Trade Alert - August 2015, Issue 20
Finland, whilst not always the main jurisdiction of the Borrower frequently features as part of performing or non-performing loan portfolio transactions and we often advise clients on Scandinavian portfolio transactions which involve assets located in Finland.
In addition, Finland became the first European country to issue a negative yield bond in February 2015 after the country successfully sold its EUR 1bn five-year government debt, meaning that investors were in effect paying to lend to the country.
A substantial proportion of the Eurozone’s sovereign debt market now trades with a negative yield and five-year government bonds in Austria, Sweden and The Netherlands all carry negative yields. However, Finland is the first country to auction debt with this maturity at such low rates.
Please click here to view an article published by the Financial Times.
This month’s Trade Alert sets out some of the key considerations for loan transfers in Finland.
REGULATION – BANKING LICENCE REQUIREMENTS
A foreign entity acquiring debt in Finland would not usually be required to obtain a banking licence under Finnish law, as a foreign entity’s activity of acquiring a Finnish loan would not ordinarily be regarded as falling within Finnish banking licence requirements.
The statutory basis for banking regulation in Finland is set out in the Finnish Act on Credit Institutions (610/2014) (referred to as the “ACI”). The Finnish Financial Supervisory Authority (“FFSA”) provides the practical supervision of banking activities in Finland and companies, banks and other credit institutions who are involved in certain banking and financing business in Finland are required to obtain a licence from the European Central Bank (such licence to be applied through the FFSA) in order to pursue their activities. The obligation to obtain a licence only extends to entities whose business activity is:- (i) to acquire deposits and other re-payable funds from the public and (ii) to grant credit or other finance on its own account.
In general, as to whether a banking licence is required for the incoming lender, it does not make a difference whether the incoming lender is acquiring a term loan or a revolving credit facility.
Finnish law does not recognise trust structures and therefore there is no concept of a security trustee.
Finland is not a party to The Hague Convention of 1 July 1985 on the law applicable to trusts. As such, in the case of a security trustee being appointed under foreign law, there may be situations where any contractual provision providing for the creation of a trust under the credit agreement may not be enforceable in Finland. In particular, property purported to be held on trust in Finland may form part of the security trustee’s assets in bankruptcy proceedings and, in such case, the beneficiaries of the trust would be treated as unsecured creditors with respect to rights over the trust property.
Finnish law recognises the powers of a Security Agent to represent all of the secured parties in matters relating to security interests as well as a Facility Agent to represent the finance parties in syndicated loan transactions. In addition, there is nothing to prevent several lenders from holding joint security in Finland.
There are strong arguments supporting the view that in the case of an insolvency of the security agent, the security interest and potential enforcement proceeds thereof would be separable to the underlying creditors as they are the true beneficiaries of the security and, as such, there is minimal risk of the security interest forming part of the insolvent estate of a security agent.
In addition, the finance parties may change and assign their rights under the finance documents in accordance with the respective transfer and assignment provisions under the specific Credit Agreement.
TRANSFERABILITY OF LOANS AND METHOD OF TRANSFER
The preferred method of transfer under Finnish law is by transfer (in Finnish: siirto), whereby the rights and obligations of the existing lender under the agreement, i.e. the whole contractual position, are transferred to the new lender as agreed in a transfer agreement. However, in principle, there is no obstacle to assign only the rights of the existing lender under the agreement to a new lender, however, this method is rarely used and there are some uncertainties relating to the assignability of other rights than monetary rights.
A transfer by novation is generally not a recognised concept in Finland and participation agreements are rarely used (but not completely unknown) in Finland.
Furthermore, there are no Borrower consent requirements under Finnish law unless specifically stated in the relevant Credit Agreement. However, the Borrower and any counterparty should be notified of the transfer to the new lender to avoid a situation where the Borrower can make effective payments to the previous lender. Such notification to the Borrower is also a requirement in order for the transfer to be effective against third parties (e.g. creditors, subsequent transferees and/or bankruptcy estate of the transferor).
WITHHOLDING TAX AND TRANSFER TAX
Finland does not impose withholding tax on interest (or principal) payments to domestic or foreign corporate lenders.
However, lenders should note that transfer tax is levied (4% of the sale price or other consideration) in Finland in relation to sale of real estate assets located in Finland. Transfer tax is also levied in relation to the sale of shares (2% of the sale price in respect of shares in a real estate company and 1.6% in case of shares in other companies). Unless otherwise agreed, the purchaser is liable to pay the tax.
Save for nominal application and registration fees payable on registration of a new mortgage holder as pledgee, in relation to the security documents there is no stamp, registration or similar tax payable in respect of the transfer of a loan.
OTHER TAX CONSIDERATIONS
In general, there is no tax imposed on transfer, repayment or enforcement of a debt in Finland.
Finland has an extensive tax treaty network with most treaties following the OECD model treaty. The country has in place around 70 tax treaties with foreign jurisdictions and these treaties generally provide relief from double taxation on all types of income. Finland is also a signatory to the Nordic Income and Capital Tax Treaty alongside Denmark, Sweden, Iceland and Norway.
No exit tax is levied when a foreign buyer acquires debt in a Finnish Borrower from a Finnish lender. It should finally be noted that all transactions between affiliated parties should be conducted on an arm’s length basis.
POST COMPLETION FORMALITIES
There are no statutory requirements in place under Finnish law required to be adhered to for a successful transfer between parties. A transfer of a loan is perfected and made valid and enforceable against third parties by way of notification to the Borrower under the loan that is being transferred.
