22 April 2020
Channel Islands funds market update
This article provides an update on trends and matters of relevance to Guernsey and Jersey investment funds arising over recent weeks.
The pandemic has taken a heavy toll on business. For many, particularly those in the retail sector, revenues have dropped to zero. Securing debt facilities has been crucial for those companies in attempting to ride out the crisis. In the Channel Islands we have already seen a great deal of lending activity – both private and public. Private equity funds have been scrambling to secure credit lines for struggling portfolio companies – often with some urgency. Even where the borrower is not in immediate distress, there has been a sense that credit should be secured while it remains available.
Carey Olsen recently advised on Guernsey and Jersey’s loan guarantee schemes under which governments in the Crown Dependencies have agreed to guarantee to participating banks up to £140 million of new lending across the islands. Other countries around the world have implemented their own mechanisms to try to help those suffering economic hardship as a result of the pandemic. Even the large buy-out firms have sought to access relief packages where available, such as the USD 2 trillion available in the USA. Carey Olsen has also seen European private equity managers seek to access governmental support for mid-sized European trading company investments.
But not all asset classes are suffering. And some mangers have already begun raising new funds targeting distressed or newly in-favour assets and to put in place new credit facilities to enable them to take advantage of opportunities quickly. Distressed debt, as in 2008, is proving attractive. How investment teams will scope and assess new opportunities under the current travel restrictions remains to be seen.
Real estate funds
The valuation uncertainty in the real estate market arising from the coronavirus outbreak has led open-ended UK property funds to suspend trading under FCA rules, and a number of Channel Islands property funds are considering whether to follow suit. Carey Olsen has recently advised a number of funds (both open- and closed-ended) on their their obligations in the event of qualified valuation reports and their ability to suspend or gate redemptions in light of the material risk that these may not fairly reflect the value of fund interests. Fund managers should be aware that any such measures taken by a fund in response to this uncertainty may give rise to regulatory notifications under local codes of practice.
Travel restrictions have made travelling to attend board meetings in Guernsey and Jersey impossible. This is a problem where the attendance of those overseas directors is essential in order to meet local economic substance requirements.
The Comptroller of Revenue in Jersey has provided some welcome reassurances by confirming that where a company’s operating practices have to be adjusted to compensate for the coronavirus outbreak, the Comptroller will not determine that the company has failed to meet the economic substance test. This treatment will only apply to adjustments to the normal operating practices, and only to the extent required to mitigate the threats from the outbreak.
Similarly, the Guernsey International Business Association has issued guidance assuring business that the Guernsey Revenue Service would take a pragmatic approach in the present exceptional circumstances and this approach was endorsed by Guernsey’s Chief Minister. In that guidance, companies are advised to maintain relevant records to demonstrate why compliance had proved impossible and utilise virtual conference facilities if possible.
The European Union (EU) has not issued any such guidance. However, HMRC in the UK has noted that existing legislation and guidance already provides flexibility to deal with changes in business activities necessitated by the response to the Covid-19 pandemic. HMRC helpfully notes that they do not consider that a company will necessarily become resident in the UK because a few board meetings are held there or because some decisions are taken in the UK over a short period of time. This is very helpful in the current circumstances. Nonetheless in the medium to longer term, businesses should consider appointing alternate directors. In some cases, board composition may need to change more fundamentally.
Those countries which have been blacklisted by the EU as a result of their failure to implement adequate substance requirements are to be subject to tougher restrictions in Luxembourg later this year. On 30 March 2020 the Luxembourg Government announced that interest or royalty payments to recipients in blacklisted countries would no longer be tax deductible (subject to certain exceptions). Given Luxembourg's extensive array of double tax treaties this measure will bite on fund structures with connections to blacklisted countries.
This is the first time an EU state has taken specific measures against the recently blacklisted countries. However, the Luxembourg law implements guidelines approved by the EU Council on 5 December 2019 which raises the possibility that other EU member states may follow suit.
Self managed Funds
Draft Guernsey legislation responding to the proposal to include self-managed funds within the scope of the substance regime remains with the EU for review. Since the original intention was to introduce these provisions retrospectively, with effect from 1 January 2020, one can only assume that the current crisis has caused delay.
Jersey is also considering legislative amendments to the same effect which are expected to provide confirmation that fund entities themselves (other than where self-managed) will be out of scope generally for substance purposes.