General framework

Legislation

What legislation governs securitisation in your jurisdiction? Has your jurisdiction enacted a specific securitisation law?

In general, there is no common legislation on securitisation and off-balance sheet treatments. Therefore, securitisation must be fitted into general rules of law. With respect to securitisation in trade receivables and other receivables, the legal rules of relevance must be derived from the Danish Act on Instruments of Debt.

As of 1 January 2014, the Danish Financial Business Act adopted rules that enable banks to establish refinancing registers for securitisation purposes by issuing securities backed by pools of loans and credits to enterprises. With the permission of the Danish Financial Supervisory Authority, banks are able to establish refinancing registers and sell their rights in loans and credits to an authorised entity. Registration of the transferred loans and credits constitutes perfection, and once the assets are entered into a refinancing register there is a transfer of ownership. Consequently, the bank’s creditors cannot seek satisfaction on assets registered in a refinancing register.

In addition to these rules, on 1 January 2019, a new framework for European securitisations consisting of Regulation (EU) 2017/2402 (the Securitisation Regulation) and Regulation (EU) 2017/2401 (the Securities Prudential Regulation) took effect. The EU Securitisation Regulation lays down common rules on securitisation, and provides a framework for simple, transparent and standardised (STS) securitisations. The Securities Prudential Regulation replaces the provisions of the Capital Requirements Regulation (CRR) relating to the regulatory capital treatment of securitisation exposures held by EU credit institutions and investment firms. The aim of the new regulation is twofold: to simplify the current framework for all securitisations by replacing the various rules with a uniform regime, and to create a framework to identify simple, transparent and standardised securitisations, with the final aim to increase investor confidence and restore market activity. The EU Securitisation Regulation applies to all European securitisations issued on or after 1 January 2019 and consolidates the patchwork of legislation governing European securitisations. The EU Securitisation Regulation also includes rules covering such matters as due diligence, risk retention and investor disclosures. As such, the EU Securitisation Regulation has replaced the previous sector-specific approach to regulating securitisations with a set of rules that will apply to all European securitisations whether public or private and regardless of the ‘investor type’.

It should be noted that special purpose vehicles (SPVs) funded by way of debt or other non-equity instruments do not qualify as alternative investment funds under the Alternative Investment Fund Managers Directive (Directive 2011/61/EU (AIFMD), which has been implemented into Danish law. Consequently, an SPV used for a securitisation will usually not need to seek authorisation or appoint an alternative investment fund manager pursuant to the AIFMD regime.

Applicable transactions

Does your jurisdiction define which types of transactions constitute securitisations?

No. Under Danish law, a general definition of securitisation transactions does not exist.

Market climate

How large is the market for securitisations in your jurisdiction?

Before the 2008 global financial crisis there was increasing interest in securitisation of Danish assets, in particular in the period from 2003 to 2007. During the financial crisis, the market remained almost non-existent, except for the special securitisation scheme made available by the Danish National Bank in 2011 to Danish banks as a mechanism to access liquidity.

In recent years, the Danish securitisation market has begun to show signs of revival. In 2013, Santander Consumer Bank AS, through its Danish branch, completed the first ever auto-loan securitisation in Denmark. The total size of the transaction was 5.936 billion Danish kroner. In 2016, Nordea Bank AB completed a securitisation on Danish corporate loans worth €8.4 billion. More recently in October 2017, Accunia Fondsmæglerselskab A/S completed a CLO bond issuance with a total commitment of €386 million.

A form of securitisation, the traditional Danish market for mortgage bonds issued by Danish mortgage credit institutions, has remained active through the financial crisis, and the Danish mortgage bond market remains one of the largest in Europe based on value, turnover and number of issues. Under this system, Danish real estate mortgage credit institutions are, on a continuous basis, issuing bonds backed by pools of mortgage deeds acquired by the mortgage institutions from real estate owners wishing to use their real estate as a means of raising finance. Danish real estate mortgage credit institutions are regulated by specific legislation, and the institutions are under the supervision of the Danish Financial Supervisory Authority. The legislation only covers mortgages in real estate, and on this basis only issues bonds by approved real estate mortgage credit institutions. The system differs from other types of securitisation by the illiquid assets (the mortgage deeds) not being transferred from the credit institution (the originator) to any SPVs.

