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What are the typical providers of real estate financing in your jurisdiction? Are there any restrictions on who may provide financing?
Real estate financing is typically provided by local, pan-Nordic and international banks; however, non-bank institutions, such as direct lending funds and other alternative debt providers, are increasingly active. Institutional investors tend to participate through the public debt capital markets, but there has also been some activity by, for example, insurers in the direct lending space.
Lending itself is not a regulated activity unless it involves consumers. However, if the entity extending loans also accepts deposits from the public, this constitutes a regulated financial activity which requires a permit (either directly from the Swedish Financial Supervisory Authority (FSA) or through EU passporting rules). Further, if the lending activity is considered regular, the entity may be regarded as conducting a permanent financing business in Sweden, in which case the FSA must be notified. Although the regulations are not entirely clear, less frequent lending to Swedish borrowers does not usually require notification.
What are the most common structures used to secure real estate financing and how are these security interests perfected?
Security over real estate is created by way of mortgage registration and the provision of mortgage certificates. On application by the legal and registered owner of a real estate, the Swedish Land Registration Authority issues mortgage certificates (in either printed or digital form), which, when pledged and handed over to a creditor (or a third party representing the creditor), represent a security right with a certain value and priority. A digital mortgage certificate is considered as officially handed over to the creditor when it has been transferred to the creditor’s account on the mortgage register (or to the account of a third party representing the creditor) administered by the Swedish Land Registration Authority. The digitalised mortgage system is available to local banks only. The issuance of a new mortgage certificate is eligible for a stamp duty of 2% of the amount secured (ie, the face value of the mortgage certificate). However, any mortgage certificates already issued can be pledged again without incurring any additional stamp duty. In essence, the security interest created by a mortgage entitles the secured creditor to payment from the proceeds from a sale of the relevant real estate up to an amount equal to 115% of the amount of the mortgage certificates issued in that real estate and held by that creditor as security. If a real estate is disposed of at a value that exceeds 115% of this amount, the difference will be allocated to the pledgor.
Security over shares is created by way of a pledge. If the relevant shares are in the form of certificates and share certificates have been issued, the share pledge is perfected by transfer of possession of the relevant share certificates (blank-endorsed) to the creditor (or a third party representing the creditor). If the relevant shares are not in the form of certificates or no share certificates have been issued, the share pledge is perfected through notification to the company’s board of directors, the relevant custodian or account bank and/or the Swedish Central Securities Depository, as applicable.
Security over cash deposits on bank accounts is created by way of a pledge, which is perfected through notification of the pledge to the bank. The pledgor cannot withdraw funds standing to the credit of the pledged account without the express consent of the secured creditor. For practical reasons, it may be undesirable to block certain bank accounts; therefore, the parties may agree that the pledge will not be perfected unless by an event of default (or similar event). However, non-perfected securities are subject to a three-month hardening period from the date of perfection and could be retrieved in the event of bankruptcy.
Security over intercompany receivables is created by way of a pledge, which is perfected through notification to the receivable debtor or, if the receivable is in the form of a bearer promissory note (or similar), by transfer of possession of the relevant promissory note (blank-endorsed) to the secured creditor (or to a third party representing the secured creditor). Proceeds should be paid directly to the secured creditor and the pledgor may not have control over any account to which payments are made.
Security over insurance proceeds is created by way of a pledge, which is perfected through notification to the insurance company with which the relevant insurance policy was placed. Insurance proceeds are to be paid directly to the secured creditor.
What covenants are typically made in financing agreements?
Typical financial covenants include loan-to-value ratio and interest cover.
Enforcement of security
How are security interests enforced in the event of default?
Market practice in Sweden is that a secured creditor becomes entitled to enforce a security following an event of default or similar under the credit documentation. Typical events of default include:
- financial covenant breaches; and
- other non-compliance with the terms of the credit documentation.
Usually, the security documents become enforceable only once the secured creditor (or an agent on its behalf) has accelerated the loan by declaring it immediately due and payable. In some cases, the relevant security document stipulates a notice period before enforcement action can be taken. There are no specific requirements under Swedish law that an event of default which constitutes a breach must be of a certain nature in order for a secured creditor to be entitled to accelerate outstanding loans and enforce security, unlike certain European jurisdictions which require that a payment default must be outstanding.
The process for enforcement depends on the type of security being enforced. A security interest created over real estate mortgage certificates can be enforced only through certain public authorities and requires an enforcement order or the commencement of formal insolvency proceedings. Other types of security can generally be enforced by public or private sale. The timing of and precise procedure for enforcement will most likely be stipulated in the relevant security documents. The market standard enforcement provision in, for example, a Swedish-governed share pledge agreement usually gives the secured creditor the right to sell the security assets (eg, pledged shares) by private or public sale, auction or in any other way and on such terms as the secured creditor deems fit (including the right for the secured creditor to purchase the assets itself or withdraw, make claims for, demand or collect payments of any amount or proceeds, as applicable, and offset them against the outstanding debt).
A secured creditor is considered to have a duty of care over the security and therefore may not enforce the pledge or realise the security assets to the detriment of the pledgor. Therefore, the secured creditor must, as a fiduciary duty, take into consideration and protect the interests of the relevant pledgor regarding enforcement, including obtaining a fair sales price at market level for the security assets. Further, if the sales price exceeds the debt for which the security was granted, any surplus must be distributed to the pledgor following the sale of the assets. There are special provisions in the event of bankruptcy and such provisions override any contractual provisions in Swedish-governed security documents.
What is the typical timeframe for the enforcement of security?
There is no typical timeframe for enforcement of security over the types of assets mentioned above, as it depends on the individual circumstances, including any preparations required or desirable, the preferred outcome and the current market conditions. It is possible to arrange for the swift enforcement of security over assets such as shares, bank accounts, intercompany receivables and insurance proceeds, whereas the more formal procedures involved in real estate security enforcement may require additional time.
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