The COVID-19 pandemic has had a brutal effect and has dramatically changed trends and the regulatory environment.
The European Central Bank and the Bank of Portugal approved exceptional regulatory measures in order to allow for the credit moratorium regimes that enabled companies and individuals to suspend bank loan payments.
In terms of trends, there was disruption to the real estate loan market in the first three quarters of 2020 and the market started to recover by the end of 2020 and is now going back to normality with transactions on sectors severally impact by COVID-19 pandemic (eg, the hotel sector).
The Portuguese loan market has been affected by the economic crisis triggered by the COVID-19 pandemic, particularly in two ways:
On moratoriums, the following legal boundaries are applicable until 30 September 2021:
Other measures that indirectly impact the loan market are:
After a first initial hit of the high-yield market has a result of the Covid-19 pandemic, the market accelerated significantly as a result of the measures adopted by the European Central Bank and the FED. The primary markets for corporate bonds accelerated significantly in March 2020 following the introduction of monetary policy measures and the total issuance of new bonds increased 66.8% in the USA and 16.4% in the European Area.
Further to the positive impact in the primary market, the liquidity measures adopted by the Central Banks improved the conditions of the secondary market for high-yield bonds. On the one hand, they contributed to a reduction in costs of market funding. On the other hand, they restored liquidity to the market (indirectly restoring liquidity to the primary market). Moreover, and by stimulating bank credit, Central Banks indirectly affect the demand for high-yield bond in the secondary market.
Alternative credit-providers have not seen any significant growth because credit activity is a regulated activity in Portugal. This limits substantially the activity of alternative credit-providers, such as funds, which can only grant loans in specific situations – eg, loans granted by a certain type of investment fund (ie, venture capital funds) to SMEs.
The Portuguese Securities Market Commission (CMVM) regulates the activity of loan funds, amending the requirements to be met from a prudential and behavioural perspective. Loan funds are considered AIFs and benefit from an express banking monopoly rules exemption, thereby expressly allowing them to perform direct lending. These funds can grant credits (loan origination) and participate in loans acquired from the credit’s originator or from third parties (loan participation).
Despite the limitations previously referred to, there has been some development and growth of financing through crowd-funding, new digital platforms and loan funds.
This growth has been boosted by legislation specifically applicable to this activity (see 1.6 Legal, Tax, Regulatory or Other Developments).
Banking and finance techniques have been evolving in Portugal, mainly in debt secondary markets and the restructuring sector, or have been driven by regulatory requirements. On 2020, the major changes result from COVID-19 measures and the EU Taxonomy Regulation, ie, Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment. Further legislation changes are expected to MiFID II, UCITS and AIFMD as a result of the Taxonomy Regulation.
Given the economic crisis arising from the COVID-19 pandemic, banks will again face challenges with future non-performing loans (NPLs), which are likely to increase significantly, especially at the end of both public and private moratoriums.
The ESG and sustainability-linked lending has been growing significantly and this was one of the most active markets last year. There were ESG linked loans and green bond issuances made by several relevant market players from different industries such as utilities, power grid operators, telecom operators or food retail companies.
In terms of legislation, the trends have been driven mainly by the European Commission with the approval the Taxonomy Regulation and implementing and delegated acts. In turn, the Portuguese government has passed legislation:
The granting of loans or other financing, which includes factoring, financial leasing and granting of guarantees, on a professional basis, is a regulated activity. Non-banks are, in principle, not authorised to provide financing to a company organised in Portugal, unless they incorporate one of the relevant credit institutions or financial companies authorised by the regulator to exercise such activity.
EU-domiciled banks may benefit from the EU passport established in the CRD IV and may be registered with the Bank of Portugal to carry out credit activity, enjoying the freedom to provide services on a cross-border basis without any local presence in Portugal.
This registration is made by a notification made in the home country indicating the activities that the entity wants to render in Portugal, which is then sent by that entity to the Bank of Portugal to make the respective registration. After such a notification, the credit institution or financial company may start providing its services in Portugal under the EU passport.
However, a non-EU-domiciled entity is only allowed to carry out banking activities in Portugal through the set-up of a branch or the incorporation of a subsidiary, both subject to specific authorisation procedures with the Bank of Portugal.
The Portuguese Legislator has expressly established the reverse solicitation principle or passive marketing rule, in the case of the provision of services by a non-EU-domiciled entity on the sole initiative of the client. According to the reverse solicitation principle or passive marketing rule, a Portuguese domiciled client directly contacts the non-EU-domiciled entity and requests a determined banking service on its own and exclusive initiative without any prior solicitation and marketing of such service by the entity, and thus the aforementioned registration/authorisation with the Bank of Portugal will not be required.
Only credit institutions and financial companies previously registered with the Bank of Portugal can engage, on a professional basis, in activity related to credit operations, including the granting of guarantees and other commitments, financial leasing and factoring.
However, if the credit operation is an isolated transaction and there is no further transaction in the future, one can be sure that it is not an exercise of a credit activity on a professional basis.
Additionally, the aforementioned registration/authorisation with the Bank of Portugal will not be required to the extent that, in respect of a specific transaction, the transaction is carried out pursuant to the aforementioned reverse-solicitation rule, now consecrated in the Legal Framework of Credit Institutions and Financial Companies.
An alternative method to raise financing is the issuance of bonds integrated in a Portuguese clearing system, given that it is not qualified as a credit activity for regulatory purposes and has a favourable tax regime.
The granting of security or guarantees is not restricted in terms of credit activity. However, there are relevant corporate limitations on the granting of security or guarantees.
