An extract from The Lending and Secured Finance Review, 6th Edition
The Dutch loan finance market for small and mid-cap corporate borrowers is still mainly handled out of a single bank on a bilateral basis or through a club of banks. For larger mid-cap and large-cap loans, debt financing is either provided by a syndicate of banks, or via private debt providers such as credit funds. Capital and risk management requirements applicable to banks, excess supply of credit, low funding costs and a 'search for yield' have led to alternative credit providers increasing their share in the debt markets. In addition, the use of green loans and sustainability linked loans continues to increase.
The financial markets have emerged from the first wave of the covid-19 pandemic. We have seen many waiver and amendment requests being successfully finalised and all types of financing transactions picking up again as a result of excess supply of credit. However, the current optimism in the loan and capital markets may fade (1) when government stimulus packages stop, (2) if a new mutation of the virus develops or (3) when central banks decrease their quantitative easing as a result of which interest rates will gradually increase, in each case potentially combined with the terms of the many (mostly short-term) waivers expiring.
Legal and regulatory developments
Dutch legal and regulatory developments from 1 June 2020 until 1 June 2021 (other than through EU regulations) that are relevant for loan finance practice include the following:
- On 1 January 2021, the bill providing for court confirmation of extrajudicial restructuring plans (WHOA) entered into force. Also known as the “Dutch Scheme”, this new tool offers an attractive Dutch alternative to the US's Chapter 11 mechanism, and to the English Scheme of Arrangement. Under the WHOA, a debtor may offer an extrajudicial restructuring plan to all or some of its creditors or shareholders. If certain requirements are met, the restructuring plan can be confirmed by the court, making it binding on all affected parties. The restructuring plan may include a cross-class cramdown and group company obligations (even if the group companies are non-Dutch). It can also terminate onerous contracts. Only rights arising from employment contracts cannot be included in the restructuring plan. Particularly relevant for the loan finance practice is the fact that the debtor has some flexibility to divide the creditors and shareholders into separate classes, which could potentially depart from statutory and contractual priority rules set out in an intercreditor agreement or subordination agreement (see Section IV). In addition, and subject to certain specific conditions, a court can, in accordance with the reasonableness exception, approve a restructuring plan that has been rejected by one or more classes and that deviates from statutory or contractual priority rules to the detriment of a class of creditors or shareholders that has not voted in favour of the plan.
- On 29 May 2020, the draft bill, which prohibits restrictions on transferability and pledgeability of receivables that have arisen from the conduct of a profession or business and are transferred or pledged for financing purposes, has been submitted to Parliament. By extending the asset base that can be transferred or pledged to financiers, the draft bill aims to increase the credit potential of (mainly) small and medium-sized enterprises and to create a level playing field with neighbouring jurisdictions. On 28 January 2021, the draft bill was discussed in Parliament and was not considered to be controversial. It is unclear when the next step will be taken in the legislative process and therefore when the bill will enter into force.
- As of 1 January 2022, the existing LIBOR and other IBOR benchmark rates will be discontinued and replaced by risk free rates. Although in live transactions, parties already use risk free rates as benchmarks or include appropriate transition provisions, there seems to be limited activity in respect of legacy contracts. However, for both borrowers and lenders, it is important that existing financing documentation also becomes geared towards the use of risk free rates.
Outlook and conclusions
The Covid-19 pandemic and the related government restrictions have severely affected the economy. Affected companies have navigated these uncertain times in a variety of ways, including: agreeing with their lenders to certain amendments and waivers of their financing agreements; ensuring adequate levels of liquidity through government support schemes; drawing under their revolving credit lines; and turning to the debt capital markets. So far, Dutch companies have found contracting parties (including lenders) to be relatively flexible in granting payment holidays. In addition, Dutch courts have adopted temporary guidelines that allow the pandemic and the state of the economy to play an important role in a court's decision whether or not to declare a company bankrupt. Consequently, the number of bankruptcies has been low since the start of the crisis. Despite all of these efforts, these liquidity measures may be inefficient or at some point, no longer available. As such, in the coming months, more businesses in the Netherlands are expected to face liquidity or continuity problems as a result of the pandemic.
In the Netherlands, there has been ongoing attention on the various ways to extend a company's life cycle and make it more resilient during a downturn. Various initiatives taken by both the EU and the Dutch legislature support this trend. Last year's adoption of the EU directive on restructuring and insolvency provides viable companies facing financial difficulties with an effective, national preventive restructuring framework. Most importantly, the WHOA entered into force on 1 January 2021. Further, the Dutch bill implementing the directive in the Dutch Bankruptcy Act was published for consultation on 2 April 2021. By using this framework, companies can avoid bankruptcy proceedings. The Directive's objective is similar to that of the WHOA. Finally, the bill on the new Dutch prepack and the related bill on the transfer of undertakings in bankruptcy proceedings are also being prepared, but it is unclear when these will enter into force. Each of these initiatives is likely to affect – and benefit – companies in financial difficulties as a result of the covid-19 pandemic.
So far covid-19 has not had a real impact on the loan finance market (i.e., on the low interest rate environment, the related decrease in banks' funding costs, lending at more competitive rates and conditions, more borrower friendly loan agreements and a gradual shift towards alternative ways of financing for corporate borrowers). Dutch banks will need to handle the new situation and competition in the corporate finance market and adapt to the new regulatory requirements and their impact on their appetite for new lending as well as funding needs of corporate borrowers. In addition, the anticipated future decrease of the European Central Bank's quantitative easing and macroeconomic developments generally will determine lending and secured finance volumes and margins in the Dutch market for the near future. Though banks are still expected in the short term to retain a dominant position, it is, therefore, fair to say that the Dutch loan finance market will continue to be a market in motion.