Regulation

Regulatory authorities

Which body has responsibility for the regulation of securitisation?

The Danish Ministry of Industry, Business and Financial Affairs has the main responsibility for all policies regarding the financial sector. The Danish Financial Supervisory Authority is part of the Ministry of Industry, Business and Financial Affairs, and contributes to the preparation of financial legislation. The Danish Financial Supervisory Authority’s main task is to supervise compliance with financial legislation by financial undertakings and issuers of securities, as well as investors, on the securities markets.

Licensing and authorisation requirements

Must originators, servicers or issuers be licensed?

In general, the originator, servicer or issuer does not need to be licensed under Danish law. However, any entities that purchase any receivables or other assets from an originator, and fund their acquisitions by issuing bonds to the general public in Denmark, might become subject to obtaining a banking licence pursuant to the Danish Financial Business Act. The Danish Financial Supervisory Authority has, however, recently issued new guidelines on this subject, which entails that any issues of bonds (and other securities) that are subject to preparation and publication of a prospectus will not be required to obtain a banking licence pursuant to the Danish Financial Business Act.

Under the well-known Danish mortgage bond system, Danish real estate mortgage credit institutions are, on a continuous basis, issuing bonds backed by pools of mortgage deeds acquired by the mortgage institutions from real estate owners wishing to use their real estate as means of raising finance. Danish real estate mortgage credit institutions are regulated by specific legislation and the institutions are under the supervision by the Danish Financial Supervisory Authority. The legislation only covers mortgages in real estate and bonds only issued on this basis by approved real estate mortgage credit institutions.

Banks and real estate mortgage credit institutions may also issue covered bonds in accordance with the rules set out in the CRD IV framework, which has been implemented into Danish law. Banks and real estate mortgage credit institutions that intend to issue covered bonds must apply to the Danish Financial Supervisory Authority for permission.

If a third-party servicer carries out debt collection on behalf of the SPV, such services must only be performed subject to the prior approval from the Danish National Police in accordance with the rules set out in the Danish Debt Collection Act.

What will the regulator consider before granting, refusing or withdrawing authorisation?

Not applicable; see question 5.

Sanctions

What sanctions can the regulator impose?

Not applicable; see question 5.

Public disclosure requirements

What are the public disclosure requirements for issuance of a securitisation?

When a public offer of securities is made in Denmark, it is generally required that a prospectus is prepared. The prospectus requirement applies to public offerings of debt and equity as well as primary and secondary offerings.

The Prospectus Directive (Directive 2003/71/EC) has been implemented into Danish law. Generally speaking, the rules provide that a prospectus must contain all information that investors and their professional advisers would reasonably need for the purpose of making an informed assessment of the securities being offered and of the issuer.

If the securities are not to be listed on a regulated market, the private placement exemptions contained in the Prospectus Directive may generally be relied upon, although the Danish implementation rules may vary from those of other jurisdictions within the EU.

On 30 June 2017, the new prospectus regulation (Regulation EU 2017/1129) was adopted. The new prospectus regulation entered into force on 20 July 2017, but the majority of the provisions will not apply until 21 July 2019. The new prospectus regulation will repeal and replace the Prospectus Directive (2003/71/EC) and the existing Prospectus Regulation (809/2004).

What are the ongoing public disclosure requirements following a securitisation issuance?

The ongoing disclosure requirements set out in the Danish Capital Markets Act will apply, if the issuer is either listed in Denmark or a Danish company listed in a member state within the EU.

The issuer is under an obligation to immediately publish information of a precise nature relating to the issuer, securities or market conditions which, if it were made public, would be likely to have a significant effect on the price (ie, inside information). To constitute information of a precise nature, the circumstances must exist or be reasonably expected to come into existence and must be precise enough to enable a conclusion concerning the effect on price. In order to fulfil the requirement of significant effect, it must be considered to be information that a reasonable investor is assumed to use as part of his or her investment decision. The information must be disclosed as soon as possible to the Danish Financial Supervisory Authority and NASDAQ Copenhagen A/S, if the issuer is listed in Denmark.

