Extract taken from 'The Lending and Secured Finance Review' – edition 5

Credit support and subordination

i Security

Obtaining security is straightforward and there are only nominal registration fees involved in the uptake of security. However, the financial assistance prohibitions for target companies mentioned in subsection ii will apply similarly to security granted by a Norwegian target company for the benefit of a lender of acquisition financing granted in connection with the purchase of shares in the Norwegian company or the purchase of shares in its parent company.

The most common security taken out in a Norwegian debt financing is share security, which is perfected by way of a notice to the company whose shares have been charged. As Norway has implemented the Financial Collateral Directive (Directive 2002/47/EC), obtaining share security under Norwegian law follows a similar approach to in the European Union, and pre-agreed enforcement procedures are commonly included to ensure swift enforcement of shares by way of either appropriation or a pre-agreed sales process.

Mortgages over real registered asset classes are also easily obtained by filing simple standard forms with the relevant Norwegian registry. Mortgage over real estate is obtained by filing the mortgage form with the Norwegian Land Registry, mortgages over vessels are obtained by filing the mortgage form with the Norwegian Ship Registry, and mortgages over aircraft and certain equipment related to aircraft (in accordance with the Cape Town Convention) are obtained by filing a mortgage form with the Norwegian Civil Aircraft Registry.

Generally, under Norwegian law, agreeing to a floating charge over all assets owned by a debtor from time to time is not allowed. Much of the same effect can, however, be achieved because floating charges over specific asset classes are allowed. This covers floating charges over a debtor's trade receivables from time to time, as well as its inventory and its operating assets. These floating charges are obtained and perfected by way of filing standard forms with the Norwegian Registry of Movable Property. The floating charge over operating assets also comprises all intellectual property used by an entity in its operating business. It is also possible to take out a separate security over patents (and applications for patents), and this security will particularly cover patents that are not used by the debtor in its own operations, but rather developed for sale or licensing to third parties.

Assignment of specific monetary claims is possible and customary under Norwegian law; however, a Norwegian company can only assign as security any future monetary claim for payment in a specifically mentioned legal relationship, with the further limitation that the contractual position as such cannot be assigned (contrary to what is possible in some other jurisdictions). Charges over bank accounts are possible, under Norwegian law, in the form of an assignment of the monetary claim against the bank for amounts deposited to the account. Such security may cover a fixed amount deposited on a blocked account or it can be a claim against the amounts from time to time standing to the credit of an operating bank account. Assignments of monetary claims are perfected by notification to the debtor of the claim.

ii Guarantees and other forms of credit support

Granting of guarantees is possible and customary in Norway; however, the granting of parent company guarantees may have adverse consequences for tax reasons (see Section III) and are therefore usually avoided if the borrower is a Norwegian entity.

Guarantees from subsidiaries are common in all types of corporate and acquisition financings. Norway, however, currently has strict financial assistance rules in force, which means that a Norwegian company may only grant guarantees or security, or advance funds in connection with an acquisition of the shares in the Norwegian entity or the parent company of the entity, with very strict limitations. The consequence of these limitations is that guarantees and security granted by a Norwegian target company and its subsidiaries will typically only extend to the amount of debt already incurred by Norwegian entities and refinanced as part of the acquisition. There is an exemption for acquisition of single-purpose entities owning real estate, which may nevertheless mortgage their properties in connection with the purchase of the shares in the single-purpose owner (thereby aligning the rules whether the property itself is sold or only the shares in a single-purpose entity with the sole purpose of owning the property). The consequence of the above exemption for real property is that acquisition financing involving real property special purpose vehicles can often obtain favourable pricing compared with other acquisitions that do not obtain a similarly strong security package. It has been suggested that the strict Norwegian financial assistance prohibitions should be softened so that Norwegian target companies and their subsidiaries should also be able to grant guarantees and security in favour of a lender to the purchaser of its shares, and it is expected that a relaxation of these rules will be adopted some time during 2019. There has been for some time, however, no clarity as to what the new rules will look like, and updated advice should be sought before structuring a financing of a Norwegian target company.