Under the Portuguese Companies Code (PCC), companies can only grant guarantees or security in favour of third parties, provided that they:
A “control relationship” is defined as the relationship between Portuguese companies where one has, directly or indirectly, a dominant influence over the other. Such influence is presumed to exist whenever one of the companies, as regards the other, directly or indirectly:
However, two or more Portuguese companies will be in a “group relationship” whenever:
Furthermore, the PCC includes a prohibition on financial assistance and therefore guarantees or security granted by Portuguese companies cannot guarantee obligations related to financing incurred for the acquisition of either the shares representing the share capital of the guarantor or the shares representing the share capital of its direct or indirect parent company. Any such guarantees or security would be deemed null and void and trigger both civil and criminal liability of the directors of the target company.
For tax reasons, the secured obligations are typically limited to an agreed maximum amount, which is linked to the value of the asset being encumbered or to the intrinsic value of the Portuguese target or subsidiary company.
There are no restrictions or controls regarding foreign currency exchange and there is no limitation on the expatriation of dividends or investments abroad. Nonetheless, reporting obligations to the Bank of Portugal apply in respect of certain finance transactions and there are the standard Anti Money Laundering (AML) rules.
Apart from those mentioned above, there are no restrictions on the borrower’s use of proceeds from loans or debt securities. However, it should be noted that it is market practice to set out contractually that the capital granted to the borrower may not be used for any purpose other than the purpose established in the facility agreement.
Portuguese law does not recognise the concept of parallel debt or of trusteeship, except for a very specific regime in the Madeira Free Trade Zone. Therefore, the beneficiary of the security needs to have a valid underlying obligation duly secured by the security and, accordingly, the lenders need to be registered as holders of the security with the competent registry office.
Typically, the security agreement and/or indenture, as well as the inter-creditor agreement, provide that only the security agent has the right to enforce the security documents in its capacity as agent and also as joint and several creditor, thus being the only entity registered as beneficiary of the security and the entity entitled to enforce the security.
Accordingly, the guarantee or security is usually enforced by the security agent after the occurrence of an event of default and following instructions from the lenders in accordance with the provisions of the inter-creditor agreement, the security agreement and/or any other agreement.
Alternatively, the banks may request to have the security registered in their own name to have the ability to enforce it directly.
Loans can be transferred through an assignment of credits or by way of an assignment of contractual position.
Usually, parties prefer the assignment of credits’ mechanism, which, contrary to the assignment of contractual position, does not require the consent of the borrower. There can be limitations established for the assignment, namely, related to tax (given that foreign lenders may be more expensive in terms of taxation if there is a gross-up obligation) and regulatory issues.
The assignment is made by private contract between the assignor and the assignee and entails the transfer of the security package associated with it. Should the security comprise mortgages, a public deed or private document with recognition of signatures is required as a formality for the transfer. Further steps for the transfer may be required, depending on the type of security, namely, registration with the real estate registry office in the case of mortgages, registration with the bank in the case of pledges over bank accounts or registration with the commercial registry in the case of pledges over quotas.
A debt buy-back by the borrower is typically not allowed, as it may trigger a subordination of the debt in the case of insolvency. Alternatively, and in order to overcome this limitation, the borrower is usually entitled to early repay the loan partially or in full.
There are no specific rules regarding “certain funds” similar to those in the City Code on Takeovers and Mergers.
An offeror in a takeover bid is only required to have the funds deposited or to present a bank guarantee for payment when applying for the registration of the takeover bid with the CMVM. There can be debt financing for the consideration of the offer, but such financing will always need to take the final format of a bank guarantee or a deposit in favour of the shareholders of the target company. Thus, in such cases, there will need to be a direct commitment of the lenders towards those shareholders.
Additionally, when a public takeover bid is at stake, there will usually be a financial intermediary who will co-ordinate all relevant arrangements for the financing of the offer with the offeror. Considering the above, “certain funds” provisions are not very common in public acquisition finance transactions.
Under Portuguese Corporate Income Tax (CIT) rules, interest owed by Portuguese residents to non-resident entities is liable to final withholding tax herein, at the domestic rate of 25%, over the interest gross amount.
The domestic withholding tax rate may, however, be reduced pursuant to the provisions of a double taxation agreement concluded between Portugal and the country of residence of the lender, typically to 10% or 15%.
Notwithstanding, interest derived from loans granted by non-resident financial institutions to resident credit institutions are exempt from withholding tax to the extent that the interest is not allocated to a local permanent establishment of the non-resident creditor. However, this exemption is not applicable if:
Non-residents may also benefit from withholding tax exemption on interest derived from listed bonds, pursuant to the regime set forth in Decree Law No 193/2005, as amended (which also provides for capital gains' exemption upon disposal of the bonds). See 4.2 Other Taxes, Duties, Charges or Tax Considerations for stamp duty on issues of bonds.
In summary, and to the extent that the necessary requirements regarding the beneficiaries (ie, bond-holders) are met, no withholding tax applies over the interest, to the extent that all the necessary formalities are duly fulfilled, namely, proof of the non-residence status of the beneficiaries and the required data regarding the debt securities and the beneficiaries.
The bonds must be integrated in a centralised system managed by an entity resident for tax purposes in Portugal (ie, Interbolsa), or an international clearing system managing entity established in another EU member state (ie, Euroclear and Clearstream Luxembourg) or in an EEA member state, provided it is bound by an administrative co-operation in tax matters similar to the one established within the EU or integrated in other centralised systems. In this last case, the competent government member must authorise the application of the special tax regime.
