Contributed by: Manuel Galicia Romero and Juan Pablo Cervantes, Galicia Abogados, S.C. (Mexico City)
- Considering the Constitutional amendments enacted late last year, resulting in the opening of the energy industry to private investment, especially oil and gas, among other laws, the Federal Executive published the Hydrocarbons Act (“HA”) earlier last month. The HA reaffirms the newly revised principle enshrined in the Mexican Constitution that all hydrocarbons underground belong to the State and its rights thereto may not be transferred or encumbered.
- The HA gives the Ministry of Energy the power to award assignments to Petróleos Mexicanos (including its subsidiaries) or any other productive state enterprises (“PSEs”) to perform the recognition and superficial exploration, and the exploration and production of hydrocarbons (“E&P”), with the prior favorable opinion of the National Hydrocarbons Commission (the “CNH”), on round zero and on an exceptional basis thereon, as well as to amend them.
- The Mexican State may enter into contracts for E&P activities through the CNH with (i) Pemex, (ii) other PSEs or (iii) companies organized under Mexican law, or with consortiums entered into by any of these companies. Such contracts shall be awarded after a public tender process. The aforementioned joint ventures shall be governed by general commercial law and shall not be deemed public-private partnerships.
- The Energy Reform gave way to a new Law of the Electrical Industry, which establishes an entirely new regulatory framework for the power industry in Mexico where the Mexican state reserves exclusivity over certain strategic areas and otherwise permits the participation of private investment in all other areas that make up the power industry in the country, including the generation and open-market marketing of electricity.
- Energy Reform: Secondary Legislation.
On August 11, 2014, several new laws and amendments to existing legislation were published in the Federal Official Gazette (“DOF”) in order to implement the constitutional amendments related to the energy industry that were published in the DOF on December 20, 2013.
In the notes linked below we analyze the new Hydrocarbons Act and the new Law of the Electrical Industry, as well as other relevant legislation that was enacted or amended as part of this reform.
- New Hydrocarbons Act (Ley de Hidrocarburos).
As a result of the opening of the energy industry to private investment, especially oil and gas in the amendments to Articles 25, 27 and 28 of the Mexican Constitution, published on December 20, 2013, the Federal Executive published the Hydrocarbons Act, which is effective as of August 12, 2014, and repeals the Regulatory Act for Article 27 of the Constitution for the Petroleum Industry (Ley Reglamentaria del Artículo 27 Constitucional en Materia de Petróleo). The most relevant aspects of this law include the ability of the private sector to enter into exploration and extraction contracts with the state (under new schemes, namely, licenses, and production or profit sharing agreements), and to pursue activities such as refining, transportation, distribution and storage of hydrocarbons, as well as the importation and retail of gasoline and diesel. For a brief summary of Hydrocarbons Act, click here.
- New Law of the Electrical Industry (Ley de la Industria Eléctrica).
The new Law of the Electrical Industry (Ley de la Industria Eléctrica) repeals the former Law on the Electricity Public Service (Ley del Servicio Público de Energía Eléctrica), in effect since 1975, and establishes an entirely new regulatory framework for the power industry in Mexico, where the Mexican State reserves exclusivity over certain strategic areas and otherwise permits the participation of private investment in all other areas that make up the power industry in the country, including the generation and open-market marketing of electricity. For a brief summary of the Law of the Electrical Industry, click here.
- The newly-created Spanish “bad bank” (SAREB) has been transferred a EUR 50.8 billion pool of loans and real estate assets from Spanish credit entities that were totally or partially nationalized, as well as the legal mandate to liquidate the entire portfolio in 15 years.
- A legal framework has been enacted to facilitate the divestment process. In particular, a new type of investment vehicle with a privileged tax regime has been implemented to attract investment by non-Spanish resident investors. The vehicle is taxed at a 1% CIT rate and income obtained by non-resident investors (including residents in tax havens) will be tax exempt in Spain.
