Use the Lexology Navigator tool to compare the answers in this article with those from other jurisdictions.
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?
The Swedish lending market has traditionally been dominated by banks – particularly domestic and pan-Nordic banks – following the 2008 financial crisis. Recently, the lending market has been diversified and borrowers can now obtain funding from direct lending funds and other alternative debt providers, as well as increasingly through the public debt capital markets. While Nordic banks still account for the vast majority of secured lending transactions in Sweden, the excess liquidity in the market and the alternative sources of funding give borrowers more options than previously. This diversification looks likely to continue given the increased capital requirements being imposed on banks.
Is secured lending a regulated activity in your jurisdiction?
Secured lending is not regulated in Sweden unless it involves consumers. However, if the entity extending loans also accepts deposits from the public, this constitutes a regulated financing activity which requires a permit in Sweden (either directly from the Swedish Financial Supervisory Authority (FSA) or through EU passporting rules).
Further, if the lending activity is considered to be fairly regular, the entity may be regarded as conducting a permanent financing business in Sweden; in such cases, the FSA must be notified. While the regulatory situation is not entirely clear, more incidental lending to Swedish borrowers does not usually require notification.
Are there any specific regulatory issues which a prospective borrower should consider when arranging or entering into a secured loan facility?
A borrower will not be subject to regulatory requirements, so in essence there are no issues for prospective borrowers.
Are there any specific regulatory issues which a prospective lender should consider when arranging or entering into a secured loan facility?
Outside the consumer credit space, lenders should consider whether the lending business in Sweden is of a more permanent character, and thus the FSA should be notified.
Are there plans or proposals for reform or significant changes to the regulatory landscape in this area?
There are no significant changes in the regulatory landscape that are exclusive to Sweden. The major reform work which is being carried out is the result of EU-wide legislation (eg, the EU Markets in Financial Instruments Directive II).
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)?
Local and pan-Nordic banks are most active, but non-bank institutions such as direct lending funds are increasingly active, particularly in the leveraged finance space. International banks are active in certain segments, such as the real estate finance market. International banks also participate in large cap transactions and funding to large corporates. 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.
Is well-established market-standard facility documentation used in your jurisdiction for secured lending transactions?
The Loan Market Association (LMA) recommended forms are widely used in Sweden (with adjustments for Swedish law aspects) in the investment grade and leveraged lending markets. Some real estate finance transactions are also documented based on the LMA recommended forms, but local standard bank templates are more prevalent. On bilateral transactions, a shortened version of the LMA forms is common.
Are syndicated secured loan facilities typical in your jurisdiction?
Yes, in respect of larger financings. Transactions below €100 million are normally done on a club basis.
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?
The mechanism provided for in the LMA forms is generally followed by appointing a facilities agent to carry out administrative duties (eg, payments and communication between the borrower and the lenders). Most agency appointments are given to banks with separate agency divisions and the capability to handle payments, but independent agency services are also available in the market.
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?
Trust is not a recognised concept in Sweden. The security is normally held by a security agent acting as a representative for the secured parties.
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?
SPVs are normally used only in pure asset-backed financings, such as aircraft financing and real estate financing. It is common for share security over the SPV to be obtained, as well as asset security over the assets owned by the SPV.
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 commonly calculated through a reference rate. For Swedish krona, the reference rate is the Stockholm Interbank Offered Rate (STIBOR). As is common, reference bank rates are used when the benchmark rate for some reason is unavailable. In smaller, bilateral deals, a bank base rate is often used rather than the benchmark STIBOR rate.
Are there any regulatory restrictions on the rate of interest that can be charged on bank loans?
In practice, there are no restrictions on the level of interest regarding commercial loans. The outer limits are when the loan interest rate is in fact usury, which is criminally punishable in Sweden. Unless stipulated in the loan agreement, default interest is payable at a statutory rate.
Use and creation of guarantees
Are guarantees used in your jurisdiction?