The Court of Justice of the European Union found that the Portuguese domestic CIT rules imposing withholding tax over interest obtained by non-residents are in breach of EU Law, considering that the withholding is imposed on the gross amount of the interest, whereas resident financial institutions are (only) taxed on their net income (decision of 13 July 2016, on Brisal – Auto Estradas do Litoral SA, KBC Finance Ireland v Fazenda Publica – Case C-18/15). Although it was expected that this decision would determine tax rules, that has not been the case so far.
The reimbursement of the principal and other payments to the lender are not liable to Portuguese withholding tax.
Value-Added Tax (VAT)
Financial transactions are, as a rule, exempt from VAT under domestic VAT law. This exemption covers notably the granting and negotiation of credit, the respective administration and management by the entity granting the credit, the negotiation and granting of security and guarantees, and transactions (including negotiation) related to the deposit of funds, current accounts, payments, transfers, collection and cheques.
The VAT treatment of bank commissions and fees is determined on a case-by-case basis, depending on their actual features, although those commissions corresponding to the transactions referred to above will be in principle VAT-exempt.
Conversely, other commissions or fees charged by the banks – eg, for consultancy, certain structuring and settlement services – are in principle out of the scope of the referred exemption, hence liable to VAT taxation. Where these fees are charged by non-resident banks to Portuguese VAT taxpayers, Portuguese VAT will apply by means of the “reverse charge mechanism”.
Financial transactions subject to but exempt from VAT are subject to stamp duty.
Portuguese stamp duty is due on a list of specified taxable events when deemed as occurring in Portugal, including several transactions, contracts, acts and documents, as outlined in the stamp duty chart, including financial transactions. However, no stamp duty is levied over transactions subject to and not exempt from VAT – eg, certain services provided by banks, as referred to above.
The granting of credit is liable to stamp duty, levied over the principal at rates that vary upon the term during which the credit is used as follows:
The extension of the term of the contract is considered as a new granting of credit, hence raising additional taxation – stamp duty is borne by the borrower. No stamp duty, however, applies in the case of funding obtained through the issue of bonds over the principal or interest (see taxation of interest below).
The granting of security is also subject to stamp duty whenever it is:
Stamp duty is borne by the entity required to present the guarantee (ie, the debtor). Accordingly, security granted in the context of a loan agreement tends not to be subject to stamp duty, as the use of credit under the loan agreement will itself be subject to taxation – provided that (a) and (b) above are met – such as in the case where a Portuguese company borrows funds from a non-resident bank. In the case of issuance of bonds, the security granted for the benefit of the relevant bondholders may trigger Portuguese stamp duty.
When due, the stamp duty taxable basis is the value of the underlying security (ie, maximum secured amount), which is the effective tax rate, dependent on the applicable term, as follows:
In the case of transactions carried out by or with the intermediation of credit institutions, financing companies or other entities legally equated to them, or any other financial institutions, interest is also liable to stamp duty over the respective amount at a rate of 4%, as well as commissions and other bank fees over the respective amount at a rate of 3% (commissions for guarantees), or 4% (other commissions and fees for financial services).
As outlined above, no stamp duty is levied over operations subject to and not exempt from VAT – eg, those bank commissions subject and not exempt from VAT.
Notwithstanding the above, an exemption applies to interest and commissions charged, security granted, as well as to the use of credit granted by credit institutions, financial companies and financial institutions to venture capital companies, and in addition to companies or entities the form and object of which corresponds to those of credit institutions, financial companies, financial institutions as provided in EU Law, both domiciled in the EU member states or in other states, with the exception of jurisdictions with a more favourable tax regime as defined by Ordinance No 150/2004 of the Ministry of Finance (as amended).
Apart from the criminal framework, there are two main legal regimes regarding usury:
In relation to the first, the Portuguese Civil Code (CC) states that any loan agreement stipulating an annual interest that exceeds the legal interest, plus 3% or 5% (depending on whether there is an in rem guarantee or not), is always deemed a usurious agreement. Additionally, whenever the interest rate exceeds the referred-to threshold, the interest rate shall be considered reduced to that maximum threshold (currently 4% or 7% for civil or commercial contracts).
The CC also establishes a generic prohibition whereby an agreement is void as a result of usury when someone, exploiting a situation of need, inexperience, dependence, mental state or weakness of character of others, obtains the promise or granting of excessive or unjustified benefits.
Credit between Credit Institutions and Consumers
Decree Law No 133/2009 on consumer credit between credit institutions and consumers (DL 133/2009), considers an agreement to be usurious whenever the overall effective annual rate (TAEG) at the time of the conclusion of the agreement:
Additionally, the following credit agreements are considered usurious:
Any interest rate above the threshold established by law is automatically reduced to half of the stated maximum limit, without prejudice to any criminal and/or administrative liability.
DL 133/2009 is not applicable, among others, to:
It is worth noting that the Decree-Law No 58/2013 limits the default interest rate to 3%.
The typical Portuguese collateral package includes:
Security over real estate assets is less frequent, except on project finance or real estate transactions or where real estate is the key asset of the guarantor/ financed company. In certain specific financing transactions (such as vessel financing and aircraft financing), security is taken over the financed assets, in this case mortgages over the vessel or the aircraft.
If the requirements are met, the lenders will use the financial collateral regime, such as bank account pledges or share security.
Formalities vary significantly according to the type of security.
In terms of documentation, mortgages over properties and banking pledges require a public deed or a document with a term of authentication of the notary. Conversely, bank account pledges and share pledges require only a simple private document, except for commercial pledges with appropriation. For certain types of security, public deeds or notarial term of authentication are usually recommended in order to serve as judicial enforcement titles.
