NEW ZEALAND Law and Practice Contributed by: David Weavers, Alex MacDuff, Matt Consedine and Verniel Virtucio, Russell McVeagh
of the holdco borrower (which would usually be limited to shares in the opco and any receivables under shareholder loans made to that company). The junior creditor will have no direct recourse to the operating business, and will also have no contractual nexus with the opco lenders. Borrowers that need junior capital tend to be term-takers, so junior private capital tends to be provided on more lender-friendly terms when compared with the terms obtained by sponsors on private-credit-funded LBOs. 3.8 Payment in Kind/Amortisation Private credit providers often offer payment-in- kind (PIK) debt. PIK is more common for spe - cial situations or distressed borrowers, and has become more prevalent due to increasing base rates. On more leveraged structures, borrowers will be given the option to PIK interest, subject to certain conditions, on the basis that the PIK rate is higher than the cash-pay rate. In senior/ mezzanine transactions, there is often a require - ment for interest to PIK if certain triggers are hit (such as financial covenants deteriorating below agreed thresholds). Private credit funds tend not to require amorti - sation, preferring to keep more of their funds at work for longer, but will require mandatory pre - payments for certain events (such as disposals). Funds that participate alongside banks in sen - ior club/syndicate structures tend to offer terms more consistent with a traditional bank financing (such as amortisation and no call protection). 3.9 Call Protection Most private credit providers acting in New Zealand require some form of call protection,
although the details vary between funds and on a deal-by-deal basis. Some funds require a form of minimum interest (eg, 12 months’ worth of interest), whereas others may require the net present value of interest over the remaining non- call period, potentially capped at an agreed per - centage of the amount prepaid.
4. Tax Considerations 4.1 Withholding Tax
New Zealand has two types of withholding tax that apply to interest, resident withholding tax (RWT) and non-resident withholding tax (NRWT). Resident Withholding Tax (RWT) RWT must be withheld on payments of resi - dent passive income, including interest, made by New Zealand tax residents or non-residents carrying on a taxable activity in New Zealand through a fixed establishment in New Zealand. Resident passive income includes payments to non-residents for the purpose of a business they carry on in New Zealand through a fixed estab - lishment, and offshore registered banks operat - ing through a New Zealand branch (who are not associated with the payer). Most New Zealand-based private credit funds would have RWT-exempt status, such that RWT is not withheld from interest payments. Non-Resident Withholding Tax (NRWT) Subject to certain exceptions, New Zealand- sourced interest paid to non-resident private credit providers will generally be subject to NRWT at the rate of 15%. This rate of tax may be reduced to 10% (or similar concessionary rates) in cases where the payee is resident in a country with which New Zealand has a double tax agreement.
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