Trends and regulatory climate
What is the current state of the lending market in your jurisdiction and have any new trends emerged over the last 12 months?
Overall, corporate borrowing in Finland has increased steadily over the past 12 months, continuing a trend of moderate credit growth. Banks remained the preferred source of debt financing. However, companies – particularly those in the Helsinki region and private equity portfolio companies – increasingly looked to alternative sources of financing, including non-bank debt and debt and equity issuances, continuing the trend of increasingly diversified financing markets.
Crowdfunding and peer-to-peer lending transactions have been popular in recent years and Finland has one of the largest crowdfunding markets in Europe. After a short plateau in 2016, these transactions increased again in 2017 in all categories (ie, peer to peer lending, debt and equity crowdfunding and crowdfunding related to goods).
The majority of the Finnish corporate market consists of small to medium-sized enterprises. When seeking financing, these borrowers typically look to the domestic or Nordic lending market. Larger companies have access to more diverse sources of financing and typically use international banks for their financing needs, particularly for syndicated loans and debt issuances.
Funds raised by companies in the past 12 months were largely used for working capital purposes and to refinance existing debt. Investments and acquisitions also continued their upward turn, with more debt having been used to finance investments and M&A transactions than in previous periods.
Is secured lending a regulated activity in your jurisdiction?
Lending to corporates (non-consumers) is not a regulated activity in itself. However, regulated entities such as credit institutions may require a licence (or passport) in certain circumstances.
Are there any specific regulatory issues which a prospective borrower should consider when arranging or entering into a secured loan facility?
Are there any specific regulatory issues which a prospective lender should consider when arranging or entering into a secured loan facility?
Not as such, but the applicability of licensing requirements should be assessed.
Are there plans or proposals for reform or significant changes to the regulatory landscape in this area?
Structuring a lending transaction
Who are the active providers of secured finance in your jurisdiction (eg, international banks, local banks or non-bank financial institutions)?
International banks, local banks and non-bank financial institutions are all active in providing secured financing into Finland. Generally, smaller financings typically involve Finnish or Nordic banks either by themselves or in a club deal. In larger financings, especially when the borrower group operates in multiple jurisdictions, international banks are more commonly seen.
Is well-established market-standard facility documentation used in your jurisdiction for secured lending transactions?
Yes. Larger financings are commonly syndicated in London and are governed by English law with the Loan Market Association’s (LMA) template documentation. In smaller financings, broadly speaking there is a Nordic standard that is essentially a truncated version of the LMA template documentation, although there are differences between countries and banks. US credit agreements are used when the lead arranger is a US financial institution.
Are syndicated secured loan facilities typical in your jurisdiction?
Yes. Syndication is typical for both Nordic club deals and naturally for larger, London-based financings.
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?
A facility agent and security agent are appointed as a rule.
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?
While Finnish law does not recognise the concept of ‘trust’ or ‘trustee’, a security agent can be appointed (although guarantees and security are legally granted in favour of the lenders), which from a practical perspective should achieve at least the same outcome. Parallel debt provisions are not used.
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?
This is fairly common, although it depends greatly on the structure and nature of the borrower’s operations. Lenders generally require share security over each company in the structure, as well as suitable direct asset security, such as floating charges and real estate mortgages, as well as pledges over IP rights, bank accounts and receivables.
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?
Interest is most commonly calculated by reference to EURIBOR.
Are there any regulatory restrictions on the rate of interest that can be charged on bank loans?
Not when lending to corporates (non-consumers). However, Finnish tax laws may limit the deductibility of interest expenses by the borrower, but that is not a regulatory restriction as such.
Use and creation of guarantees
Are guarantees used in your jurisdiction?
Yes, guarantees are commonly used.
What is the procedure for their creation?
The procedure for creating a guarantee is simple, since it is essentially a contractual obligation. Accordingly, a guarantee undertaking or agreement will suffice. No registrations or similar are required.
Do any laws affect or restrict the granting or enforceability of guarantees in your jurisdiction (eg, upstream guarantees)?
Yes. Under Finnish financial assistance rules, Finnish companies are prohibited from providing loans, funds or security for the purpose that a third party would acquire shares in the company itself or any of its parent companies.