As for possessory or other similar actions, the creation of pledges over the movable assets requires the delivery of the asset to the creditor (except if the pledge at stake is a banking pledge). Assignments of receivables and pledges over credits require a notice of the assignment or the pledge to the respective debtors.
The most relevant costs arise from taxation, as notarial costs are usually not material.
The registration requirements also vary with the type of security at stake.
Pledges over bank accounts require a registration with the bank with which the account is held.
Pledges over shares are:
Pledges over quotas are subject to registration with the commercial registry.
Mortgages over properties or registrable movable assets – such as aircraft, vessels, vehicles – are subject to registration with the competent registry office (real estate or other).
Registration costs are also not material.
It is not possible to grant a floating charge or any other universal or similar security interest over all present and future assets of a company. Security is granted over specific assets, which need to be identified. Security over future assets can be granted to the extent that they are identifiable, although there are further limitations depending on the type of security. However, some authors have recently argued the admissibility, even if in a limited way, of floating charges.
Under the PCC, downstream, upstream and cross-stream guarantees are allowed, provided that certain requirements are met. However, a few scholars have argued that in cases in which there is only a dominant influence (capable of originating a “de facto group”), upstream guarantees are not allowed, considering the legal lack of protection of the controlled company.
As previously mentioned, Portuguese companies shall have a justified corporate self-interest in granting guarantees or security in favour of third parties or otherwise be in a group or control relationship with the beneficiaries (see 3.2 Restrictions on Foreign Lenders Granting Security).
Usually, cross-guarantees cannot fulfil the requirement of the group or control relationship. As such, they need to meet the requirement of the justified corporate interest, otherwise they will be null and void.
The PCC provides for a prohibition of financial assistance. The target company is prohibited from granting any type of guarantees or security or any other type of funding in respect of any financing for the purposes of acquiring shares in the target company or in its direct or indirect parent company. This shall also include any guarantees or security for the refinancing of a previous debt incurred in the acquisition of shares of the target company or its parent company.
Breach of the financial assistance prohibition renders the respective guarantees, security, financing or funding made by the target company null and void. In addition, directors may incur civil and criminal liability. For this reason, it is common to include guarantee-limitation language in a guarantee or security agreement.
The parties usually agree, for tax reasons, to limit the maximum amount secured by the guarantees or security in order to limit the impact of stamp duty that is due in connection therewith (see 4.2 Other Taxes, Duties, Charges or Tax Considerations).
In the event that the assets of the Portuguese companies are covered by legal immunities, namely, public-domain assets of the Portuguese Republic, or are allocated to any public-service purposes, those companies can claim immunity from suit, attachment or other legal process in respect of this.
Finally, any guarantee or security must guarantee or secure one or more obligations, to which they are ancillary, and such obligations shall be identified in the guarantee or security agreement. Accordingly, the guarantee/security will always follow the underlying secured obligation and the invalidity of the underlying obligation entails the invalidity of the guarantee/security and termination of the underlying obligation entails termination of the guarantee/security.
Guarantees and security are ancillary to the guaranteed or secured obligation and thus the repayment, satisfaction or cancellation in full of such obligations automatically determines the release of the guarantees or security.
Nonetheless, it is market practice to execute a formal release agreement in order to obtain all necessary documentation from the lenders that allows perfection of the release of the security with the relevant authorities. This is particularly relevant if the security had been registered with a real estate or commercial registry office (mortgages and quota pledges) or with a bank (bank account pledges). Other actions such as notices, return of share certificates and cancellation of registrations may also be required, depending on the type of security that is being released.
The priority of competing security interests is determined by the date of registration of the security interest (registration priority principle) if the security is subject to registration, such as in the cases of mortgages over properties, vessels, aircraft, factory and car mortgages, quota pledges, pledges over bank accounts and pledges over deposited and dematerialised shares. Conversely, if no registration is required but merely the transfer of possession (eg, assignment of receivables), priority is determined by the date on which the relevant perfection requirements of the security are completed, namely, the act of possession by the creditor or similar (eg, notification to debtors in an assignment of receivables).
Contractual subordination is allowed under Portuguese law. Creditors may qualify their debt as subordinated and have it treated as such in an insolvency proceeding. However, contractual subordination is only recognised if it is made before all creditors (eg, deeply subordinated debt) and not just before certain creditors (eg, mezzanine debt). This is because insolvency law has general classes of creditors (see 7. Bankruptcy and Insolvency).
Therefore, waterfall provisions of inter-creditor agreements are not recognised in an insolvency proceeding thus distributions may be corrected amongst creditors after having received the proceeds in an insolvency proceeding based on payment provisions of the inter-creditor agreement.
Structural or legal subordination resulting from law are also permitted under Portuguese law.
Security interests are usually enforced by the secured parties directly (if lenders hold the security directly and retain the enforcement right) or by the security agent upon the occurrence of an enforcement event following an instruction of all or the majority of lenders.
Early termination clauses based exclusively on the declaration of insolvency are generically not allowed, although it is commonly accepted that, in credit agreements to corporate entities, they are accepted based on customary practice.
Enforcement procedures vary significantly, depending on the type of security. The enforcement of mortgages is subject to a judicial enforcement proceeding, and no private or out-of-court enforcement is allowed.
In general, appropriation by the creditor is not allowed, thus enforcement requires a court sale or an extra-judicial sale. However, the financial pledges over shares and bank accounts and other financial collateral arrangements allow for an appropriation of the asset and for an extra-judicial sale, provided that the agreement sets forth rules for the evaluation of the asset, as well as for disposal of the underlying asset even before enforcement.