Yes, guarantees are common in Swedish secured (and unsecured) lending transactions.
What is the procedure for their creation?
There are no formal requirements, but guarantees are normally made in writing. It is common to include the guarantee in the loan agreement and to make the guarantor a party to the agreement. Separate guarantees – either unilateral or documented in an agreement – are also common if, for some reason, the guarantor will not be a party to the loan agreement.
Do any laws affect or restrict the granting or enforceability of guarantees in your jurisdiction (eg, upstream guarantees)?
Yes, Swedish financial assistance restrictions are fairly strict and will apply to guarantees.
In general, a company may not grant loans or provide security or guarantees for loans granted to:
- a person who is a shareholder, director or managing director (including its respective relatives) of the company or another company within the same group of companies; or
- legal entities controlled by any such person.
There are a number of exceptions to this general restriction – the most widely used is when the entity whose obligations are being guaranteed is an entity within the same group as the company providing the guarantee. This exception also applies when the parent entity is a foreign legal entity similar to a company and domiciled within the European Economic Area.
However, even if such financial assistance falls within this exception, if it takes the form of security or guarantees, such security or guarantees must also comply with the Swedish transfer of value rules. Under those rules, a company must generally not undertake a transaction without deriving real and adequate corporate (commercial) benefit from it. Thus, when a company is providing security or a guarantee for a third party’s obligation, it must be considered whether the company gains any benefit from the transaction. A guarantee without sufficient corporate benefit may nonetheless be valid if the value of the guaranteed amount does not, at the time when the guarantee is provided, exceed the amount available for distribution by the company as dividends.
In addition, a company may not provide financial assistance, either by way of an advance, a loan or security, or guarantees for a loan granted to a debtor so that the debtor can acquire shares in the company or shares in its (direct or indirect) parent company or any other company placed above or at the same level as the company in the group structure. Consequently, a Swedish subsidiary may not normally guarantee debt incurred for the purpose of financing an acquisition by a parent company of a Swedish company.
The prohibition applies to financial assistance given before or simultaneously with the acquisition of shares, but not after the acquisition. Therefore, a loan, a guarantee or any other financial assistance provided after the acquisition, where the funds are used to pay for the acquired shares or repay financing incurred in connection with such acquisition, will not be prohibited. The period that must lapse between the acquisition and such financial assistance to avoid the prohibition is unclear and must be established on a case-by-case basis. However, to be on the safe side, the period should be at least three months.
No whitewash procedure is available under Swedish law.
Subordination and priority
Describe the most common methods of structuring the priority of debts and security.
In Sweden, contractual and structural subordination are common ways to ensure a certain priority order. On more complex leveraged finance transactions, an intercreditor agreement will regulate the priority of debts and security, while in lesser structured transactions, a short-form subordination undertaking or agreement may be used. Under the intercreditor agreement or subordination agreement the parties will contractually agree on a certain order of priority. The ranking of security is normally dealt with in the relevant security documents (ie, the security provider will grant first and second ranking security to certain creditors, either in the same security document or in separate security documents), and will be underpinned by the intercreditor or subordination agreement.
Structural subordination (ie, when the creditors lend to different entities in the corporate structure) is common on mezzanine transactions, although there has been a firm pushback from mezzanine lenders on structural subordination.
Intercreditor agreements have not been fully tested by Swedish courts, so there is uncertainty as to whether some of the provisions of standard intercreditor agreements will be upheld (in particular, release provisions in respect of subordinated debt). Further, in case of formal bankruptcy proceedings involving a Swedish company, the bankruptcy administrator can elect whether the estate will be bound by the intercreditor agreement.
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 stamp duty or documentary tax is payable in respect of granting a loan, entering into loan documentation or granting guarantees.
The issuance of a new mortgage certificate in respect of real estate attracts stamp duty of 2% of the amount secured (ie, the face value of the mortgage certificate).
The issuance of a business mortgage certificate attracts stamp duty of 1% of the amount secured.
