Africa's green energy transition
Could Russia's invasion of Ukraine jeopardise Africa's green energy transition?
EU ESG in Emerging Markets
What does ESG in the EU mean for Emerging Markets?
Trading Distressed Debt
Trading Distressed Debt in the Middle East
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We have been working in emerging markets for decades across multiple practices and regions, helping our clients to navigate the unique challenges and opportunities associated with doing business in different markets. Our work spans a wide range of jurisdictions, parties and products – one of the main reasons we enjoy the work so much. In this, the second edition of our quarterly Eye on Emerging Markets newsletter, we look at the growing distressed debt trading market in the Middle East, the latest developments in energy markets, Africa’s green energy transition and what EU ESG regulations mean for emerging markets. These are just some of the topics that lawyers across our offices are assisting clients with right now, as they navigate the headwinds of 2022. This newsletter features articles from our lawyers in the Europe and Middle East regions. If you have any questions about any of the articles, please do not hesitate to reach out to us.
Eye on Emerging Markets
Q2 2022 Edition Two
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Eye on Emerging Markets | Q2 2022
The active trading of loans made to a borrower that has become unable to repay in full (known as non-performing loans or distressed debt) has been a feature of the North American and European loan markets for a number of years.
Depending on the characteristics of the loan in question, a margin "penalty" may also be assigned for falling below a predetermined minimum SPT, whereby any previously achieved incentive is lost.
These markets experienced particularly strong growth following the financial crisis which resulted in tighter capital adequacy requirements and banks seeking to reduce their exposures to such debt. This led to the development of a robust and fairly standardised distressed debt market, utilising Loan Market Association standard terms. The primary ways in which a financier can trade such debt (legally or economically): 1. by transfer (i.e. assigning or novating interests in accordance with the loan terms); 2. by sub-participation; or 3. through synthetic arrangements (such as credit default swaps). Here, we consider the growing market for distressed debt trading in the Middle East, particularly in the United Arab Emirates (UAE) and the Kingdom of Saudi Arabia (KSA). The distressed debt market in these jurisdictions is somewhat less developed for various reasons, including (i) a historically unhelpful legal regime, and (ii) negative attitudes towards financial distress often resulting in a mere reshuffling of deckchairs. In recent years, however, both the UAE and KSA have made considerable advances in overcoming these issues, including by introducing new regimes for corporate insolvency and taking security. However, there can be a number of challenges in trading debt in such markets. One such challenge is the means by which debt can be traded and potential buyers should be mindful of two key points in this respect: 1. The first of these is with respect to the traditional tool of assignment. Although the UAE’s Civil Code and recent Mortgage Law make reference to the concept of an assignment, its use as a device for transferring rights or taking security is not fully developed, nor are the requirements for perfection especially clear. 2. The second is due to the licensing requirements. Although foreign lenders often make loans to UAE entities, this is technically a licensed activity and certain types of security (such as land mortgages and commercial pledges) can only be granted in favour of locally licensed institutions. Consequently, it is not uncommon for distressed debt in the Middle East to be traded by sub-participation, rather than by way of assignment.
Written by Barry Cosgrave, Chris Street and Hannah Davies
Other challenges include those relating to the trading of secured debt. Although security may be of limited value in a distressed debt trade (particularly in jurisdictions such as those in the Middle East where enforcement has traditionally been court-led), the availability of security may still be an important consideration, especially if it allows a creditor to achieve secured status in insolvency proceedings. For debts created in the UAE after the enactment of security reforms in 2016, purchasers of secured debt ought to confirm whether the security has been registered with the Emirates Integrated Registries Company (EIRC). One of the many benefits of the EIRC is that it allows for registrations to be updated and therefore purchasers of bilateral loans would need to ensure the beneficiary of the registrations is amended, if only to ensure that the selling creditor does not benefit from priority status in any insolvency proceedings. For older financing arrangements, the picture is unfortunately more complicated and may give rise to some of the licensing issues raised earlier in this article. Original wet-ink security or credit support documents are also of heightened importance in Middle Eastern jurisdictions for the purposes of enforcement. This is particularly true in KSA, where Promissory Notes, which can only be enforced in original form, often serve as an important form of credit support. This was highlighted in a case before the English courts (Golden Belt 1 Sukuk Company B.S.C.(c) v BNP Paribas [2017] EWHC 3182 (Comm)), which found a bank to be negligent in arranging a Sukuk (Islamic bond) financing where it failed to ensure the promisor delivered a wet-ink promissory note. As with many other jurisdictions, the COVID-19 pandemic has impacted employment levels in the Middle East and, consequently, their tourist- and expatriate-driven economies. This, combined with positive legal developments and the potential for greater returns than may be available in more traditional markets, means we anticipate the Middle East becoming an increasingly important market for distressed debt trading in the medium term.