Decree Law No 75/2017 on commercial pledges also allows for appropriation, provided that the pledgee has the obligation to repay the pledgor the difference between the value of the appropriated asset and the secured amount owed. Finally, assignment of receivables only requires a notification to the debtor/client of the borrower or guarantor to make payments directly to the secured parties.
Borrowers or guarantors usually grant irrevocable powers of attorney in favour of the security agent to create additional security over the new asset or to enforce security and sell the assets upon the occurrence of an event of default.
The choice of a foreign law is valid, recognised and enforceable under Portuguese law, unless there is a mandatory provision that determines the competence of Portuguese law in accordance with Regulation (EC) No 593/2008 on the law applicable to contractual obligations (Rome I).
The submission to a foreign jurisdiction is also valid, recognised and enforceable under Portuguese law, provided that the exclusive jurisdiction provisions, set forth in Council Regulation (EC) No 1215/2012 (Regulation 1215/2012), are complied with.
A waiver of immunity is also recognised, except where, as previously mentioned, the assets are in the public domain (bens do domínio público) or allocated to public interests or in the case of states and diplomatic sectors.
Judgments rendered by EU Member State courts are enforceable in Portugal in accordance with the terms of Regulation 1215/2012.
Judgments rendered by foreign courts outside the EU, should there be no bilateral treaty, will also be recognised and enforced in Portugal according to the procedures set out in the Portuguese Civil Procedure Code on the recognition of foreign judgments, provided that the following requirements are met:
In respect of foreign arbitral awards, the enforcement scenarios may vary, depending on the concrete situation and whether or not they are covered by the New York Convention or by any bilateral agreement.
Aside from the above, there are no other matters which might impact a foreign lender’s ability to enforce its rights under a loan or security agreement (other than all documents having to be translated into Portuguese, including any enforcement titles).
There are three main recovery/reorganisation procedures outside of insolvency proceedings: Out of Court Recovery Proceeding (RERE); the Special Revitalisation Proceeding (PER); and the Extraordinary Proceeding for Companies Recovery (PEVE) that was created during the COVID-19 pandemic.
The RERE is an extra-judicial voluntary mechanism aimed at allowing the recovery of companies in financial difficulties or imminent insolvency through negotiations with creditors for its revitalisation. If the parties' aim that the negotiations for reaching a restructuring agreement produce the effects provided for in the RERE, the company and the creditors, representing at least 15% of the company’s liabilities (non-subordinated), must sign a negotiation protocol and promote its deposit at the commercial registry. Once the requirements have been met, the agreement reached will have the same effects as the agreement in a PER.
The PER aims at allowing debtors in financial difficulties or imminent insolvency, but whose recovery is still feasible, to negotiate with creditors an agreement for the revitalisation of the company. The approval of the PER requires that a vote be held among creditors whose claims represent at least one third of the total voting-related credits contained in the list of credits which results in a favourable vote of more than two thirds of the votes cast and more than half of the votes cast corresponding to non-subordinated claims; alternatively, it is necessary to obtain a favourable vote of creditors whose claims represent more than half of the total voting rights and where more than half of these votes correspond to non-subordinated claims.
The PEVE is a temporary judicial process, valid from 28 November 2020 until 31 December 2021, of an extraordinary and urgent nature, intended exclusively for companies that are in a difficult economic situation or insolvency, imminent or current, by virtue of COVID-19 pandemic. Whilst the PEVE is pending, no judicial proceedings may be brought against the company to collect debts and the outstanding proceedings are suspended. The homologation decision binds the company, the creditors subscribing to the agreement and the creditors included in the list of creditors, even if they have not participated in the extrajudicial negotiation.
There is a specific Legal Framework for Conversion of Debt into Equity that allows companies in a negative equity position to restructure their balance sheet and strengthen equity, assuming that a majority of creditors propose a conversion of debt into equity.
The declaration of insolvency triggers, in principle, the automatic acceleration of the liabilities of the insolvent entity. As such, there will be, in principle, an automatic acceleration of the loan.
In respect of guarantees, the declaration of insolvency determines the automatic claw-back actions of:
These automatic claw-back actions do not apply to financial collateral arrangements, such as financial pledges.
Additionally, enforcement of guarantees and security are made within the insolvency proceeding of the guarantor, except for, eg, financial collateral arrangements. Therefore, all future enforcement proceedings will no longer be allowed and those ones currently pending will be suspended, and creditors will need to lodge their claims in the insolvency proceeding.
The PIC provides for the following classes and ranking of credits:
The payment will be performed according to the credit ranking: firstly, guaranteed credits, followed by privileged credits, then common credits and finally subordinated credits.
If the assets of the insolvent estate are insufficient to pay all creditors in full, the payment to common creditors will be made by apportionment amongst all creditors and in proportion to their credits.
The payment of subordinated credits will only take place after full payment of common credits.
Subordinated credits ranking last are defined as any credits held by “related entities” to the insolvent company, provided that the special relationship existed at the time the credit was constituted, and those that were transmitted in the two years prior to the insolvency proceeding. Credits arising from shareholders’ loans are subordinated.
Aside from the above, all security over assets of the insolvent entity (except for financial collateral arrangements) will need to be enforced in the respective insolvency proceeding, and accordingly the creditors will need to wait for the liquidation of the assets and respective payments to creditors to be made.
Furthermore, if there were any pending judicial enforcement proceedings, these will be suspended, and the creditors will need to lodge their claims in the insolvency proceeding and wait for the liquidation of the assets and payment to creditors within that proceeding.
