Structured Finance & Derivatives 2019

Last Updated February 07, 2019

Romania

Law and Practice

Authors



Leroy si Asociatii SCA (Bucharest - HQ) is one of Romania’s leading independent firms. With 20 years’ experience in the Romanian market, the firm, which emerged from the Bucharest office of the international law firm Gide Loyrette Nouel, has worked on ground-breaking transactions across multiple practice areas, notably in M&A, capital markets, banking and finance, and projects and infrastructure. It has four partners and 16 lawyers, who work closely with international law firms on cross-border transactions, and it acts as lead counsel on regional transactions in the CEE. Having advised on several privatisations of state-owned enterprises in the manufacturing, energy and financial sectors, the firm has been involved in high-profile acquisitions of private and public companies, and was instructed to act on the first Romanian law-governed syndicated credit facility, the largest real estate financing in Romania and the first motorway concession project in the country at that time. Clients include MNCs, credit institutions, international financial institutions (IFIs), investment funds, SMEs and state-owned companies. Leroy şi Asociaţii’s departmental structure covers corporate M&A and capital markets; banking and finance; competition, distribution and consumer law; real estate; energy and natural resources; projects and infrastructure; IP and data protection; employment; dispute resolution; and insurance and aviation. Over the past ten years, the team have advised the International Swaps and Derivatives Association (ISDA) on derivatives-related issues.

In the context of a highly liquid market and strong economic growth, the financing and refinancing market in Romania is on an upward trend, although this is tempered by the post-crisis, risk-adverse approach.

Bank financing is the most common form of lending, being complemented by mezzanine or high-yield structures. As a result, although not significantly impacting the Romanian finance market, the presence of alternative lenders such as mezzanine funds, private debt funds, asset managers, finance companies and business development companiesis also starting to be felt. Factoring has also seen a remarkable expansion in the market.

In 2018, transactions with structured products have also been increasing.

Acquisition finance transactions mainly consist in debt structures, which may take the form of bilateral or syndicated facilities, the latter involving facility agent and security agent structures.

Leveraged acquisitions normally involve more complex debt structures, in the form of senior loans or a mix of senior and junior (mezzanine) loans, as well as bridge loans.

In an environment characterised by low interest rates and high liquidity, dividend recaps have also been recently proposed to leveraged finance bankers as methods of generating return on investments in the absence of good opportunities to exit them. The typical structure of such a financing arrangement includes senior loans (together with the related securities) along with, if such is the case, subordinated or junior loans that may take the form of mezzanine financings or high-yield bond issuances and own funds.

Payment-in-kind (PIK) loans are also occasionally seen.

Usually, the finance parties in acquisition finance/leveraged finance transactions are international and multilateral development banks and local subsidiaries of multinational banks and local banks. 

The main sectors targeted by acquisition finance/leveraged finance deals include manufacturing and retail.

There is no specific law governing acquisition finance or leveraged finance transactions in Romania. With respect to special corporate and financial assistance limitations, see 2.4 Restrictions and Limitations, below.

Romanian financing documentation is often based on the forms of facility agreements recommended by the Loan Market Association (LMA), in particular the LMA documentation for leveraged finance (including senior term facility agreements and intercreditor agreements), and usually includes a Romanian law security package supplemented by sponsors’ guarantees and undertakings.

Romanian security documentation must comply with the requirements described in 2.3 Security, below.

Acquisition/leveraged financings typically involve creating security interests over the shares acquired by the financed SPV in the target company, as well as over the shares of the SPV itself. Furthermore, subject to general corporate and financial assistance issues, the security package often includes security interests over the assets of the target company, including its real estate, present and future tangible assets, bank accounts and receivables.

Under the sanction of nullity, a security agreement over movable assets must, inter alia, describe the asset subject to a security interest in a sufficiently precise manner. 

Legal requirements as regards certain types of assets used as security include the following: 

  • floating charge collateral, which cannot be individualised, should be described in the security agreement in a manner allowing for the reasonable identification of such collateral, including by location, list, category, quantity, or other determination formula; 
  • in the case of a security interest over a universality of assets, the security agreement should describe the nature and contents of the universality; 
  • in the case of collateral consisting in cash standing to the credit of a bank account, the respective bank account must be identified in the security agreement; and
  • in the case of collateral consisting in securities negotiable on the capital markets, the security interest is created in accordance with the rules of the market on which they are traded (including by way of registration and separate evidence thereof in the system kept by the central depository), whilst a security interest over shares of a company must also fulfil the requirements set forth under Law 31/1990 on companies (the Romanian Companies Act).

Under Romanian law, for validity purposes, a security interest agreement must be executed in writing and, in addition, security interest agreements with respect to immovable assets must be concluded in authentic form (ie, be authenticated by a notary public). 

