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Structuring a lending transaction
General Who are the active providers of secured finance in your jurisdiction (eg, international banks, local banks or non-bank financial institutions)? In general, international and local banks and local insurance companies provide for secured financing in Austria. It is difficult for other institutions to provide such services due to the licensing requirements.
Is well-established market-standard facility documentation used in your jurisdiction for secured lending transactions? In addition to the Civil Code, the Corporate Code and the Consumer Protection Act affect loan facilities. Therefore, general market-standard documents are rarely used. However, all banks uses their own standardised documentation for lending business (although these documents usually have similar content). For international loan agreements (ie, international syndicated loans), Loan Market Association documentation is mostly used.
Syndication Are syndicated secured loan facilities typical in your jurisdiction? Syndicated loan agreements are common for large investments (eg, infrastructure, large restructuring and financing projects). In terms of risk mitigation and required equity, multiple investors (mostly banks) forming a syndicate will grant loans.
How are syndicated facilities normally structured? Does the law in your jurisdiction allow a facility agent to be appointed to act on behalf of other banking syndicate members? Austrian law provides for two types of syndicated loan. An internal consortium will provide a syndicated loan to a prospective borrower, for which only one bank is the contractual partner. Usually, one of the lenders is appointed as ‘mandated lead arranger’ and will:
- represent the consortium;
- manage the syndicated loan;
- lead the group of investors (ie, lenders); and
- hold the consortium’s security.
A loan granted by an external consortium is different as every participating investor will become a contractual partner of the borrower, with the effect that every lender will receive security.
A syndicate can qualify as a ‘civil law partnership’ if the parties agree to work only on a defined project for a limited period. In general, every lender is then entitled to represent the syndicate under Section 1197 of the Civil Code. However, it is common to provide only the mandated lead arranger with the power to act on behalf of the syndicate (as set out above).
Does the law in your jurisdiction allow security and guarantees to be held on trust by a security trustee for the benefit of the banking syndicate? Austrian law does not recognise the concept of ‘security trustees’. Where security is governed by Austrian law, specific formalities must be observed in order to ensure the validity of the security. An accessory security interest (eg, a surety or pledge) cannot be separated from the underlying loan or the security interest will be extinguished (the same applies in cases of novation). A security trustee can hold accessory security only for his or her share of the loan. It is therefore market practice to include a parallel debt structure for the security trustee concerning security governed by Austrian law. In order not to breach the principle of accessory, a security trustee will have a parallel claim in the entire loan, so that he or she can enforce the security interest for the full amount (and not only his or her part of the claim).
For non-accessory security interests (eg, guarantees), the above is not applicable. As non-accessory and therefore abstract security interests are legally not connected to the loan, a security trustee could hold this kind of security interest without a parallel debt claim, if agreed in the documentation. However, as most loan facilities include accessory and abstract security interests, a parallel debt claim will still be necessary.
Special purpose vehicle financing Is it common in secured finance transactions for special purpose vehicles (SPVs) to be used to hold the assets being financed? Would security generally be given over the shares in the SPV or would lenders require direct asset security? An ‘SPV’ is a legal entity created to fulfil only specific or temporary objectives. Companies often use SPVs to finance large projects without putting the entire undertaking at risk. The SPV purchases and holds the assets and the lenders grant the SPV the loan necessary for the project.
While it is common to structure a financial transaction in this way and to take security over the shares of the SPV, lenders usually also take security over the SPV's assets to avoid structural subordination and third-party creditor access to such assets.
Interest Is interest most commonly calculated by reference to a bank base rate or a market standard variable reference rate (eg, LIBOR, EURIBOR or HIBOR)? If the latter, which is the most commonly used reference rate in your jurisdiction? In general, it is up to the parties to agree on a calculation model and the reference rate. Usually, the main interest rate is calculated by a variable reference rate increased by a margin. The margin depends on the rating of the creditor and the project, while the reference rate normally depends on the currency of the loan. The Euro Interbank Offered Rate (EURIBOR) is the most common reference rate in Austria. For foreign currency loans, a different reference rate is frequently agreed on (eg, the London Interbank Offered Rate for pound sterling loans).
Are there any regulatory restrictions on the rate of interest that can be charged on bank loans? In general, the parties are free to agree on the amount of interest to be paid.
Default interest for consumer loans cannot exceed the agreed interest rate by more than 5 percentage points.
Reference interest rates such as the EURIBOR have recently turned negative. Loan facilities generally state that the overall interest rate to be paid by the borrower will be the respective reference rate increased by the agreed margin. Thus, following a strict interpretation of the loan agreement, the interest rate paid by the borrower could also be negative and the lender could actually get less than the margin or could have to pay the borrower. As this is a major issue for lending business, several court procedures on this subject are pending.
A district court has decided that in negative interest rate cases the borrower must pay at least the agreed margin – even though the reference rate is negative (BGHS Wien 15 C 344/15w). However, the Austrian Supreme Court has not yet ruled on this matter and the district court’s decision may still be overruled.
Apart from this, Austrian law does not foresee any regulations as to the admissible amount of interest. However, certain restrictions apply with respect to interest and consideration for credit arising from the following principles:
- In accordance with the civil law morality clauses in the Civil Code and the Usury Law, a contract is partially void if one party exploits, for example, the carelessness, financial situation, inexperience or a similar circumstance of the other party and demands a consideration that is disproportional to the obligation.