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Erica Arcudi Associate, London E: earcudi@mayerbrown.com T: +44 20 3130 3263
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Hannah Davies Associate, London E: hdavies@mayerbrown.com T: +44 20 3130 3258
Chris Street Senior Associate, London E: cstreet@mayerbrown.com T: +44 20 3130 3831
Barry Cosgrave Partner, London E: bcosgrave@mayerbrown.com T: +44 20 3130 3197
...security may be of limited value in a distressed debt trade (particularly in jurisdictions such as those in the Middle East where enforcement has traditionally been court-led), the availability of security may still be an important consideration...
One of the many benefits of the EIRC is that it allows for registrations to be updated and therefore purchasers of bilateral loans would need to ensure the beneficiary of the registrations is amended...
Chris Street Associate, London E: cstreet@mayerbrown.com T: +44 20 3130 3831
Barry Cosgrave Partner, London/Dubai E: bcosgrave@mayerbrown.com T: +44 20 3130 3197
Eye on Emerging Markets | Q1 2022
At the end of 2019, the Brent crude oil price was around US$65/bbl. The key issues prevalent in the sector were energy transition, a continuing growth in global demand for energy and how the energy sector as a whole was going to respond to those competing pressures.
Security of supply has become a key factor in national energy policies and it is likely that one of the results will be an increase in global LNG production and export to countries previously reliant on Russian oil & gas.
In the 30 months since then, there have been two unlinked global events that have resulted in a paradigm shift in the global oil and gas sector. The Covid-19 pandemic altered the demand and supply equation and caused oil and gas companies to review investments and strategies. Coupled with an oversupply caused when the OPEC+ countries decided not to cut back on supply in March 2020, the falling demand caused by Covid lockdowns around the world sent the oil price into freefall, with the Brent crude price bottoming out at US$20/bbl in April 2020. Since then, there has been a gradual recovery of the oil price and investment in the sector. By February 2022, crude had recovered to around US$90/bbl and that looked to be something of a new norm. The Russian invasion of Ukraine and the resulting economic sanctions created a supply crunch, temporarily forcing up the price of crude to US$140/bbl, which then levelled out by May 2022 to around US$110/bbl. These price rises clearly affect consumers and businesses, who have to pay more for their energy, and have led to a growth in inflation. They have also impacted corporate strategy. At the new higher oil prices many oil and gas prospects that had previously looked uneconomic will be unlocked, while at the same time increased investment in renewable energy now looks much more attractive. Not only is there now a general upward slope in the global energy demand curve, with increases in demand particularly in Asia and Africa going past 2050, there is now, at least temporarily, a constriction of supply with Russian oil and gas being taken out of the global market. These competing forces will keep oil and gas prices high for some time. Security of supply has become a key factor in national energy policies and it is likely that one of the results will be an increase in global LNG production and export to countries previously reliant on Russian oil & gas. However, in spite of a huge demand for energy, it is clear that energy transition – the move away from hydrocarbon-sourced energy – has a momentum that is not being slowed: indeed, Russia’s actions in Europe have only reinforced the need for renewable and alternative sources of supply. All stakeholders – from investors to consumers – have embraced the need for energy transition and continued investment in non-hydrocarbon sources of energy.
Written by Bob Palmer
Nevertheless, for every international oil company that sells off oil and gas assets, there is a buyer to step in. Some companies do not have the financial muscle to shift quickly from one type of business to another – and the buy-side has been filled to a large extent by private equity-backed companies and national oil companies. Stakeholder pressure and improved corporate governance has led to most, if not all, of those companies that are committed to continued investment in oil and gas to embrace low-carbon initiatives and, more generally, environmental, social, and governance issues. Energy transition and increasing global demand for energy, now coupled with concerns about security of supply caused by Russia’s actions in Ukraine, will dominate strategy and policy-making for the foreseeable future. Most regulators around the world are committing to energy transition, however, it is clear that oil and gas will continue to play an important role in the energy mix for some time.