In addition, and from a practical perspective, it should also be outlined that the insolvency proceeding can jeopardise the day-to-day functioning of the company (debtor, guarantor or other) and thereby the value of the company and recoveries of the lender. Additionally, the special recovery processes referred to above are dependent on the debtor’s will, which makes it more difficult to entail a recovery proceeding based on an agreement exclusively between creditors.
Following the recent enactment of the National Investment Plan, defining the structural investment priorities for the next ten years, there may be a new incentive for public investments and PPP, although the COVID-19 pandemic could now put them on hold.
There is no specific legal framework for project finance. The Portuguese Public Contracts Code (PPCC), approved by Decree Law No 18/2008, which implemented Directives 2004/17/EC and 2004/18/CE, establishes the legal regime applicable to public contracts and the material regime applicable to contracts of an administrative nature. One of the PPCC’s major innovations is the creation of adequate regulation of some aspects of project finance techniques not reflected in ordinary legislation and which had hitherto created a conflict between the contractual techniques and the legal rules relating to public procurement.
The PPP legal framework emerges from the PCC and Decree Law No 111/2012 (PPP Laws), setting forth the regime for the preparation, launch, implementation and subsequent change of PPP.
Portuguese PPP typically follow project finance structures with a Build Operate-Transfer (BOT) model. The concession agreement regulates the major contractual issues of the PPP, namely, the terms on which the project company will construct the project and operate it and the payment terms of the PPP. Attached to the concession agreements are also the remaining documents comprising the PPP package: the equity subscription agreement, the shareholder’s agreement, the direct agreement, the construction contract, the operation contract and the finance documents.
Before launching and awarding the PPP, the environmental impact declaration and urban planning licences need to be issued. An environmental licence may also be required for certain industrial projects.
Under PPP Laws, the risks of the project shall be clearly and contractually identified, and its allocation shall be made in accordance with each partner's ability to manage it. Nonetheless, the partnership shall entail a significant and effective transfer of risk to the private partner, particularly the financing risk, which will always be on the private partner’s side.
The financial rebalance, as the main mechanism covering project risks, remains with the public contracting entity.
Following the execution of the PPP contract, and prior to its entry into force, the Court of Auditors will review the agreement to verify that the acts, contracts or other instruments that generate expenditure or represent direct or indirect financial liabilities are in accordance with the laws in force. The acts, contracts and other instruments subject to the previous auditing by the Court of Auditors may produce its findings prior to the visa, except in respect to payments resulting from such acts, contracts or instruments being audited.
Project finance transactions do not need governmental approval, except for certain sectors of activity or public concessions (namely, energy, transport, health and others). The authority for such approvals lies with the relevant ministries or governmental agencies or departments (eg, IMT for transports, DGEG for energy). In addition, the Court of Auditors is responsible for verifying that the acts, contracts or other instruments that generate expenditure or represent direct or indirect financial liabilities are compliant with the laws in force.
As regards PPP, the Technical Unit for Monitoring Projects (UTAP or Unidade Técnica de Acompanhamento de Projetos) has the role of executing the majority and most relevant tasks in respect of the preparation and implementation of PPP contracts.
Typically, the project finance documents do not need to be registered or filed with the governmental body, except for the cases referred to above and those where is necessary to execute a public deed or make a term of authentication with the notary.
Stamp duty may be due in respect of the granting of guarantees or security, as well as for providing loans (see 4.2 Other Taxes, Duties, Charges or Tax Considerations).
The regulatory authorities for oil and gas are the Ministry of Economy, the General Directorate for Energy and Geology (Direcção Geral de Energia e Geologia or DGEG), the Regulatory Entity for Energy Services (Entidade Reguladora do Sector Energético or ERSE), and the Energy Sector National Entity (Entidade Nacional para o Sector Energético or ENSE). For oil and gas, the primary laws and regulations are:
In the power sector, the responsible government bodies are the Ministry of Economy, ERSE, DGEG and ENSE.
The Portuguese electrical system is regulated by Decree Law No 29/2006, and by Decree Law No 172/2006, as amended.
Additionally, the following ERSE regulations are relevant (as amended):
Regarding the mining sector, the main regulatory entity is the DGEG, currently integrated into the Ministry of Environment and Energy Transition.
The main regulatory framework for the exploration and extraction of mineral resources in Portugal is provided in (as amended):
Regulations relating to environment, public procurement, health and safety, labour, tax, planning and expropriation of lands shall also apply.
Additionally, there are a couple of local mining laws applicable in the archipelagos of the Azores and Madeira.
Project finance structures in Portugal are similar to those used internationally. A special-purpose vehicle (SPV) is usually incorporated as a share company. The financing structure is usually a loan, although bond structures are also used when there is international financing involved or there is the participation of funds that, for regulatory reasons, cannot grant loans. Monoline structures are less common but they were successfully used in the past. The loan structures can have different types of facilities for working capital, letters of credit or banking guarantees, liquidity, VAT or long-term loans, and they can be granted by one or two banks, or they can be club deals, depending on the size of the financing. In certain projects, there can also be a credit agreement with the European Investment Bank (EIB).
There is typically a full security package which, however, limits the recourse to the project, project assets and project documents (such as the construction and operation contract) and, apart from the pledge of shares of the SPV, is not available to shareholders of the project company, which usually have their liability limited to certain amounts in relation to their respective participation in the share capital of the project company.
The laws relevant to the project depend on the project at stake. In the energy sector, the energy legal framework is of utmost importance and the lenders usually try, for example, to obtain certain protection on the reduction of feed-in tariffs. In the transportation and infrastructure sector, the concession agreement is usually the main legal document to consider.
There are no relevant limitations on foreign investment, except for energy and certain other sectors.