As regards the content of security interest agreements, the Romanian Civil Code provides that in order for a security interest agreement to be valid, it must:

  • specify the secured amount or include provisions whereby the secured amount can be reasonably determined (a maximum secured amount is usually specified);
  • identify the security grantor and the secured party;
  • evidence the cause of the secured obligation; and
  • describe the collateral in a sufficiently precise manner. 

A security interest in movable assets is effective as of the date the secured obligation arises, and the security grantor gains rights over the collateral. 

As regards perfection and priority, a security interest in movable assets is perfected when it becomes effective and is registered with an online publicity register – the electronic archive for secured transactions (the Romanian publicity system for movable security interests and other assimilated arrangements). It is notable that in the case of cash in a bank account, publicity is satisfied through the control of the account and registration with the electronic archive for secured transactions. Other methods of perfection apply to specific assets (for instance, perfection through registration with special registries – eg, securities negotiable on the capital market are perfected by way of registration with the central depository or, with respect to shares in companies, registration with the shareholders’ registry and with the electronic archive for secured transactions). 

Security interests over real estate become enforceable against third parties and acquire a preferential rank upon registration with the relevant land book of the real estate (ie, a public registry where property, its owners and encumbrances are recorded). 

Security agreements are qualified by law as enforceable titles per se and can thus be directly enforced in accordance with the provisions set out under the Romanian Civil Code or the Romanian Civil Procedure Code. 

Security interests may be enforced in various ways depending on the type of collateral. In principle, security interests over movable assets are mainly enforced by direct sale of the collateral by the secured party, sale via public auction or by taking over the asset by the secured party for the account of the secured obligation (it being specified that such method of enforcement extinguishes the secured claim). 

As regards enforcement of security interests in shares issued by limited liability companies, note that both the creation of the security interest and the transfer of shares to a third party in the context of enforcement require an approval by the shareholders representing at least three quarters of the share capital.

Security interests in securities negotiable on the capital market are enforced in accordance with specific regulations issued by the financial supervisory authority ('FSA'), the Romanian financial market supervisory authority (ie, enforcement must be carried out only through a specialised investment firm, by way of 'special sale upon order').

Finally, security interests over immovable assets are mainly enforced by private sale or public auction. 

Thin capitalisation

Rules on interest limitation and thin capitalisation are applicable in Romania. The rules on the deductibility of interest and other costs economically equivalent to interest were amended at the beginning of 2018, mainly setting forth that 'excess borrowing costs' (the difference between borrowing costs and interest income and other economically equivalent income) exceeding the deductible amount of EUR200,000 is deductible only up to 10% of the base computation.

Financial assistance

Financial assistance is prohibited under the Romanian Companies Act, according to which "a company may not grant advances or loans nor create securities in view of the subscription or acquisition of its own shares by a third party."

Under the current status of case law, it is unclear whether this prohibition applies only to joint stock companies or also to limited liability companies. Since one may not completely rule out the risk of cancellation of the security interests created by a limited liability target in the context of an acquisition financing transaction, various structures are sought in practice as mitigators to the financial assistance prohibition, in particular the merger between the SPV and the target, followed by the creation of security interests by the merged entity in favour of the lenders. Such structures, of course, do not remove the corporate interest test.

Corporate benefit/corporate interest

It is an underlying requirement for any transaction entered into by a company that such transaction be made in pursuit of the company's corporate interest. Shareholders and directors should exercise their rights and duties in good faith and in observance of the company's legitimate rights and interests. 

The Romanian Companies Act does not define the concept of 'corporate interest'. According to certain Romanian legal writers, corporate interest would be the criterion to be applied when assessing any managerial or administrative action of a company. To our knowledge, there is no authoritative case law interpreting the concept of corporate interest in the context of intragroup guarantees.

'Corporate interest' is ultimately a business matter; the directors and managers of a company should assess whether or not the company derives sufficient benefit from guaranteeing the obligations of another company belonging to its group, or whether or not the business or prospects of the company are adversely impacted thereby.

There may be potential lender liability issues in an insolvency scenario, to the extent that a lender is proven liable for using cumbersome means in providing funds to the insolvent debtor for the purpose of delaying its insolvency status. One typical example would be the conclusion of loan agreements providing for interest rates higher than the market practice, where such cumbersome financing conditions lead to the insolvency of the debtor.

Given the usually very restrictive assignment and transfer provisions under loan agreements, it is fairly inconceivable that a borrower or financial sponsor would be allowed to engage in debt purchase transactions.

Funding under an acquisition finance transaction is provided on a certain funds basis, given that the purchase price is mostly financed by bank debt and in a smaller proportion by equity provided by the sponsors. This entails that the lenders will be required to make funds available once the conditions in the loan agreement have been fulfilled, subject of course to the borrower not being in breach of its representations and undertakings and not being in default. In the event the certain funds representation or undertaking under the underlying acquisition documentation is breached, the seller may have a claim in damages against the purchaser, or in some cases against the sponsors. There is no direct contractual relationship between the seller and the lender.   