- SAREB already announced divestitures in 2013 and the pipeline for new projects is extensive and appears to have attracted the attention of the largest international real estate firms as a result of the significant price discounts and the efficiency of the investment structure.
- Amid the generally improved outlook of the Spanish economy and the increased stability in the Eurozone, the Spanish real estate market appears to be taking off after multiple years of significantly reduced activity.
In the context of the EUR 100 billion external financial assistance requested by the Spanish Government with the aim of facilitating the restructuring and recapitalization of the Spanish banking sector, a memorandum of understanding (MOU) was agreed in July 2012 by and between the Spanish Government and certain European Union authorities (with the participation of the International Monetary Fund) by virtue of which specific political and financial-related conditions were imposed on Spain.
Key elements of the roadmap provided under the MOU included: (i) the identification of the individual capital needs by each of the Spanish banks by means of a “bottom-up” stress test (as well as a determination of which banks would need public support to complete the necessary recapitalization); and (ii) the segregation of the impaired assets of banks under public control or receiving public assistance and their transfer to a “bad bank”.
As a result of the stress test undertaken by Oliver Wyman and released in September 2012, the Spanish banking sector was divided into four groups: group 1 (comprising banks already nationalized, such as Bankia); group 2 (banks with capital needs that would likely lead to the bank requiring public assistance); group 3 (with lower capital needs and no expectation of public intervention); and group 4 (without further capital needs).
In November 2012, legislation enacted in consultation with the European Commission, the European Central Bank, the European Stability Mechanism and the International Monetary Fund provided for the creation of the Spanish “bad bank” (denominated the Sociedad de Gestion de Activos Procedentes de la Restructuracion Bancaria, or SAREB) and the establishment of a specific legal and tax framework applicable to the bank.
Creation and main features of SAREB
SAREB is a for-profit corporation which overarching objective is the management and, ultimately, the divestiture of the assets received from the contributing banks within a period of no more than 15 years.
The contributing banks are those financial institutions included under groups 1 and 2. Assets transferred to SAREB between December 2012 and February 2013 were primarily: (i) foreclosed real estate assets with a net book value exceeding EUR 100,000; (ii) (not necessarily non-performing) loans to real estate developers with a net book value exceeding EUR 250,000; and (iii) controlling shareholdings in real estate companies. Assets for an aggregate value of approximately EUR 50.8 billion have been transferred to SAREB, which price reflects an average haircut over gross book value of approximately 63% for foreclosed assets and 45% for loans. As consideration, SAREB issued state-guaranteed senior debt securities in favor of the participating banks. The securities have been structured to meet all requirements to be accepted as collateral for purposes of European Central Bank financing.
In order to fund operational needs, SAREB has raised equity for an aggregate amount of EUR 4.8 billion (25% share capital and 75% subordinated debt). A public-controlled fund for the restructuring of the Spanish financial sector (FROB) is the major shareholder with 45% of the equity holdings, while the remaining equity (55%) is held by a number of Spanish and foreign financial institutions (including Spanish banks under groups 3 and 4), insurance companies, and leading industrial corporations.
Divestment alternatives: Banking Assets Funds
Although SAREB may decide to refinance or further develop some of the assets received in order to maximize their value, the ultimate objective is the profitable liquidation of the entire pool of assets within the 15-year statutory deadline, either through the full collection of the principal of the loan (where feasible) or, most likely, by transferring the asset.
While the discounted price at which SAREB acquired the assets is itself an incentive for transfers, an ad hoc structure was created by law to facilitate the acquisition by foreign institutional investors of SAREB assets in tax-advantageous conditions.
In short, SAREB is able to divest the assets by incorporating insolvency-remote vehicles (denominated Banking Assets Funds, or BAFs) that provide structural flexibility and a favorable tax regime for investors and the BAFs themselves, subject to the condition that either SAREB or the FROB retain a stake.
