RegulationCapital and liquidity requirements
Describe how capital and liquidity requirements impact the structure of bank loan facilities, including the availability of related facilities.
The Capital Requirements Directive IV (CRD IV) and the Capital Requirements Regulation 2013 (CRR), as amended by CRD V/CRR II, have been implemented into Belgian law by the Banking Act.
As a general rule, a credit institution must have a liquidity and capital requirements policy that is appropriate to its activities. To this end, the board of directors must define a prospective management policy that identifies the current and future liquidity and capital requirements of the institution. The policy must take into account the nature, volume and characteristics of the institution’s activities and the associated risks. It should be regularly assessed and updated when necessary. If the supervisory authority learns that an institution’s policy is not in line with its risk profile, it may impose additional solvency, liquidity, risk concentration or risk position requirements.
The equity structure of credit institutions is currently divided into Tier 1 (Common Equity Tier 1 and Additional Tier 1) and Tier 2 items. Tier 1 capital is considered to be going concern capital and is intended to allow the institution to conduct its activities and prevent insolvency. Tier 2 capital is considered to be going concern capital and consists of hybrid instruments, undisclosed reserves and subordinated debt. Its purpose is to absorb losses and repay depositors and creditors if the institution fails.
Credit institutions must also maintain an institution-specific countercyclical capital buffer equivalent to their total risk exposure. The countercyclical capital buffer is defined by the National Bank of Belgium (NBB) as a macro-prudential instrument designed to mitigate cyclical systemic risk and counter pro-cyclicality in lending. Its rate is determined by the Royal Decree of 25 November 2015, approving the NBB’s regulation of 24 November 2015 determining the rate of the countercyclical Tier 1 capital conservation buffer. On 1 April 2022, the NBB set the countercyclical capital buffer at zero per cent. This decision is reassessed quarterly.
Belgian credit institutions must also comply with a liquidity coverage ratio (LCR), which aims to ensure, on the basis of a stress test, that they have sufficient liquid reserves to cope with outflows for a period of 30 days.
Bank loan facilities may impact the foregoing requirements and vice versa. Depending on the risks arising from a certain bank loan facility, a credit institution may be required to hold more capital to cover these risks. A credit institution may also seek to mitigate these risks, for instance, via collateral or other forms of securities arrangements. The foregoing could entail that a credit institution may, on the one hand, seek to maintain or increase its high-quality liquid assets (such as cash) and, on the other hand, decrease its short-term net liquidity outflows (for instance, by limiting or delaying drawdowns under a bank loan facility).
Loan documentation based on the Loan Market Association’s recommended forms contains ‘increased costs’ provisions that allow lenders to demand reimbursement from the borrowers for any additional costs the lender may incur as a result of a change in law, such as implementation of Basel III. It is common in Belgium for lenders to request to expressly address increased costs relating to the implementation of Basel III or CRD IV. It is also not uncommon for borrowers to successfully manage to qualify this provision in the sense that such increased costs may be claimed from the borrower only if it is the lender’s policy to seek to recover these costs from other borrowers in relation to similar facilities.Disclosure requirements
For public company debtors, are there disclosure requirements applicable to bank loan facilities?
There are no disclosure requirements for public company debtors specifically applicable to bank loan facilities. A debtor may, however, be required to make reference to its existing bank loan facilities in its statutory financial reporting. In addition, if the public company debtor is required to make price-sensitive information public, it should disclose any price-sensitive information in relation to such bank loan facilities (eg, substantial changes to the loan facilities and security rights granted in connection therewith and termination of important loan facilities by a bank).Use of loan proceeds
How is the use of bank loan proceeds by the debtor regulated? What liability could investors be exposed to if the debtor uses the proceeds contrary to regulations? Can investors mitigate their liability?
The actual use of the proceeds of a bank loan by a debtor is not specifically regulated in Belgium. However, the entry into or continuation of a business relationship or certain transactions by a Belgian credit institution with a debtor is, and may be, subject to anti-money laundering or sanction regulations.
Further, financial assistance restrictions apply pursuant to which no monies borrowed by a Belgian company may be used to finance or refinance, in whole or in part, an acquisition of, or subscription to, that Belgian company’s shares, profit shares or certificates relating to any of these, unless the Belgian company complies with a whitewash procedure.Cross-border lending
Are there regulations that limit an investor’s ability to extend credit to debtors organised or operating in particular jurisdictions? What liability are investors exposed to if they lend to such debtors? Can the investors mitigate their liability?
There are no restrictions on the extension of credit to foreign debtors. However, a lender may be subject to anti-money laundering and sanctions laws, limiting such possibilities.
Entities that are subject to the Act of 18 September 2017 on the prevention of money laundering and terrorist financing and on limitation of cash payments (the AML Act) must take appropriate steps proportionate to their nature and size to identify and assess the risks they are exposed to, taking into account, among other things, the characteristics of their customers, products, services or transactions they offer or enter into, the countries or geographic areas concerned, and the delivery channels they use.
In addition, obliged entities must keep a copy of all the documents and evidence necessary to identify clients for a period of 10 years, which starts from the date that the business relationship with such a client ends. When the entities know or have reasonable ground to suspect that a transaction is related to money laundering, they must report the transaction.
Failure to meet the requirements under the AML Act may lead to administrative and criminal sanctions.
