Norway is highly dependent on its petroleum industry. When petroleum investment began falling in 2013, the Norwegian economy entered into a downturn, with significant impacts on new investments in a range of industries. The negative trend bottomed out early 2017. Although oil production decreased in 2018 and 2019, the petroleum industry as a whole has seen a steady rise, along with a stabilisation of oil prices. Further growth is expected in petroleum investments over the next years, with several plans for the development and operation of new oil and gas fields, including Johan Castberg in the Barents Sea.
The downturn in the economy led to bankruptcies and restructurings in the oil and gas sector. The high-yield bond market for small and mid-sized companies practically shut down in 2014 and did not recover until 2017. Norwegian banks also lost their appetite to take on risk during this period, and concentrated on lending to relatively large and established companies rather than smaller and less established companies, a trend that started around 2010.
Tougher capital requirements have reduced bank lending volumes further, particularly to marginalised borrowers. Current requirements are stricter than in the other Nordic countries, challenging the competitiveness of Norwegian banks in the loan market, particularly in respect of real estate finance. Stricter requirements imposed under CRD IV/CRR may eventually close the gap, but only over several years.
Along with an upturn in the global economy and increased activity in the oil and gas sector, the Norwegian high-yield bond market recovered during 2017, with more diversification than before and growth within shipping and real estate. The amount of high-yield bonds has grown markedly over the last ten years, although the number of new issues has been volatile on a year-on-year basis. At the end of 2018, the volume of Norwegian corporate bonds (high-yield and investment grade) stood at NOK500 billion.
The Norwegian high-yield market has been an important source of funding where banks are reluctant to lend. However, this market has, to a lesser extent, affected financing terms and structures generally, although it offers lighter conditions and often longer terms than traditional bank debt.
Norwegian companies are increasingly borrowing from alternative credit providers. Life insurance and pension companies are sometimes lenders in project finance deals and often appear in long-term financings of real estate and other stable assets.
Nearly all market participants must hold a banking licence in order to lend money on a regular basis, even if they do not take deposits. Financial institutions with an equivalent licence from another jurisdiction within the European Economic Area may passport their licence to Norway. Direct lenders, on the other hand, will often operate in their local jurisdiction without such banking licence, and must acquire one if they are to market their activities in Norway or lend through a Norwegian office. This is not feasible from a cost and business perspective, and limits the amount of direct lending in the Norwegian market. Direct lenders have nonetheless increased their share of the loan market to Norwegian borrowers as sponsors and companies increasingly seek financing sources outside Norway.
The Norwegian finance market is relatively small, and influences come mainly from other jurisdictions. On larger deals there have been few new innovative finance techniques in recent years. On a smaller scale, in the midst of a tightening regulatory regime, the first peer-to-peer loan platforms have been launched, but this market will need to mature before it can conquer a larger part of the market.
The most important provisions of the Payment Services Directive (EU) 2015/2366 (PSD 2), including those on security and interaction, have been implemented by inclusion in the Financial Institutions Act of 2015 and through new regulations on payment services. Bank customers in Norway have had access to the new PSD 2 services since 14 September 2019. The remaining provisions are scheduled to be implemented in 2020.
CRR Financial Requirements
The Ministry of Finance has submitted a law proposal implementing Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (CRR) and Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (CRD IV). The proposal is under consultation.
MiFID II and MiFIR
MiFID II has been incorporated in the Securities Trading Act of 2007. The amendments and new provisions in the Securities Trading Act replaced the MiFID II-regulation in 2017. MiFIR has been mirrored through the Norwegian MiFIR-regulation since 2017. When MiFIR is included in the EEA Agreement, it will be fully incorporated into Norwegian law in an EEA adapted form.
EMIR has been implemented by inclusion in the Securities Trading Act. The EU regulation 2019/838 "EMIR Refit" has not yet been formally implemented, but the Norwegian Financial Supervisory Authority (FSA) has stated that it will base its supervision on EMIR Refit rather than the now obsolete EMIR regulation. The Norwegian FSA expects entities under supervision to conduct their business in accordance with the current EU regulations.
Due to the increase of consumer loans in the Norwegian market, new legislation on consumer lending requirements for financial institutions was enacted in 2019. The new regime has been supplemented by detailed guidelines from the Norwegian FSA. The new rules apply to unsecured credit and credit cards, and set out in detail the requirements to debt ratio, solvency, repayment terms and refinancing.
The Norwegian FSA has proposed new legislation implementing parts of the Mortgage Credit Directive 2014/17/EU concerning licence requirements for the mediation of mortgage credit. The proposal is under consultation.
Financing activities may only be carried out by banks, mortgage companies and other finance companies that are licensed under the Norwegian Financial Institutions Act of 2015. Necessary authorisations may either be obtained from the Norwegian FSA or passported to Norway.
