Orrick's Financial Industry Week in Review

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Distressed Debt and Restructuring Developments

A Battle in the Making in the Oil and Gas Sector:  Second Lien vs. High Yield Debt

In the oil and gas industry, there is a storm brewing between holders of second lien debt and unsecured high yield bonds. These creditor groups are finding themselves pitted against one another as oil and gas companies become increasingly leveraged in an effort to alleviate liquidity constraints.

As widely publicized, oil prices precipitously decreased in 2014 and depressed prices have continued into 2015, with prices falling from $103 per barrel a year ago to around $60 per barrel today. With this prolonged decline and period of weak oil prices, oil and gas companies are having difficulty breaking even. Therefore, it is not surprising that many industry players, particularly the upstream division (comprised of exploration and production activities), have experienced tightened liquidity. Larger and well-diversified companies are best equipped to weather the storm because they are able to rationalize liquidity by suspending new projects and future exploration, selling non-core/non-producing assets and demanding price reductions from service providers. While these measures have helped ease some financial stress, they are often not enough and companies have turned to the debt capital markets as a source of liquidity. These new financings provide companies with much needed time to either wait out this period of depressed oil prices or formulate a restructuring plan.  Read More.

RMBS and Other Securities Litigation

New York's Highest Court Affirms Dismissal of RMBS Suit Against DB Structured Products as Time-Barred

On June 11, 2015, the New York Court of Appeals issued its decision in the closely-followed case of ACE Securities Corp., Home Equity Loan Trust, Series 2006-SL2 v. DB Structured Products, Inc.  New York's highest court affirmed the First Department's dismissal of an action brought by HSBC, as Trustee of the Home Equity Loan Trust, Series 2006-SL2 ("Trust"), against DB Structured Products ("DBSP") on timeliness grounds, concluding that a cause of action for breach of the representations and warranties accrues on the closing date of the transaction.  The Court held that New York's six-year statute of limitations for such breach of contract claims runs from the date the representations and warranties are made.  While the trial court reasoned that DBSP's cure or repurchase obligation under the Pooling and Servicing Agreement ("PSA") was ongoing, the Court of Appeals explained that DBSP represented and warranted certain facts about the mortgage loans as they existed when the PSA and Mortgage Loan Purchase Agreement were executed and expressly stated they did not survive the closing date.  The Court noted that it makes sense that DBSP "[did] not guarantee payment for the life of the transaction because loans may default 10 or 20 years after they have been issued for reasons entirely unrelated to the Sponsor's representations and warranties."  The court also held that a timely repurchase demand and subsequent expiration of the cure period was not a substantive condition precedent that delayed the accrual of the cause of action; instead, the Court held that it was a procedural prerequisite to suit.  Order.

European Financial Industry Developments

EC and Banks Disagree on Capital Markets Union Priorities

Of the five priorities for early action listed in the European Commission's Capital Markets Union green paper (lowering barriers to accessing capital markets, widening the investor base for SMEs, building sustainable securitization, developing European private placement markets, and boosting long-term investment), bankers speaking at the International Capital Market Forum's annual conference earlier this month strongly agreed with only one of them: securitization. The other early priorities were not listed by panelists as immediate concerns.

Panelists agreed that it would make sense to approach first those aspects where there is political will and change is already underway, such as the Prospectus Directive review and regulatory relief for simple and transparent securitizations (which was highlighted as the area where benefits would be seen most quickly).

Participants said that the regulatory distinction between market making and proprietary trading also needed to be an early action item for the CMU, though their other priorities, namely the harmonization of EU insolvency laws, were at odds with the immediate priorities listed in the CMU green paper.

Fair and Effective Markets Review Publishes Final Report

On June 10, 2015, the Fair and Effective Markets Review (FEMR), established by the Chancellor in June 2014 to conduct a review of fixed income, currency and commodity markets, published its final report. The report contains 21 policy recommendations aimed at preventing a repeat of the recent years' misconduct in fixed income, currencies and commodities markets. The recommendations largely rely on market-led initiatives, or suggest legislative reforms to formalize regulators' existing practices and extend incoming reforms to previously under-regulated markets.

The recommendations include the creation of a Market Standards Board to improve dialogue between regulators and the industry,  the extension of the senior managers' regime to non-banks and (as the key element of the review) regulation of spot foreign exchange (FX). In the UK, spot FX has previously been treated as falling outside the scope of financial regulation and securities laws since it involves trading cash for cash but the recent probe into FX benchmark rigging in the UK and US identified spot FX as the market where most wrongdoing occurred.

European Supervisory Authorities Launch Second Consultation on Draft Regulatory Technical Standards

The European Supervisory Authorities (ESAs) have launched a second consultation on draft Regulation Technical Standards (RTS) outlining the framework of the European Market Infrastructure Regulation (EMIR). The document is the result of engagement with other authorities and industry stakeholders and focuses only on a narrow set of topics in order to clarify and finalize all the operation issues that may arise from the implementation of the EMIR framework. These draft RTSs prescribe the regulatory amount of initial and variation margin that counterparties should exchange, as well as the methodologies for their calculations, for over-the-counter derivative transactions not subject to central clearing. The RTSs also outline the criteria for eligible collateral, and establish the criteria to ensure that such collateral is sufficiently diversified and not subject to wrong-way risk. The consultation closes on July 10, 2015.  Release.

Events

Orrick Breakfast Briefing: BitLicense and the Virtual Currency Regulatory Landscape

What does the BitLicense require and how will the newly finalized New York State BitLicense regulations affect participants in the virtual currency space?  In addition to BitLicense, what regulatory requirements are being developed or imposed in other jurisdictions?  This program is meant to inform businesses, investors, entrepreneurs, lawyers and others on the state of virtual currency regulation. New York CLE credit will be offered. Date to be announced.

For more information on this event, please click here​​.​​

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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