The Romanian market has seen quite a few restructurings, given the post-financial crisis environment and market conditions.

In the context of quite rigid procedures and long procedural delays within pre-insolvency and insolvency arrangements with the creditors, a successful financial restructuring often involves complex legal structures and complicated intercreditor negotiations, the result of which must always be driven by the operational needs of the business.   

No significant Romanian reforms or regulatory changes specifically affecting acquisition finance/leveraged finance transactions have been announced.

The Romanian securitisation framework is governed by Law 31/2006 on the securitisation of receivables, and FSA Regulation 11/2006 for the implementation of Law 31/2006.

Securitisation is a financing mechanism at the disposal of companies holding assets which give rise to a cash flow, and consists in:

  • the acquisition for a consideration by a special purpose vehicle ('SPV') of individual receivables or portfolio receivables, from one or more originators;
  • the classification of receivables in terms of certain criteria;
  • the issuance of classes of securitised financial instruments ('SFI') depending on such criteria;
  • the sale of instruments to investors by way of primary public offering; and
  • the return of principal and related interest to investors.

Law 31/2006 provides for certain derogatory principles, including the true sale principle (the sale of assets represents a true and effective sale), bankruptcy remoteness (an administrator, receiver, liquidator or creditors may not, under the originator’s insolvency proceedings, file a claim for the annulment of an assignment of receivables performed for securitisation purposes) and limited claw-back rights available to the originator’s creditors (the limitation to 45 days of the period within which the creditors of the originator may challenge the assignment of the receivables portfolio to an SPV).

Although the legal framework was enacted in 2006, the Romanian securitisation market has seen very little movement and originators assessing securitisation structures are usually banks contemplating securitisation of loan receivables portfolios. Securitisations involving commercial receivables are also contemplated, however most frequently as part of a cross-border securitisation scheme rather than a domestic one. 

We have not identified any risk-retention requirements for originators under Law 31/2006, other than potential risks and liability deriving from the originators’ option to continue servicing the receivables. 

The transfer of receivables is achieved by way of an assignment of claims entailing the transfer of one or more receivables from the existing creditor (ie, the assignor) to a new creditor (ie, the assignee) under an agreement concluded between the assignor and assignee. The assignment of claims must be made enforceable against the debtors of the receivables as well as against any other third parties.   

According to Law 31/2006, for enforceability purposes, the assignment of receivables has to be:

  • registered with the Romanian electronic archive for secured transactions at least 15 days prior to the issuance of the prospectus related to the issuance of securities;
  • notified by the assignor to the debtors by registered letter; and
  • communicated to the creditors of the assignor either individually by registered letter, or by displaying at the assignor's office, indicating the assignee and the price at which the assignment was made.

If the assigned debtors are consumers, the assignee should also comply with the requirements set out in the consumer protection legislation, especially Emergency Government Ordinance 50/2010 on consumer loans. For instance, in the case of assignments of receivables arising under consumer loans, the notice related to the assignment must be sent to consumers by registered letter, with confirmation of receipt, within ten calendar days as of the conclusion by the assignor and the assignee of the assignment agreement.

Unlike the mortgage bonds legal framework, Law 31/2006 has no specific provisions on professional secrecy and data protection issues. Pursuant to Romanian data protection legislation, an assignor would be entitled to disclose information with respect to the underlying receivable to an assignee based, for instance, on legitimate interest, provided also that transparency principles were observed.

Furthermore, depending on the entity originating the receivable, the assignment may also be subject to banking secrecy in the case of credit institutions, or professional secrecy in the case of non-banking financial institutions.

The risk associated with the asset pool is transferred from the originator to the SPV upon transfer of the assets. However, the purchase price may be paid to the originator at a later stage, from sources attracted by the SPV from the securitisation or even in the form of asset-backed securities.

The sale of receivables for securitisation purposes is recognised as a 'true sale' under Romanian law.

According to Law 31/2006, a securitisation structure is implemented by the establishment of an SPV, which may be either a fund (civil partnership agreement with no legal personality) or a joint stock company. The establishment and functioning of the SPV is subject to the FSA’s authorisation. 

If established as a fund based on a civil partnership agreement, the initial minimum capital of an SPV must be the equivalent, in RON, of EUR25,000.

If established as a joint stock company, an SPV must have a minimum share capital representing the equivalent, in RON, of EUR25,000, calculated at the exchange rate communicated by the National Bank of Romania ('NBR') on the subscription date. In addition, this must be subscribed and paid fully in cash upon the company's incorporation.

These minimum capital requirements might be reviewed in the context of a possible future update of the securitisation framework. 