Furthermore, the issuer is subject to various specific ongoing reporting obligations such as periodical financial information and major shareholding of treasury shares.

Eligibility

Originators

Outside licensing considerations, are there any restrictions on which entities can be originators?

No. The originators may be Danish as well as foreign companies. It should be noted that if the entity is not incorporated within the EU there could be data protection issues if some or all of the customers of the originator are individuals.

Receivables

What types of receivables or other assets can be securitised?

In general, there are no restrictions on the type of assets that can be securitised under Danish law. However, special legislation relates to transfer of bank loans and consumer credits.

It is possible to transfer future receivables, provided that they are sufficiently identified. The originator (seller) can, to a certain extent, enter into a receivable transfer agreement concerning future receivables, provided that the contractual relationship between the originator and the obligor, which gives rise to these future receivables can be described in detail. However, under Danish law it is not entirely clear to what extent it is possible to serve only one notice to the relevant obligors in connection with the entry into such agreement.

Investors

Are there any limitations on the classes of investors that can participate in an offering in a securitisation transaction?

Under Danish law, there are no general limitations on which type of investors may purchase the issued securities. This is, however, subject to the usual investor protection rules under the Markets in Financial Instruments Directive, which has been implemented into Danish law.

Custodians/servicers

Who may act as custodian, account bank and portfolio administrator or servicer for the securitised assets and the securities?

Custody services in Denmark (ie, services such as safekeeping and administration for investor accounts) qualify as investment services. An entity providing such services is therefore subject to a licensing requirement in accordance with section 9 of the Danish Financial Business Act, and shall either be licensed as a bank or as a securities dealer to render such services. Deposit taking as an account bank is also subject to obtaining a banking licence in accordance with section 7 of the Danish Financial Business Act.

There are no restrictions under Danish law on which types of entities may act as portfolio administrator. However, if the portfolio administrator renders investment services, the portfolio administrator is subject to a licensing requirement as a security dealer as described above.

To ensure a ‘true sale’, the originator should be deprived of access to the transferred receivables. This would normally be achieved by way of opening a collection account in the name of the issuer (operated by a cash manager) to which payments on the receivables are made. As long as the originator is deprived of access as described above, the originator can act as servicer, provided that the issuer has a right to terminate the originator as servicer without cause and with short notice. By applying an analogy to an old Supreme Court case and using principles from consignment sale we believe that the assignor could under certain circumstances also act as collection agent. It is required that strict, effective and thorough control is exercised by the issuer or his or her representative in order to make sure that the originator does not benefit from the collections. These requirements are being applied very strictly by the Danish courts and an otherwise perfected assignment may be disregarded and set aside by a Danish court, if proper control of handling the payments has not been performed.

Public-sector involvement

Are there any special considerations for securitisations involving receivables with a public-sector element?

No. Any receivable that evidences a debt of the government or a government or other public agency can, in general, be sold to any third party in the same manner as other receivables. There are, however, certain formal rules that must be observed in relation to transfer of tax and VAT claims against the Danish government.

Transactional issues

SPV forms

Which forms can special purpose vehicles take in a securitisation transaction?

There are no restrictions under Danish law with regard to the type or nationality of an SPV and, accordingly a non-Danish entity could be used.

If a Danish SPV is elected, it usually takes the form of a public company limited by shares incorporated in accordance with the Danish Companies Act.

SPV formation process

What is involved in forming the different types of SPVs in your jurisdiction?

Public limited companies must have a minimum share capital of 500,000 Danish kroner (or the equivalent euro amount).

In connection with the incorporation of public limited companies, articles of association must be adopted and filed with the Danish Business Authority. The Danish Companies Act sets out the minimum requirements, specifying information that must be included. Danish company law is largely based on a principle of freedom of contract, which allows shareholders to organise their company as they see fit. Consequently, shareholders are free to include provisions relating to issues other than those listed in the Danish Companies Act in the articles of association, subject to compliance with the provisions of the Danish Companies Act.

