Danish bombshell

A new law is designed to remove the favorable tax status enjoyed by leveraged loans.

It may constitute only a small fraction of the European private equity market in terms of deals done and funds raised, but Denmark has punched above its weight with a powerful blow to an asset class increasingly up against the regulatory ropes.

At the beginning of June, the Danish Parliament (Folketing) passed new legislation reducing interest deductibility on loans used to finance takeovers. While the legislation applies to all Danish companies, it is expected to hit private equity firms undertaking leveraged buyouts particularly hard.

?Even though this is a general change, it was presented by the press and government as an attempt to counter very aggressive private equity tax planning,? says Arne Mollin Ottosen, a tax partner at Copenhagen-based law firm Kromann Reumert.

Market sources say the roots of the new law ? which introduces an interest deductibility ?ceiling? based on the tax value of a company's assets ? can be traced back to the buyout of Danish telecom operator TDC in March 2006 by Apax Partners, Blackstone Group, KKR, Permira and Providence Equity Partners. At €10 billion, TDC was Europe's largest private equity deal at the time.

The highly leveraged deal stoked controversy, as TDC had been steadily reducing its debt burden in the years leading up to the deal. The takeover, which featured a large junk bond issue, led to an instant downgrade of TDC's debt by rating agency Moody's and was labeled a ?scandal? by former Danish premier Poul Nyrup Rasmussen, a member of the Socialist Group in the European Parliament.

Market sources say the Social Democrat-led coalition that governs Denmark jumped on the bandwagon when it realized that Rasmussen's criticism of ?predator funds? had tapped into popular feeling. This does, however, place the nominally pro-business grouping in a difficult position. ?The government claims only 1,000 companies will be hit by the new legislation and that [because of falling company tax rates] everyone else will benefit,? says Ottosen. ?The problem is that these companies employ the majority of the Danish workforce.?

For private equity pros in European markets where the issue of interest deductibility is currently being debated, such as the UK and Germany, the Danish precedent will not be welcomed.

SEC paves way for IFRS accounting standards
The US Securities and Exchange Commission has proposed allowing companies based outside the US to file financial statements using accounting standards set by the International Accounting Standards Board. The current practice requires foreign companies that file financial reports in the US to reconcile figures to US GAAP (generally accepted accounting principles). The move, which was designed to mitigate risk, is part of the SEC's roadmap to eliminate the requirement that foreign companies reconcile their financial statements to US generally accepted accounting principles (GAAP). ?Global accounting standards would allow investors to draw better and more accurate comparisons among issuers around the world,? said Christopher Cox, SEC chairman, at an agency meeting. The commission, however, specified that foreign companies will have to use the English version of international financial reporting standards. The proposal is open for public comment for 75 days and must be approved again by the SEC before taking effect. The SEC also said it will begin exploring the possibility of allowing US companies to file financial statements under US GAAP or IFRS, this summer.

NVCA: SOx 404 reform insufficient
The National Venture Capital Association told Congress that recent proposals from the Securities and Exchange Commission and the Public Company Accounting Oversight Board to lower costs of Sarbanes Oxley compliance for small companies falls short of the mark. The NVCA's President, Mark Heesen, testified before Congress recently, citing three reasons why the slate of proposals submitted by the SEC and the PCAOB remains insufficient. ?First we are gravely concerned that the accounting profession will not change its high cost practices and the recent guidance provided by both the SEC and the PCAOB regarding materiality is nor specific enough to compel them to do so,? Heesen said. ?Second, the oligopoly that exists for 404 audits leaves no choice for small companies in terms of service providers.? The last reason for his misgivings about the current proposals is that they all need to be field-tested to prove that they actually reduce costs. To address these concerns, he suggested raising the threshold for defining what is and is not material for sound reporting and allowing accredited officials beyond the Big Four to perform 404 attestations.

Chinese bank official calls for new PE rules
The People's Bank of China deputy director, Wu Xiaoling, has called for regulatory change to foster private equity within the country. Wu reportedly urged that Chinese commercial banks be allowed to invest in the country's private equity funds, along with a list of other reforms to encourage the asset class, at an international forum held in the country's northern city of Tianjin. ?Our current capital market is insufficient in meeting the funding needs of our companies,? Wu said, according to the China Economic Information Service. ?Banks are institutions that manage risks anyway so they should be in the position to judge the risks in these instruments.? It was unclear if Wu meant that banks should be allowed to invest in both foreign and local private equity funds, though she did specify that private equity firms should be given the room to bring in overseas management expertise to enhance a company prior to an IPO. Not all Wu's proposals were directed at regulatory reform however. Wu also asked that foreign private equity firms raise yuan-denominated funds so portfolio companies would no longer list offshore. China Development Bank and the Tianjin government do plan to set up a RMB2 billion fund to invest in venture capital firms, according to the city's deputy mayor, Cui Jindu.