Unlike private companies, sovereigns and SOEs have to take into account political considerations as well as ESG-related and economic considerations.
Bob Palmer Partner, London E: bpalmer@mayerbrown.com T: +44 20 3130 3363
Reproduced with permission from Law Business Research Ltd. This article was first published in Lexology Getting the Deal Through – Oil Regulation 2022; contributing editor: Bob Palmer, Mayer Brown International LLP. For further information please visit lexology.com/gtdt.
When considering the economic impact of the Russia-Ukraine conflict on Africa, it’s worth noting that between 2018 and 2020, the continent of Africa imported 44 per cent. of its wheat from these two nations . In a somewhat resultant statistic, African Development Bank has reported that the price of wheat has soared in Africa by over 45 per cent. since the Russia-Ukraine conflict began , due to the disruption of food supplies caused by the conflict.
Only about 2.5 per cent of the Congo River’s hydroelectric potential has been developed so far, but if properly exploited, it’s thought that the Congo River could generate enough clean energy to power the whole continent.
The continent of Africa is comprised primarily of commodity based economies, and the impact of supply shortages of grain, wheat and fertiliser have led to low GDP forecasts as well as spiking inflation across many African countries. This in turn has raised questions as to how serviceable debt (both sovereign and private sector) will be across the continent if the impacts of the Russia-Ukraine conflict persist. Why the above is important in respect of Africa’s green energy transition is that as African nations struggle to maintain debt sustainability, European nations (among others) are eager to ensure their own energy security, by sourcing alternatives to Russian gas. As an example of this, the European Union has recently softened its previous objections to liquefied natural gas ("LNG"), which it has now labelled a "transition fuel", and a draft European Union paper has identified the largely untapped LNG potential of Nigeria, Senegal and Angola as the best option for reducing the European Union’s dependency on Russian natural gas by two thirds this year. The above points to a trade-off that may take place across African nations between economics and climate sustainability. Given the current global demand for LNG (as well as other fossil fuels) and the need for African nations to maintain debt sustainability, ramping up production in respect of LNG would seem like a rational economic step, at least in the short term. Alternatively, a transition to green energy may be perceived as an economic luxury that the continent of Africa simply cannot afford right now, and which needs to be deferred. Notwithstanding the above, it's worth noting that the reason why the European Union has labelled LNG a "transition fuel" is because ultimately, it is the cleanest fossil fuel. There are also notable incidents of significant investment in green energy on the continent already, for example the Energy and Petroleum Regulatory Authority of Kenya reported in 2021 that 75 per cent. of Kenya’s electricity generation comes from renewable sources. As a final statistic, though Africa is renowned for its fossil fuel reserves, it also has hugely untapped renewable energy sources, which are far less discussed. Only about 2.5 per cent of the Congo River’s hydroelectric potential has been developed so far, but if properly exploited, it’s thought that the Congo River could generate enough clean energy to power the whole continent.
Written by David Fraher
There isn’t a correct answer as to how decision makers in Africa should choose between debt sustainability and promoting a green energy transition. Arguably, the two options aren’t mutually exclusive in all circumstances. Even though strong international demand for LNG points to Africa ramping up production in this area, this doesn’t necessarily mean that alternative funding won’t be made available for green energy projects too, particularly if they can be shown to be economically viable. Much like the rest of the world (and somewhat regardless of the Russia-Ukraine conflict), a green energy technology breakthrough has the potential to materially disrupt how funds are allocated to energy projects throughout Africa, and could bridge the gap between debt sustainability and green energy transition.
David Fraher Senior Associate, London E: dfraher@mayerbrown.com T: +44 20 3130 3248
1. https://unctad.org/system/files/official-document/osginf2022d1_en.pdf
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https://www.afdb.org/en/news-and-events/press-releases/african-development-bank-board-approves-15-billion-facility-avert-food-crisis-51716
3. https://www.epra.go.ke/energy-petroleum-statistics-report-2021/
https://energycapitalpower.com/beyond-fossil-fuels-a-look-at-the-republic-of- the-congos-hydropower-potential/
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As has been well-documented on our 'Eye on ESG' blog, a wide range of sustainable finance-related initiatives are coming online in the European Union. These initiatives, many of which originate from the European Commission's Action Plan on Sustainable Finance ("SFAP") published in 2018, aim to achieve the EU’s primary goals of reorienting capital flows towards sustainable investment, managing financial risks stemming from sustainability-related issues, and fostering greater transparency in economic activity.