Such financing activities include the granting of credit and the furnishing of guarantees for one's own account, financial leasing or other participation in the financing of businesses other than one's own. Financing activities do not include the following:
Norwegian legislation contains further restrictions on how loans are marketed, originated and sold, how lenders administer loans on an ongoing basis and how lenders may handle borrowers falling behind on their instalments.
The bond market is an alternative funding source in Norway, and investing in bonds, notes and similar securities is not a regulated activity.
As Norway is part of the EEA, EEA-licensed entities may passport their licences from other EEA jurisdictions into Norway. Foreign lenders headquartered outside the EEA may conduct business in Norway by establishing a subsidiary or branch office in Norway and having such subsidiary or branch apply for authorisation from the FSA.
Foreign lenders may freely lend to Norwegian entities, provided such lending is made on the basis of reverse solicitation (ie, where the borrower solicits funding) without having obtained a permit from the FSA. However, foreign lenders without a licence may not actively market their financial activities in Norway, nor lend from a representative office in Norway.
Granting security or guarantees to foreign lenders is not restricted or impeded in any way, unless the lender is targeted by any relevant sanctions regulation, or such security or guarantees would otherwise serve an illegal purpose.
Norway does not operate any foreign currency controls (subject to anti-money laundering and tax considerations), but imports of foreign currency from countries outside the EU may need to be declared in customs declarations, and all electronic cross-border money transfers are reported to the Norwegian Currency Register.
The use of proceeds from loans or debt securities is not a regulated activity in Norway, and there are few legal restrictions, particularly applying to the use of borrowed money. Any such use will be restricted or prohibited in the same manner as other sources of funding.
The concept of a trust as it exists under common law is not recognised in Norway. However, the use of an agent to act on behalf of certain finance parties or secured parties is recognised and well established in Norway. Such finance parties or secured parties might be required to appear in their own name in connection with legal proceedings. However, for the special function as agent for bondholders, there are Supreme Court precedents for such agent appearing in its own name to represent the bondholders in legal proceedings.
Unless otherwise agreed with the borrower, a lender may freely transfer any monetary claim it has against the borrower to a third party. The perfection act is a simple notice to the borrower, and any security interest securing the claim is assumed to be transferred to the new lender unless otherwise agreed.
Commercial lenders routinely sell individual loans or loan portfolios as part of their business. For syndicated loans, transfers usually follow standardised procedures and documentation for commercial lending in the European market.
Since lending is a regulated activity in Norway, assuming a creditor position as part of a loan transfer might trigger an authorisation requirement (subject to any applicable exemptions).
There is no general restriction under Norwegian law against debt buy-back by the borrower or sponsor. However, in larger deals such buy-back is often regulated by agreement allowing such buy-back but restricting some of the rights of the borrower or sponsor as lender under the facility agreement.
There is no legal requirement to document financing or provide a guarantee in respect of a voluntary offer to acquire shares listed on the Oslo Stock Exchange (OSE). A mandatory offer, on the other hand, requires a Norwegian law guarantee from a financial institution with a licence to issue such guarantees in Norway, and the offer document must describe how the acquisition shall be financed. The guarantee text must be approved by OSE. Such guarantee is also required in connection with a squeeze-out (when more than 90% of the shares in the target has been acquired).
Irrespective of a guarantee being required, fairly standard LMA-based (or LMA-like) provisions are included in Norwegian public acquisition finance transactions to secure financing. Documentation tends to be comprehensive, but somewhat shorter than the equivalent documentation in the UK. Any guarantee to the OSE is standardised and short-form. Documentation is generally not publicly filed.
Norway does not currently impose any withholding tax on payments of principal or interest to lenders.
There are no general Norwegian taxes or duties that apply particularly to non-Norwegian lenders. However, lenders should be aware that a Norwegian borrower that is part of a group of companies may be restricted from deducting interest on external loans for tax purposes under certain circumstances.
There are no Norwegian laws imposing an absolute ceiling on the amount of interest that can be charged on a debt obligation. However, Norwegian courts may modify or set aside a contractual provision if it is considered unreasonable in scope or content. The assessment of reasonableness is highly case-specific and based on a broad range of factors. In any case, contractual provisions will only be considered unreasonable in exceptional cases if both contracting parties are professional entities.
A typical security package for a mid-sized Norwegian corporate financing will consist of fixed charges over shares, bank accounts and significant intra-group loans and floating charges over inventory, operating assets and trade receivables, in addition to borrower-specific assets.
For some of the most relevant security interests, the following formalities apply:
A security interest that has not been validly perfected is void against attachments and execution proceedings, and against a bankruptcy estate.
Security cannot be created over all of the assets of a Norwegian company generally, and may only be created if specifically permitted by statute, such as the Liens Act of 1980. Norwegian law does not permit a floating or other universal security over all present and future assets of a company. Under the Liens Act, a floating charge may be created over all of a Norwegian company's inventory, operating assets, trade receivables and certain other asset classes.
Unless provided as financial assistance in connection with the acquisition of its own shares or shares in its parent companies, a Norwegian limited company may generally provide downstream, upstream and cross-stream guarantees within the same group of companies.