A public limited company comes into legal existence once it is registered with the Danish Business Authority. Registration of the public limited company with the Danish Business Register is subject to a registration fee of 670 Danish kroner.

Governing law

Is it possible to stipulate which jurisdiction’s law applies to the assignment of receivables to the SPV?

In general, there is freedom of contract to determine which law should govern the assignment, in other words, the sale agreement between the assignor (the originator) and the assignee (the SPV), just as the assignor is free to agree the governing law in relation to the receivable. A different issue is which law governs the question of perfection of the sale when the obligors are domiciled outside of Denmark (to obtain protection against the assignor’s creditors). There is no clear case law on this issue in Denmark, but it has been generally assumed that lex situs applies. The answer therefore depends on the interpretation of the term lex situs. As receivables have no physical domicile, it is normally found that receivables exist in the country where the obligors under the assigned receivable are domiciled.

The legal theory cannot agree on whether the law of the creditor’s (the originator’s) domicile, in this case Danish law, or the laws of the obligors’ domicile apply. A number of scholars have recently argued that where a great number of similar assets are transferred or there is a transfer of receivables, the law of the creditor (the originator) should apply. In a securitisation this seems to make sense, and there is also one supporting case. A Danish law notification should therefore be sufficient, although to avoid any uncertainty, the law of the obligors’ domicile should also be observed if different from Danish law.

Asset acquisition and transfer

May an SPV acquire new assets or transfer its assets after issuance of its securities? Under what conditions?

There are no restrictions under Danish law on an SPV’s ability to acquire new assets or transfer its assets after issuance of its securities. This would usually be subject to the agreed terms and conditions set out in the securitisation documentation.

Registration

What are the registration requirements for a securitisation?

In general, there are no registration requirements for a securitisation.

As mentioned in question 1, Danish banks may, with the permission of the Danish Financial Supervisory Authority, choose to create a refinancing register with respect to a securitisation of bank loans and credits granted to commercial enterprises.

Furthermore, if a bond representative has been appointed to act on behalf of the investors, such bond representative must be registered with the Danish Financial Supervisory Authority.

Obligor notification

Must obligors be informed of the securitisation? How is notification effected?

Notice to the obligor is a perfection requirement, and must be served by the originator or the issuer. No consent is required from the obligor (unless otherwise specifically required in the contract). An acknowledgment, although not required, would minimise the procedural risk of evidencing the notification having reached the obligor.

No particular requirements apply to the form of notice or to the effective service, as it may be served orally or in writing. Danish law operates on the basis of substance over form; however, the notice must be clearly defined and precise in order for the obligor to become fully aware of the transfer. The notice must reach the obligor in order for perfection to be duly obtained, and that burden of proof lies with the one serving the notice. In addition, it may be required that foreign obligors are notified in their languages. Normally, a notice is delivered in connection with or following the sale, but it may be delivered earlier if the receivables can be clearly specified and identified.

What confidentiality and data protection measures are required to protect obligors in a securitisation? Is waiver of confidentiality possible?

The Danish Data Protection Act applies to the processing of personal data relating to private individuals, whether they are consumers or not, and to some extent to corporate entities (primarily in relation to the processing of credit information by credit agencies). Danish data protection law will not prevent the assignment of receivables to the SPV, but there are certain data protection obligations that must be complied with.

The term ‘personal data’ means information about an identified or identifiable physical person. Processing’ is any operation or use of the personal data. A data controller is the person, or persons, who makes decisions about how the personal data is used.

According to the provisions of the act, personal data may only be gathered, and subsequently processed for specifically stated purposes and must be processed in accordance with good data processing practice. The SPV must put in place measures to ensure compliance with the data protection principles set out in the Act, such as the obligations to:

  • keep and process data only for specified and lawful purposes;
  • keep personal data that is adequate, relevant and not excessive;
  • keep data accurate and up to date;
  • not keep data for longer than necessary for the purpose for which the data was collected;
  • inform the data subjects of their rights (see below);
  • process data in accordance with the data subjects’ rights;
  • apply appropriate technical and organisational measures to protect data; and
  • not transfer data outside of the European Economic Area (EEA) unless special conditions are complied with.

