Acquisition Finance 2015

Last verified on Friday 3rd March 2017

Venezuela

Carlos Omaña and Fulvio Italiani
D’Empaire
  1. 1.

    What was the level of debt-financed M&A in your jurisdiction in 2014?

  2. Although there are no reliable records or statistics in Venezuela, the trend has been to fund acquisitions with the acquirer’s own funds. Large and medium-sized companies in Venezuela tend to have large cash positions in local currency and are eager to deploy those funds to protect their balance sheets and to take advantage of the current challenging environment that sometimes creates opportunities for deep-pocketed players with strategic interests.

    Under the current local liquidity levels, which are historically high, blue chip companies have very easy access to the bank loan market, and more recently to the local capital market, where interest rates are negative with regard to inflation and expected devaluations. Although local currency loans typically have short durations, rolling over maturing debts is currently not a problem for Venezuelan blue chips.

    However, as said before, blue chips and other large corporates are constantly looking at investment opportunities to deploy cash held in local currency which is not readily convertible into hard currency, at least until now.

  3. 2.

    What types of investors are the most frequent sources of acquisition financing in your jurisdiction?

  4. Cross-border acquisition finance has been somewhat reduced in Venezuela given the current foreign exchange control which restricts the possibility to repatriate dividends and other capital distributions, unless the acquisition of the Venezuelan operations, assets or shares are part of a global acquisition.

    Traditionally, in the past, a money-centre bank would provide the acquirer with an international bridge loan for the acquisition that was later, upon completion of the acquisition, taken out and sold to investors via syndication, participations, bond issuance and warrants.

    Acquisitions that are financed with debt tend to be financed locally and in local currency. Given the historically high levels of local liquidity, multinationals and local companies have turned to acquisitions as a means to protect their balance sheets and to make strategic acquisitions. Large real-estate investments as well as acquisitions of other companies provide balance sheet protection against inflation and devaluation but more importantly, may provide acquirers with strategic entrances into new markets (or larger footprints) which are seen as crucial when the Venezuela turn-around story materializes.

    Also, Venezuelan operations or subsidiaries are acquired as part of a global acquisition that is financed and funded internationally by the acquirer. In these cases, it is sometimes common for the creditors to require upstream guarantees from all the local subsidiaries, the shares of which are also pledged as security for the acquisition financing.

  5. 3.

    What types of debt instruments do you most frequently see for local acquisition financings?

  6. When financed with debt, local banks typically use syndicated loan facilities and bilateral loan agreements. Local debt securities issuances have been rare since 2010, although we have seen a renewed interest by blue-chip companies in issuing local debt securities which may carry coupons even lower than bank loans and whose duration and amortisation profile may be more beneficial to the issuer when compared with more traditional bank financing.

  7. 4.

    What are the usual maturities and amortisation profiles of acquisition-financing credit facilities?

  8. It is very difficult to obtain local bank financing beyond three years and the local bank market is accustomed to monthly amortisations. This has been historical due to inflation levels and the banks’ preference for cash flow.

    In practice, blue chip borrowers have access to the bank loan market at rates that are extremely attractive because they are negative real interest rates (ie, substantially below the official inflation) and interest expenses are fully deductible for income tax purposes. Also, blue chips have no difficulty in rolling over maturing loans.

    Also, the Venezuelan Central Bank limits the ability of Venezuelan banking institutions to hold foreign currency denominated assets (including loans and securities). This limitation is based on a bank’s “net foreign currency position” (ie, a bank’s total foreign currency denominated assets minus its foreign currency-denominated liabilities) and is set as a percentage of banks’ own funds. The current limitation on net foreign currency position was set by the Venezuelan Central Bank at 30 per cent of a bank’s own funds but there are certain Venezuelan securities that are excluded from the calculation.

    Debt securities may have longer maturities but typically are also amortized on a monthly or quarterly basis, although we have seen cases with bullet maturities which are virtually non-existent in more typical bank loans.

  9. 5.

    Are there legal, banking, currency exchange, regulatory or other considerations that favour certain sources of funds over others? For instance, mandatory reserve or deposit requirements? Do the requirements vary by type and location of investor or lender?

  10. Local bank financing is practically the only source available for Venezuelan companies given the current foreign exchange control regulations that substantially restrict both the capital and the current account.

    From a strictly regulatory perspective, Venezuelan banks would theoretically rather invest in publicly issued bonds as opposed to granting credit via loans. Specifically because financial institutions are generally required to allocate substantial portions of their credit portfolios to pivotal economic areas such as housing, agriculture, tourism and manufacturing at subsidized rates, whereas investing in securities does not trigger this obligation.

    As explained, Venezuelan banks have a limitation on their “net foreign currency position” The currently set at 30 per cent of a bank’s own funds (ie, assets minus liabilities) but there are certain Venezuelan securities that are excluded from the calculation, they are typically those issued by the Republic or government-owned entities.

    International loans and bonds were used prior to the enactment of the foreign exchange control regime. Market participants are anticipating a renewed interest in international loans and bonds in light of the very recent flexing of the foreign exchange regime.