The company's board of directors is required to ensure that it acts reasonably, within the objectives set out in the company's articles of association, and in the best interests of the company and its shareholders. Therefore, the Private Limited Liability Companies Act of 1997 and the Public Limited Liability Companies Act of 1997 set out provisions designed to ensure that companies enter into agreements with shareholders and group companies on arm's length terms. The rules on corporate benefit are not precise, but the board should consider (i) the company's equity, (ii) the company's other obligations (including future and contingent obligations and debts), (iii) the company's exposure under any guarantees or security agreements, (iv) the extent of gross guarantees for the company's benefit, and (v) whether any part of a loan facility is made available to the company or its subsidiaries.
Transactions Between the Company and its Shareholders
Shareholder approval is required in order for a limited company to enter into contracts with its direct or indirect shareholders (or their related parties) if the company's consideration exceeds NOK50,000 or 10% of the company's share capital (5% for public limited companies) if the latter is higher. Such contracts would include guarantees or asset security provided to a third party lender for the obligations of a shareholder.
Most agreements with shareholders fall within an exemption for agreements in the company's ordinary business at ordinary business terms. Guarantees and security provided to shareholders within the same group of companies (including foreign entities) are also exempt if the company's direct shareholder owns 100% of the shares in the company.
If an upstream or cross-stream guarantee (or other security) does not fall clearly within an exemption, shareholder approval is regularly required by the beneficiary of the guarantee (or other security).
If shareholder approval is required, the company's board of directors must provide a formal declaration to the general meeting. The statement must be confirmed by the company's auditor. The shareholder resolution, the statement and the auditor's confirmation are to be registered with the Norwegian Register of Business Enterprises. Auditors are often reluctant to provide the required confirmation as it means they have to consider the board's basis for making its statement on the value of the guarantee or security.
If shareholder approval is not obtained where it is required, the relevant guarantee or security may be challenged as being void and non-binding for the company. The lack of a board statement, auditor's approval or registration may not render the guarantee or security void, but it cannot be ruled out, especially if such lack is deemed to have influenced the decision of the general meeting.
An amendment to the current rules has been proposed by the legislator, but the proposal has not yet been passed into law (as of September 2019).
A limited liability company can provide financial assistance in connection with the acquisition of shares in the company or its parent companies if (i) the total financial assistance provided does not exceed the amount of the assets which the company may legally use for the distribution of dividends (free equity), (ii) adequate security is furnished for the claim for repayment or recovery, and (iii) the company's assistance is made on customary business terms and principles. The board of the company must also make a detailed statement in respect of the financial assistance, and must obtain a credit rating of the party or parties enjoying the benefit of the financial assistance. A qualified majority of the general meeting of the company must approve the financial assistance. Somewhat similar restrictions apply to unlimited partnerships.
Due to the narrow ability of a limited company to provide financial assistance, it can generally be stated that a Norwegian limited liability company cannot provide such financial assistance in connection with the acquisition of its, or its parent company's, shares. For real estate companies that are not engaged in the development of property and that do not have employees and other creditors, there is a general exemption for providing financial assistance in the form of mortgages over their properties.
A transaction in violation of the financial assistance restriction is null and void, except against a counterparty that has acted in good faith. In exceptional cases, a violation of the financial assistance restrictions may lead to criminal charges.
An amendment to the current regime has been proposed by the legislator, but the proposal has not yet been passed into law (as of September 2019).
In most cases, board approval is sufficient to approve the grant of security or guarantees, but if there is more than one shareholder in the company granting such security or guarantee, a shareholder resolution may be required. Other than legal costs, the costs in connection with such approvals are limited.
Security interests are typically released between the parties by agreement or declaration, without further formalities. Following such release, security that is registered in a public register is deregistered, normally by delivering the original registration forms signed for discharge to the relevant registers. Deregistration generally carries no registration fees. For some registers, such as the Ship Register, deregistration may be agreed in advance to coincide with the registration of new security in favour of a refinancing lender. Other registers, such as the land register, will not make any agreement on registrations, and new security is normally registered on lower ranking priority, but with step-up rights.
If an original registration form is lost, the security holder and the security provider must go through an annulment process with the courts. This process may take between three and six months to complete, unless a bank guarantee is issued for any loss incurred by any person as a consequence of the annulment.
Security not registered in a public register is normally released by notice to the relevant debtor (in the case of monetary claims, including bank account claims and insurance claims) or company (in the case of shares). For shares and other securities registered in a securities depository, the relevant account operator (a bank) is instructed to deregister the security over the securities account in which the securities are held.
Under Norwegian law, conflicts with entitlements of third parties and problems related to competing security interests are, as a rule, determined by the first-in-time principle, entailing that the security established first shall have the best priority.
A pledgee may accept to have priority behind pledges of a certain amount at any time, or may accept to have priority after a specified, later established, security interest. This means that a pledgee may only initiate enforcement proceedings if all claims with better priority are covered by the value of the pledged asset.