If the SPV is acting as a joint data controller, the SPV is also obliged to inform the data subject about the extent of the processing and its purposes, unless the originator has already informed the data subject. The information given to the data subject on the processing shall include a listing of the categories of data processed, the categories of receivers of the personal data and information on the data subjects’ right to insight and correction on the processing. If the SPV only acts as a data processor, a written contract must also be prepared with the originator. The SPV will be categorised as a data processor, if the SPV only processes data on behalf of and under the instruction of the originator. The contract shall stipulate that processing personal data is only to be done under the instruction of the originator. The contract shall furthermore commit the SPV to take appropriate technical and organisational security measures to protect data against accidental or unlawful destruction, loss or alteration and against unauthorised disclosure, abuse or other processing in violation of the provisions laid down in the Danish Data Protection Act. If the SPV is located in another country within the EU, the contract must also stipulate that the provisions on security measures laid down by the law in that country must comply with the SPV. If data is transferred to a country outside the EU, a contract in accordance with the EU Commission’s Standard Contractual Clauses must be made.

In addition, the processing of personal data will require a legal basis. Such legal basis will, with respect to the SPV’s processing of personal data as a data controller, be:

  • the consent of the data subject;
  • the processing is necessary for the fulfilment of a contractual obligation; or
  • an assessment of whether the interest of the SPV overrides those of the data subject.

If the data is of a sensitive nature, processing will generally require consent as a legal basis for processing it. Under Danish law, ‘sensitive data’ is personal data revealing or concerning:

  • racial or ethnic origin;
  • political opinions;
  • religious or philosophical beliefs;
  • trade union membership;
  • health or sex life;
  • criminal offences;
  • serious social problems; and
  • other purely private matters than those mentioned.

The Danish Financial Business Act will apply if the originator is a financial institution. According to the Danish Financial Business Act, all persons acting on behalf of the institution have, as a general rule, an obligation of confidentiality concerning the information obtained during the performance of their duties. The board of the financial institution can, however, chose to divulge information concerning the institution, but not the clients. Client information can only be divulged if the relevant financial institution has obtained an informed consent in writing from the client. This does not apply for usual information on client matters for the performance of administrative tasks. Usual information on commercial clients may also be divulged for the purposes of marketing.

Credit rating agencies

Are there any rules regulating the relationship between credit rating agencies and issuers? What factors do ratings agencies focus on when rating securitised issuances?

When a credit rating agency rates a structured finance instrument (ie, an instrument resulting from a securitisation transaction, Regulation (EU) No. 1060/2009 on credit rating agencies (as amended in May 2011 by Regulation (EU) No. 513/2011 and in June 2013 by Regulation (EU) No. 462/2013)) sets out specific information requirements to be disclosed in the credit rating. The credit rating agency is, among others, obliged to disclose their loss and cash flow analysis, their assessment of the due diligence performed, methodologies, models and key rating assumptions. In addition, the rating agency is obliged on an ongoing basis to disclose all securitisation products submitted for their initial review or preliminary rating. Such disclosure shall be made even though the issuer does not contract with the credit rating agency for a final rating. In addition, three new delegated regulations have been adopted by the European Commission on technical standards for regulating credit agencies, which entered into force in June 2015.

Rating agencies are generally concerned about the variety of legal risks associated with the securitisation emanating from the SPV location and the type of assets securitised. In particular, they are concerned about the speed and ease of enforcement and the jurisdiction that will govern insolvency proceedings. The agencies will also take other factors into account, such as the historic performance of the securitised assets, any credit enhancement, liquidity facilities and the credit standing of the administrative parties, and the structure and legal integrity of the transaction.

Directors’ and officers’ duties

What are the chief duties of directors and officers of SPVs? Must they be independent of the originator and owner of the SPV?

A public limited company must choose between two different types of management structure:

  • a board of directors and a management board; or
  • a supervisory board and a management board.

The management board shall consist of at least one general manager, appointed by the board of directors, or the supervisory board. A legal entity is not eligible for election as a general manager.