Further, all arrangements entered into by a Finnish company must provide adequate corporate benefit for the relevant Finnish company. Any acts that diminish the company’s assets or increase its debts without a business rationale may constitute unlawful distribution of assets. Consequently, a Finnish company should not grant guarantees (upstream or otherwise) when there is no business rationale in doing so.
These issues are typically dealt with through the inclusion of an appropriate limitation language in the agreements, as well as with tranching of the facilities and structuring measures where available.
Subordination and priority
Describe the most common methods of structuring the priority of debts and security.
The priority of both debts and security is most commonly structured contractually (ie, through an intercreditor agreement, which will contain provisions on waterfalls and right to acceleration and enforcement). It is also possible to separate senior and junior debt and the related security into separate agreements (with no intercreditor agreement in place), but this is relatively rare. Structural subordination is also fairly commonly (ie, ring-fencing the senior borrower group and security from the junior borrower group and security).
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?
No documentary taxes, stamp duties or similar are levied.
Is it more common for local law to govern the terms of the facility documentation or is the law of another jurisdiction often elected by the parties (eg, English law or New York law)?
This depends on the size of the financing and the lenders. In smaller financing, the governing law would typically be Finnish law (or Swedish, Norwegian or Danish, depending on the lead arranger bank), whereas English law would be the standard in larger financing. The use of New York law is fairly common when a US bank is in the lead.
Are there any restrictions on the making of loans by foreign lenders or the granting of security or guarantees to foreign lenders?
Not as such. However, New York law judgments, for example, are not directly enforceable in Finland.
Are there any exchange controls that restrict payments to a foreign lender under a security document, guarantee or loan agreement?
Security – general
Is it possible to create a security interest over all assets of an entity? If so, would a single security agreement suffice or is a separate agreement required for each type of asset?
No. While a floating charge covers much of the assets of the company, certain key assets are excluded from its scope and, accordingly, the creation of separate security interests is needed. A single security agreement suffices in principle, but given that the perfection and enforcement mechanics are different for different types of security asset, separate agreements are commonly used. There is no public register for registering security interests such as the Uniform Commercial Code filings in the United States (although certain security certain interests are registered in a public registry).
Release of security
What are the formalities for releasing security over the most common forms of assets?
The release itself is effected with a free-form release agreement or letter and, depending on the type of asset, certain additional measures such as notices to third parties (eg, pledges over bank accounts or receivables), delivery of original documents (eg, share certificates, real estate mortgage notes or floating charge notes) or (de)registrations (eg, pledges over IP rights) may be needed.
Asset classes used as collateral for security
Can security be granted over real estate? If so, what are the most common forms of security granted over real estate and what is the procedure?
Yes, real estate (freehold and certain leaseholds) may be mortgaged. A security over real estate is created by the parties entering into a security agreement and registering the mortgage with the registrar. The registrar will register the real estate mortgage on an electronic register. Previously, real estate mortgage notes were issued by the registrar to be delivered to the possession of the beneficiary of the mortgage – these old notes may still be used when taking security, but are being phased out.
Machinery and equipment
Can security be granted over machinery and equipment? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes. Machinery and equipment, as well as inventories, are covered by a floating charge. A floating charge is created by the parties entering into a security agreement and the chargor company issuing floating charge notes which are registered with the registrar and delivered to the possession of the beneficiary of the floating charge.
Machinery and equipment may also be pledged separately, but in order for such a pledge to be valid against third parties, the pledgor’s control over the assets would need to be effectively removed (so-called ‘possessory pledge’). This type of security is not usually practically and commercially viable and is therefore rare.
Can security be granted over receivables? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes. Receivables may be pledged. A pledge over receivables is created by the parties entering into a security agreement. In order to perfect the pledge, the underlying debtor must be notified of the pledge and instructed to make payments to the pledgee from the outset. Given that such payment instructions are not usually practically and commercially viable (at least with regard to trade receivables), such payment instructions are commonly given only on the occurrence of an enforcement event or similar trigger event, it being acknowledged that such delayed notice may subject the pledge to clawback in case of insolvency proceedings and jeopardise its validity against third parties.
Financial instruments and cash
Can security be granted over financial instruments? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes. Financial instruments are typically in dematerialised form on a book-entry account, in which case security is created over the whole book-entry account by pledging it (if there are such financial instruments which should be excluded from the scope of the pledge, they must be transferred to a separate book-entry account). Security over a book-entry account is created by the parties entering into a security agreement and notifying the central securities depository of the pledge and requesting it to record the pledge over the book-entry account.
