Despite the consistent increase in regulation of the sector in the aftermath of the financial crisis, Romanian credit institutions have successfully adapted their asset structure, operations and business strategies to the post-crisis Basel III reforms, with significant balance sheet cleaning efforts. In this context, according to the most recent annual report of the National Bank of Romania, in 2018 there was an increase in the private loan sectors of the Romanian market, in both retail and corporate finance.
The quality of assets of Romanian banks is under continuous improvement, and the non-performing loan ratio as well as the restructured loans ratio have registered a consolidated downtrend in the past years. Currently, the prudential and financial indicators of Romanian banks reflect a stable banking sector with continuous growth in lending to the private sector, despite the risks of unexpected and burdensome legislative changes and an upward adjustment of interest in RON-denominated loans.
The business model of local banks is still traditional, focused mainly on the relationship with households, where growth is generated by housing loans (mortgage loans and state-guaranteed housing loans under the Governmental “Prima Casa” programme) as well as consumer loans. As for corporate loans, at the end of 2018 growth reached the highest value ever.
While Romanian companies' interest in debt financing through bond issues is currently increasing, the high-yield market is not yet a real alternative to bank lending, which remains the main source of debt financing in Romania.
However, generally the upward trend in capital markets debt financing was more evident in 2018, as fixed debt transactions increased by 27%, and banks and several non-financial companies issued corporate bonds to support their business plans.
Providing financing to companies on a professional basis, by granting loans or providing other types of financing, is a regulated activity in Romania and may be carried out by credit institutions (including EU banks on the basis of the EU passporting process), payment institutions for loans granted in relation to payment services (including EU payment institutions on the basis of the EU passport) and non-banking financial institutions licensed by the National Bank of Romania (the NBR). In practice, the non-banking financial institutions are the key alternative credit providers on the Romanian market.
Currently, crowdfunding platforms do not benefit from a dedicated legal framework, and do not represent an alternative to traditional banking financing methods. However, some new recent initiatives indicate that crowdfunding platforms already operating in other EU jurisdictions intend to target the Romanian market in the near future.
In terms of corporate banking and finance techniques, the increasing number of sophisticated investors in Romania and the upward trend in the appetite of local banks to participate in cross-border financing transactions have required local banks to adapt their modus operandi in order to become more competitive and meet the expectation of well-informed clients. Therefore, although there is no official Romanian adaptation of the LMA standards, the lenders usually prefer LMA-type facility agreements for syndications or club-loans, and stick to their internal standard documentation for bilateral loans or smaller clients. Several local banks have developed their own in-house LMA-style standard financing documentation.
From the consumer finance perspective, banks are looking to provide innovative financing products to consumers, blending traditional credit provision with payment services. In this context, competition among banks providing consumer-friendly online crediting is expected to increase.
On both the corporate and consumer lending side, new technologies such as blockchain are expected to be integrated, and will affect the way credit products are provided, including how corporate finance transactions are negotiated and concluded.
Legal developments that have an impact on the Romanian loan market typically concern the retail segment (mainly aimed at consumer protection and avoiding the over-indebtedness of households). From this perspective, in an attempt to increase consumer protection, there have been recent changes to the manner of calculation of the floating interest rates under loan agreements to consumers in the local currency. Following such changes, the old ROBOR benchmark rate has been replaced with a reference rate to be calculated daily by the NBR as the weighted average interest rates on the interbank market.
In addition, at the end of 2018, the Romanian Government enacted a controversial emergency ordinance setting a burdensome tax on the financial assets of Romanian banks and the Romanian branches of foreign banks, starting on 1 January 2019. The tax was intended to be declared and paid quarterly and calculated to the bank’s financial assets, with the first payment to be made at the end of Q1 of 2019. The tax rate differed, depending on how much the ROBOR quarterly average would exceed the reference rate of 2%, and could have reached a maximum quarterly rate of 0.5%.
However, the Romanian Government revised the tax on the financial assets of banks at the end of March 2019 (prior to the first quarterly payment of the tax becoming due). In the current form, the tax on financial assets is 0.4% p.a. or 0.2% p.a., and its application depends on whether the relevant bank has at least 1% or less than 1% of the market share, and is not linked to ROBOR. The tax on the financial assets of banks may be subject to discounts if the bank reaches certain indicators aimed at increasing financial intermediation and decreasing interest margins. Furthermore, the tax cannot exceed the book profit of the bank.
As indicated under 1.4 Banking and Finance Techniques above, providing loans or other types of financing on a professional basis is a regulated activity in Romania.
EU licensed credit institutions may benefit from the so-called “EU banking passport regime” – ie, they may also provide financing as well as other banking services in Romania on a professional basis either by establishing a branch in Romania or directly under the EU freedom of services, in both cases subject to a notification by the supervisory authority in the home EU Member State to the NBR.