- In addition, the Exploitation Regulation prohibits – among other things – the granting of credit against a disproportionate consideration. A consideration is regarded as ‘disproportionate’ if the total amount to be paid by the borrower (including interest, costs and charges) substantially exceeds the normal market consideration and is not justified by specific circumstances. A violation may lead not only to the possibility of claiming back the disproportionate part of the consideration, but also to imprisonment of up to six months, a maximum fine of €1,450 and revocation of the banking licence.
- Another limitation arises from the laesio enormis principle, according to which the obligation may not be less than the half the consideration. Though these provisions are not consumer specific, they have a mandatory nature under Austrian law and, as such, can be derogated from by choice of law only in contracts between entrepreneurs (ie, non-consumers).
Use and creation of guarantees Are guarantees used in your jurisdiction? Guarantees are commonly used in Austria and are created by way of an agreement between the guarantor and the beneficiary or by the guarantor’s unilateral declaration. Austrian law recognises two types of guarantee:
- a personal guarantee or surety agreement – the guarantor undertakes to settle certain debtor obligations in the event of default (Section 1346 of the Civil Code). This is an accessory security and is therefore conditional on:
- the debtor's default; and
- a valid and existing underlying debtor obligation; and
- an abstract guarantee – the guarantor promises to pay a certain amount on formal request of the beneficiary under the guarantee (Section 880a of the Civil Code). The guarantor's obligation is abstract and therefore (unlike a personal guarantee) independent from any underlying legal relationship between the beneficiary as creditor and the debtor.
What is the procedure for their creation? In accordance with Section 1346(2) of the Civil Code, guarantees and sureties generally must be issued in writing (ie, signed by the parties). In the case of an abstract guarantee, it must ensure that the guarantor undertakes to pay the amount due under the guarantee unconditionally, irrevocably, on first demand and without raising any defences.
However, Section 1(6) of the Banking Act specifies that guarantees issued by a bank do not have to be in writing, meaning that a personal signature on the document is unnecessary. This exception applies explicitly for banks, due to the fact that issuing a guarantee within the Society for Worldwide Interbank Financial Telecommunication framework would not be considered to be ‘in writing’.
Abstract guarantees are usually issued only for a certain period.
Do any laws affect or restrict the granting or enforceability of guarantees in your jurisdiction (eg, upstream guarantees)? Securities granted for loans by a subsidiary to their parent company or affiliate beneficiary (ie, sidestream or upstream securities) could be void if they qualify as ‘repayments of equity’ restricted by law (Section 82 of the Limited Liability Company Act and Section 52 of the Stock Corporation Act).
Shareholders can receive only the company’s profit; the equity must not be repaid to the shareholders or third parties. Payments from the company to its shareholders referring to any kind of contract (eg, lease agreements) which are not ‘at arm's length’ qualify as repayments of equity. Payments to third parties that are made only because of a shareholder's order are also considered repayments of equity if they are not at arm's length (eg, if a guarantee is issued for the shareholder's benefit).
Therefore, guarantees or surety agreements and all other forms of security interest within a group of companies to a shareholder or to subsidiaries of the shareholder may be granted only at arm's length. ‘At arm's length’ means that the guarantor would have concluded the same deal with anyone else on the same terms.
Subordination and priority Describe the most common methods of structuring the priority of debts and security. Debts are structured in the following layers, starting with the lowest in terms of payment priority in insolvency proceedings:
- hybrid (eg, convertible bonds);
- subordinated (ie, junior) debt (eg, subordinated bonds);
- senior debt (eg, unsecured corporate bonds); and
- senior secured debt (eg, secured bank loans).
A loan can be granted on security in rem (eg, in a mortgage or pledge) or in personam.
In general, mortgages and pledges are valid only if the underlying contract is also valid. The property which is mortgaged or pledged must be specified and the obligation for which the property is pledged or mortgaged must be sufficiently determined in the contract on which the mortgage or pledge is based. This gives creditors the right to obtain satisfaction out of the property before all other creditors of the property owner. In the case of insolvency, the right to obtain satisfaction follows a chronological order.
Security in personam consists of an obligation of a third party other than the borrower. All creditors are treated equally, meaning that no priority exists among them. Insolvency creditors will only obtain satisfaction proportionally.
Documentary taxes and stamp duty Are any taxes, stamp duty or other fees payable on the granting of a loan, guarantee or security interest, or on its enforcement? Stamp duty is determined in the Stamp Duty Act and follows a strict civil approach. Stamp duty is levied on various legal transactions concluded in written form physically or electronically (eg, via email). In general, it is not the legal transaction as such that triggers stamp duty, but rather the written instrument executed to document such transaction (with a few exceptions). Even legal documents executed abroad can be subject to Austrian stamp duty. Stamp duty is levied either when both parties to an agreement are Austrian residents or when the written document evidencing the transaction is brought to Austria in its original form or in the form of a notarised copy, provided that;
- the legal transaction has legal effect in Austria; or
- a legal obligation is assumed under the legal document or will be performed in Austria.
If – based on the legal instrument concerned – another legally binding action will be undertaken in Austria or use is made of the document in Austria before government authorities or courts, stamp duty will also be levied.
No taxes or stamp duty will apply when granting loans or guarantees. However, banks charge internal fees for granting loans, guarantees and other security interests.
For surety agreements and mortgages not linked to loans, stamp duty at the rate of 1% will apply. For assignments not linked to loans, stamp duty at the rate of 0.8% will apply.
Further, notary fees are payable with respect to real estate and the creation of mortgages, which must be notarised for registration and will depend on the transaction value. In addition, the registration of a mortgage in the Land Register will incur a registration fee of 1.1% of the mortgage.
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