There are some exceptions to the main rule. First of all, if a pledge can be registered in a securities register, the security that is registered first holds the best priority regardless of when it was established. Also, security in a specified asset may rank in front of a floating charge covering that asset.
Contractual subordination of debt is normally set out in the relevant loan agreement, agreed in a separate intercreditor agreement or declared by the creditor in a separate statement.
If a company or a person is declared bankrupt, a creditor's security interest must be fully perfected in order to enjoy protection from bankruptcy seizure. Creditors with collateral security have a special privilege in the settlement of their claim in one or more stated assets. Contractual arrangements made between different creditors may be valid between the parties, but have no effect against seizure in bankruptcy. Contractual subordination provisions may therefore not survive the insolvency of a borrower.
The enforcement of security interests is generally subject to the mandatory provisions of the Norwegian Enforcement Act of 1992 and must be carried out through the Norwegian enforcement authorities. Prior to the occurrence of an enforcement event, the parties are generally not permitted to agree any other enforcement procedures; any such agreement will not be recognised by the Norwegian courts. However, certain exemptions apply, in particular for financial collateral, pledge of monetary claims and bank accounts, and separate pledges of patents and plant breeder's rights. The enforcement measures under the Enforcement Act are primarily a forced sale, which can be carried out either as a public auction or – as is the usual solution – through a third party seller (eg, a real estate broker) appointed by the court. Forced use of an asset is also available for certain assets (eg, real estate, aircraft and vessels). A forced sale is administered by an enforcement officer, who is responsible for ensuring that the sale, in his or her discretion, generates the best possible return.
A security holder only has a right to the value of the security asset, not to the asset itself.
If the security assets are registered in a security register, the sales price must be confirmed by the courts before the bid can be accepted. In such cases, it is not unusual for the sales procedure to take as long as six months.
A private sale bypassing enforcement proceedings is only possible if security is given in financial assets subject to the Financial Collateral Act of 2004 and the transfer of property rights is agreed in the security agreement from the outset. Financial assets for the purpose of the Financial Collateral Act include, but are not limited to, bank deposits and financial instruments such as transferable securities (including shares and bonds).
Choice of Law
The choice of foreign law as the governing law of a contract will generally be upheld by the courts of Norway, subject to Norwegian public policy and any mandatory applicable provisions of law.
Choice of law clauses are only binding and enforceable between the parties and will not affect the standing of a third party. Choice of law clauses that relate to insolvency, reorganisation and other laws of general application relating to or affecting the rights of creditors may render provisions or documents void or voidable, or otherwise limit or affect their enforcement.
Any security created over assets located in Norway will be subject to Norwegian law. The Norwegian Supreme Court has stated that the validity and perfection of a Norwegian security asset shall automatically be subject to Norwegian law.
Furthermore, the parties cannot decide which law shall govern their own capacity, and any action brought before a Norwegian court will be subject to Norwegian rules on civil procedure.
Submission to Foreign Jurisdiction
Under Norwegian law, the submission to foreign jurisdiction is governed by either the Disputes Act of 2005 or, for international civil cases, the Lugano Convention of 2007.
The main rule under both the Disputes Act and the Lugano Convention is that the parties are free to agree that the national courts of one or several countries shall have jurisdiction to settle disputes that have arisen or may arise in connection with a particular relationship. Such agreements must be entered into in writing. For consumer agreements, Norwegian courts will not recognise agreements on jurisdiction unless they are entered into after the dispute arose. Special rules also apply to consumer contracts under the Lugano Convention.
There is a risk that jurisdiction clauses that are asymmetrical or for one party's benefit only may be set aside or revised by Norwegian courts in line with recent case law from some European courts. Norwegian courts have not yet ruled on the validity of such clauses.
Waiver of Immunity
Norwegian courts will recognise a waiver of immunity to the extent it is permitted by international law.
A Norwegian court will recognise a foreign judgment if it is given by a court chosen by the disputing parties, provided Norwegian public policy is not violated or frustrated by the recognition of such a judgment.
A judgment given in a state bound by the Lugano Convention will be recognised in Norway without any special procedure being required. A party who is domiciled or registered in a country that is not a member to the Lugano Convention and who raises the recognition of a judgment as the principal issue in a dispute may, subject to certain exemptions and qualifications, apply for a decision that the judgment be recognised.
Norway is a party to the New York Convention with no reservation for reciprocity. A foreign arbitral award rendered in a contracting state to the New York Convention will therefore be recognised and enforced by Norwegian courts in accordance with the New York Convention and related Norwegian laws.
Norwegian law includes a general principle of fairness in contracting, enabling the revision of unfair contract terms. In addition, there are certain statutory rules that apply to financial institutions, such as the mandatory requirement to include a maximum liability for a security interest or guarantee if that security interest or guarantee is given in favour of a financial institution (other than in respect of security provided for the borrower's own debt).
