The New Zealand debt market is dominated by the “big-4” Australian-owned banks, with around 85% combined market share as at February 2021. However, there has been real growth for private capital participants, and we expect that to continue, particularly given the following:
- There is impending increased regulatory capital requirements for banks in New Zealand (noting that these were delayed as a result of COVID-19, but will be phased in from July 2022).
- There is greater flexibility of terms and structures that private credit can offer.
- It will become harder for many borrowers in certain sectors post-COVID-19 to access traditional bank-debt, and the equity capital and debt capital markets.
In recent years, a number of international credit funds have funded significant New Zealand deals. A couple of large Australian players have opened offices in New Zealand, and some
local investment banks and family offices have established separate divisions to engage in special situation and property financings. We expect these new participants to be particularly
competitive in the mid-market, where most of New Zealand’s M&A and financing activity occurs.
Can a fund make a new loan to a borrower incorporated in New Zealand without a banking license?
Yes, noting the specific rules, such as the following, that may apply in some cases:
- The Reserve Bank of New Zealand Act 1989 (NZ) requires any foreign entity that carries on any activity directly or indirectly in New Zealand (whether through an agent or otherwise) to be registered (and regulated) as a bank if it has the word “bank” (or any derivative or variant of the same) in its name. Certain exemptions or authorizations may apply or be available for overseas banks that primarily deal with wholesale customers in New Zealand.
- Certain entities are required to register on the financial service providers register under the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (NZ) if they are in the business of providing credit. This will, however, generally only apply where the entity has a place of business in New Zealand (or where it has retail customers in New Zealand), or is otherwise required to hold certain types of license (including being a registered bank, as discussed above).
- A fund that is structured as a company or a limited partnership may need to be registered with the New Zealand Companies Office under the Companies Act 1993 (NZ) or Limited Partnerships Act 2008 (NZ) as an overseas company / limited partnership if it carries on a business in New Zealand.
Do taxes or other similar charges usually present a material issue to a fund lending directly to, or taking credit support from, a company incorporated in New Zealand?
Generally no, but New Zealand has some unique tax rules.
- Withholding tax: New Zealand imposes withholding tax obligations on New Zealand resident borrowers and guarantors (together “payer”) that make interest payments to nonresident lenders under the nonresident withholding tax (NRWT) rules. A New Zealand payer will be required to apply the NRWT rules on interest payments to a nonresident lender (“NRWT Lender”), unless under either of the following circumstances:
- The nonresident lender lends to the New Zealand payer through a fixed establishment (i.e., branch) in New Zealand.
- The nonresident lender is a registered bank (that is not associated with the New Zealand payer) engaged in business in New Zealand through a fixed establishment in New Zealand.
- AIL regime: It is standard commercial practice for NRWT Lenders to require a New Zealand payer to “grossup” their interest payments for NRWT. This practice means that the NRWT cost is not borne by the NRWT Lender as intended (and is instead an additional cost that the payer must bear in order to obtain funding). To address this issue, New Zealand enacted the “AIL regime,” which stipulates as follows:
- A payer may register with Inland Revenue as an “approved issuer” and register the relevant loan as a “registered security.”
- A payer may make a payment equal to 2% of each gross interest payment to Inland Revenue (being the AIL).
Where the AIL regime is used, the applicable NRWT deduction rate for payments made to the NRWT Lender will be 0%. From a payer’s perspective, paying AIL is usually more cost-effective than grossing an NRWT Lender up for the NRWT that would otherwise be payable.
- New Zealand borrowers are generally entitled to deduct interest expenses and other borrowing costs, subject to New Zealand’s thin capitalization and restricted transfer pricing rules
Can interest, fees and remuneration be agreed freely between a lender and a borrower in New Zealand?
In principle, interest, fees and remuneration can be agreed freely between a lender and a corporate borrower, with terms governed by the contractual arrangements between the parties and common law. However, we note the following:
- Penalties: There may be circumstances in which default interest or fees may be considered to be an unenforceable penalty.
- Oppression: The terms of a credit contract may be unenforceable to the extent that: (a) the terms are oppressive (including the interest rate); (b) the exercise by a party of any of its rights and powers is oppressive; or (c) a party has been induced to enter into the transaction by oppressive means.
- Related parties: New Zealand’s restricted transfer pricing rules effectively limit the interest rate that can be applied to cross-border related party debt.
Can a fund hold directly all security granted by a security provider incorporated in New Zealand?
Yes, although security is commonly granted in favour of a security trustee to facilitate administration and future transfers and enforcement.
Can a company incorporated in New Zealand provide credit support for the acquisition of its or its holding companies’ shares?
Yes. The Companies Act 1993 (NZ) permits a company to provide financial assistance in connection with the purchase of a shares issued or to be issued by a company or its holding company, provided that certain requirements are met.
The most common means of approving financial assistance requires the board of the company providing the assistance to obtain a written entitled person agreement signed by all “entitled persons” of a company (in most cases, these will be the shareholders). The directors of the company providing the financial assistance must be satisfied on reasonable grounds that the company will, immediately after the giving of the financial assistance, satisfy a solvency test.
How strong in relative terms is credit support given by a company in New Zealand likely to be?
Strong. It is common in New Zealand for companies within wholly-owned groups to provide security over all of their present and future assets and give unlimited cross guarantees in support of their debt obligations. The company directors will need to be satisfied as to the corporate benefit of the transaction (which can be for the benefit of its holding company if its constitution expressly provides) and the company’s solvency at the time the credit support is provided. It is accepted market practice for these and various other matters to be certified to financiers at the time of providing credit support.
Is the enforcement regime in New Zealand relatively lender-friendly?
Yes, the enforcement regime in New Zealand is considered to be “lender-friendly,” and a lender can usually achieve enforcement out of court and expeditiously. Hardening periods can apply for up to two years after security has been granted, but they rarely present an issue where the underlying security document secures money advanced at the time of, or at any time after, the granting of the security and provided that the company was able to pay its due debts at the time of granting such security.
The most common means for a lender to take enforcement action is to appoint a receiver over the debtor or its assets under contractual rights conferred under the relevant security document(s), and then for the receiver to exercise a power of sale. Where a receiver is not appointed, there are other statutory regimes available for a secured party to take possession of and sell the secured property to realize debt.
The content above was authored by banking experts Steve Gallaugher and Sam Gunson for the Baker McKenzie Guide to Private Credit in Asia Pacific, published in January 2022.
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