Guide to private credit in Asia-Pacific: New Zealand

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The New Zealand debt market is dominated by the “big four” Australian banks, with around 85% combined market share in February 2021. However, there has been real growth for private equity players, and we we expect this to continue, especially given the following:

  • There is an impending increase in regulatory capital requirements for banks in New Zealand (noting that these have been delayed due to COVID-19, but will be phased in from July 2022).
  • There is greater flexibility in terms and structures that private credit can offer.
  • It will become more difficult for many borrowers in certain sectors after COVID-19 to access traditional bank debt and equity and debt capital markets.

In recent years, a number of international credit funds have financed major New Zealand transactions. A few major Australian players have opened offices in New Zealand, and some local investment banks and family offices have set up separate divisions to engage in special situations and property finance. We expect these new entrants to be particularly competitive in the middle market, where most M&A and financing activity in New Zealand takes place.

Can a fund make a new loan to a borrower incorporated in New Zealand without a banking licence?

Yes, noting 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 does business directly or indirectly in New Zealand (whether through an agent or otherwise) to be registered (and regulated) as that bank if it has the word “bank” (or any derivative or variation thereof) in its name. Certain exemptions or permissions may apply or be available to foreign banks that deal primarily with wholesale customers in New -Zealand.
  • Certain entities are required to register with the Financial Services Providers Register under the Financial Services Providers (Registration and Dispute Resolution) Act 2008 (NZ) if they are in the business of credit. However, this will generally only apply where the entity has an establishment 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 shown above).
  • A fund structured as a partnership or limited partnership may need to be registered with the New Zealand Companies Office under the Companies Act 1993 (NZ) or the Limited Partnerships Act 2008 (NZ ) as an overseas company/limited partnership if it is carrying on business in New Zealand.

Are taxes or other similar charges generally a significant issue for a fund lending directly to a New Zealand incorporated company or taking credit support from it?

Generally not, but New Zealand has unique tax rules.

  • Withholding tax: New Zealand imposes withholding tax obligations on New Zealand resident borrowers and guarantors (together “payer”) who pay interest to non-resident lenders under the non-resident withholding tax rules. -residents (NRWT). A New Zealand payer will be required to apply the NRWT rules on interest payments to a non-resident lender (“NRWT loan”), except in one of the following circumstances:
    • The non-resident lender lends to the New Zealand payer through a fixed establishment (i.e. a branch) in New Zealand.
    • The non-resident lender is a registered bank (not associated with the New Zealand payer) carrying on business in New Zealand through a fixed establishment in New Zealand.
  • AIL Scheme: It is standard business practice for NRWT lenders to require a New Zealand payer to “mark up” 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 financing). To address this issue, New Zealand has enacted the “AIL Regime”, which states the following:
    • A payer can register with the Inland Revenue as an “approved issuer” and register the relevant loan as a “registered security”.
    • . A payer can make a payment equal to 2% of each gross interest payment to the Inland Revenue (being the AIL).

When the AIL scheme is used, the applicable NRWT deduction rate for payments made to the NRWT lender will be 0%. From the payer’s perspective, paying the AIL is generally more cost effective than marking up an NRWT lender for the NRWT that would otherwise be payable.

  • New Zealand borrowers are generally entitled to deduct interest charges and other borrowing costs, subject to New Zealand thin capitalization and restricted transfer pricing rules

Can interest, fees and remuneration be freely agreed between a lender and a borrower in New Zealand?

In principle, interest, costs and remuneration can be freely agreed between a lender and a borrowing company, the conditions being governed by the contractual agreements between the parties and common law. However, we notice the following:

  • Penalties: There may be circumstances in which late payment interest or fees may be considered an unenforceable penalty.
  • Oppressive: The terms of a credit agreement may be unenforceable to the extent that: (a) the terms are oppressive (including interest rate); (b) the exercise by a party of any of its rights and powers is oppressive; or (c) a party was induced to enter into the transaction by oppressive means.
  • Related parties: New Zealand’s restrictive transfer pricing rules effectively limit the rate of interest that can be charged on cross-border related party debt.

Can a fund directly hold all securities issued by a New Zealand incorporated securities provider?

Yes, although the security is generally given in favor of a security trustee to facilitate administration, future transfers and enforcement.

Can a company incorporated in New Zealand provide credit support for the acquisition of its shares or those of its holding companies?

Yes. The Companies Act 1993 (NZ) allows a company to provide financial assistance in connection with the purchase of shares issued or to be issued by a company or its holding company, provided certain conditions are met.

The most common means of approving financial assistance requires that the board of directors of the company providing the assistance obtain a written assignee agreement signed by all of a company’s “assignees” (in most cases this 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 granting of the financial assistance, pass a solvency test.

What is, in relative terms, the amount of credit support provided by a business in New Zealand?

Strong. It is common practice in New Zealand for companies belonging to wholly owned groups to guarantee all of their present and future assets and give unlimited cross guarantees in support of their debts. The directors of the company will need to be satisfied with the social benefit of the operation (which may be for the benefit of its holding company if its constitution expressly so provides) and the solvency of the company at the time the credit support is provided . It is common market practice for these and other matters to be certified with financiers when providing credit support.

Is the enforcement regime in New Zealand relatively favorable to lenders?

Yes, the New Zealand enforcement regime is considered ‘lender friendly’ and a lender can usually obtain enforcement amicably and quickly. Hardening periods can apply for up to two years after the granting of security, but they rarely present a problem where the underlying security document guarantees the money advanced at the time of the granting of security or at any time after this and provided that the company was able to pay its debts due at the time of the granting of this guarantee.

The most common means for a lender to take enforcement action is to appoint a receiver over the debtor or its assets under the contractual rights conferred under the relevant security document(s), and then have the receiver exercise power of sale. Where a receiver is not appointed, there are other legal regimes that allow a secured creditor to take possession and sell the secured property to realize the debt.

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