BAFs can therefore be featured as joint ventures between investors and SAREB, and can be used to repackage different types of assets. Furthermore, BAFs’ liabilities can include loans, debt securities, quasi-equity instruments, several types of credit enhancement instruments or a combination of several. As a result, investors will have the flexibility to invest or co-invest in one or multiple tranches of BAFs whose assets were previously cherry-picked by investors (or “put on sale” by SAREB). Although the representation and management of the BAFs is legally reserved to regulated Spanish entities (securitization funds management companies), there is an expectation that, and experience has already shown, the leading role when it comes to material decisions (e.g., the sale of an asset allocated in a BAF) will be placed in the hands of investors or an asset manager appointed by them.
Nevertheless, in general, the main benefit of investing in SAREB assets through a stake in a BAF, as opposed to a direct acquisition of the relevant assets by the institutional investor or a subsidiary of the same, is tax-related. While the BAF itself enjoys a privilege treatment (for instance, a 1% corporate income tax rate as opposed to 30% for regular Spanish corporation), the key element of the scheme is the privileged tax regime applicable to the BAF’s stakeholders, particularly non-resident holders: non-resident entities without a permanent establishment in Spain investing in BAFs, including those domiciled in tax havens, will benefit from a full Non-Resident Income Tax exemption on income (interest, distributions) and gains (transfers) deriving from their BAFs’ stakes. Thus, from a tax standpoint, investment in real estate assets using a BAF would be the optimal option in contrast to using a regular corporation for the same objective (which would imply 30% CIT and, if not properly structured, Spanish taxation on income received from the vehicle).The privileged tax regime will only apply as long as SAREB or the FROB remains exposed to the BAF with, in principle, a stake of at least 5%.
Although the resulting outcome of the BAF joint structure is that SAREB will only partially dispose of the assets (as it would still have indirect exposure to them through its stake in the BAF), these assets will now be managed by specialist investors and SAREB will likely benefit from some portion of the upside upon exit.
Debut transactions and prospects
Following the completion of the process to group all assets transferred from the contributing banks and a comprehensive internal commercial and legal due diligence, SAREB has started to test the waters with a number of projects involving diverse types of assets.
Transparency and competitiveness have been key elements in all divestment processes. SAREB has proactively put specific groups of assets “in play” (perhaps after perceiving specific interest in the marketplace) and, with the assistance of corporate and real estate advisors, have organized auctions general open to bidders. The improved outlook of the Spanish economy, the increased stability in the Eurozone and the attractive features of the potential transactions (both in terms of price and tax-efficiency) have incentivized some of the largest international private equity and real estate investment houses to submit bids in these auctions.
Bull Project, whose EUR 100 million portfolio included real estate developments located in eight different Spanish regions, was the first auction completed last August. The selected buyer was H.I.G. Capital (through its affiliate Bayside Capital) and the transaction was structured through a BAF which will be held by H.I.G (with a 51% stake) and SAREB (with a 49% stake). Prestigious funds such Lone Star, Apollo, Colony, Centerbridge and Cerberus were reportedly among the other bidders in the auction.
As of July 2013, SAREB had sold 1,800 retail residential assets through the participating banks’ branch network. That figure increased to around 6,400 real estate assets as of November 2013. In addition, a portfolio of stakes in syndicated loans granted to Spanish listed real estate companies (Metrovacesa and Colonial, for approximately EUR 1.2 billion) have also been transferred to an undisclosed investor and Burlington, respectively. Other transactions in SAREB’s pipeline (including urban and rural land, luxury homes, shopping malls, office projects and additional stakes in loans to Spanish listed real estate companies), are expected to be announced before the end of the year or in the first quarter of 2014.
The general perception that the Spanish economy and real estate market have bottomed out and that prices now reflect the fair market value of the real estate assets is also contributing to a significant activation of the Spanish real estate M&A sector after several years of dramatic downturn. Some of the 2012 and 2013 deals included the acquisitions by TPG, Cerberus and a consortium of Kennedy Wilson and Varde of the Caixabank, Bankia and Catalunya Bank’s real estate portfolio management companies, respectively (and Grupo Santander and Banco Popular are also in the process of selling their recovery units). In all the cases of these sales of servicing companies by healthy banks, the managed assets are not transferred, but retained by the transferor. Other recent highlights include the purchase of Aktua (the former customer collection company within the Santander group) by Centerbridge, the approximately EUR 200 million sale by the Madrid regional government of a group of 3,000 subsidized apartments to a Goldman Sachs affiliate, and the pool of 1,860 rent-controlled properties sold by the City of Madrid to Blackstone for EUR 125 million.