On the other hand, non-EU licensed credit institutions may carry out financing activities on a professional basis through either setting up a branch or incorporating a subsidiary, subject to the general licensing regime. From a theoretical perspective, the NBR may exempt the branches of non-EU licensed credit institutions from the application of certain prudential requirements, if it considers that the home third country state has a prudential framework equivalent to that applicable to Romanian banks, and that the home competent authority exercises adequate supervision over the bank, including over its Romanian branch. It is likely that the practical application of this exemption will be considered by the NBR in a post-Brexit context in connection with UK banks/subsidiaries of UK banks.
The above limitations apply only if financing is being provided on a professional basis within the territory of Romania. There are no official guidelines on the assessment of the territoriality criteria applicable to the cross-border provision of banking services from non-EU credit institutions. In the context of Brexit, the NBR has published an official notice specifying that, in the absence of a licence from the NBR, the activity of the branches of UK banks and the possibility to provide banking services cross-border in Romania ceases as of the date of a hard Brexit.
Subject to the authorisation regime briefly set out under 2.1 Authorisation to Provide Financing to a Company above, there are no other restrictions applicable to foreign lenders for providing financing to Romanian companies or consumers.
Romanian-resident borrowers must notify the NBR of any mid and long-term (more than one-year) cross-border loans, for statistical purposes.
On a general basis, except for the restrictions applicable in connection with land ownership in Romania that could affect – to a certain extent – the enforcement means available in the case of land mortgages, there are no restrictions or impediments under Romanian law regarding the granting of security that would apply to foreign lenders only; the general limitations set out under 5 Guarantees and Security apply. See also 3.3 Restrictions and Controls on Foreign Currency Exchange regarding exceptional measures that may be taken by the NBR that may also affect financing transactions.
In principle, there are no restrictions, controls or other concerns on and regarding foreign currency exchange. However, in exceptional circumstances of distress (eg, those that severely affect the monetary policy and the foreign exchange rate), the NBR is entitled to apply certain safeguarding measures, which could negatively affect the operation of certain short-term financing transactions (eg, repayments under the facility, or the appropriation of proceeds in case of enforcement).
Such safeguarding measures include the following:
As per the anti-money laundering legislation, credit institutions must report any cross-border transfers into or out of the RON or foreign currency accounts exceeding EUR15,000 (irrespective of whether the transaction is performed through a single operation or through various operations that seem to be linked) to the National Office for Prevention and Control of Money Laundering within a maximum of three business days of the transfer date.
There are no specific restrictions on the borrower’s use of proceeds from loan or debt securities, except from the contractual provisions that usually require the borrower to use such proceeds for the purpose contemplated under the relevant financing agreement. Failure by the borrower to comply with such provisions would result in an event of default, which, in the case of a loan, may trigger the acceleration of the outstanding loan and the cancellation of any available commitments.
The agent concept is recognised under the Romanian Civil Code, which expressly allows for the creation of security to the benefit of a party other than the creditor of the secured obligations in the case of security interests over movable assets. No similar recognition of the agent concept exists for security interests over immovable assets. For immovable assets, the security is typically established in favour of each lender and, to a lesser extent, in favour of a security agent, under a foreign law parallel debt and/or trust structure.
The concept of “fiducia” has been expressly regulated under Romanian law since the entry into force of the new Civil Code in 2011, and is allegedly meant to implement certain mechanics and benefits of the Anglo-Saxon trust into Romanian law. However, in practice, the Romanian “fiducia” is not used in financing transactions due to its formal and onerous regime (it requires various formalities and triggers certain tax liabilities).
Trust relationships created under a foreign legal regime would be recognised by Romanian courts subject to Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (the “Rome I Regulation”) or to the Civil Code provisions, in the case of non-EU laws. However, trust-based structures have not been tested by Romanian courts and there is no indication on what the position of such courts would be when presented with such concept, including whether such arrangements would be deemed compatible with the Romanian international public policy.
In the above context, the following structures are the most commonly used on the Romanian market:
The most commonly used loan transfer mechanisms under Romanian law are: (i) assignment of rights, (ii) assignment of contract, and (iii) novation. The particularities of each loan transfer mechanism and the effects on the associated security package are as follows:
Furthermore, where the security package is granted directly in favour of each of the lenders and not through a security agent structure (eg, in case of security packages associated with bilateral loans or in relation to mortgages over immovable assets), the perfection formalities (please see 5.1 Assets and Forms of Security) need to be updated to reflect the new secured creditors, and confirmations by the security providers are usually requested.
Debt buy-back by the borrower or debt purchase by the sponsor is permitted under Romanian law, subject to contractual documentation. In the case of debt buy-back by the borrower (ie, repayment/prepayment of the loan), any security interest over movable assets securing the loan will be terminated by operation of law, and the security interest over immovable assets will be deregistered from the relevant land book.
Debt purchase by the sponsor is permitted under Romanian law, subject to compliance with the conditions applicable to assignments of debt under the Civil Code (eg, the transfer of debt via an agreement between the old and the new debtor is subject to the creditor’s consent).
