An extract from The Lending and Secured Finance Review, 7th Edition

Overview

Since the onset of the covid-19 pandemic in the first quarter of 2020, many companies are trying to best position themselves to cope with evolving economic circumstances and new challenges. Against this background, both lenders and borrowers are taking a proactive approach to overcome covid-19 implications with rapid responses, either by means of ramping-up operations and restructuring the business or otherwise aiming at thriving through the pandemic. Driven by that, need for liquidity increased and lending activity in Austria remains strong.

Austrian lenders are very active in both the Austrian lending market and the central and eastern Europe (CEE) lending market, given that several Austrian credit institutions have a strong market presence in the CEE region. As far as financings in the CEE region are concerned, Austrian lenders provide financing to Austrian borrowers active in the CEE region and to non-Austrian borrowers located in the CEE region.

Moreover, Austrian lenders' participation in Anglo-Saxon and German syndicated financing transactions comprises a fair amount of their overall lending activity (either with or without the involvement of an Austrian borrower or security provider).

When focusing on the Austrian law financing market, infrastructure deals and public–private partnership transaction structures aiming at further modernising public and social infrastructures (e.g., glass fibre networks) are growing particularly rapidly. Also, because of the current borrower-friendly interest rate environment, borrowers are seeking to refinance their existing debt on more favourable and commercially attractive terms.

What can also be recognised is a constantly growing interest of US- and UK-based alternative lenders and investment funds in the Austrian lending market since they were active in several significant transactions in 2020. Further, owing to the ongoing digitalisation in the financial industry, a rapidly growing demand can be seen for start-up and technology-driven financing transactions (e.g., bond issuances on blockchain technology).

A fair bulk of Austrian law-syndicated loan transactions are documented on the basis of the Loan Market Association (LMA) recommended template forms (leveraged or investment grade, as applicable) adapted to meet Austrian law requirements. However, depending on the specific circumstances of the transaction, including the size of the loans made available, the documentation standard used may be fairly shortened compared with the LMA (leveraged) template.

Moreover, the number of non-performing loan transactions in Austria (and also the CEE region) continued to increase in past years, and this field is expected to become even more active (also considering the covid-19 pandemic). Those transactions included sales of Austrian banks in the region, and of non-performing loans and leasing portfolios.

Legal and regulatory developments

i Certain regulatory aspects with respect to (cross-border) lending business

Lending in Austria generally forms part of a comprehensive list of banking activities enumerated in the Austrian Banking Act. Lending may thus only be conducted on a commercial basis in Austria if the relevant loan provider has been granted an Austrian banking licence or to the extent it is validly passported into Austria under Regulation (EU) 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (CRR) if no exemption is available. Furthermore, any credit institution authorised in a Member State of the European Economic Area may perform the activities referred to in Nos. 1–15 of Annex I to the European Directive 2013/36/EU in Austria by either the establishment of a branch or by way of the freedom to provide services. While not explicitly stated in the Austrian Banking Act, certain structural alternatives or exemptions when a lender does not hold the aforementioned banking licence or passport may be available and worth further exploring on a strict case-by-case basis.

The Austrian Banking Act may also be applicable if the lending activities are conducted from a place outside Austria (i.e., if cross-border activities are carried out).

However, even if not explicitly stated in the Austrian Banking Act, the existence of a lending activity presumes, at least to a certain extent, engagement in the domestic market. Whether a lending business will be considered to be carried out in Austria for the purposes of the Austrian Banking Act may be difficult to determine, as there is no law or regulation to establish the requirements that would have to be fulfilled.

Following discussions in academic literature and decisions rendered by the Austrian Supreme Court and the Austrian Supreme Administrative Court, respectively, there is a non-exhaustive set of factors to be taken into consideration when assessing whether a lending activity is carried out in Austria. The risk that the result of a proposed transaction might be considered to constitute 'lending business' could be mitigated by avoiding any geographical connection to Austria, such as by (1) performing any negotiations in the context of the envisaged lending outside Austria; (2) executing and keeping all arrangements concerning the loans outside Austria; and (3) having all accounts relevant in the context of the lending arrangement outside Austria (ensuring, in particular, that any disbursements and repayments are made from, and to, accounts located outside Austria).

Conducting licensable activities (such as lending activities) with respect to Austrian banking law in Austria without a licence (or without benefiting from an exemption) could trigger at least administrative fines and civil law sanctions; criminal sanctions may, under certain circumstances, also be imposed. Furthermore, the law provides that whoever carries out the lending activities unlicensed shall not be entitled to any compensation connected with such activities (e.g., interest, commissions, fees); sureties and guarantees granted in connection therewith may be ineffective.