The EU Blocking Statute prohibits European businesses from complying with certain US extraterritorial sanctions and export controls targeting Iran and Cuba. It also provides for certain protections in this context. The Belgian Act of 2 May 2019 sets out Belgium’s penalties for a breach of the EU Blocking Statute, and appoints the authorities that are competent for monitoring compliance with the Statute and making the required reporting.Debtor’s leverage profile
Are there limitations on an investor’s ability to extend credit to a debtor based on the debtor’s leverage profile?
Certain regulated financial undertakings, in particular investment funds (eg, AIFMD and UCITS), are subject to statutory leverage limitations. A breach of such leverage limits should, in principle, not affect the capacity of such an undertaking to attract loans from an investor, but this cannot be ruled out entirely. It may, however, subject the financial undertaking to enforcement measures imposed by the relevant supervisory authorities, which may range from instructions to administrative fines.
Further, specific thin capitalisation rules apply.Interest rates
Do regulations limit the rate of interest that can be charged on bank loans?
Although, in principle, parties are free to determine the interest rate, several provisions under Belgian law contain restrictions.Excessive rates
If the interest rate obviously exceeds a ‘normal’ interest rate and the risks associated with the loan, a court may upon request of the borrower reduce the interest rate set by the agreement.Interest on overdue interest
Provisions providing for interest to accrue on overdue interest may be held to be unenforceable, unless all conditions set out in article 1154 of the Civil Code are met. Article 1154 provides that interest may only accrue on overdue interest to the extent that the interest has been overdue for at least one calendar year and provided the debtor is put on notice by a judicial summons or specifically agrees at the relevant time to such interest being due.Default interest
Article 1907, third paragraph, of the Civil Code prohibits an increase of interest on a straight (term) loan in cases of late payment of more than 0.5 per cent per year on the outstanding principal amount. To the extent that the credit agreement provides for a higher rate of default interest, payment of additional interest indemnity in excess of 0.5 per cent per year may be held to be unenforceable.Break costs and funding loss
Under a straight (term) loan, the amounts of indemnity that can be charged upon total or partial prepayment must be limited to an amount equal to six months of interest on the amount reimbursed, at the interest rate fixed by the agreement (article 1907-bis of the Civil Code). In the event that any premium or breakage costs under the credit agreement would exceed such amount, payment of the excess may be held unenforceable. Recent case law confirms that this limitation applies to any compensation owed by a borrower to a lender upon full or partial prepayment of the term loan, regardless of whether early prepayment was excluded in the agreement.
It is possible that a Belgian court would consider these above provisions to be overriding mandatory provisions of Belgian law that may, therefore, be applied by a Belgian court in derogation of the relevant provisions of the loan documentation. If the loan documentation is governed by foreign law, such a risk of invalidation is probably remote since these provisions are generally considered to be of a mandatory nature only and not of an overriding mandatory or public policy nature.Small and medium-sized enterprise financing
Finally, certain restrictions on early repayment charges apply to loans that are granted to small and medium-sized enterprises (SMEs) and are subject to the Belgian Act of 21 December 2013 on provisions regarding the financing of SMEs, as amended from time to time (the SME Financing Act).Currency restrictions
What limitations are there on investors funding bank loans in a currency other than the local currency?
Parties may stipulate that payments should be made in a certain currency (other than euros) and that all costs related to a payment are borne by the party that is obliged to make the payment. A judgment of a Belgian court relating to a claim for a sum of money expressed in a foreign currency may be expressed in a foreign currency to the extent that it is a currency of a member state of the Organisation for Economic Co-operation and Development, but any payment obligation under such a judgment in a currency other than euros will be enforceable in Belgium only in terms of euros at the exchange rate at the time of payment.Other regulations
Describe any other regulatory requirements that have an impact on the structuring or the availability of bank loan facilities.
Under Belgian law, only the following three types of credit are regulated:
- consumer credit (regulated by Book VII of the Code of Economic Law (CEL));
- mortgage credit (regulated by Book VII of the CEL); and
- credit to SMEs (regulated by the SME Financing Act).
Providing loans or extending credit (other than consumer credit, mortgage credit, and credit to SMEs) are not regulated activities in Belgium and, hence, do not require any licences or registration.
However, this supposes that the lender does not, at the same time, solicit deposits or other repayable funds from the public in Belgium. Only credit institutions with a Belgian licence (ie, Belgian banks or non-European Economic Area banks with a duly licensed Belgian branch) or a European Economic Area passport (ie, European Economic Area banks having notified their home country’s competent authority of their intention to solicit deposits and other repayable funds from the public in Belgium, either on a cross-border basis or via a branch), and various other specifically listed entities can solicit deposits or other repayable funds from the public in Belgium.
It is prohibited to grant loans or mortgages to consumers without the provider being registered with the Financial Services and Markets Authority as a consumer credit provider or as a mortgage credit provider, respectively.
For the purposes of the CEL, a consumer is an individual acting for purposes that do not fall within the person’s commercial, industrial, artisanal or professional activities. A mortgage is a loan for the financing of the acquisition or the conservation of in rem rights on property that is secured by a mortgage or by certain other types of security interests.
The SME Financing Act governs the extension of credit to SMEs by means of loans, or any other similar facilities, that are not a consumer credit or a mortgage credit. No specific licence or registration is required to extend credit to SMEs. The SME Financing Act only contains conduct-of-business rules and provisions concerning the entering into the content and the early termination of a credit agreement.
The SME Financing Act applies to any natural or legal persons pursuing an economic goal or a liberal profession that exceed no more than one of the following thresholds:
- fewer than 50 employees on average during the financial year;
- an annual turnover of less than €9 million (excluding value added tax); and
- a balance sheet total of less than €4.5 million.