In the context of takeover transactions carried out under the Romanian law transposing the EU Takeover Directive, the offeror in the takeover bid is required to provide proof of the availability of funds representing 30% of the total value of the offer (which should be deposited and blocked in a bank account of the intermediary until the completion of the offer) or a bank guarantee covering the entire value of the bid (valid until the close of the offer). Additionally, the offer document needs to provide specific details on the source and amount of funds available for completion of the takeover offer (including the terms and conditions of loans or other types of financing). There is no requirement to make the financing documentation publicly available, although the Financial Surveillance Authority has the power (in theory) to request that additional information is published in the offer document.
The type of documentation used in acquisition finance is not necessarily driven by the “certain funds" requirement, and varies depending on the size and specifics of the transaction. While there is no official Romanian adaptation of the LMA standard documentation, lenders usually prefer LMA-type facility agreements for syndications or club-loans, and go with their internal standard documentation for bilateral loans or smaller clients. English law-governed LMA financing documentation is used in cross-border transactions with foreign lenders and Romanian components.
Payments of principal are not subject to withholding tax under Romanian law, but interest and commission fees are subject to 16% withholding tax in Romania (subject to any exemptions or reductions under any double-tax treaties in place).
Tax gross-up clauses are usually put in place in cross-border financing transactions with a borrower incorporated in Romania. The involvement of a Romanian tax consultant in the drafting of such clauses is highly recommended in light of the existing Romanian case law on matters of gross-up.
There are no stamp duties, taxes or similar charges for providing loans (or taking security and guarantees from) entities incorporated in Romania, other than the following:
In corporate finance transactions, there are no regulatory limitations applicable on interest charged to borrowers – the parties are free to contractually determine the applicable interest.
However, limitations are applicable as regards compound interest. As a rule, the interest can be calculated only on the amount borrowed; in exceptional cases, the interest can be capitalised and, therefore, generate other interest only through a special agreement concluded with this purpose, after the due date, and only for the interest owed for a minimum period of one year.
Theoretically, in certain circumstances, the court has the right to reduce the default interest (eg, when the default is manifestly excessive by reference to the damage that could have been foreseen by the parties upon the conclusion of the agreement). In practice, as far as is known, there have been no published cases where the courts ruled in favour of reducing the default interest on this basis in corporate financing transactions.
Consumer lending is subject to specific limitations as regards the calculation of the interest rate, disclosure and limitations applicable to interest rate penalties, under the legislation implementing the Consumer Credit Directive 2008/48, as amended, as well as to limitations deriving from the legislation on unfair terms, including that which transposes the Unfair Terms Directive (93/13/EEC).
Typical Assets and Security Package
The typical Romanian law security package includes the following:
Additional arrangements may be put in place, depending on the transaction and the financed assets.
Form of Security Arrangements
In terms of documentation, the movable mortgage agreements may be executed as private deeds. As an exception, mortgage agreements over aircrafts are generally executed as notarial deeds before a notary public.
Immovable mortgage agreements need to be executed in authenticated form before a notary public.
The execution of mortgage agreements in authenticated form before the notary public is subject to notarial fees, which are computed ad valorem (depending on the maximum secured amount and the number of mortgage agreements that cover the same amount).
Perfection Requirements and Other Formalities
Immovable mortgage agreements are subject to registration with the relevant land book. The land book fees are computed ad valorem by reference to the secured amount and depending also on the number of immovable assets subject to registration.
Movable mortgage agreements (which cover the shares in or the movable – tangible and intangible – assets of the Romanian entity) need to be registered with the National Register for Publicity in Movable Property. Depending on the type of assets covered by the mortgage agreement, the following additional formalities apply:
Registrations with the National Register for Publicity in Movable Property cost approximately EUR20 and are usually carried out on the same date the registration form is submitted to the relevant operator. Registrations with other public registries trigger additional costs.
Financing transactions involving oil and gas projects may involve the creation of security over industry-specific assets, including assets located outside the Romanian territory (eg, offshore), such as extracted petroleum or marine platforms and related equipment. In principle, security agreements over such assets follow the general rules outlined above, with certain limitations. Depending on the type, qualification and location of those assets, additional registration requirements may apply, triggering additional costs.
The movable mortgage agreement can generally cover all movable assets (tangible or intangible) of the mortgagor. However, a generic description of the mortgaged property in the security agreement – such as all “movable property” or “all present and future movable property” – is not satisfactory for creating the mortgage, so the description of the mortgaged property should include the content and nature of all assets included. In practice, this is achieved by including a list of all assets or the material assets of the mortgaged universality, which is updated periodically throughout the lifetime of the mortgage agreement.
Under Romanian law, if a company guarantees or secures the obligations of any other company, there must be sufficient corporate benefit in respect of such obligations for the relevant Romanian company, otherwise the rights of the secured creditors under the relevant documents may be challenged for a lack of corporate benefit/legal cause (in Romanian, cauza), and the cancellation of the relevant guarantee/security operation may be ruled by Romanian competent courts.