  11. 6.

    What is the withholding tax treatment of acquisition finance loans made by, and bonds purchased by, foreign investors in your jurisdiction?

  12. Interest and fee payments on international loans and bonds are subject to a flat 4.95 per cent income tax in Venezuela levied at source via withholding. This reduced tax rate is applicable to chartered financial institutions not domiciled in Venezuela.

    A case by case analysis should be made to ascertain if a specific hedge funds, sovereign wealth funds or foreign pension fund qualifies for the aforesaid reduced income tax rate. This is because the law requires that to qualify for the reduced income tax flat rate, the creditor must hold a banking licence from a regulatory body of its the jurisdiction where it is incorporated and sometimes hedge funds, pension funds and sovereign wealth funds don’t necessarily carry a banking licence.

    In these cases, it is sometimes advisable to structure the loan via a vehicle that is entitled to the benefits of a double taxation treaty in effect in Venezuela, which has signed such treaties with the US, UK, Holland, Spain, France, Germany and many other jurisdictions which are also global and regional financial centres.

    Interest and fee payments made to local banks are not subject to withholding but are subject to the ordinary marginal income tax rate in Venezuela with a top bracket of 34 per cent on net taxable income.

  13. 7.

    Are there limitations on the ability of the parties to choose a foreign law as the governing law of the financing or to select a foreign forum for dispute resolution?

  14. There are currently no restrictions on choosing a foreign law or to select a foreign forum for dispute resolution. International loans and bonds are typically governed by New York or English law and submit to the non-exclusive jurisdiction of courts in New York, London and Caracas.

    There has been a recent trend in having arbitration clauses in loan agreements, both international and local loan agreements.

  15. 8.

    Does the local insolvency regime treat lenders under an unsecured credit facility on a on a pari passu basis with all other unsecured obligations of the debtor?

  16. Financial and commercial unsecured creditors are treated pari passu with all other unsecured financial and commercial creditors, but they are subordinated to employees who are due unpaid wages and other labour benefits (severance, vacation bonus) and to certain taxes.

    Under the commercial code’s par conditio creditorum principle, all creditors which are not secured by a legal and valid security interest or have a preference as mandated by law (ie, labour benefits unpaid wages, certain taxes) must be treated equally by the bankruptcy court.

    Also, the bankruptcy trustee and its advisors have a statutory preference over all other creditors.

  17. 9.

    Discuss the legal and practical limitations on obtaining a valid and perfected security interest. Are there any documentation formalities required by local law to make the security interest enforceable against the debtor and third parties? Is it possible to create a floating blanket lien on all of the debtor’s assets?

  18. Security interests over real estate (ie, real estate mortgages) need to be registered with the real estate registry.

    Pledges over moveable property only need to be notarised, but the creditor needs to be put in possession of the pledged asset unless it’s a non-possessory pledge or chattel mortgage.

    Chattel mortgages and non-possessory pledges to secure debts owed to non-Venezuelan banks or to non-banks need to be approved by the Venezuelan Banks’ Superintendent.

    The main practical limitation is that security interests are for a maximum principal amount (which needs to be included in the security documents in bolivars) and over specific assets (ie, no floating liens are available).

    It is currently not possible to grant floating liens over, for example, inventory.

    The perfection of security over accounts receivable that have not been generated (future flows) requires that the debtor of the receivable be notified of the pledge or assignment when and if the receivable is generated, otherwise the security will not be bankruptcy remote.

  19. 10.

    Does the local insolvency regime enable complex capital structures, for instance, recognising the validity of subordination of payment, subordination of liens, and other inter-creditor agreements?

  20. Although there are almost no judicial precedents, Venezuelan legal scholars tend to believe that subordination and inter-creditor arrangements are enforceable in a Venezuelan bankruptcy or moratorium.

    Traditional scholars believe that security interest are a statutory closed list of available security interests such as mortgages, pledges, usufruct, antichresis, non-possessory pledges and chattel mortgages. On the other hand, modern scholars tend to believe that freedom of contract empowers creditors to agree on different sets and orders of priorities, even when dealing with security interests.

    Insolvencies tend to be arranged out of court because the Venezuelan bankruptcy and moratorium regimes put the insolvent entity under the control of a court-appointed trustee over which the entity, creditors, shareholders, management or employees have no control.

  21. 11.

    If an equity investor provides some of the debt financing, do local insolvency rules afford those loans equal treatment as other (third-party) loans?

  22. Yes, equity investors that also provide loans are treated equally as other financial creditors with respect to their debt financing.

  23. 12.

    Are there any other insolvency considerations that a foreign debt-investor or lender should be aware of?

  24. The Venezuelan suspect period, within which certain transactions may be avoided, is long and may be fixed retroactively by the bankruptcy court up to two years prior to the date on which the “cessation of payments” occurred. This means that if a creditor is shown to have knowledge of a company’s insolvency when dealing with said company, then it runs the risk of seeing the transactions entered into under such knowledge avoided by the bankruptcy court (payments, securities, etc) even if no fraudulent conveyance is shown to have occurred.