There are no specific rules under Danish law that stipulate that the board of directors and the management must be independent of the originator and owners of the SPV. However, in order to keep, in particular, the originator and the SPV as two separate legal entities and avoid the risk of assets being consolidated, it is advisable that the board of directors and the management of the SPV are independent from the originator (see question 32).

The board of directors is responsible for supervising the management board, establishing general policies and making decisions on extraordinary transactions, and shall, inter alia, consider from time to time whether the financial position of the company is sound in the context of the company’s operations.

The board of directors must ensure proper organisation of the company’s business, and ensure, among others, that:

  • the bookkeeping and financial reporting procedures are satisfactory, having regard to the circumstances of the company. The annual report shall be submitted for approval at the annual general meeting;
  • adequate risk management and internal control have been established, and that the company has adequate insurance coverage;
  • they supervise activities and ensure that the company is managed in compliance with the articles of associations, policies and guidelines, and applicable rules and regulations;
  • the board of directors receives ongoing information as necessary about the company’s financial position;
  • the executive management performs its duties properly as directed by the board of directors; and
  • the financial resources of the company are adequate at all times, and that the company has sufficient liquidity to meet its current and future liabilities as they fall due. The board of directors is, therefore, required to continuously assess its financial position and ensure that the existing capital resources are adequate.

The supervisory board, if any, is responsible for supervising the management board. As opposed to the board of directors, the supervisory board is not responsible for establishing general policies and making decisions on extraordinary transactions, and it may not bind the company.

The management board is in charge of the day-to-day operations of the public limited company. Since the SPV’s business activities will usually be limited to those related to the securitisation transaction and with no employees, the management board will only have limited duties. The management of the SPV will usually be independent from the originator, ensuring that the SPV operates on a stand-alone basis in order to achieve insolvency remoteness. The management’s main tasks may be provided by a corporate service provider.

Risk exposure

Are there regulations requiring originators and arrangers to retain some exposure to risk in a securitisation?

Under Danish law, there are no general rules requiring originators and sponsors to retain a net economic interest in their securitisation transactions.

However, under Regulation (EU) No. 575/2013, risk retention rules apply to certain institutions (namely credit institutions and investment firms) located within the EEA. The EU risk retention rules prohibit affected investors from becoming exposed to the credit risk of a securitisation unless the sponsor, the originator or the original lender in the transaction discloses that it will retain an interest of not less than 5 per cent of the securitised exposures. Should an affected investor invest in a securitisation transaction that does not meet the risk retention, due diligence and disclosure requirements of the EU risk retention rules in any material respect by reason of such investor’s negligence or omission, the competent authorities must impose a proportionate additional risk weight against the relevant securitisation position equal to no less than 250 per cent (capped at 1,250 per cent) of the original risk weight of that position.

It should be noted that similar risk retention rules apply to EU insurance companies through Solvency II and alternative investment funds via AIFMD.

Security

Types

What types of collateral/security are typically granted to investors in a securitisation in your jurisdiction?

Usually the underlying assets and related bank accounts and collection accounts are granted as security interest to the investors in a securitisation. In relation to receivables, the security is granted by way of assignment.

As of 1 January 2014, a bill was enacted that resolved past uncertainty with respect to trustees under Danish law, by recognising the use of security agents and trustees in syndicated loans and, subject to certain conditions, the use of bondholder representatives and security trustees in bond issues. The rules provide that security interests can be granted directly in favour of the representative (the security agent) acting on behalf of the secured parties from time to time, therefore, making perfection and preservation of security interests in connection with bond issues more feasible.

Perfection

How is the interest of investors in a securitisation in the underlying security perfected in your jurisdiction?

Requirements to perfect security will depend on the asset and the form of security taken.

In order to create a security interest over the receivables and any related security, the parties would have to enter into a pledge agreement in relation to these assets. The pledge will usually be granted in favour of the bond representative acting as security agent on behalf of the investors.

The perfection requirement would be notice to the obligors along the same lines as in relation to a true sale (see question 33). In addition, the issuer must be deprived of control over the receivables, as well as over any income deriving from these receivables.