The existence of adequate and sufficient corporate benefit by reference to the exposure of the obligor under the guarantee/security provided is a matter of fact that should be determined by the management of the guarantor considering the best interest of the guarantor, in principle, on a standalone basis. While the management of the guarantor may assess the corporate benefit at a group level, it should be noted that Romanian law does not recognise the group benefit.
The corporate benefit of the guarantor is ultimately subject to validation by the courts and, as far as is known, has not been properly tested in front of Romanian courts. Furthermore, the guarantee is subject to potential challenges in light of the fraudulent transactions carried out during the hardening period in the insolvency of the Romanian guarantor/security provider (please see 7.5 Risk Areas for Lenders).
Theoretically, entering into guarantees where the guarantor does not derive sufficient corporate benefit might lead to criminal liability of the management of the guarantor (ie, if the conduct meets all the features of being qualified as a misuse of the guarantor’s assets). In an attempt to mitigate risks of criminal liability for the management/founders of the guarantor, including in relation to corporate benefit aspects, the financing agreement typically includes limitation language of the Romanian guarantor. However, the efficiency of the limitation language has not been tested in front of Romanian courts, as far as is known.
From a practical perspective, these issues may have the following mitigating factors:
Financial assistance is prohibited in Romania – the Romanian companies law prohibits a Romanian joint stock company from advancing funds, granting loans or creating guarantees/security interests in view of the acquisition of its own shares by third parties.
Romanian law does not contemplate any “white wash” procedure. The prohibition is expressly regulated for joint stock companies, and there are certain views based on some limited case law arguing that it should also apply to limited liability companies.
Several solutions have been discussed and used in practice to address the above issue, but have not been tested in court, such as:
In Romania, there are no significant costs associated with the grant of security or guarantees for credit or loan agreements, except for the costs related to the conclusion of the security over immovable assets (see 5.1 Assets and Forms of Security, above). No works council approval is required to grant the security or the guarantee.
Formalities on the release of security depend on the type of security that has been granted.
Security interest under immovable mortgage agreements is released by means of a release notice issued as an authenticated deed, and a release application form to be submitted to the relevant land book office.
Security interest under movable mortgage agreements is terminated by operation of law following the satisfaction of the secured obligation, and deregistration formalities are generally straightforward, typically implying a release notice issued as a private written deed and an application form to be submitted to the National Register for Publicity in Movable Property and, depending on the type of assets covered, deregistration from the shareholders’ registry, cancellation of control to the account bank, or deregistration from the other relevant public registers.
Perfected mortgages have priority over mortgages that are not perfected (please see 5.1 Assets and Forms of Security). In the case of security interests over bank accounts, the lender who has control over the bank account enjoys a right of “super-priority" over a lender that has no control over the mortgaged accounts.
As a rule, priority is given to whichever security interest is either perfected or registered first, as the case may be.
In addition to the structural priority of liabilities (secured/unsecured), contractual subordination – usually established under a subordination or intercreditor agreement – is effective between the parties to the arrangement, but may not be enforceable against third parties (including in an insolvency scenario).
As a general note, enforcement may be carried out for receivables which are certain, liquid, due and payable (in Romanian, “certa, lichida si exigibila”) and only based on writs of execution (in Romanian, “titlu executoriu”). Enforcement is carried out in accordance with the Romanian Civil Code and/or the Romanian Code of Civil Procedure, and the applicable enforcement procedures/formalities vary depending on the agreement subject to enforcement.
The enforcement of receivables originating from unsecured loans or loans secured only by personal guarantees is generally subject to the terms of the underlying facility agreement regulating the conditions of acceleration and enforcement thereof. Unless otherwise agreed in the loan agreement, acceleration of the loan is not mandatory for the start of the enforcement proceedings, with the enforcement being possible if there is an unpaid receivable that is certain, liquid, due and payable. In practice, however, the enforcement generally starts after acceleration of the loan.
No out-of-court enforcement proceedings are available, and the enforcement is carried out through an enforcement officer, with authorisation and supervision by the relevant courts in accordance with the Romanian Code of Civil Procedure.
Romanian law-governed loan agreements entered into with Romanian credit institutions and non-banking financial institutions are writs of execution by effect of the law, and no prior judicial proceedings are required to validate the acceleration of the loan (the enforcement starting only with the filing of an application for enforcement to the competent court bailiff, who must obtain the approval of the enforcement court). However, the quality of writ of execution is not recognised by the law in respect of cross-border financing based on foreign law-governed loan agreements. In such cases, before initiating any enforcement actions against a Romanian obligor, lenders would need to obtain a writ of execution in relation to the outstanding claims, either (i) by obtaining a court judgment in the relevant jurisdiction (subject to the recognition and enforcement of such foreign judgment in line with the principles set out below under 6.3 A Judgment Given by a Foreign Court) or (ii) by obtaining a European enforcement order based on the provisions of EU Regulation no. 805/2004.
There are no particular enforcement procedures for guarantee agreements; the above comments in relation to the enforcement of loan agreements are equally applicable to guarantee agreements.