Export credit agency financing is not that common in Portugal, although it has increased in the last few years. It is common to have financing coming from both commercial banks and the EIB, which requires the structure to be duly modelled to ensure a higher ranking for EIB debt and, usually, guarantees from the commercial banks of the bank financing. As for project bonds, they are not commonly used but they were successfully implemented in certain project finance deals. The use of monoline structures was previously common, particularly in the railway and subway financing contracts, but nowadays is a less commonly used structure.
The use of performance bonds is quite standard and are delivered by the contractor, as well as by the O&M contractor and the constructor in concession projects; they usually consist of bank guarantees and are intended to assure the performance of the obligations of the contractors.
The ownership of hidden mineral resources is vested in the state. Any entity that is interested in searching for or exploiting such resources needs to obtain an adequate licensing title. The type of licence that is required can vary, depending on the type of resource sought and also on the type of activity. Usually, mere exploration requires a simple licence, while exploitation will necessarily imply a concession.
Mining rights can be acquired by direct negotiations with the licensing authority, which can be the DGEG or, in the case of oil and gas, also the National Entity for the Fuel Market (ENMC). However, in the case of oil and gas rights, there has been an indication that future rights will only be awarded as part of competitive bidding procedures.
The exploration and exploitation operations require prior adequate environmental assessment, subject to public discussion. Any protective or remedial actions that are identified as necessary are exclusively the responsibility of the licensee.
The licensee is entitled to take and dispose of the production resulting from his or her activity, except for any quantities that may be due to the state as royalties that the state decides to take in kind. Export is not subject to any specific duty or tax, and is free, other than as may otherwise be regulated under sanctions adopted by the UN or the EU or other competent international organisations.
Projects may be subject to environmental impact assessment, to environmental incidence assessment, and sometimes to environmental licensing.
The main environmental legislation applying to projects are:
The regulatory body that oversees the Environmental Law is the Portuguese Environment Association, which is an independent administrative entity supervised by the Environment Ministry.
Decree Law No 273/2003 established the prerequisites regarding health and safety in projects that entail construction. It requires the existence of a health and safety plan and of a safety co-ordinator for the project drafting and afterwards for the project execution.
The Authority for Work Conditions is responsible for the control of the aforementioned requirements.
In order to obtain and maintain a permit to perform public or private works, an insurance for work accidents is required, the existence of which is supervised by the IMPIC (Instituto dos Mercados Públicos, do Imobiliário e da Construção). In turnkey or concession contracts, additional rules regarding health and safety can be included.
Introduction and Snapshot of the Portuguese Banking Sector
The year 2020 was surely one of the oddest and most challenging in memory. The impact of the COVID-19 pandemic on the lives of individuals and businesses alike has been extensively discussed and echoed through to 2021. Some of the shifts witnessed during the first lockdowns, which may have been initially overlooked as temporary variations arising from interim fallback solutions, have now been coined as some of the major trends for the coming years.
The way almost every business operates daily, regardless of the industry, has changed – those changes varying from meaningful to drastic – and the banking sector was no exception to this (in most cases) forced evolution.
The acceleration of digital transformation, the strengthening of ESG-related concerns and also the resurgence of markets which staggered during the lockdown periods, and are now expected to come back with a bang not in spite of, but to a great extent due to the pandemic’s impact, such as the debt trading market, are good examples and some of the major trends emerging from these challenging but increasingly riveting times.
Snapshot of the Portuguese banking sector
As a backdrop to these trends, the Portuguese banking sector has recently displayed signs of recovery – the first half of 2021 produced aggregate numbers similar to, if not marginally above, 2019 and not so surprisingly sky-rocketed above 2020’s figures. Millenium BCP, Caixa Geral de Depósitos,Novo Banco, Santander Totta, BPI and Caixa Económica Montepio Geral produced aggregate net positive results of EUR678 million in the first two quarters of 2021 against the EUR67 million negative results of the corresponding period in 2020.
Although these may be encouraging hints of what is in store for the upcoming months, it is still too soon to cast aside false dawn scenarios. These are essentially fuelled by the legal moratorium – which is in force until 30 September – and the significant weight it represents to the banking sector. Credits benefiting from the legal moratorium in Portugal represent a significant proportion of 15% vis-à-vis total bank credits, which is well above the average of their European counterparts. For some players, this proportion goes as high as 20%, or even slightly above that.
The End of Moratoriums and the Debt Trading Market Resurgence
The temporary legal moratorium
In March 2020, the Portuguese government established a temporary legal moratorium on certain financing agreements with a view to protecting the liquidity of both businesses and individuals. The framework approved in early 2020, which is still in force, included three key temporary measures:
Under the moratorium legal framework, the contractually agreed payment plans were automatically extended for a period equal to the suspension period. This was aimed at ensuring that there were no charges other than the variability of the reference interest rate underlying the relevant agreements, as well as all associated elements, such as guarantees, which were also extended.
The moratorium was aimed at a wide scope of beneficiaries, including companies, sole traders and other legal entities (entities operating in the financial sector were excluded, unless they qualified as micro, small or medium-sized enterprises in accordance with the Commission Recommendation of 6 May 2003). Individuals could also benefit from the moratorium framework, but solely in respect of mortgage loans and student loans.
The stress imposed by the pandemic on businesses and families, together with the broad scope of the moratorium in Portugal, resulted in the above-mentioned significant weight of the credits benefiting from this framework in the banking sector global loan portfolio. Medium or small enterprises represent the larger share of these credits and are thus expected to take the hardest hit come 30 September and the end of the legal effects of the moratorium.