    Specifically, In general, a bankruptcy court may invalidate any payment made by the debtor within the suspect period, if the creditor who received payment had knowledge of the debtor's insolvency (art. 946 of the Venezuelan Commercial Code). Therefore, any payments made to a financial institution by an insolvent debtor, could be invalidated by the court if the financial institution knowledge its debtor's insolvency. Note, however, that to have the payment invalidated by the court, the bankruptcy trustee and/or the other creditors would have the burden of showing to the court that the financial institution had knowledge of the debtor's insolvency.

    In addition, the Court must invalidate: (i) any security interests (such as mortgages and pledges) granted by the debtor within the suspect period for debts unsecured prior to the suspect period; (ii) any payments for un-matured debt; (iii) any gratuitous transfers of real or personal property made by the debtor; and (iii) any payments-in-kind for matured debt that was originally payable in cash (art. 945 of the Venezuelan Commercial Code).

    The invalidation of any of the foregoing payments would cause the financial institution to become liable for the refund of the invalidated payments to the bankruptcy estate (ie, unsecured creditors). Consequently, if the refund is made the financial institution would rank pari-passu with all other unsecured creditors and would be paid if any assets remain in the bankruptcy estate, after: (i) the creditors of the bankruptcy estate (e.g., the bankruptcy trustee), (ii) privileged creditors (eg, employees of the bankrupt entity with unpaid wages and severance benefits) and, (iii) secured creditors, have been paid.

    Insolvency set-off should be reviewed carefully, because it may be sometimes unenforceable. This is crucial for derivative transactions, especially under the ISDA Master Agreement. We believe that under Venezuelan law, netting under a contract for determination of the amount owed is different from set-off. In effect, netting is not a form of collection of amounts due, either by early termination or otherwise, but rather a method of determining the amount that is owed in respect of a single swap transaction and has the effect of fixing exactly that amount. Therefore, netting, in our opinion, for the purpose of settling payments, is effective and valid and the occurrence of a bankruptcy event does not impede the application of netting of amounts for payments made in respect of a single swap transaction. Venezuelan doctrine and case law hold that compensation (set-off) cannot be used to satisfy obligations if the conditions of compensation (that is, the right to set-off) arise after the bankruptcy of a company is declared.

    Under Venezuelan law, a Venezuelan company may request a moratorium declaration from a Venezuelan court if certain conditions are met. If the Venezuelan court grants the moratorium, the Venezuelan company would be allowed to suspend payments to its creditors for one year (except for certain creditors, such as its employees and other creditors) and seek to solve its temporary cash-flow problem. During the moratorium, the company would continue to be managed by the existing management, but subject to the approval of the Venezuelan court and a special receiver with respect to certain transactions outside the normal course of business (the Venezuelan court would determine which type of transactions would be subject to approval).

  25. 13.

    What do you expect to see in terms of market developments for acquisition financings in 2015?

  26. The new Venezuelan foreign exchange law and the recently created Venezuelan foreign currency alternative market (known as Sicad II) are positive signals that the foreign exchange, and access to hard-currency specifically, may become less restricted in Venezuela, and hence there may be a pick-up in cross-border M&A activity in the country.

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Questions

  1. 1.

    What was the level of debt-financed M&A in your jurisdiction in 2014?


  2. 2.

    What types of investors are the most frequent sources of acquisition financing in your jurisdiction?


  3. 3.

    What types of debt instruments do you most frequently see for local acquisition financings?


  4. 4.

    What are the usual maturities and amortisation profiles of acquisition-financing credit facilities?


  5. 5.

    Are there legal, banking, currency exchange, regulatory or other considerations that favour certain sources of funds over others? For instance, mandatory reserve or deposit requirements? Do the requirements vary by type and location of investor or lender?


  6. 6.

    What is the withholding tax treatment of acquisition finance loans made by, and bonds purchased by, foreign investors in your jurisdiction?


  7. 7.

    Are there limitations on the ability of the parties to choose a foreign law as the governing law of the financing or to select a foreign forum for dispute resolution?


  8. 8.

    Does the local insolvency regime treat lenders under an unsecured credit facility on a on a pari passu basis with all other unsecured obligations of the debtor?


  9. 9.

    Discuss the legal and practical limitations on obtaining a valid and perfected security interest. Are there any documentation formalities required by local law to make the security interest enforceable against the debtor and third parties? Is it possible to create a floating blanket lien on all of the debtor’s assets?


  10. 10.

    Does the local insolvency regime enable complex capital structures, for instance, recognising the validity of subordination of payment, subordination of liens, and other inter-creditor agreements?


  11. 11.

    If an equity investor provides some of the debt financing, do local insolvency rules afford those loans equal treatment as other (third-party) loans?


  12. 12.

    Are there any other insolvency considerations that a foreign debt-investor or lender should be aware of?


  13. 13.

    What do you expect to see in terms of market developments for acquisition financings in 2015?


Other chapters in Acquisition Finance 2015