The EU Taxonomy establishes a detailed framework for determining whether economic activities are “environmentally sustainable”, helping investors to assess whether their investments meet standardised and robust environmental standards.
There is undoubtedly significant market noise and commentary on these initiatives but, despite their obvious significance to many EU-based entities, their relevance to non-EU-based entities is not always so clear. In this article, we take a brief look at a few of the key EU initiatives and developments in this space and what they might mean for those focused on, and operating in, the emerging markets. Sustainable Finance Disclosure Regulation ("SFDR") The SFDR – currently, the most advanced component of the SFAP – imposes sustainability-related disclosure requirements on financial market participants and financial advisers. Broadly speaking, it affects entities offering and advising on fund products in the EU. In-scope entities may be required to disclose, amongst other things, how they integrate sustainability risks within their investment services and how they assess the principal adverse sustainability impacts of their investment activities. There are also requirements to disclose detailed data about the design of their products, alignment with the EU Taxonomy (see below for further details) and the sustainability credentials of the assets and investments that underpin their product offerings. Whilst many entities in the emerging markets are not directly caught by the SFDR, they may still be impacted by it. The SFDR is representative of a shift in the investment industry in the EU towards greater transparency of the sustainability credentials of financial products. Non-EU based entities may, therefore, find themselves subject to additional ESG and sustainability scrutiny and related information requests from entities subject to the SFDR in order to allow them fulfil their regulatory obligations. Taxonomy Regulation (EU) 2020/852 ("EU Taxonomy") The EU Taxonomy establishes a detailed framework for determining whether economic activities are “environmentally sustainable”, helping investors to assess whether their investments meet standardised and robust environmental standards. The EU Taxonomy will have broad application in the EU. It is not only an important component of the SFDR, but will also apply in a range of other contexts, including corporate disclosure via the EU Non-Financial Reporting Directive (“NFRD”), the proposed Corporate Sustainability Reporting Directive (“CSRD”), and the proposed EU Green Bond Standard. As with the SFDR, we expect emerging markets entities that are not subject directly to the EU Taxonomy to nevertheless receive additional information requests from in-scope counterparties about their sustainability credentials. The aim of the SFDR, NFRD and the CSRD is to create a disclosure chain that allows end investors to obtain robust sustainability data and allocate resources and investment accordingly. It remains to be seen whether the data produced by these initiatives does indeed fulfil the EU’s primary objective of “reorienting capital flows towards sustainable investment” but the regulatory push in that direction is clear.
Written by Peter Pears and Oliver Williams
Green Asset Ratio ("GAR") Under the Disclosures Delegated Act, in-scope EU banks will be required to report their GAR, i.e. the proportion of assets invested in EU Taxonomy-aligned economic activities. The basic intention of the GAR is for it to be used to publicly monitor the alignment of banks’ portfolios with EU sustainability goals. It is therefore likely to become an increasingly important part of the integration of ESG and sustainability considerations into EU lenders' credit decisions and therefore relevant to all borrowers, including to those in non-EU emerging markets. ESG ratings Investors in Europe are increasingly looking to ESG ratings to help inform their investment strategies. Despite this increased attention, the market structure for ESG rating agencies is fragmented, and the agencies’ operations remain largely unregulated. The recently published outcome of the EU’s Call for Evidence on the functioning of ESG ratings (available here) highlighted a range of shortcomings in the sector and further regulation seems likely. Whilst, clearly only one factor in the range of investment and lending considerations, there is, however, potential for a low rating from an ESG rating agency to have a drag effect on investment decisions and the availability of funding. It remains to be seen how future regulation affects the development of ESG ratings, however, their increased prominence is undoubted.
Peter Pears Partner, London E: ppears@mayerbrown.com T: +44 20 3130 3297
Few facility agreements expressly address the consequences of a finance party becoming subject to sanctions.
The financial landscape in the EU (and beyond) is undergoing significant change at the moment and ESG and sustainability considerations are increasingly important. Even where emerging market entities are not directly subject to these new rules, it seems likely they will be affected. If you would like to discuss in more detail, please do get in touch.