Norwegian law poses certain challenges in the context of project finance and some other types of asset lending transactions, as security cannot – as a general rule – be granted over contracts as such (only monetary claims arising under a contract), except for mortgages on leases of land and the houses thereon, requiring careful structuring of these types of transactions.
Company rescue is available through voluntary or compulsory debt settlement proceedings. The initiation of such proceedings takes place through a petition to the courts from a debtor. If a company is insolvent, Norwegian law imposes a duty on the board of directors to file for debt settlement or insolvency proceedings.
If the court decides to commence debt settlement proceedings following the petition from the debtor, the opening of the proceedings will be announced in the Norwegian Register of Business Enterprises, and in the debtor's local newspaper. The company will then be under the supervision and control of the courts, which will elect a creditors' committee whose task is to assist the debtor in developing a debt settlement proposal for the creditors.
Several requirements must be met in order to open debt settlement proceedings. First, the debtor must be illiquid – ie, unable to pay its payment obligations as they fall due. Secondly, the court must find that the debtor is likely to succeed in reaching an agreement with its creditors regarding the settlement of its debt, and thus prevent bankruptcy. After the opening of debt settlement proceedings, the creditors vote on a debt settlement plan prepared by the creditors' committee.
Voluntary and compulsory debt settlement proceedings are subject to different requirements and thresholds.
In order to open voluntary debt settlement proceedings, all unsecured creditors must consent to the proposed debt settlement scheme, which is only binding upon those creditors who have voted in favour or the debt settlement proposal or who are not affected by it.
Compulsory debt settlement proceedings can only be opened if 75% (in number and in outstanding debt) of the unsecured creditors have consented to the proposed debt settlement scheme. In addition, all unsecured creditors must, subject to certain exceptions, receive at least a 25% dividend. The compulsory debt settlement proceeding will be binding on creditors whose claims exist before the opening of the proceedings, except for (i) certain claims that hold an especially high priority in insolvency proceedings, (ii) secured claims if the claim does not exceed the value of the security asset, and (iii) claims that a creditor may set-off against a counterclaim from the company, to the extent that the value of the claim does not exceed the value of the counterclaim.
After debt settlement proceedings are opened, there is a six-month protection period during which secured creditors are not allowed to enforce security unless permitted to do so by the creditor committee (a few exceptions apply with regards to financial collateral), and unsecured creditors cannot file for debt recovery. Generally, agreements entered into by the debtor continue during the debt settlement proceedings. As a rule, the debtor's counterparties may not terminate such agreements during the debt settlement proceedings, but may require the debtor to provide security that it will fulfil its contractual obligations.
Debt settlement proceedings usually last four months, but may take longer.
Due to the strict requirements relating to creditor consents and minimum dividends, debt settlement proceedings are by and large unsuited to achieve a successful company rescue. The estate has limited powers to seek debt-to-equity solutions, for instance by writing off debt against the receipt of shares. Additionally, the legislation does not allow for the granting of security to lenders during the debt settlement period, meaning that there is limited legal protection to secure financing for the company during the negotiation of the debt settlement scheme.
If the borrower has opened debt settlement proceedings, security cannot be enforced for a period of six months.
If the borrower is declared bankrupt, the security holder can take over property rights to the security to effectuate a sale so long as the value of the security does not exceed the value of the loan. Otherwise, the bankruptcy estate has six months to effectuate a sale, failing which a public execution sale can be enforced.
Apart from non-statutory passivity rules that first come into play in cases of unreasonable delays caused by the creditor, there is no time limit to enforce a security. A lien will thus continue to be attached to the security asset even if the underlying claim is barred. In cases of default, the lender will nevertheless be best served to enforce the security as soon as possible to avoid complications (such as the statutory six-month delays described above in cases of insolvency).
A Norwegian bankruptcy estate has a statutory lien in all pledged assets belonging to the company at the time of the commencement of bankruptcy proceedings and which may be subject to disbursement or bankruptcy seizures. The bankruptcy estate also has a statutory lien in assets that third parties have pledged as collateral for the company's debt, when the security exists at the time of the commencement of the bankruptcy proceedings. The pledge amounts to up to 5% of the assets' estimated value or sales value. For security registered in an asset-based register, the pledge amounts to a maximum of 700 times the Norwegian court fee (NOK1,150 as of September 2019) per asset. The statutory lien ranks ahead of all contractually agreed pledges, and has to be respected by all pledgees.
The priority of payments in insolvency is as follows:
Norway does not have a concept of equitable subordination. However, Norwegian law contains several claw-back provisions aimed at voiding certain transactions carried out by the company before bankruptcy. Examples include transactions that give rise to a fraudulent preference of creditors, or transactions that involve an extraordinary method of payment from the debtor (ie, payments carried out in means other than money, payments made prior to their maturity date or payments that substantially weaken the debtor's financial position at the expense of other creditors).