Security over shares of a private limited liability company – which are most commonly not in dematerialised form – is created by the parties entering into a share pledge agreement. If share certificates have been issued by the target, the pledge is perfected by the pledgor delivering the share certificates to the possession of the pledgee, endorsed in blank. If no share certificates have been issued, the pledge is perfected by notifying the target of the pledge and instructing it to register the pledge in its share register.
With regard to financial instruments not in dematerialised form, the position should be assessed on a case-by-case basis.
Can security be granted over cash deposits? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes. The bank account may be pledged. A pledge over a bank account is created by the parties entering into a security agreement. In order to perfect the pledge, the account bank must be notified of the pledge and instructed to block the pledgee’s access or control to the bank account from the outset. Given that such blocking of the bank account is not usually practically and commercially viable, instructions to block the account are commonly given only on the occurrence of an enforcement event or similar trigger event, it being acknowledged that such delayed notice may subject the pledge to clawback in case of insolvency proceedings and jeopardise its validity against third parties.
Can security be granted over intellectual property? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes. Security may be granted over registered intellectual property (eg, patents, trademarks and utility models by pledging them; however, copyrights are not registered and cannot be pledged). A pledge over registered intellectual property is created by the parties entering into a security agreement and notifying the registrar of the pledge and requesting it be recorded.
Criteria for enforcement
What are the common enforcement triggers for loans, guarantees and security documents?
The enforcement triggers may be freely determined by the parties. The most typical triggers would be non-payment, commencement of insolvency proceedings and material breach of contract in line with international practice.
Process for enforcement
What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?
Loans and guarantees may be accelerated or enforced with a simple demand to the borrower or guarantor in accordance with the relevant agreement. As regards security, the procedures vary depending on the type of security, as well as on whether the grantor of the security interest is in insolvency proceedings.
Pledges over movable property
The enforcement of a pledge over specific movable property (eg, shares in Finnish limited liability companies, bank accounts, IP rights and receivables) is primarily regulated by the Commercial Code. However, the code is not mandatory and it is common practice to deviate from or exclude entirely the code’s applicability in a Finnish law pledge agreement.
Where the code has been excluded, the enforcement of a pledge over movable property is primarily governed by terms of the respective pledge agreement and other relevant finance documents. Finnish law pledge agreements commonly provide that the pledgee (often the security agent acting on behalf of pledgees) is authorised to enforce the pledge in any manner it deems appropriate, including by selling, transferring or otherwise disposing of the pledged property, be it through public auction or privately, which would also include arranging a limited auction (ie, an auction where the pledgee seeks bids from pre-selected potential buyers).
If bankruptcy proceedings (which are similar to US Chapter 7 proceedings) have been initiated against the pledgor, pursuant to the Bankruptcy Act the pledgee may enforce a pledge during the bankruptcy proceedings of the pledgor by means of an independent sale of the pledged assets. However, the pledgee must notify the bankruptcy liquidator of the intended enforcement at least two weeks before enforcement. Once the bankruptcy liquidator has received the pledgee’s notice of the upcoming enforcement, the bankruptcy liquidator may prohibit the pledgee from enforcing the pledge for up to two months for the reason of either determining the pledgee’s rights to enforce or protecting the interests of the bankruptcy estate. Once this period has lapsed, the timeframe for the completion of the enforcement proceedings and the distribution of the enforcement proceeds depends mostly on the practicalities, such as on how swiftly pledged assets may be realised. The bankruptcy liquidator may also settle the pledgee’s secured claim and thereby release the pledged property from the pledge.
If administration proceedings (which are similar to US Chapter 11 proceedings) have been initiated against the pledgor under the Administration Act, the pledgee can no longer enforce the pledge independently (nor accelerate the underlying loans against the pledgor) and any enforcement procedures already initiated (but not completed) will be discontinued.
Under Finnish law, a floating charge may be enforced only after the beneficiary has obtained a court decision in which the debtor’s payment liability under the secured debt is established. After this judgment is obtained and the pledgee can engage public enforcement authorities that will sell the collateral assets, and the net proceeds will be used to satisfy the beneficiary of the floating charge. Instead, the beneficiary cannot take the enforcement measures privately.