The way the financial assistance prohibition is typically dealt with under the current rules is nevertheless to obtain the usual security package over the target and its subsidiaries (as obtaining security is not costly in Norway), but adding appropriate limitation language ensuring that the security and the guarantee obligations incurred will only extend to the amount allowed possible under the law on occasion. In this way, it will be a factual matter how strong the security that is obtained from the target group turns out to be under the specific acquisition financing in question.

As a result of the above financial assistance restrictions as currently in force, lenders must rely to a larger extent on negative pledge clauses and prohibitions against additional financial indebtedness in the target group to get the same level of comfort. It is therefore the authors' impression that Norwegian acquisition financings have generally had less flexibility for the borrower and its subsidiaries under Norwegian law.

The prohibition that a Norwegian target entity may not advance funds to the benefit of a purchaser of shares in the company will not prohibit the Norwegian target from distributing ordinary dividends to the purchaser.

Norwegian entities (and their boards of directors) will generally have an obligation to act in the best interest of the company, and ensure that there is sufficient corporate benefit when undertaking a transaction. This will, as a main rule, also apply to the granting of guarantees to related parties. Calculating the actual arm's-length consideration for a guarantee or security interest under Norwegian law can be complicated, but lenders should make sure that arrangements are in place ensuring that arm's-length provisions are paid to protect their security position, as this will typically be an assumption under the relevant legal opinions granted in favour of the lenders (see Section V).

iii Priorities and subordination

Contractual subordination is recognised and customary under Norwegian law, and may generally take two different forms. The first possibility is to agree to grant a fully subordinated loan (labelled as such), which under Norwegian law is recognised as a separate class of loan that ranks behind all pari passu debt (whether secured or unsecured), but ahead of equity claims from shareholders. In the event of a bankruptcy of the borrower, the holder of a fully subordinated loan will not be able to claim any dividend on the fully subordinated loan unless all the pari passu debt (as well as the prioritised claims, e.g., bankruptcy costs) has been paid. The second possibility is to agree to a contractual subordination and turnover in favour of another creditor (typically a bank) of claims of an ordinary claim against the borrower. In the event of a bankruptcy involving the borrower in this scenario, the holder of the loan will claim against the borrower in the bankruptcy as normal, but any dividend received from the bankruptcy estate will, in accordance with the subordination and turnover agreement, be turned over to the other party (typically the bank), in accordance with the contractually agreed terms and without involvement of the bankruptcy estate. Norway has not yet implemented the Creditor Hierarchy Directive, which implements the new class of 'senior non-preferred' liabilities, which rank below ordinary claims and above subordinated claims. This will likely be rectified as Norway transitions into the bail-in regime created by the BRRD.

Intercreditor agreements regulating security sharing are also customary and its content will vary depending on the structure and type of financing in question. The traditional security structure under Norwegian asset financings has been that of first and second priority security in the same asset, typically with a bank having first priority security in the asset and the junior creditors such as, for example, bondholders having second priority security. The intercreditor arrangements in such a setting would customarily revolve around enforcement rights, standstill periods and cash distribution waterfall, sometimes also with a purchase option for second priority security holders to purchase the first priority collateral position.

'LMA-style' intercreditor agreements are customarily seen where the structure is more akin to a financing of the whole group as such and not limited to specific assets. The concept of a security agent holding common security positions on behalf of different creditor classes is recognised under Norwegian law. The most typical structure is probably the 'super senior' revolving credit facility granted by bank lenders to support a borrower with working capital facilities and secured in the same assets as a bond tranche having security on the same priority in the same assets, but where the revolving facility takes priority in coverage from enforcement proceeds from realising the security. However, typical LMA-style intercreditor agreements will contain provisions that have not been tested under Norwegian courts and may be difficult to enforce in a bankruptcy situation of the relevant obligor as the bankruptcy estate will, as the main rule, have the possibility of electing whether to step into the position of unfulfilled contractual obligations in a contract of a mutually burdening nature. The obligation included in LMA-style intercreditor agreements to release intra-group claims in the event of a default will, for example, probably not be binding upon the bankruptcy estate unless there is a valid security interest in the intra-group claim (and if there is, as a main rule under Norwegian law, a prohibition to pre-agree sale or transfer procedures for such security positions). Regardless of the above, these intercreditor provisions are often entered into, and legal opinions will contain relevant carve-outs for these kinds of provisions in a bankruptcy (see Section V).