Furthermore, all signs seem to indicate that the Spanish real estate market will continue to provide attractive opportunities for international funds in future months. SAREB projects will continue to fuel the activity, as SAREB’s business plan contemplates the divestiture of half of its portfolio during its first five years of existence. Additionally, most of the Spanish banks within groups 3 and 4 created their own “bad banks” in late 2012, into which they transferred all foreclosed assets as well as those acquired through debt-to-asset transactions. As the banks try to refocus on their core business, most of these “bad banks” (some of which became major Spanish real estate companies in terms of volume of assets) are up for sale, attracting the attention of the international investors.
For investors in distressed assets, undertaking appropriate servicing actions is a key element in their long-term plans to recover value on acquired bad debts. The offsetting up of local teams and the acquisition of Spanish collection platforms and real estate management companies by the largest international funds suggests that the investors are here to stay (at least for a while).
Nevertheless, there is no hope, or fear, of a new construction “boom” in Spain, as the main indicators on new construction, construction employment and cement consumption have remained weak. Conversely, experts consider that Spain is living in a period of price correction and reordering of the real estate existing stock which will produce attractive yields to those who are able to anticipate and invest at these valuation levels.
Executive Summary: The Committee for Encouragement of Investments in Public Companies Engaged in R&D, formed by the Israeli Securities Authority, has recommended adopting three main solutions aimed at encouraging public funding of hi-tech companies: promoting IPOs of relatively large hi-tech companies; facilitating the establishment of publicly-traded venture capital funds and encouraging the establishment of publicly traded R&D partnerships. The Committee also recommends establishing two extra-stock exchange funding routes for seed-stage hi-tech companies: crowd-funding, and investor clubs. The article below details some specific recommendations made by the Committee.
Israel has set a goal of promoting and developing the hi-tech sector, which is the industry of the future and one of Israel’s primary growth engines. However, so far, the Tel Aviv Stock Exchange (“TASE”) has failed to present an efficient alternative for raising public funds for companies in this sector. In order to investigate ways of encouraging such investment in hi-tech companies via capital markets, the chairman of the Israeli Securities Authority (the “ISA”) appointed a Committee for Encouragement of Investments in Public Companies Engaged in R&D (the “Committee”). On 4 June 2013, the Committee issued its interim report and recommendations.
Among the issues explored by the Committee aimed at facilitating public fund raising for hi-tech companies, were the adjustment of prospectus and ongoing disclosure requirements; determination of specific rules of trade and the establishment of a designated trade list; encouragement of analysis; facilitating access of foreign investors and companies to the TASE; encouragement of institutional investment in hi-tech companies; issues of structure and corporate governance; investor tax benefits.
In its interim report, the Committee recommends adopting three main solutions aimed at encouraging public funding of hi-tech companies: promoting IPOs of relatively large hi-tech companies; facilitating the establishment of publicly-traded venture capital funds and encouraging the establishment of publicly traded R&D partnerships. The Committee also recommends establishing two extra-stock exchange funding routes for seed-stage hi-tech companies: crowd-funding, and investor clubs. In the following paragraphs, we have highlighted some specific recommendations made by the Committee.
IPOs: the Committee recommends enabling growth-stage companies (generally, with a post-IPO market cap of at least ILS 250 million, or sales of at least ILS 80 million per annum and a market cap of at least ILS 185 million) to go public on a designated trade list, to be known as “Tech Elite”. The Committee also recommends looking at ways to incentivize the creation of derivative markets for Tech Elite securities. The Committee further recommends that for a limited period of time and subject to additional conditions, investments of up to ILS 5 million in IPOs of Tech Elite companies may be written off and regarded and recognized as a capital loss in the year in which they were made.