Romanian law-governed mortgage agreements are writs of execution by the effect of the law. Therefore, subject to the secured claims being certain, liquid, due and payable, the enforcement can be initiated based only on the mortgage agreement, without it being necessary to obtain a writ of execution in respect of the principal documents originating the main claims. The relevant Romanian legal provisions on this topic are not fully correlated, which for a while generated significant uncertainty in connection with the enforcement conditions applicable in the enforcement of claims generated under foreign law-governed loan agreements secured with Romanian law mortgages, but this uncertainty was clarified in 2017 by the Romanian High Court of Justice in favour of the creditors – it being specified that such an enforcement may be based on the mortgage agreement as a writ of execution, without the need to obtain an additional writ of execution in relation to the foreign law-governed loan agreement.
The enforcement of immovable mortgages is a judicial procedure governed by the Romanian Code of Civil Procedure. No out-of-court enforcement procedures are available in connection with such types of mortgages, and the enforcement may only be carried out through an enforcement officer and authorisation and supervision by the competent courts.
Generally, the enforcement of immovable mortgages can be achieved through either an amicable sale (performed by the debtor himself), a direct sale (performed by the court bailiff), or a public auction sale. If there are several real estate assets, separate public auctions will be organised for each real estate asset.
The enforcement of movable mortgages may be carried out though either a judicial procedure under the Romanian Code of Civil Procedure, or out-of-out court procedures under the Romanian Civil Code, with limited involvement of the courts and enforcement officers, where most of the enforcement actions are carried out by the creditors themselves.
Depending on the class of assets subject to the movable mortgage agreements, the usual enforcement methods include:
Restrictions to consider in relation to enforcement proceedings depend on the structure that is used in relation to the holding of the Romanian law security package.
In the case of syndicated lending-related enforcement proceedings, some limitations may be related to the need to involve all secured parties in the enforcement process, despite the use of security agent structures. In consideration of some unclear legal provisions in the Romanian Code of Civil Procedure in connection with the prohibition of representation by legal entities of other legal entities in court proceedings, such limitations may trigger a need for the various formalities required in the enforcement process to also be carried out with the signature of or based on specific powers of attorney being issued by all such secured parties.
The choice of foreign law to govern a contract would be a recognised as a valid and binding choice of law by the Romania courts, subject to the provisions of Rome I Regulation No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations.
Also, according to the Romanian Civil Code, in general, parties may mutually choose the law governing their contractual relationship, provided a ‘foreign’ law element (in Romanian “element de extraneitate”) can be identified in the relevant contractual arrangement. However, the governing law chosen by the parties will not be applicable if such law provides regulations that are contrary to the Romanian mandatory laws on international private law, or was chosen or became applicable by fraud.
Unfortunately, there is still uncertainty in connection with the scope of the Romanian concept of international public policy relevant on matters of credit and security agreements. The Romanian Civil Code provides that the implementation of the foreign law shall be deemed contrary to the Romanian international private law public policy if it triggers an outcome that is “incompatible with the fundamental principles of the Romanian law or the EU law and with the fundamental human rights.” While international public policy is clearly regarded as being narrower in scope and content than public policy as applied in domestic matters, and has not been used in commercial case law other than exceptionally, its scope and content are not precisely or exhaustively defined under Romanian law, and are determined by Romanian courts on a case-by-case basis, taking the precise circumstances of each case into account.
The submission to the jurisdiction of a foreign court by a Romanian company would be a valid consent to the jurisdiction of that court, subject to the terms of Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the “Brussels I Regulation”) and the Romanian Civil Code of Procedure.
It is recommendable for the relevant governing law and jurisdiction clauses in the finance documents to be explicitly accepted by the Romanian obligors in order to limit the risks of potential challenges by such obligors in connection with their consent thereto, mainly by reference to Article 10 of the Rome I Regulation.
Romanian courts would recognise and enforce a judgment given by an EU court against a Romanian company in accordance with and subject to the terms of the Brussels I Regulation and the Romanian Civil Code of Procedure.
Romania is also a party to the Lugano Convention on the jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, signed in 2007 and in force since 1 January 2010, and the recognition and enforcement of judgments given by foreign courts from non-EU Member State parties to the Lugano Convention shall be made subject to and in accordance with the terms of the Lugano Convention.
Judgments rendered by other non-EU courts against a Romanian company would be recognised and enforced by Romania courts without any retrial or re-examination of the merits of the underlying claim in accordance with and subject to the terms of the Romanian Code of Civil Procedure in the following circumstances:
Such judgments may not be recognised and enforced if:
Regarding foreign arbitral awards, Romania has been a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards since 1961.
Because the finance documents in cross-border secured finance transactions with foreign lenders are usually in the English language, any such finance document would need to be translated into Romanian by a sworn Romanian translator (and must include such translator’s statement that the translation is true and correct), and such translator’s signature must be legalised by a notary public, in order to be filed with the Romanian enforcement officer and/or courts. Therefore, in order to avoid potential delays during enforcement, it is generally recommended that the secured lenders prepare such notarised Romanian translations of the finance documents prior to initiating the enforcement proceedings.