The resurgence of the non-performing loans (NPLs) market
As anticipated above, this is expected to have an impact on Portuguese banks’ NPLs ratios and consequently on the Portuguese NPLs market, which was significantly active in the years preceding the COVID-19 pandemic, but reached complete stagnation during 2020 and the first quarter of 2021.
The NPLs ratio of the Portuguese banks referred to above dropped to 5.1% in the second quarter of 2021, from 6.5% at the end of the corresponding period of last year. This material decrease was mainly due to recent asset portfolios sales.
We are now witnessing the first signs of a resurgence of the NPLs market. Slowly, but steadily, the first debt trading transactions in over a year are underway and more are expected to emerge soon, as banks are likely to accelerate this strategy to avoid potential economic deterioration that may arise after the end of moratoriums. The last quarter of 2021 may confirm the formation of a strong U-shaped curve in this traditionally very active market.
The Directive on Credit Servicers and Credit Purchasers
Also pressured by the aftermath of the end of the moratoriums and by the ensuing and anticipated increase of NPLs ratios of European banks, the legislative process for the approval of the Directive on Credit Servicers and Credit Purchasers has taken a massive leap forward. In the making and under discussion for several years now, the European Council submitted a compromise text of the draft Directive to the European Parliament in June 2021 for first reading.
With the view to preventing excessive future build-up of NPLs on banks' balance sheets, the current text of the draft Directive on Credit Servicers and Credit Purchasers proposes to address these issues in two ways:
While the first solution is expected to have the ability to increase the value of NPLs transactions, due to the shorter time for enforcement and increased recovery rates, the second measure is aimed at the creation of a pan-Union NPLs market, which is currently being prevented by barriers arising from divergent national legislations in the absence of a dedicated and harmonised regulatory and supervisory framework.
To encourage the creation of a professionalised secondary market for NPLs, the directive sets out, on one hand, the requirement for credit servicers to obtain an authorisation prior to starting their activities, and on the other hand, the freedom to provide credit servicing in other member states, after such authorisation has been obtained in their home member state.
As to credit purchasers, while they are not subject to an authorisation procedure, they are required to appoint a credit institution or an authorised credit servicer to perform credit servicing activities in respect of credit agreements concluded with consumers.
Although the conclusion of the legislative procedure may take us past 2021, it is very likely early 2022 will bring the final text to light and, with it, the seed of a paradigm shift in the NPLs market across all European Union.
Shadow banking continues to play an ever-increasing role within the overall credit granting landscape. In fact, over recent years, including in 2021, the recourse to private placements of bond issuances became a mainstream means of credit granting, particularly to fund investments in the real estate sector. While the dimension of this growing trend remains unclear, given the stark difference in the regulatory requirements applicable to bonds issuers vis-à-vis credit institutions, it remains to be seen, like in other jurisdictions, whether any measures will be taken by the Bank of Portugal or on a broader scale within the Eurosystem, to ensure a level playing field between such entities by reducing capital restrictions and liquidity requirements currently applicable to credit institutions.
In addition to unregulated shadow banking in the strict sense, some sectors within the financial system have seen the emergence of new market players, in direct competition with the traditional deposit taking credit institutions. First and foremost, as in other economic sectors, tech has increased its presence in the financial sector. This presence is even clearer in the provision of specialised services, notably payments services, in which they compete with traditional credit institutions. While traditional banks have responded to this by incorporating technological solutions in their day-to-day operations, some new market players continue to gain market share and fiercely compete for market share within niche services within the financial sector.
Additionally, in the wake of the approval of the legal framework applicable to loan funds, there is a legitimate expectation that credit institutions will be joined by loan funds in engaging in the regulated activity of credit granting, thus contributing to the formal decentralisation of this activity.
Nevertheless, the activity of credit granting remains tightly regulated and even the accession to syndicated performing loans continues to be considered by the Bank of Portugal as the performance of a credit granting activity, which impacts the liquidity of existing syndicated loans.
ESG in the Financial Sector – Climate Change Considerations in Monetary Policy
A major trend across the board, environmental, social and governance (ESG) concerns are also becoming an increasingly central factor in the financial sector. If, on the one hand, sustainable finance has been at the top of the agenda in recent times, in parallel there are voiced concerns that the financial sector still has room to grow in this respect.
According to data disclosed by the European Central Bank (ECB), the majority of the banks of the European Union are not meeting the ECB’s supervisory expectations on how these entities should manage risks arising from the potential impact of climate change. Banks themselves consider that 90% of reported practices only partially meet ECB’s requirements, or do not meet them at all. Only 20% are assessing climate risks systematically, and almost all of these have found climate risks to materially impact their risk profile.
Against this background, the ECB published its new monetary policy strategy on 8 July. One of the key takeaways of this review is the decision to further incorporate climate change considerations into its policy framework, which resulted in a comprehensive action plan including measures aimed at tackling climate change related risks. The following measures should be highlighted:
Some of these measures will pose additional challenges for banks in the context of an already intricate and demanding regulatory landscape. They will also critically contribute to necessary development and to make the European Union the global centre of green finance it aspires to be.
The New Portuguese Banking Act
The Bank of Portugal launched a public consultation in 2020 regarding the approval of a new banking act, which, on top of performing a long overdue reorganisation of the provisions resulting from successive enactments of EU directives over the years, aims to ensure that CRD V and BRRD II are incorporated into national law.
As of this date, the Bank of Portugal has issued a report with its main conclusion following the completion of the public consultation. In short, key amendments introduced include the following:
The proposal for a new banking act is currently pending approval at the Portuguese Parliament and this is expected during the course of 2021.