Where there is also a guarantee in place, the guarantee will transfer in connection with the loan unless the terms of the guarantee prohibit the transfer. No notice to the guarantor is required in order for the transfer to be effective unless specifically required by the terms of the guarantee. However, for clarity, the guarantor should be notified of the transfer of the loan.
Finnish law loan and security documentation should be transferred to the possession of the new lender (including all mortgage certificates and share certificates) in connection with the transfer. As a post-settlement issue, for practical reasons it is recommended that the relevant third-parties are notified of the transfer. It is also recommended to note the validity and continuity of the security in the transfer agreement.
Special thanks to Sakari Lukinmaa and Mikko Heinonen at Castrèn & Snellman Attorneys who assisted us with the Finnish law aspects of this Trade Alert.
With the recent events of ‘Black Monday’ rocking the equity market in China, Chinese policymakers may be hoping that the latest announcement from the People’s Bank of China (“PBOC”) will help calm what they see as an unwarranted equity sell-off.
The PBOC announced this week (25 August) that it would cut in the reserve requirement ratio (“RRR”) by 0.5% (effective from 6 September) and make further cuts (effective 26 August) of 0.25% to both the one-year benchmark lending rate (now standing at 4.85%) and the one-year benchmark deposit rate (now at 2%). These measures were most likely triggered by the 8.5% drop of the Shanghai Composite Index on 24 August, which was followed by another decline of 7.6% this week.
Creditors’ meetings are due to be held in Reykjavik in September and October for each of the failed banks to progress to the next steps in the implementation of the Composition Plans and Stability Payments.
- Glitnir: 8 September 2015: Glitnir has announced that due to the meeting there will be a moratorium of claims during the period from 27 August 2015 until and including 8 September 2015 and no new notices of successful transfers will be issued by the claims transfer agent during this period.
- LBI hf : To be confirmed: The creditors’ meeting for LBI hf will be held on a date to be confirmed in late-September 2015 where the composition plan and stability contribution will be introduced.
Following this meeting, LBI will send the formal exemption request based on the composition plan to the Central Bank of Iceland.
- Kaupthing: 21 October 2015: The next creditor’s meeting for Kaupthing will be held on 21 October 2015 in Iceland. Details of any proposed moratorium have not yet been published by the Winding-up Committee.
- T&C’S: NEGATIVE IBOR RATES: Questions have recently been raised in respect of how to treat negative IBOR rates when calculating the amount of Delayed Settlement Compensation payable pursuant to Condition 11.1 of the LMA Standard Terms and Conditions. The settlement calculation in Condition 11.1(b) provides that the Seller or the Buyer (as applicable) shall pay an amount equal to interest (i.e. LIBOR, EURIBOR or the relevant applicable rate for the transaction) that would accrue for each day during the delay period divided by the total amount of days in such period on the Settlement Amount. In the event of negative IBOR rates during such period, should the Seller pay the Buyer an amount equal to the negative IBOR rate when calculating the Delayed Settlement Compensation amount? Or should the negative IBOR rate be considered to be zero? This issue is currently arising on trades given the negative rate environment in the Eurozone.
LOAN MARKET ASSOCIATION
Under the current reading of the LMA Standard Terms and Conditions, there is no express provision providing for zero to apply where the IBOR rate is negative. Therefore the negative IBOR rate should be applied to the Delayed Settlement Compensation calculation unless the parties agree otherwise in the Agreed Terms.
- ABENGOA S.A: On 26 August, Abengoa’s bonds and shares jumped in value following the reports that Credit Agricole SA, Banco Santander and HSBC had agreed to underwrite a EUR 650m proposed capital increase for the Spanish based renewable-energy company.
The news instigated the value of Abengoa’s bonds to substantially increase with the 2016 bonds rising from mid-70’s to around 90 cents on the euro, the highest in more than three weeks, together with the 2018 and 2021 notes jumping around 15 points to mid-60’s. This in turn has led to increases in the Bank of America Merrill Lynch Euro High Yield Index.
Abengoa’s B shares climbed by around 32% and A shares by 11% in response to the news that the rights issue will comprise 90% B shares and 10% A shares. The share value closed on the day at 26.615% at 0.98 and 8.656% at 1.657 respectively.
Bank of America Merrill Lynch and Citigroup are also said to be in talks with the company to potentially join in the underwriting. Despite the proposed capital increase, the company remains at a distressed level and there is speculation as to whether that sum will be enough to satisfy Abengoa’s capital requirements.
- ROYAL IMTECH: Royal Imtech continues to sell its various subsidiaries and announced on 26 August that the shares of Imtech Industry International B.V and Ventilex B.V were sold to Techim B.V. The transaction is said to have provided enough funds to enable its associated company, Imtech Nederland B.V, to carry out business operations until 28 September. Creditors are also in discussions with the UK based Private Equity firm, Endless LLP, for a potential acquisition of its Irish business, Imtech UK and various other subsidiaries.
A failed payment by the company of EUR 21m pushed its German subsidiary, Imtech Deutschland, into insolvency on 6 August which was converted into bankruptcy proceedings by the District Court of Rotterdam on 13 August. The company’s shareholders will receive no proceeds and its bank creditors have become its material owners.
The company has clarified that despite the recent transactions, the sales will not result in substantial payments to the creditors and that shareholders of the company should not expect to receive any proceeds from the transactions. As at 30 June, Royal Imtech reported net debt of EUR 545 million.