Insuring cross-border M&A deals.

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INSURING CROSS-BORDER
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2. 2 www.riskandcompliancemagazine.comRISK & COMPLIANCE Oct-Dec 2018
ONE-ON-ONE INTERVIEW
Adrià Vázquez
TRI Manager - APAC
Tokio Marine HCC
T: +65 6592 5671
E: adria.vazquez@tokiomarine.com.sg
Adrià Vázquez joined Tokio Marine HCC in 2012 on the financial
lines team and later moved to the transaction risk insurance team.
With vast experience in warranties & indemnities (W&I) across
different geographies and complex transactions, he currently
works as regional TRI manager for Asia-Pacific in Singapore. He
has an economics and finance background, obtaining both his
Bachelor and Master’s degrees from ESADE Business School. He
speaks Catalan, Spanish, English and German.
ONE-ON-ONE INTERVIEW
INSURING
CROSS-BORDER
M&A DEALS

3. www.riskandcompliancemagazine.com 3RISK & COMPLIANCE Oct-Dec 2018
ONE-ON-ONE INTERVIEW
R&C: Reflecting on the last 12 months
or so, how would you describe the level
of cross-border M&A activity involving
emerging markets? To what extent are
you seeing appetite for deals across these
regions?
Vázquez: Inbound and outbound dynamics in
emerging markets will strongly depend on
the economic reality and political context of
the country. If we look at statistics for Asia,
inbound activity has increased significantly,
compared to 2016, as European and US
buyers keep investing in Asia’s industrial
fabric. Outbound activity, however,
seems to have been strongly penalised,
with increased outflow capital controls
implemented by the Chinese government
in order to encourage domestic investment.
However, Chinese companies remain thirsty
for foreign strategic resources, technology,
know-how and brands, and are subsequently reaching
out to new markets for further expansion. From a
warranty & indemnity insurance (W&I) perspective,
we have seen a healthy flow of Japanese outbound
transactions as Japanese buyers become more
familiar with this solution. On the contrary, the usage
of W&I in Asia is dominated by international private
equity (PE) or other financial investors seeking a
clean exit, as well as international bidders enhancing
their competitive offers by utilising W&I policies as
an alternative form of security to the more traditional
escrow or hold-back of purchase price.
R&C: What steps should parties take
to identify and understand the kinds of
transactional risks they are likely to face in
emerging markets?
Vázquez: The term ‘emerging markets’
encompasses many countries at different
development stages with diverse realities. Accordingly,
especially for transactions in emerging markets,
the fundamental risk is failing to understand the
idiosyncrasies of the business practices and legal
framework where targets are located. For instance, in
Southeast Asia there are 11 neighbouring countries
with important differences when it comes to legal
fundamentals, not to mention economic and political
Adrià Vázquez,
Tokio Marine HCC
“Inbound and outbound dynamics in
emerging markets will strongly depend
on the economic reality and political
context of the country.”
INSURING CROSS-BORDER M&A DEALS

4. 4 www.riskandcompliancemagazine.comRISK & COMPLIANCE Oct-Dec 2018
ONE-ON-ONE INTERVIEW
principles. Plus, from a commercial perspective, there
are cultural differences, resulting from the diverse
historical and religious backgrounds of the many
cohabiting nations. However, one of the elements that
all these countries tend to have in common is their
focus on economic growth as a priority, which may
take precedence over developing and implementing
sound corporate governance policies. While this trait
is not unusual for developing countries, it is certainly
a key risk factor that needs to guide the diligence
process of any prudent investor.
R&C: In what ways can firms mitigate
the risks associated with undertaking
cross-border M&A in emerging markets,
such as fraud & corruption, ownership
and governance issues, and legal and
regulatory developments?
Vázquez: Perpetrators of bribery, fraud or wilful
misconduct tend to use sophisticated efforts to
cover their tracks. This makes it very challenging
for regular audits or due diligence to identify such
practices, unless they are flagrant, or the review team
gets lucky with a tip-off of some kind. Accordingly,
an effective risk mitigator should choose the right
business partner – that is, a counterparty which
has an established reputation regarding compliance
and sound business practices. Although it is not
an infallible test, sellers that have an international
footprint and are governed by strict codes of business
conduct in Europe and the US are usually seen as
more reliable parties, considering they are expected
to implement their expertise and compliance
practices on a global level. Plus, they are subject
to a higher level of scrutiny by regulators. However,
learning how to select the right local business
partners and understanding what tools are available
to effectively control the target, which does not
always flow from having a controlling stake in a
company or majority in the board of directors, is also
key. This is particularly relevant in jurisdictions which
impose foreign investment restrictions, basically
forcing international investors to partner with locals.
R&C: What insurance options are
available to parties undertaking cross-
border M&A? What are the key issues
they need to consider when assessing
appropriate policies?
Vázquez: From a transaction risk insurance (TRI)
perspective, the solutions available vary from the
most commonly used W&I to less commonly used but
increasingly offered tax contingency, litigation buyout
and contingent risk policies. Insurers provide these
solutions, depending on their risk appetite. When it
comes to emerging markets, it is quite rare to see
TRI solutions being offered, other than W&I, with the
only exception being India in which a growing amount
of tax contingency policies are being placed. When
seeking to engage W&I, parties need to fundamentally
INSURING CROSS-BORDER M&A DEALS