Disclosure: the Committee recommends relieving Tech Elite companies from some of the more stringent disclosure requirements, during the first few years after listing. For example, such companies will be able to enjoy the reporting and disclosure benefits of small-cap companies. They will also be permitted to do their financial reporting according to GAAP (rather than IFRS), and will not be required to file quarterly management reports. The ISA will be authorized to allow further extenuations, depending on circumstances.
Corporate governance: Elite Tech companies will be permitted – during the first few years following listing – to implement less stringent corporate governance controls. For instance, they will not have to appoint a financial reports committee, their chief executive officer may also act as the chairman of the board, their compensation controls may be less strict, and they may simplify certain mechanisms for the approval of interested party transactions.
Delaware entities; language of reports: in order to encourage hi-tech companies incorporated in Delaware to list their securities in Israel, the Committee suggests permitting such entities to report in English (alongside a general recommendation to permit Tech Elite companies to file in English).
Listed VCs; R&D Partnerships: the Committee envisages two forms of publicly-traded VCs, which shall both act as mutual investment funds (under the applicable Israeli legislation): limited-period funds (of up to 15 years), and evergreen funds (whose duration may be terminated by resolution of the interestholders). These VCs will be permitted to invest up to 30% of their proceeds in Israeli, or Israeli-oriented, unlisted hi-tech companies. R&D partnerships are VCs that are co-managed by unaffiliated strategic investors (in the relevant field of investment) and financial investors (who will act as joint general partners), who will each have to hold a significant stake in the partnership. R&D partnerships will have durations of no more than 15 years.
Crowdfunding: following on the US JOBS Act, the Committee recommends excluding certain crowdfunding activities from the scope of securities regulation and provide safe harbour for crowdfunding financing. Funds raised by crowdfunding will be limited to ILS 2 million (approximately US$550,000) during each 12-month period. Generally, an investor will be permitted to invest up to ILS 20,000 (approximately US$5,500) during any 12-month period, with each investment limited to ILS 10,000 (approximately US$ 2,750).
Sophisticated investor clubs: the investor club model would enable companies to raise higher amounts of funding compared to crowdfunding, from fewer and more sophisticated investors. Contingent upon prescreening of such investors, so as to make sure they meet the “eligible investor” threshold set forth in Israeli security regulations, investments made through such clubs will also be exempt of stringent security regulation.
Assuming adoption of the Committee’s recommendations into law, these are set to revolutionize the ways in which hi-tech, bio-tech, bio-med and other R&D companies may raise funds in Israel.
The Global Capital Confidence Barometer is a regular survey of senior executives from large companies around the world, conducted by the Economist Intelligence Unit (EIU) of Ernst & Young. This snapshot of findings gauges corporate confidence in the economic outlook, and identifies boardroom trends and practices in the way companies manage their capital agenda:
- Nearly half (47%) of real estate, hospitality and construction companies surveyed see the global economy declining, compared to 39% that see the economy improving.
- The economic environment for transactions remains challenging, with executives continuing to grow their companies organically and focusing on stability.
For the results of the survey, click here.
- To address issues of sufficient protection for farmers’ property rights, tensions and conflicts arising from land rights, and monopolies on land supply that cause systematic corruption, China’s Ministry of Land and Resources (MLR) approved Beijing and Shanghai to start a pilot program on building and leasing residential properties on rural land.
- The pilot policy aims to create opportunities for investors and developers. The pilot policy allows farmers to adopt various methods to build and lease residential properties. Farmers may build and lease by themselves, or rent their land to developers/investors for the purposes of building and leasing, or alternatively set up a joint venture with investors or developers by contributing their land to the joint venture.