Also, since Romanian courts are not generally familiar with complex financing structures, significant matters in a financing context such as corporate benefit for individual obligors in the context of multi-obligor financing structures and the use of security agent structures have not yet been tested in front of Romanian courts, and should be carefully considered in the finance documentation. Additional complexities may appear in these scenarios in the case of challenges to the enforcement procedures, and also in connection with the proof of the applicable foreign law governing the main finance documents.
Under Romanian law, enforcement proceedings are suspended upon the commencement of insolvency proceedings, so secured lenders should also consider a potential application for insolvency of the relevant Romanian obligors once they start any sort of enforcement procedures, with such procedures being relative straightforward in Romania and sometimes used abusively by companies aiming to protect themselves against enforcement.
There are two rescue or reorganisation procedures outside of insolvency proceedings in Romania, available only to debtors undergoing financial difficulties (creditors are not able to propose them): the ad hoc mandate (Mandat ad-hoc) and the preventive concordat (Concordat preventiv). The ad hoc mandate is a confidential procedure initiated at the request of the debtor, and involves the appointment by the court of an ad hoc agent to reach an understanding between the debtor and one or more of its creditors. However, this procedure has a major downside, since it does not protect the debtor undergoing financing difficulties from enforcement actions. The preventive concordat is a court procedure allowing a debtor undergoing financial difficulties (which, although performing outstanding obligations, has a reduced liquidity level on the short term and/or a high long-term indebtedness level) to propose a recovery plan with the support of a court-appointed professional, subject to its acceptance by creditors holding 75% of accepted and uncontested claims, and ratification by the court.
However, such procedures are rarely used in practice. An improvement of the applicable Romanian legal framework regulating the pre-insolvency options available for the rescue of a company facing financial difficulties is expected in the context of the European developments in connection with the amendment of European directive 2012/30/UE.
As a general rule, the opening of insolvency proceedings against a company suspends all judicial and extrajudicial procedures or enforcement measures started by creditors against the insolvent company and its assets, and claims against the insolvent company can be pursued only within the insolvency procedure. However, the opening of such a procedure does not suspend any enforcement actions against third-party guarantors or security providers.
From a theoretical perspective, secured lenders may request the syndic judge to lift the stay of the enforcement proceedings and allow the sale of the mortgaged assets subject to their security package, subject to a number of cumulative conditions being met, essentially aimed at ensuring the necessary resources for the continuance of the insolvent company’s activity. In practice, however, syndic judges rarely agree to such requests, arguing mainly that the relevant collateral is essential for the pursuit of the debtor’s reorganisation.
Lenders secured with cash collaterals or mortgages over bank accounts are entitled to request the judicial administrator or the bankruptcy trustee (in the case of bankruptcy) to release for their benefit the amounts held in such accounts mortgaged in their favour. However, the judicial administrator/bankruptcy trustee may refuse to give effect to such request and use the respective funds, subject to the syndic judge's authorisation, and to grant the secured lenders adequate protection.
The opening of insolvency proceedings also triggers the freezing of the accrual of interest, default interest, penalties or any other amount whatsoever that can be added to the debts that have arisen before the commencement of the insolvency procedure (except when the asset subject to security interest is sold at a value higher than the secured claim registered in the table of claims based on the appraisal of the collateral, in which case the ancillary rights will continue to accrue up to the date the collateral is sold, and will be covered from the sale proceeds).
In the liquidation of the insolvent (bankrupt) company's assets, the secured lenders will be preferred in the distribution of the proceeds obtained from the sale of the assets covered by their security package, subject to the following claims first being satisfied:
In the claims of secured lenders exceeding the value of the collateral, the secured lenders will be deemed unsecured. The payment of such unsecured claims will be made in an insolvency/bankruptcy procedure in the following order of priority:
Claims under shareholder loans by shareholders that own at least 10% of the insolvent company’s share capital or voting rights in the general meeting of shareholders qualify as subordinated claims under Romanian insolvency law and rank below all the other unsecured claims (except claims under free of charge acts, with the latter category also being deemed subordinated claims under the insolvency law).
In addition to the risks set out under 7.2 Impact of Insolvency Processes, the fraudulent transfers provisions under the Romanian insolvency law should also be considered. Pursuant to these provisions, the judicial administrator is entitled to challenge the guarantee/security interests granted by the insolvent company during a two-year period before the opening of the insolvency procedure if, inter alia, the purpose of the transactions was to conceal assets from creditors or otherwise prejudice their rights, or the company receives a consideration of significantly less value than the value provided by the other party.
Unfortunately, the relevant legal provisions in the Romanian insolvency law allowing a challenge by the judicial administrator/bankruptcy trustee of such operations entered into by the insolvent debtor within a two-year period before the opening of the insolvency proceedings are rather broadly and vaguely worded, and give the judicial administrator/bankruptcy trustee a certain discretion in filing annulment actions. Therefore, secured lenders should carefully consider the relevant legal provisions in the Romanian insolvency law when structuring the security package, in order to mitigate such risks.