Pursuant to the Danish Registration Act, no person may grant security interests over all of his or her present or future assets, whereby the purchaser is unable to grant security interests over all of its assets. As an exemption, the purchaser may grant a floating business charge over some of its assets (including receivables, intellectual property, etc) by way of registration with the Danish Registry of Chattel Mortgages. Perfection is subject to a stamp duty of approximately €200, and an additional 1.5 per cent of the nominal amount of the charge.

It is possible to create a pledge over related bank accounts and the collection account (if any) under Danish law. A pledge over accounts is perfected by delivering notice to the account bank and effectively blocking the pledger’s access to the account. In order to evidence notification, it is common to request that the account bank execute an acknowledgement; however, this is not a legal requirement for the perfection of the pledge. There are no registration requirements in relation to the pledge; however, the pledged account must be effectively blocked at all times in order for the pledge to be perfected. Accordingly, the secured party must consent to each and every release from the pledged account. Account pledges may therefore not work from a practical perspective depending on the account in question.

Enforcement

How do investors enforce their security interest?

With respect to the transferred receivables and any related bank accounts, the bond representative (on behalf of the investors) will be able to:

  • collect the receivables directly from the obligors as they fall due; and
  • take possession of the funds on the pledged account.

Deposits on accounts and receivables may be enforced in accordance with the agreed terms in the pledge agreement without preceding a court order.

In relation to all other assets, the basic rule is that security is enforced by a sale of the secured assets at an auction following an order of the bailiff’s court (unless otherwise agreed) and after notice has been given to the pledgor. However, different rules apply for different assets. The initiation of enforcement procedures in Denmark is not conditional upon the obligors being subject to insolvency proceedings, nor will the enforcement automatically trigger any insolvency proceedings.

Commingling risk

Is commingling risk relating to collections an issue in your jurisdiction?

Yes. Commingling is a risk under Danish law. Ideally, any payments collected from the obligors should be made directly into a separate collection account held in the name of the assignee. The assignor can, however, be given the right to act as agent in administering and collecting the receivables as long as the assignor cannot freely dispose of the incoming receivables and the arrangement is carefully monitored by the assignee. It is also possible for payments to be made into an account of the assignor, provided that funds are credited on a daily or very frequent basis to a separate bank account held in the name of the assignee. Payments to the assignee should not be commingled with any other funds of the assignor because this would jeopardise the security interest. If bankruptcy occurs in relation to the assignor, funds standing to the credit of the assignor’s bank account will belong to the assignor’s estate.

Taxation

Originators

What are the primary tax considerations for originators in your jurisdiction?

Transfer of assets, including receivables, is a taxable disposal subject to capital gains taxations.

No transfer, stamp, registration, value added tax (other than on fees, such as payments to a service provider, which may be subject to value added tax in Denmark) or other similar taxes, duties or charges are payable pursuant to the laws of Denmark on, or in connection with, the transfer of receivables.

Issuers

What are the primary tax considerations for issuers in your jurisdiction? What structures are used to avoid entity-level taxation of issuers?

Payments by obligors under the assigned receivables of interest and principal may be made without withholding or deduction for, or on account of, any taxes or duties in Denmark, except for payments in respect of controlled debt (intergroup debt).

To the extent the securities are considered debt for Danish tax purposes, the issuer is allowed interest deductions. Such deductions will reduce the taxable income arising from the issuer’s receivables.

For securities not considered debt, entity-level taxation will not apply if the issuer is organised in a manner that is transparent for tax purposes, which means that its income is allocated to, and taxed only to, the issuer’s owners. Generally, partnerships are considered transparent for Danish tax purposes. Danish partnerships may, however, be classified for tax purposes as corporations in some circumstances, such as under the Danish reverse hybrid entities rules.

If the issuer is organised offshore outside of Denmark, no Danish taxation should apply to the issuer.

Investors

What are the primary tax considerations for investors?

Except for controlled debt, no withholding taxes or other taxes are levied in Denmark on payments under the receivables of interest and principal, unless the receivables are to be allocated to a Danish permanent establishment or other Danish entity subject to Danish tax. If the investor is subject to tax in Denmark, the investor is taxable on financial income, including interest and capital gains on receivables.