Since the enforcement of a floating charge requires a court decision establishing the debtor’s payment liability, the debtor may plea its case in the court proceedings and also appeal the court’s decision. This may serve to materially suspend the enforcement proceedings. In practice, such collection measures of a floating charge (which are public) typically mean that the borrower company loses its creditworthiness altogether and will seek bankruptcy or administration. For typical practical purposes, this entails that the enforcement of a floating charge will eventually take place in a bankruptcy or administration environment, even though enforcement measures would have been commenced outside insolvency proceedings.
When bankruptcy proceedings have been initiated against the debtor, a floating charge can no longer be enforced separately from the bankruptcy proceedings. Further, enforcement proceedings which have not been completed by the time bankruptcy proceedings are initiated will be discontinued. In order for the beneficiary of the floating charge to exercise its rights, it must notify the liquidator of the existence of the secured claim and floating charge.
In a bankruptcy scenario, the bankruptcy liquidator will sell the assets covered by the floating charge and the liquidator will then distribute the net proceeds. However, only 50% of the net proceeds of the assets covered by the floating charge – which remain after debts to creditors with a better priority position than the holders of the floating charge (in particular debts secured by pledges on specific assets) have been satisfied – will be applied to satisfy the floating charge holders, while the balance (50%) will be applied to satisfy the unsecured creditors. Holders of floating charges stand pari passu with (other) unsecured creditors for satisfaction of their excess claims from the balance of the proceeds.
In administration proceedings, the same principles as with movable property apply.
Real estate mortgages
Under Finnish law, a real estate mortgage may be enforced only by public means and in order to enforce a mortgage, the mortgagee must obtain a court decision in which the mortgagor’s payment liability under the secured debt is established. After the judgment is obtained, the mortgagee can approach the public enforcement authorities, which will then sell the real estate and the net proceeds will be used to satisfy the mortgagee’s secured claim. Any excess proceeds will be transferred by the public enforcement authorities to the mortgagor.
In case of the mortgagor’s bankruptcy, the court decision to initiate bankruptcy proceedings is sufficient for the mortgagee to enforce a mortgage and no separate court decision on the debt is required. The mortgagee may enforce a mortgage during bankruptcy proceedings independently of the bankruptcy proceedings, but the mortgagee cannot sell the underlying real property privately. The real estate must be sold with the assistance of public enforcement authorities.
Alternatively, with the mortgagee’s consent, the underlying real property can be sold by the bankruptcy liquidator on behalf of the mortgagee. The bankruptcy liquidator may then sell the real property independently without the assistance of public enforcement authorities.
In administration proceedings, the same principles as with movable property apply.
Ranking in insolvency
In what order do creditors rank in case of the insolvency of a borrower?
In the event of the borrower’s insolvency, creditors rank in the following order:
- Bankruptcy costs (eg, the liquidator’s fees and legal expenses), commitments and undertakings of the bankruptcy estate (eg, agreements entered into by the bankruptcy estate) and debts for which the bankruptcy estate is responsible by law (eg, use by the bankruptcy estate of leased premises and employees’ salaries after the commencement of bankruptcy) are to be satisfied directly by the bankruptcy estate as they fall due and thus enjoy top priority.
- Secured creditors with pledges or mortgages, claims secured by a pledge or mortgage or right of retention up to the amount of the proceeds of the collateral assets – if the proceeds of the collateral assets are insufficient to provide full repayment of the creditor’s secured claim, the outstanding balance of the secured claim is taken into account as an ordinary, unsecured receivable ranking pari passu with other ordinary, unsecured claims. Set-off also enjoys a high priority.
- Secured creditors with floating charges up to 50% of the net proceeds of relevant assets – if 50% of the net proceeds of the collateral assets are insufficient to provide full repayment of the creditor’s secured claim, the balance of the secured claim is taken into account as an ordinary, unsecured claim ranking pari passu with other ordinary, unsecured claims.
- Ordinary, unsecured creditors (eg, all ordinary, unsecured creditors rank pari passu and pro rata, including tax claims and employees’ unpaid salaries).
- Subordinated creditors (eg, subordinated loans and any interest or default interest accruing after the commencement of bankruptcy, where such interest is not secured).