Stamp duty is payable in respect of security over certain assets such as aircraft and ships.
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)?
For transactions with a Swedish borrower and a lender group comprising mainly Swedish entities, it is common to use Swedish law as the governing law. In wider syndications where the transaction parties are seeking access to capital markets outside Sweden, English law or New York law is sometimes used.
Are there any restrictions on the making of loans by foreign lenders or the granting of security or guarantees to foreign lenders?
There are no such restrictions.
Are there any exchange controls that restrict payments to a foreign lender under a security document, guarantee or loan agreement?
There are no exchange controls in Sweden.
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, Sweden does not recognise all-asset-encompassing security and security is taken on an asset-by-asset basis.
Release of security
What are the formalities for releasing security over the most common forms of assets?
There are no formal requirements for a release of security under Swedish law. Common practice is that the parties agree on a release letter or pay-off letter and the secured party or security agent returns the pledged collateral to the pledgor once the secured liabilities are satisfied. Given that certain Swedish security is perfected through transfer of possession, it is important for the borrower that the charged property is returned to the pledgor.
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?
Security over real estate is granted by way of a mortgage and official registration with the Land Registration Authority. On application by the legal and registered owner, the registration authority issues mortgage certificates, which, when handed over to the secured creditor, represent a security right with a certain value and a certain priority.
A dematerialised mortgage certificate will be regarded as handed over to the creditor when it has been transferred to the creditor’s account in the mortgage register (or to the account of a third party representing the creditor) held by the Land Registration Authority. The dematerialised mortgage system is available to local banks only. The secured creditor must return the certificate or be deregistered as a holder, as applicable, when all secured obligations have been satisfied.
Certain assets (eg, machinery) may be regarded as industrial accessory equipment or fixtures, and would then be covered by a mortgage.
In essence, the security interest entitles a secured party to payment out of the proceeds from a sale of the relevant real property up to an amount equal to 115% of the amount of the mortgage certificates issued in that property and held by that secured party as security. If a real property is disposed of at a value that exceeds 115% of such amount, the difference will be allocated to the pledgor.
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?
Unless the machinery and equipment is industrial accessory equipment or fixtures and thus covered by a real property mortgage, the only practical way to grant security over machinery and equipment is by way of a business mortgage. The reason is that security over movable property requires change in possession of the property and the pledgor must be excluded, both legally and practically, from dealing with the pledged assets. Consequently, it is difficult to obtain perfected security over machinery and equipment other than through a business mortgage.
A business mortgage covers all of the pledgor’s movable property (other than cash at hand and bank deposits, shares and other tradable financial instruments and securities) used in the pledgor’s business. Such security is perfected by the delivery of the business mortgage certificate to the pledgee and is registered with the Companies Registration Authority.
A business mortgage does not prevent the pledgor from disposing of its assets in a way that diminishes the value of the mortgage. A business mortgage is subordinate to other perfected pledges, even if such pledges are created after the business mortgage. A debtor may therefore pledge receivables that form part of a pre-existing business mortgage, and the pledge of the receivables will then rank ahead of the business mortgage.
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. Security over accounts receivable and contractual rights is granted by way of a pledge. Such pledge is perfected through notification to the receivable debtor or contractual counterparty, as applicable. If the receivables are in the form of a bearer promissory note (or similar), the pledge is perfected by transfer of possession of the relevant promissory note to the pledgee. Proceeds are to be paid directly to the pledgee and the pledgor may not have control over any account to which payments are made.
Security over accounts receivable may be cumbersome for the pledgor as it must have no disposal rights in respect thereof. A pledge requires that the secured parties have total control over the payment of the accounts receivable, meaning that all debtors must be notified of the pledge and instructed to pay to an account which is not controlled by the pledgor.
Security over receivables can also be created by means of a business mortgage.
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?