For many years China has been implementing separate policies for urban and rural land, under which urban and rural land are governed by different legal systems and governmental authorities and are traded in different markets and have different rights. Use of farm land for non-agriculture purposes is monopolized by government. Rural land to be used for urban construction needs to be expropriated from farmers first and then to be sold to land users by government. Government benefits from this process, i.e. government pockets differentials between land premiums paid by land users on the one side and compensation paid to farmers plus infrastructure development costs incurred by government on the other. Farmers do not have a say in expropriation process and their property rights might not be fully protected. The dual-track land policy in recent years has contributed greatly to high speed industrialization and urbanization of China. But its problem is obvious: there is a lack of sufficient protection for farmers’ property rights, tensions and conflicts arising from land rights continue to aggravate, and a monopoly on land supply causes systematic corruption among governmental officials.
At the beginning of this year, the Ministry of Land and Resources (MLR) approved Beijing and Shanghai to start a pilot program on building and leasing residential properties on rural land. We believe that this move is a significant breakthrough of the existing land policy and may open a door for farmers to participate in urbanization.
Highlights of the pilot policy are summarized as follows:
- Counties or villages may use rural construction land (non-agriculture land) to build and lease residential properties, to which counties or villages will own the title.
- The first pilot program in Beijing has been launched at Tangjialing Village, Haidian, under which the village will build and lease 100,000 sqm residential properties on its land. Upon the completion of construction work, Haidian Low-Income Housing Centre (a government agency) will rent the entire project and operate it as low-income housing. The first pilot program in Shanghai will start in Chongming, Qingpu, Baoshan and Fengxian, building and leasing residential properties with total gross floor area reaching 1,000,000 sqm.
- Counties or villages may choose different methods to build and lease residential properties on rural land. They may independently develop residential properties on their land, or contribute their land as equity to a joint venture, which will develop residential properties, or lease its land to developers or investors to build and lease.
- The development and operation of residential properties on rural land will be covered by the construction plan for low-income housing and will be entitled to certain tax incentives from government.
Underlying Reasons for the Pilot Policy
The tension and division in the land market has acted as a catalyst for the MLR to deviate from the dual-track land system and release the pilot policy. On the one hand, government is under great pressure from the aspects of land and capital in connection with building low-income housing. Building and leasing residential properties on rural land would help to lower land costs and alleviate imbalances between supply and demand for residential housing in urban areas. In addition, by allowing farmers to build and lease residential properties and benefit from rental income, the pilot policy should help to avoid tensions and conflicts arising from expropriation of rural land by government.
The pilot policy aims to create opportunities for investors and developers. The pilot policy allows farmers to adopt various methods to build and lease residential properties. Farmers may build and lease by themselves, or rent their land to developers/investors for the purposes of building and leasing, or alternatively set up a joint venture with investors or developers by contributing their land to the joint venture. The advantages for renting rural land or setting up a joint venture with farmers include the followings:
- Because there are no land premiums, or taxes and fees to be collected by government, land cost is lower compared with renting and acquiring stated-owned land.
- A majority of rural land included in the pilot program is located in the proximity to urban area and there are relatively mature infrastructure facilities. As a result, the infrastructure costs are expected to be lower than other rural areas.
- Government will grant certain tax incentives for building and leasing residential properties on rural land.
- There is great need for low-income housing in the market. For example, in 2010, Qibao County (Minghang district, Shanghai) has built and leased a residential project called “Lianming Yayuan”, with over 300 one-bed-room units. Qibao County rented Lianming Yayuan to its neighboring manufacturers as staff dormitories and has maintained 100% occupancy since its opening.
Possible Expansion of the Pilot Policy
According to the head of MLR, subject to the approval of MLR, the municipalities directly under the central government and a few vice-provincial cities (these cities are subject to the administration of the relevant provinces but economic and social development planning can be made separately from the provinces), whose housing prices are relatively high and which lack sufficient urban construction land, may implement a pilot program to build and lease on rural land. In May of this year, MLR will finalize a list of cities permitted to implement the pilot policy. We expect that the pilot policy will spread beyond Beijing and Shanghai in the near future.