The New Banks – Alternative Lending with SRZ’s Leading Structured Finance Lawyers – The Hedge Fund Journal – April / May 2016

Schulte Roth & Zabel

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April | May 2016 everyone else’s profits, so Breslow does not expect to see a tail of more than 5-10%. Whither usury laws: which state’s Valuation is rarely an explicit requirement rules apply?transfers of ownership around for typical Usury rules are anothertransactions are not succession. “These type of regulation that are structured in the They are set by the various in a state of flux. same way as selling US states, according to factors includingseed or minority or controlling interests to the sizestrategic and the type of borrower, with of loans investors,” Breslow reveals. Rather, interest rate thresholds letsfor civil usury, “a sunset provision set the key person andcontinue to share in profits on usury. higher thresholds for criminal a declining Most direct lending deals are below‘sunsetted’ basis, and in this way they get usury ceilings of the business,” explains Breslow.

This out or outside the scope of usury laws, but may imply some do extra due diligence what investors should probabilistic value on on those that might be caught in the net. but is a kind of declining variable annuity, there is no need to carry out a valuation “When loans are made, usury laws always have exercise. to be considered,” says Ziser. But risk can be transferred multiple times: first to platforms, One reason for this deal structure is then to investors, and subsequently continuing optimising tax efficiency for the amongst investors.

UsuryExplains either the borrower’s employees. laws in Nissenbaum, “Though 2 2 a one-off sale of retirees’ ownership could be advantageous for their estate, because or the lender’s state will often need toat lower profits would incur capital gains tax be observed. The general thinkingnew been that rates than income tax, if the has owners “if the loanoutright purchase of interests in made an complied at origination, then the transfer of suchthe consideration would not the business, loans to a non-bank lender was thought to not as it would beThe Madden be tax deductible change that.” viewed as decision reached the in public equity.” SRZ also like an investment opposite conclusion. Midland Funding has petitioned the US tax has specialist teams of industry-leading Supreme Courtwillhear its on these matters the lawyers who to advise complaints about implications the fund formation team. parallel to of the Madden decision.

“Future legal rulings will determine if state usury laws become a bigger managers? Centenarian issue in the space,” says Ziser. A Though both emergency ruleslonger-term number of other federal and can also be relevant.  plans should be in place, in succession some cases they may not be actioned for Inmany years or even decades. The absence the meantime, the most conservative approach to theseretirement age in the of a mandatory legal uncertainties could be to follow a ‘lowest common denominator’ United States – combined with the energy, approach and ensure that interest rates are stamina and good health of some people working in finance – means that a number of septuagenarian and even octogenarian inside fund managers are usury ceiling, or that hedge the lowest US state still going strong. loan types are nonagenarian and centenarian The number of outside the scope of usury laws. A more time-consuming sure to grow. money managers seems approach could be to check if interest rates on each loan are inside Studies including some from the Brookings the specific ceilings prevailing in that borrower’s Institute show higher income groups in the state, extending their lifespans every year. US arein order to get comfort in the event of Madden prevailing. At the other end of the age spectrum, many successful hedge fund managers could afford Irrespective of usury laws, alternative lending to retire almost any time and some choose to offers potential for investors to target doubledo so in their 40s, making it a more urgent digit yields matter. THFJwhile supplying finance that some companies, and individuals, apparently cannot obtain anywhere else.

THFJ .
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