Security over shares and other financial instruments is granted by way of a pledge. A share pledge is perfected by transfer of possession of the relevant share certificates (if the relevant shares are in certificated form and share certificates have been issued) to the pledgee or, if no share certificates have been issued, through notification of the pledge to the company’s board of directors.
If the shares or other financial instruments are in a dematerialised registered form and held on a securities account, perfection is made by registration with Euroclear Sweden or, if held on a deposit account (as opposed to a securities account), through notification of the pledge to the account bank. Other financial instruments which are not in a dematerialised form require transfer of possession in order to be perfected.
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, security over cash deposits on bank accounts is granted by way of a pledge. Such pledge is perfected through notification of the pledge to the account bank. The pledgor must not be allowed to withdraw funds standing to the credit of the pledged account without the express consent of the secured party.
For practical reasons it may be undesirable to block the bank account and the parties may agree that a pledge over the bank account will not be perfected until the occurrence of an event of default (or similar triggering event). However, non-perfected security will be subject to a three-month hardening period from the date of perfection and could be clawed back in a following bankruptcy.
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 over patents and trademarks may be created by registering a pledge with the Patent and Registration Office. No similar registration is available for copyrights and, provided that there is no counter party or official registry to give notice of pledge to, this form of security may not be created over copyrights or goodwill.
Security over patents and trademarks can also be created by means of a business mortgage. Copyrights and goodwill may also be secured by a business mortgage.
Criteria for enforcement
What are the common enforcement triggers for loans, guarantees and security documents?
Market practice in Sweden is that a lender becomes entitled to enforce security and claim under guarantees following an event of default or similar under the credit documentation. Such events of default include non-payment, financial covenant breaches and other non-compliance with the terms of the credit documentation. Usually, but not always, the security documents become enforceable only once the lenders (or the agent on behalf of the lenders) have 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 a breach constituting an event of default must be of a certain nature in order for a secured creditor to be entitled to accelerate outstanding loans and enforce security, such as the requirement (in certain European jurisdictions) that a payment default must be outstanding.
Process for enforcement
What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?
The process for enforcement depends on the type of security being enforced. Real property mortgages and business mortgages can be enforced only through certain public authorities and in essence require an execution 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 the precise procedure for enforcement will most likely be stipulated in the relevant pledge agreement.
The market standard enforcement provision in, for example, a Swedish law-governed share pledge agreement usually gives the pledgee 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 pledgee in its sole discretion deems fit (including the right for the pledgee to purchase the asset itself).
Under Swedish law, a secured creditor or pledgee is considered to have a duty of care in relation to the security, and therefore may not enforce or realise the pledge or sell the security assets in a way that is unduly adverse to the pledgor. Therefore, the secured creditor must, as a fiduciary duty, take into consideration and protect the interests of the relevant pledgor in connection with enforcement, including obtaining a fair sales price at market level for the security assets.
Further, if the sales price exceeds the indebtedness 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 case of bankruptcy. These provisions override any contractual provisions in Swedish law security documents.
Ranking in insolvency
In what order do creditors rank in case of the insolvency of a borrower?
In summary, priority between claims in a Swedish bankruptcy is dependent on the type of claim. There are three main types of claim:
- claims with special priority (eg, secured claims, claims secured by mortgage and claims secured by seizure);
- claims with general priority (eg, claims given priority because of public interest); and
- claims without priority.
If any assets remain after the claims with special priority have been discharged, claims with general priority will be discharged out of the remaining assets. Within the group of claims without priority, all claims rank equal in priority (pari passu) and will be discharged pro rata. Within the group of claims with special priority, the claims will be entitled to be paid out from the proceeds of the assets that are subject to the relevant security.
Costs for remuneration of the bankruptcy administrator, general costs and expenses for the management of the bankruptcy estate and costs accrued by the estate during the bankruptcy proceedings are considered to be claims with general priority in bankruptcy.
Claims from employees for salaries and pensions have general priority in bankruptcy.
Claims for unpaid taxes have no priority.