Bankruptcy

Bankruptcy remoteness

How are SPVs made bankruptcy-remote?

An SPV usually achieves insolvency remoteness by implementing the following measures:

  • utilisation of a newly formed limited liability company as an SPV, which will have no operating history and a limited number of known creditors;
  • appointing members of the board of directors and the management of the SPV who are independent of the originator;
  • the shares of the SPV are owned by a foundation or foreign trust;
  • limiting the SPV’s business activities to those related to the securitisation transaction;
  • having no employees;
  • outsourcing all business services (in particular, services being provided by a third-party service provider); and
  • inserting limited recourse and non-petition clauses into agreements entered into by the SPV.
True sale

What factors would a court in your jurisdiction consider in making a determination of true sale of the underlying assets to the SPV (eg, absence of recourse for credit losses, arm’s length)?

In general, a debt owed according to a receivable can be assigned or sold to a third party by agreement between the originator and the issuer, whereby the receivable is assigned to the issuer. For the legal analysis, it makes no difference whether it is characterised as a sale, transfer or assignment. Consent of the obligors is not required unless otherwise specifically required for in the receivable, or the mutual relationship between the assignor and the assignee is deemed to be of special importance, or the receivable relates to certain public payments.

A true sale would normally be achieved by observing the due perfection of the assignment. An assignment of receivables is perfected by notification to the obligors of the assignment. In addition, the originator must be deprived of control over the receivables, as well as over any income deriving from these receivables. Therefore, the debtors under the receivables must pay all debt from it directly to the issuer or to a bank account pledged and fully blocked in favour of the issuer.

The transaction must accurately reflect the intention of the parties and the terms must be consistent with a sale. Generally speaking, a true sale would require the originator and the issuer enter into an agreement whereby the receivables are transferred to the issuer effectively without recourse to the originator. The Danish courts will look at the substance of the transaction and examine the economic effects of the transaction and whether it creates rights and obligations consistent with a sale. In particular, it is crucial that the credit risk should pass to the issuer because the transaction would otherwise be at risk of being recharacterised as a secured loan transaction. In assessing this, one should take all aspects of the transfer into account and not just rely on a few factors. It is evident that the economic effects of the transfer are key factors in making this determination. In this respect, the Danish courts will be likely (although there is practically no case law to rely on) to recharacterise a sale as a secured loan if the risk and benefits in relation to the receivables in general remain with the originator.

Any right of repurchase or redemption jeopardises the true sale characterisation and is recharacterised as a secured loan. In particular, an obligation of repurchase or redemption with respect to defaulted receivables is deemed to weaken the true sale characterisation considerably. The terms and conditions of the repurchase or redemption should not effectively mean that the vast majority of the credit risk remains with the originator.

Consolidation of assets and liabilities

What are the factors that a bankruptcy court would consider in deciding to consolidate the assets and liabilities of the originator and the SPV in your jurisdiction?

In general, Danish corporate law distinguishes between the originator, the SPV and its affiliates. Each are regarded as separate legal entities, whose rights and liabilities must be addressed separately.

The Danish courts have, in some cases, deviated from this when the economy and management of entities have been interconnected to such an extent that the boundaries of the legal entities become blurred, or if the entities have tried to take advantage of the corporate structure and its limited liability in order to favour certain creditors.

Updates and trends

Recent developments

Are there any rules governing securitisations pending in your jurisdiction or reforms under way, such as prohibitions on financial firms betting against the securities they package, improved disclosure and oversight of the asset-backed securities market, rules limiting bank compensation structures that incentivise risk, etc?

On 1 January 2019, a new regulation for European securitisations (Regulation (EU) 2017/2402) took effect. The new regulation applies to all European securitisations issued on or after 1 January 2019 and consolidates the patchwork of legislation governing European securitisations. The regulation also includes rules covering matters such as due diligence, risk retention and investor disclosures. As such, the regulation has replaced the previous sector-specific approach to regulating securitisations with a set of rules that will apply to all European securitisations whether public or private and regardless of the ‘investor type’.