n° 09 – November 2010 ; Le caractère accessoire du gage et la loi sur les contrats de garantie financière, Patrick Geortay, ALJB Droit Bancaire et Financier – 2014 Volume III ; Security Rights and Similar Security Arrangements – Neighbours against all odds, Jan A. Krupski, ALJB – Bulletin Droit et Banque N° 52 – December 2013

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Asia Market Review A Tale of Two Markets: Public and Private Markets The first half of 2022 has seen global deal-making falling to its lowest level since the start of COVID-19. Both the real economy and financial markets have been struggling to absorb multiple challenges which include high inflation, changing monetary policy from the US Federal Reserve (the "Fed"), the deterioration of China's over-leveraged property market, China's zero-COVID policy (which has a global impact on already stretched supply chains), increasing regulation, and the war in Ukraine.

Investors in fixed income markets have had a torrid time in 2022 and the US yield curve inverted in March for the first time since 2019, sending a possible warning that a recession could be on the horizon.

Global equity markets have either had a bad half, or a dreadful half, depending on which markets and sectors are being reviewed. For example, April saw the worst monthly performance for the S&P 500 and the Nasdaq since 2008.

Investors continue to rotate out of long duration assets, especially the more 'bubbly' parts of the stock market such as technology and SPACs, into defensive, cyclical safe havens, such as utilities, consumer staples and energy.

Irrespective of the location of markets and sector allocation, the public equity markets will likely continue to experience high volatility throughout 2022, and this will be unattractive for many institutional investors, especially those that usually adopt a 'buy and hold' long-only strategy.

Some institutional investors have reallocated their funds to commodities, but for many, this will not be permitted by their investment restrictions and / or the potential volatility of these markets will make them an unappealing replacement for equities and fixed income. Some institutional investors are increasing their cash allocation, but their investment committees are acutely conscious that this strategy guarantees a loss of purchasing power due to high levels of inflation. Those investors looking to reallocate capital to the fixed income markets are querying if it is an appropriate portfolio diversifier in these conditions, and they will need to be very selective and nimble if the Fed continues to move swiftly to tackle inflation.

Private Debt As discussed above, the outlook for public markets in 2022 is uncertain and will likely be volatile and difficult to navigate. But despite this, and possibly as a consequence of this, we are seeing an increased interest from our clients in private markets. In particular, one of the growing areas of interest in Asia is the private debt market. This is especially

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the case for private equity firms that are looking to deploy the vast reserves of 'dry powder' they have accumulated over the last few years.

Also known as private credit, non-bank lending, or alternative lending, private debt is an asset class that typically comprises higher yielding, (relatively) illiquid investment opportunities – ranging from secured debt that is senior in the capital structure, to distressed debt that displays equity-like risk and returns.

The private debt market is well established in the US and, in fact, it is estimated that nearly 75% of institutional lending in the US is provided by private debt firms. This is followed by Europe, where the private debt market is increasing, but is not as established in the US. Asia, by contrast, has traditionally been slower to adopt private debt funding, partly due to ample bank liquidity and the large balance sheets of the Asian banks, and also partly due to the varied legal and regulatory regimes across Asia.

As noted above, there are signs that private debt is becoming increasingly important in the Asian market. In particular, we are seeing significant growth in private debt firms lending outside of the 'mid-market' and increasing numbers of large borrowers are emerging. We are also seeing a significant increase in 'special situations' financings, as the tougher macro-economic environment makes it harder for some borrowers to meet their loan commitments or to refinance. We foresee this trend will continue as traditional lending banks look to remove distressed debts from their loan book. This will provide more opportunities for private debt firms to step in and establish a relationship with borrowers who, previously, would only have considered traditional bank lending as a primary source of financing.

The outlook for public markets in 2022 is uncertain and will likely be volatile and difficult to navigate

and robust to perform well in the short and intermediate term despite any macro or geo-political challenges to the financial system. We agree.

How can the Maples Group help?

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Greater customisation of structures, including bespoke maturity profiles, to match borrowers' financing needs; and

We work with a significant number of funds, private debt managers and investors that are active in, or looking to increase their exposure to, the private debt markets in Asia. We often see private debt financing involving Cayman Islands SPVs, either in the capacity as a financing vehicle, or in the borrower group as an obligor. As noted above, an increasing number of these financings involve 'special situations' where a borrower is either in the 'twilight zone' of insolvency, or requires careful structuring of security in order to navigate its existing, senior loan covenants.

Whether we are advising the lender or the borrower in these situations, the Asia private debt group combines experienced finance and restructuring lawyers (all within Asian time zones), which enables us to help our clients with the specialised areas of Cayman Islands law that typically arise in private debt financings. A detailed discussion of these is beyond the scope of this article, but they include areas such as quasi-security, golden-share structures, tactical ways to wind up a non-performing obligor, directors' duties, provisional liquidation, claw-back risk, dividend payments and enforcement of security.

•

Speed and flexibility compared to traditional lending banks.

For further details, please contact:

A common question we receive is, "Are private debt managers in Asia in regular, direct competition with banks?"

The answer is yes, and no. Outside of special situations financings, this is not common (yet). However, it is increasingly the case that private debt firms are attractive to borrowers in Asia because they can provide:

Of course, this does not mean that private debt managers will not be impacted by a possible downturn in the credit cycle, but many of the private debt managers we speak to believe that the private debt model is sufficiently flexible

James Kinsley

+65 6922 8410 james.kinsley@maples.com

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Global Expertise Combining the Maples Group's leading finance and investment funds capability, our Fund Finance team has widespread experience in advising on all aspects of fund finance and related security structures for both lenders and borrowers.

We advise on issues relating to taking security over assets, including shares, limited partnership interests and other forms of securities issued by British Virgin Islands, Cayman Islands, Irish, Jersey and Luxembourg vehicles.

For further information, please speak with your usual Maples Group contact, or the following primary Fund Finance contacts:

British Virgin Islands

Dublin

London

Richard May +1 284 852 3027 richard.may@maples.com

Sarah Francis +353 1 619 2753 sarah.francis@maples.com

Jonathan Caulton +44 20 7466 1612 jonathan.caulton@maples.com

Cayman Islands

Hong Kong

Luxembourg

Tina Meigh +1 345 814 5242 tina.meigh@maples.com

Lorraine Pao +852 2971 3096 lorraine.pao@maples.com

Arnaud Arrecgros +352 28 55 1241 arnaud.arrecgros@maples.com

Dubai

Jersey

Singapore

Manuela Belmontes +971 4 360 4074 manuela.belmontes@maples.com

Paul Burton +44 1534 495 312 paul.burton@maples.com

James Kinsley +65 6922 8410 james.kinsley@maples.com

maples.com