The Norwegian Recovery of Claims Act of 1984 contains several claw-back provisions. The timeframes under which transactions can be challenged by liquidators are tied to the time that debt settlement proceedings or insolvency proceedings are opened.
Norwegian law reserves the longest period (ten years) for voidable transactions that involve an element of counterparty bad faith. This prerequisite is established where the counterparty knew or should have known of the debtor's financial situation and the improper circumstances of the transaction. Secured lenders have due diligence obligations to ensure that the borrower is not already insolvent at the time of the conclusion of the security agreement.
Transactions entered into by the debtor for no consideration (ie, gifts) and transactions including a gift element may be set aside by the court if they are concluded less than one year before proceedings were opened.
For transactions concluded less than three months before proceedings are opened, the court has the power to set aside certain extraordinary payments (including by way of set-off) made by the debtor. Security granted in respect of existing debt is subject to the same three-month hardening period. This further applies to security that has been perfected with unnecessary delay after the debt was incurred.
Project finance has traditionally not been a significant source of financing in the Norwegian market, although it has become more relevant in recent years. Project finance was used in the oil and gas industry during the capital-intensive exploration and development on the Norwegian continental shelf in the late seventies and early eighties. One of the first such project financings was provided by a consortium of local and international banks to AmocoNoco in 1982 in connection with the development of the Valhalla field. In later years, oil companies operating out of Norway have mainly relied on other structures for external financing, such as bond issues or reserve-based lending, which may offer better pricing or more flexible terms.
Norway also has large deposits of metals and minerals, and has a long history of such mining resources as well as natural stone. Project finance has not been a major source of financing for this industry but remains a possible structure, with the most recent announcement being the proposed financing of the development by Nordic Mining of the Engebø rutile deposit on the western coast of Norway.
Today, the market for project finance in Norway is dominated by large projects in the renewable energy sector, particularly onshore wind power projects. Norway's geography and available land are well suited for wind parks and well-developed infrastructure. Norway has also provided stable and credible renewables incentives, although such support is (in common with most European jurisdictions) being scaled back as Norway is to withdraw from the el-certificate scheme (jointly administered with Sweden) in 2021. Recent wind projects have been supported by power purchase agreements with large, credit-worthy corporate end users, which, together with reducing construction costs, is allowing for project financings that are less dependent on subsidies. Thus, project finance structures lay behind major onshore developments in Norway such as the 1 GW Fosen wind park and the 208 MW Tonstad wind park.
There is no regulatory framework in place in Norway applying specifically to project finance, but the parties to such structures will have to take into consideration the legislation that applies to the underlying asset or to the conduct or set-up of the borrower and its ability to service principal and interest from revenue generated. Licensing requirements for the various sectors will also be a significant consideration when structuring a deal. In addition, there are rules of general application that may interfere with the ability of the lenders to take security over certain assets, such as rights under project agreements, or to enforce their rights in an insolvency situation.
The public-private partnership (PPP) as a method of financing and constructing infrastructure projects has received appraisal by the government as well as private sector market participants, but such transactions have not become commonplace in Norway in the same manner as in some other European jurisdictions. This is partly due to the ability of the state to fund infrastructure projects at a lower cost than through external financing. There is also considerable political opposition against engaging the public sector in long-term structures that bind spending over several budget periods.
Despite the scepticism, experiences from PPP transactions in Norway have generally been positive since the first project was launched in 2004, a road project on E39 (Klett–Bårdshaug). Two more road projects have been completed since (E39 Lyngdal–Flekkefjord and E18 Grimstad–Kristiansand), and in 2018 work started on another road development on Rv3/Rv25 (Ommangsvollen–Grundset/Basthjørnet). Two further road projects are planned as PPPs: Rv555 (Sotrasambandet) and E10/Rv85 (Tjeldsund–Gullesfjordbotn–Langvassbukt).
Apart from road developments, a limited but growing number of other infrastructure projects are being arranged as PPPs, mainly constructions of schools and hospitals. For these projects, the sponsor has usually been the constructor, but the end user is the state or local authorities. Operation of the road or building is normally outsourced to the private sector for a long period after completion. For the road project on Rv3/Rv25, the agreed period is 20 years after completion.
There is no specific legislation in Norway regulating PPPs, although aspects are addressed in certain political statements and policies, such as the national transport plan (which is non-binding), and the current conservative government has proposed a framework for the use of PPPs in road development. Relevant legislation includes the Public Procurement Act of 2016 with regulations, most notably the Regulation on Public Procurement of 2016/974. There is also sector-specific regulation regarding public procurement, and any PPP transaction must take requirements as to pay and working conditions in public contracts into consideration.
Environment, health and safety laws will also have to be considered in a PPP transaction. These may be of a general nature, such as the Pollution Control Act of 1981 and the Working Environment Act of 2005, or sector-specific, such as the Planning and Building Act of 2008, the Petroleum Activities Act of 1996 and the Water Resources Act of 2000. More detailed regulation exists for certain sectors, such as the Regulation Concerning Safety, Health and Working Environment at Construction Sites and the Framework Regulation on Health, Environment and Security in Petroleum Activities and at Certain Onshore Facilities.