Another risk resulting from lenders in connection with the opening of insolvency proceedings against Romanian obligors is related to the fact that clauses under facilities agreements pursuant to which the opening of insolvency proceedings against the borrower triggers the acceleration of the loan are null and void under Romanian law.
Other risks should also be considered, depending on the specificities of the security structure and package (eg, there may be complex discussions with the judicial administrator/bankruptcy trustee in connection with the registration of the receivables in the table of creditors in the case of legal structures using the security agent concept; the appointment of the final judicial administrator/bankruptcy trustee is key in ensuring the fair protection of creditors’ interest in the procedure; and the appointment of the appraiser should be carefully scrutinised by the secured creditors, with the value of their secured claims depending on the value of the collateral in the appraisal report put together in the procedure).
Finally, the remarks under 6.4 A Foreign Lender’s Ability to Enforce Its Rights are equally applicable in insolvency proceedings.
Project finance transactions made their debut in Romania in the first part of the last decade and were still in their infancy when the 2008 financial crisis hit. While Romanian credit institutions were relatively open to such structures for projects meeting certain criteria, unfortunately, not many successful project finance transactions were implemented on the Romanian market. The relatively low number of project finance transactions were mainly focused on the real estate, transportation and renewables sectors.
Such structures are not based on a specific legal framework, but rely on the general regulations governing professional credit activity in Romania.
Project finance under the form of public-private partnerships is subject to a special regulation, as approved by Government Emergency Ordinance no. 39/2018. Despite multiple attempts and updates to the PPP regime in Romania in the past (for further details on the special legal framework governing public-private partnerships in Romania, please see 8.2 Overview of Public-Private Partnership Transactions below), purely PPP transactions actually implemented on the Romanian market are also very rare, mainly due to the multiple shortcomings of the various sets of laws enacted on this topic. Circumstances are likely to change in the near future, as the initiation of PPP transactions in high-priority sectors is part of the official Governmental agenda, and the legal regime currently in force seems to be in line with the international practices on such matters on most of the important topics.
The Romanian Government has approved a list of PPP-dedicated strategic projects (principally in infrastructure and healthcare) proposed to be developed in the near future, and competitive procedures for the implementation of such projects are expected in the following years.
In general terms, under Romanian law public-private partnership transactions may be structured under either Government Emergency Ordinance no. 39/2018 on public-private partnerships (the “PPP GEO”) or Law no. 100/2016 on works and services concessions (the “Concessions Law”).
The PPP GEO (the legal enactment dedicated to public-private partnerships since 2002) is the dedicated legal framework for such projects and is deemed to be better than the previous legal regimes, offering a balanced and flexible legal framework for their implementation, in line with international best practices on this type of project. The residual weaknesses of the recently enacted legal framework include the treatment of the resulting liabilities as off-balance sheet liabilities (not yet achieved based on the discussions with EUROSTAT, and still depending on future legal amendments) and the need for professionals in the public sector who are knowledgeable in project finance as an essential condition of successful public-private partnerships implemented in Romania.
Under the PPP GEO, PPP projects are to be carried out by means of a project company that is owned entirely by the private partner (contractual PPP) or co-owned by the private partner and the public partner (institutional PPP). A condition for the applicability of the PPP GEO is that more than half of the revenue to be obtained by the project company should derive from payments of the public partner or other public entities, while the intervention of such public entities during the project construction/investment phase should be limited to a maximum of 25% of the project costs.
An essential condition for the success of a PPP under the PPP GEO is a very well-prepared feasibility study (a document that has to be carried out by the public partner and approved by the Government or local authorities, as applicable, prior to initiating the public procurement for the award of the PPP), which has to establish the project's bankability, provide for the intervention of third party public entities assuming payment obligations, and contemplate the main elements of the PPP contract, among other matters.
In terms of the bankability of the PPP project, the PPP GEO allows the private partner/project company to grant a security interest over the rights and receivables under the PPP agreement, and over the shares in the project company (although attention should be paid to the contractual clauses in the PPP agreement regarding the effects of the early termination of the PPP contract on the security package). Financiers may also benefit from guarantees or other obligations granted/assumed by the public partner (if such were provided for in the feasibility study). Additionally, failure by the private partner to comply with its obligations towards the financiers under the financing arrangements may theoretically trigger replacement of the private partner under the PPP agreement (if this is specifically set out under the PPP agreement).
There are no specific government approvals, taxes, fees or other charges specific to project finance transactions. However, underlying projects in regulated sectors (such as mining, energy or healthcare) may require approvals or certain formalities (including permitting/authorisations) before ministries or governmental agencies (for the oil and gas, power and mining sectors, please see 8.7 The Acquisition and Export of Natural Resources) and regulatory compliance. Real estate projects have a specific component of permitting (eg, building permits, urbanism certificates and ancillary endorsements) and require compliance with planning and zonal laws. For PPP projects, the remarks under 8.2 Overview of Public-Private Partnership Transactions apply.