5. www.riskandcompliancemagazine.com 5RISK & COMPLIANCE Oct-Dec 2018
ONE-ON-ONE INTERVIEW
conduct their disclosure process and due diligence,
while negotiating an arm’s length catalogue of
warranties and indemnities. Also, bear in mind that
traditionally, W&I is a fall-back solution for unexpected
risks – that is, breaches of warranties which the
parties were genuinely not aware of in the negotiation
process. W&I policies will exclude ‘known’ risk issues
that have been disclosed during the deal process,
even if such risk is remote or unquantified.
R&C: To what extent do emerging market
environments complicate the risk profile
as far as insurance coverage is concerned?
Vázquez: Compared to more mature markets,
such as Europe, the US or Oceania, W&I in emerging
markets has just left the gestation stage. Contrary to
the situation two years ago, there is already a certain
critical mass in terms of W&I opportunities, but still
far from the figures seen in more developed W&I
markets. This is reflected in a W&I user community
which is often still understanding what to expect
and how a W&I policy can be used, as well as
raising questions surrounding moral hazards when
engaging such insurance solutions. In terms of
technical complications, deals in emerging markets
often include a cross-jurisdictional element, with
assets scattered across neighbouring countries. This
poses an additional level of complexity because,
as previously outlined, not all jurisdictions are the
same. This usually translates into gaps in the due
diligence process since, given a fixed budget, buyers’
advisers tend to conduct a transversal due diligence
process. This covers as many jurisdictions as possible
and does not always delve into a desirable level of
granularity from a W&I perspective. For instance, it
is not uncommon for local language records and
documentation to not be considered or challenged
as part of the review. Also, from an institutional
perspective, it is important to bear in mind that
public registers, to the extent they exist, do not
always contain reliable, up-to-date information when
it comes to title ownership, securities’ interests,
litigation processes and so on. Combined with the
fact that compliance tends to be a second order
priority, including but not limited to the possibility
of maintaining several different versions of financial
records, risk profiles can be complex. Finally,
depending on the parties involved, due diligence
reports might not be fully translated into English.
W&I insurers have different approaches to their risk
appetite in these circumstances.
R&C: To what extent can appropriate
insurance coverage function as a
strategic tool during a cross-border M&A
transaction? How can different types of
insurance influence negotiations and move
a deal toward close?
Vázquez: Precisely because of the complexities
involved, when it comes to insuring deals in the
INSURING CROSS-BORDER M&A DEALS

6. 6 www.riskandcompliancemagazine.comRISK & COMPLIANCE Oct-Dec 2018
ONE-ON-ONE INTERVIEW
context of cross-border transactions, especially in
emerging markets, W&I brings the additional comfort
that a cautious buyer needs when dealing with
an unknown risk. However, there are many other
strategic benefits that a buyer can leverage, such as a
negotiated W&I policy with a bidder’s Sale & Purchase
Agreement (SPA) draft proposal at the pre-exclusivity
stage. This would have the effect of significantly
reducing the amount of back-and-forth negotiations
on the warranties and accompanying limitations
required in the SPA. While this approach was seen as
providing a competitive advantage for sophisticated
bidders in the past – and it still is – nowadays
the inability of a bidder to offer a W&I solution is
considered a negative factor by an increasing number
of sellers. In some instances, where the seller is a
financial investor seeking to obtain a clear exit, the
use of W&I will be driven by the seller and imposed by
the buyer. In such cases, the seller may substantially
negotiate the W&I policy in advance of receiving bids
and may go so far as to dictate that all bids should
contemplate use of the negotiated policy. In the
world of TRI, this process is often called the ‘seller-
to-buyer flip’. Outside of W&I, contingency solutions
enable parties to park discussions on identified but
not certain risks, and deal with them by transferring
the risks to the insurer and therefore allowing
negotiations to resume on other commercial points.
Often, parties manage to maximise the negotiated
price by making adequate use of the currently
available insurance solutions.
R&C: Looking ahead, do you expect to
see rising demand for insurance in cross-
border emerging markets M&A? How do
you expect coverage offerings to evolve in
the years ahead?
Vázquez: Several factors substantiate the expected
rise in M&A insurance in emerging markets. Firstly,
usage of W&I has grown by triple digits in Asian
emerging markets over the last 24 months and
forecasts remain optimistic. Brokers and insurers
are building up their local capabilities by structuring
the necessary licensing capabilities, increasing
experienced headcount and more granularly reaching
out to potential local markets. Also, international
financial investors already versed in the usage of
this product in other markets, comfortably repeat
their W&I experience in their business ventures in
emerging markets. Further, there is an existing local
W&I community in a number of emerging markets
sitting closer to the risks they underwrite. This enables
insurers to better understand local risks and deal
with them in a commercially effective manner, which
means more attractive cover positions for parties.
Also, as W&I opportunities grow and the number of
competitors underwriting ‘exotic’ risks in emerging
markets increases, it is reasonable to expect that
general policy conditions, such as pricing, deductibles
and so on, will soften. RC&
INSURING CROSS-BORDER M&A DEALS