Due to the infrequent use of PPP for infrastructure projects in Norway, there is no set standard for PPP contracts in the Norwegian market, except for the standard for road developments prepared by the Directorate of Public Roads and used for the three completed PPP road projects. A standard for the construction of public buildings is under consideration. The lack of standardisation means there is often uncertainty in the negotiation process, and project contracts that are unclear (in particular on the placement of risk) or based on non-standard conditions may make the project more difficult to sell after completion for the sponsor (which is often also the contractor).
Whereas the construction of a project may require one or several licences or other government approvals, few are normally required for the financing of a project in Norway. However, government approvals may be required when taking security over assets that require a licence to own or operate. One notable example is that taking security over petroleum production licences requires the prior consent of the Ministry of Petroleum and Energy. Other than in respect of security documents, no registration or filing of the transaction documents in connection with the financing is required with any governmental body.
Registration fees are payable in connection with the registration of security assets in public registers, such as the land register and the Norwegian Register of Mortgaged Movable Assets. For most registrations, these fees are nominal and have no progressive element based on the secured amount. Security that requires such registration includes charges over land rights (including mineral extraction permits), operating assets, trade receivables (as a floating charge), electrical certificates and petroleum production licences. Security created over assets that do not require registration in a public register does not involve any notarisation or similar acts carrying stamp duties or other charges. Security that does not require registration in a public register includes charges over shares, bank accounts, contract receivables (excluding floating charges) and insurance claims.
The governing law of the main project finance documents is normally determined by the lender. The choice is often Norwegian or English law, but other jurisdictions may be selected. For the special case of PPP transactions, the governing law is invariably Norwegian. All security agreements regulating Norwegian assets are governed by Norwegian law, without exception.
The Ministry of Petroleum and Energy has the overarching responsibility for the energy sector and the oil and gas sector, as well as the state's ownership in Equinor (Statoil), Gassco, Petoro and the State's Direct Financial Interest. The Directorate for Water Resources and Energy and the Petroleum Directorate are the government specialist directorates and administrative bodies for the energy sector and the oil and gas sector, respectively; both report to the Ministry of Petroleum and Energy. The Norwegian Energy Regulatory Authority is an independent subdivision of the Directorate for Water Resources and Energy, and is the national regulator for the Norwegian electricity and downstream gas market. In addition, the Ministry administers the state enterprises Enova SF, which promotes renewable energy production and administers the Norwegian Energy Fund scheme, and Statnett SF, which is the system operator in the Norwegian energy system.
The Ministry of Trade, Industry and Fisheries has overall responsibility for the mining sector. The Directorate of Mining is the technical agency for administering the extraction of mineral resources. The Ministry of Trade, Industry and Fisheries is also consulted when new petroleum licences are granted, in order to balance the interests of stakeholders in the petroleum and fisheries industries. The Ministry of Trade, Industry and Fisheries further administers the state's ownership in the state enterprise Statkraft SF, which is Europe's largest generator of renewable energy.
The Ministry of Finance has overall responsibility for taxes in the energy and the petroleum industry. The Petroleum Tax Office determines and collects tax payments, and the Directorate of Norwegian Customs determines and collects the NOx tax.
The primary act regulating the oil and gas sector is the Petroleum Activities Act of 1996. There are several regulations and guidelines applying to the sector, most notably the general Regulation to the Petroleum Activities Act of 1997/653.
For the energy sector, the main legislation is found in the Energy Act of 1990, with the main regulations being contained in the Regulation on Production, Conversion, Transmission, Trading, Distribution and Use of Energy, etc of 1990/959.
The Minerals Act of 2009 (currently under evaluation for a possible revision) and the Mining Code for Spitzbergen of 7 August 1925 regulate mineral extraction in Norway. Further regulation is found in the Regulation to the Minerals Act of 2009/1842.
In addition to the sector-specific legislation, the Planning and Building Act of 2008 and related regulations are important legislation for virtually all land-based (and nearshore) projects.
The undertaking of infrastructure projects in Norway is dominated by large, sometimes international, sponsors experienced in project finance. Consequently, deals are generally structured in the same manner as in other jurisdictions in Europe. Financing is long term and made available on a non-recourse basis, with debt service based on cash flows generated in the project company. Individual infrastructure projects will often be highly leveraged, with up to 70-80% of project costs funded by senior debt, possibly higher if public sector-backed.
The project company operates as an SPV and is usually organised as a private limited company, which is subject to the Private Limited Companies Act, and is owned directly or indirectly by one or more sponsors.
There are few absolute restrictions on foreign investment in Norway, and such restrictions are rarely relevant for project finance deals. However, foreign investments may be restricted or controlled if they are considered to threaten security interests of national importance. National and international sanctions regulation may also mean that targeted persons may be restricted from making investments in Norway in specific sectors or on a general basis.