Given the increased appetite and presence of funds in the Austrian lending market, regulatory exemptions for the respective regulated activities become more and more important and are a key structuring element of a lending transaction.

ii Basel III and IV implementation

As far as the Basel III and IV framework is concerned, this has been and, as regards Basel IV, will be implemented in Austria by the CRR and the transposition of the Capital Requirements Directive IV into the Austrian Banking Act, both applicable since 1 January 2014. Basel IV will be implemented by Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019, amending the CRR as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements (CRR II).

Furthermore, several directly applicable Commission-delegated regulations, based on regulatory technical standards drafted by the European Banking Authority, complement this legislative package.

The aim of this extensive reform is to strengthen the EU banking sector by introducing higher capital requirements in terms of quality and quantity, new liquidity requirements, improved risk management and governance, and strengthened banks' transparency and disclosure.

iii Intensification of know your customer checks

The core part of the Financial Market Anti-Money Laundering Act (implementing Directive 2015/849 (EU) of the European Parliament and the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (AMLD IV)) has been applicable since 1 January 2017 and has been amended meanwhile in course of the introduction of Directive 2018/843 (EU) (i.e., the fifth Anti-Money-Laundering Directive (AMLD V)). The Financial Market Anti-Money Laundering Act applies, among others, to credit institutions and financial institutions pursuant to the Austrian Banking Act as well as CRR institutions pursuant to Section 9 of the Austrian Banking Act, and has a significant impact on, inter alia, the know-your-customer checks to be conducted by the respective institutions in relation to their customers. Each such institution is obliged to take appropriate steps to identify, assess and mitigate the risks of money laundering and terrorist financing, taking into account risk factors, including those relating to their customers, geographic areas, products, services, transactions or delivery channels, and thereby preventing the use of the EU financial system for the purposes of money laundering and terrorist financing.

iv Introduction of an Austrian Beneficial Ownership Register

The AMLD IV requires Member States to establish a central register on the beneficial ownership of corporate and other legal entities incorporated within each Member State's territory. The Austrian Beneficial Owner Register Act (implementing Articles 30 and 31 of the AMLD IV and its most recent update, the AMLD V) provides that as of 1 June 2018 Austrian entities (with some exceptions) shall register their ultimate beneficial owners (UBOs) in the Austrian Beneficial Owner Register. Austrian entities thereby have to disclose, inter alia, name, residence, birthday and citizenship of their UBO. A UBO by definition is a natural person. There are several routes to establish one or more UBO (e.g., based on direct or indirect ownership, or control over the Austrian entity), such as a natural person holding more than 25 per cent of the capital in the Austrian entity. If no UBO can be identified, the senior managing official (e.g., the management board) of the Austrian entity must be registered. Currently, this register is not publicly accessible. However, third parties can inspect the register when proving a legitimate interest. Furthermore, various authorities and legal representatives are entitled to inspect.

v Legal and administrative developments in the context of the covid-19 pandemic

Regulation (EU) 2020/873 of the European Parliament and of the Council of 24 June 2020 (amending CRR and CRR II as regards certain adjustments in response to the covid-19 pandemic) contains amendments to the EU prudential framework for banks, primarily the CRR, to encourage lending by banks to mitigate the economic impact of the covid-19 pandemic. The purpose of that is to encourage banks to continue lending to businesses and households during the covid-19 pandemic, thereby absorbing adverse implications of the pandemic. The Commission's view is that, although the existing prudential and accounting frameworks allow banks a degree of flexibility in their response to covid-19, limited changes to specific aspects of the CRR are also necessary. The Regulation makes targeted 'quick fix' amendments to the CRR for this purpose. It also reflects policy decisions taken by the Basel Committee on Banking Supervision in response to the pandemic.

Outlook and conclusions

Future legal developments related to financings are crucially dependent on how quickly and comprehensively the economy recovers from the covid-19 pandemic. While many of the measures adopted to mitigate the economic impact of the pandemic are, in principle, only intended to be effective temporarily, at this point it cannot be predicted to what extent the legal and regulatory framework will need to be amended to adequately respond to the challenging circumstances.

Apart from that, we see an ongoing digitalisation in the financial industry (further intensified by covid-19-related curfews) and, following that trend, some traditional banks increasingly embracing new technologies. Furthermore, the continuing restructuring needs of several debtors (in particular, in emerging markets where Austrian credit institutions play a very active role) have sharpened lenders' sensibility in general. This sensibility, however, does not necessarily lead to Austrian lenders being more conservative in terms of providing new financing, but to decisions on whether the new financing provided is carefully considered and well founded in response to the financial crisis. In general, Austrian lenders are very active and, by conducting significant lending business in Austria and the CEE region, are contributing to further stabilisation and growth in eastern Europe.