Other than the relevant perfection formalities described under 5.1 Assets and Forms of Security and the specific formalities related to the award of a PPP contract in line with the European public procurement rules, transaction documents do not need to be filed with governmental bodies.
As concerns the governing law, while Romanian law governs the financing documentation in purely domestic project finance transactions, English law usually applies in cross-border project finance transactions. Security documents over Romanian located/registered assets (including receivables under Romanian law-governed contracts/insurance policies or bank accounts with Romanian banks) are governed by Romanian law.
The main pieces of legislation on oil and gas exploration and production are as follows:
The main piece of legislation regulating the power sector and midstream to downstream gas operations and markets is the Electricity and Natural Gas Law No. 123/2012, while Mining Law no. 85/2003 regulates the mining sector, with their implementation regulations.
The main regulatory bodies for the oil, gas, power and mining sectors are, among others, as follows:
Certain other regulatory authorities may have authority to issue permits in relation to various specific operations, including:
The typical issues that need to be addressed when structuring a project finance deal relate to the technical feasibility of the project as well as its economic viability, with the role of technical experts and consultants being crucial.
From a legal perspective, project financing documentation follows the usual general regime, restrictions and limitations as regards financing and security interest in Romania.
The project company is usually incorporated as a limited liability company, which allows sole shareholding and provides larger flexibility in terms of corporate governance as compared to a joint stock company.
The typical funding source for project financing is debt financing by means of bilateral or club/syndicated loans. Usual financiers include local banks and international finance institutions, such as the International Finance Corporation, the European Bank for Reconstruction and Development or the European Investment Bank. In a lack of large-scale projects (which translates into less interest from international lenders) and an underdeveloped loan secondary market, large syndicated financings are not the rule. Project financing usually consists of making different type of facilities available (eg, term loans, working capital, letter of guarantees, VAT financings), and the terms of facilities may vary depending on the phase of the project (development and/or operation). Security is generally taken over the shares in the project company together with all the assets of the project company (eg, financed assets, real estate, bank accounts and receivables).
Project bonds are not a common source of funding in project financings, but several bond issues have been carried out by active real estate developers in Romania in past years for financing their development and investment plans.
Occasionally in some projects, financing from foreign credit export agencies is also implemented in Romanian project finance transactions.
Similar to other jurisdictions, natural resources (mineral resources, oil and gas) in Romania are subject to the public ownership of the Romanian state, and the exploitation thereof can only be carried out under a concession agreement awarded by the National Agency for Mineral Resources, based on either the Petroleum Law or the Mining Law. Title holders may transfer their rights in connection with the concession agreement under farm-out agreements only with the prior approval of the National Agency for Mineral Resources.
Romanian law provides for equal treatment of private local and foreign investors applying to obtain concession rights in relation to mineral resources. However, foreign investors are required to incorporate a local subsidiary if they are awarded a mining/oil and gas concession.
There are no restrictions on the sale and export of processed mineral resources. Title holders under relevant concession agreements and, under certain conditions, companies that process or transport crude oil, gasoline, diesel or liquid ethane are authorised to sell and trade (including export) such products. However, generally, traders of oil and petroleum products need to obtain a trade certificate issued by the Ministry of Finance through its regional custom offices.
On the other hand, the wholesale and retail sale of natural gas may be carried out only by holders of natural gas supply licences issued by ANRE. There are also additional restrictions brought by a relatively recent legal enactment (Government Emergency Ordinance 114/2018 as subsequently amended in March 2019), as follows:
Based on a draft law in public consultation aiming to amend the Offshore Law, it is contemplated that the aforementioned restrictions will be removed in connection with offshore gas producers.
The main environmental laws that apply to projects are as follows:
The main environmental regulators and supervisors are the Ministry of Environment, Waters and Forests, the National Environmental Protection Agency and their local divisions.
Concerning health and safety, Law no. 319/2006 regarding work health and safety is the main piece of legislation covering all industries. The main regulatory body is the Ministry of Labour and Social Justice. Additional regulations and regulatory supervisory bodies may be relevant depending on the project – eg, in offshore oil and gas operations, Law 165/2016 on the safety of offshore petroleum operations transposing Directive 2013/30/EU offshore oil and gas operations and the Competent Regulatory Authority for Black Sea Petroleum Offshore Operations as supervisory authority.
No Islamic finance transaction has yet been implemented in Romania, and there is no specific policy in place for this type of financing.
There is no specific regulatory or tax framework in Romania for Islamic finance and, as far as is known, there are no expected developments in this regard. Islamic finance transactions will therefore be subject to the general legal framework that applies to all finance transactions.
No Shari'a-compliant products are used in Romania.
Since no Sukuk issuances have been carried out in Romania, there is no judicial precedent on the treatment claims of sukuk holders in insolvency, and there is no regulatory guidance in this regard.
There have not been any notable cases on jurisdictional issues, the applicability of Shari'a or the conflict of Shari'a and local law that are relevant to the banking and finance sector.