One issue that is particular for Norway, and has an impact on the risks to the funders of a project, is the inability to take security over contractual rights other than monetary claims that may arise against a contracting party or contractual rights that are registered in a public register, such as the land register. To mitigate this, lenders commonly enter into direct agreements and other arrangements granting step-in rights in case the project company defaults on its obligations. However, should the project company go into bankruptcy, the bankruptcy estate may by law step into the contractual position and terminate any prior agreed step-in right in favour of the lenders. This issue can, therefore, potentially limit the lenders' enforcement options (when compared with project financing in some other jurisdictions) as it may not be possible for them to effect an asset sale while keeping the project a going concern. However, the security package will invariably include a pledge over the shares in the SPV, and enforcement by way of share sale is not affected by this issue.
For some types of projects, this issue has been solved through legislation. For instance, the Road Traffic Act of 1965 allows the right to collect road tolls (including the necessary land rights) to be registered in the land register and charged in favour of the lenders, subject to the prior consent of the Ministry of Transport and Communications. Furthermore, a step-in right agreed in connection with guaranteeing or pre-paying the buyer's obligations under a long-term power purchase agreement will, by law, be enforceable against the other creditors or the bankruptcy estate of the buyer, so long as the agreement on such step-in right is entered into no later than the date of the power purchase agreement.
Most project financings in Norway are funded as bilateral or club deals, with lenders including commercial banks, international financial institutions, infrastructure funds, insurance companies, pension funds and export credit agencies. Lenders are typically based in the Nordic countries, but there is an increasing number of lenders from outside the Nordics, particularly in the larger infrastructure developments. Some Norwegian banks rarely provide project finance due to the long-term commitment such financing requires. Export credit agencies typically seen in project financing transactions are the Norwegian Export Credit Guarantee Agency (GIEK), the Swedish Export Credit Corporation (SEK) and Denmark's Export Credit Agency (EKF).
Project bonds have not yet been used actively in Norwegian project finance as there is currently no appetite in the Norwegian bond market for this type of risk.
Norway exports most of its production of oil and gas, and is the third largest exporter of natural gas in the world. In the mining sector, a significant portion of extracted minerals and natural stone is exported. There are no relevant export controls, other than for resources that may be restricted for safety or national security reasons or restricted under international conventions or regulations.
The acquisition of natural resources extracted in Norway is generally not restricted, except for the same reasons export may be restricted. However, the extraction of natural resources on the continental shelf or on the mainland will require one or more licences from the state (such as a production licence for exploration and production of oil and gas and a mining licence in respect of extracting metals, minerals and natural stone). Electrical power is traded on Nord Pool and is subject to the rules of the exchange.
Under the Working Environment Act 2005, the employer is responsible for ensuring that the enterprise maintains a healthy and safe working environment. The Ministry of Labour has the overall responsibility under the Working Environment Act, whereas the Norwegian Labour Inspection Authority, which reports to the Ministry, has been delegated the administrative, supervisory and information responsibilities under the act. The Petroleum Safety Authority has the corresponding supervisory authority for the administration of the work environment, safety and emergency preparedness in the oil and gas sector, pursuant to the Regulation to the Petroleum Activities Act 1997/653.
The Pollution Control Act of 1981 is the principal legislation concerning pollution control and waste management. The Ministry of Climate and Environment has the overall responsibility for environmental protection under the act. The Environment Agency reports to the Ministry and is the administrative body responsible for managing Norwegian nature and preventing pollution. The Ministry of Transport and Communications, with the Coastal Administration as specialist agency, has responsibility for providing emergency response to acute pollution in Norwegian coastal waters. The Directorate of Mining has certain responsibilities in respect of pollution from mining, which falls within the Mineral Act of 2009.
Breaches of environmental, health and safety laws may carry substantial fines for the enterprise responsible. Individuals found responsible for such breaches may also be prosecuted, and can be fined or imprisoned in more severe cases. In exceptional cases, especially if lives have been lost, individuals may be imprisoned for up to ten years.
There has been some public discussion on Islamic finance over the last few years, and a few banks have considered launching Shari'a-compliant products. However, for the moment, there is no market for Islamic finance in Norway.
Although sukuk are well suited for the smart management of risk and provide a solution in which investments can be liquidated easily, there is no Norwegian legislation applicable to sukuk specifically, meaning that sukuk will be treated as any other financial instrument and/or contract and be subject to the same Norwegian rules and apparatus.
Storebrand Bank initiated a Shari'a-compliant loan structure for house buyers in 2017, but this product has not gained any significant traction. No other such products have been made available in the market.
As there is currently no Norwegian legislation or regulation specific to Islamic finance or sukuk instruments, sukuk holders would be treated as regular creditors by an insolvency estate or court, and be subject to the same rules and regulations.
As far as is known, there is no Norwegian case law concerning the applicability of Shari'a or the conflict of Shari'a and local law that is relevant to the banking and finance sector.