The management of an SPV is performed by an entity established as a joint stock company, and having the following features:

  • share capital amounting to the equivalent, in RON, of EUR125,000;
  • its exclusive purpose of business must be the management of investment vehicles;
  • at least two significant shareholders must be financial/credit institutions; and
  • its board of directors must include at least three persons having good reputation and expertise in the financial field.

As per Regulation 11/2006, in addition to the mandatory provisions of the Romanian Companies Act, the by-laws of an SPV must include:

  • clauses according to which decisions regarding the amendment of the SPV's by-laws can only be carried out subject to the prior consent of the general meeting of the holders of securitised financial instruments, provided that the SPV proceeded with their issuance;
  • clauses according to which the liquidation, dissolution or spin-off of the company may only be performed with the prior consent, expressed in a general meeting, of the holders of securitised financial instruments, with the vote of all the holders of securitised financial instruments, and that any such action is notified to the FSA; and
  • clauses according to which the benefits reserved to the founders are payable only after all obligations related to an issuance of securitised financial instruments have been paid both to the holders of securitised financial instruments and to the entities involved in such issuance.

Law 31/2006 does not provide for the possibility of multi-issuance vehicles or compartment companies.

Romanian law does not provide for the consolidation of the assets of the SPV with those of the originator.

The SPV may be set up as bankruptcy-remote entity.

According to Law 31/2006, if a bankruptcy procedure is opened against the SPV, the general meeting of the investors may decide (with a vote of the SFI's holders representing 75% of the value of all issuances) on one of the following ways to settle the receivables:

  • direct sale of the portfolios, by public auction or by other means provided by law; or
  • adjudication of the portfolios for the account of their claims against the debtor, without performing the formalities towards third parties, by paying the amounts representing the remuneration of the agent and of the portfolio administrator or the liquidation cost.

Furthermore, each SFI issuance is secured with the receivables portfolio. Based on such security rights created in their favour, the investors may satisfy their claims arising from SFI ownership by enforcing the receivables portfolio, with priority over any other creditor, provided that the rights of the investors were registered with the electronic archive for secured transactions prior to the registration of the other creditors’ security interests.

Under Law 31/2006, the judicial administrators, the judicial liquidators or creditors of the originator may not challenge the assignment of the receivables portfolio under a reorganisation or bankruptcy procedure initiated against the originator.

There are no pending reforms that will have an impact on securitisation transactions in Romania.

As a preliminary comment, please note that factoring is currently not a regulated concept under Romanian law. A former law dating back to 2002, which was repealed without replacement in 2009, defined factoring as "an agreement concluded betweena provider of goods or services (the adherent) and a bank or other financial institution (the factor), whereby the latterensures the financing, the collection of claims and the preservation against credit risk, whilst the adherent assigns to the factor, by way of sale, its claims arising from the sale of goods or provision of services towards third parties."

Nonetheless, even in the absence of a legal definition or special regulation, factoring is, in practice, a common financing method in Romania, entailing an assignment of claims, as well as, according to some legal authors, a subrogation in the creditor’s rights, under the mechanics of a complex contract.

In practice, various types of factoring arrangements are possible, depending on the terms of the agreement between the factor and the adherent, such as recourse or non-recourse factoring, advance or maturity factoring, domestic and cross-border factoring, etc. 

Usually, factoring is used as a financing method and, therefore, advance factoring arrangements are the most often seen in practice. In such arrangements, the factor makes an advance payment from the amount of the receivables to the adherent ahead of maturity (advance ranging between 75% and 90% of the amount of the receivables), the difference being paid after collection from the debtors, it being specified that the factor also collects the agreed rate of interest for the advance payment made to the adherent considering, inter alia, the short term rate, the turnover or the financial standing of the adherent’s business.

An advance factoring may be with or without recourse, meaning that either the credit risk of the debtors stays with the adherent (ie, in the case of non-payment of any receivables by the debtors, it is the adherent and not the factor who bears the risk) or, conversely, the credit risk of the non-payment of receivables stays with the factor.

Servicing of the receivables may stay with the factor or the adherent. If servicing of the receivables stays with the adherent, it is notable that under Romanian law, there is no exception providing that a commercial seller could continue to service receivables originated by it under factoring operations (such exceptions exist only in relation to securitisation and mortgage bonds schemes). Consequently, it may be that the originator (adherent) may require a licence to service the receivables, depending on whether or not such servicing activity is performed as an independent economic activity, with the aim of obtaining regular incomes.

In principle, the transfer of receivables is legally achieved by way of an assignment of claims (present or future claims or even a universality of claims) entailing the transfer by the assignor to the assignee of all rights, securities and accessories of the assigned receivable. The assignment of claims must be made enforceable against the debtors of the receivables as well as against any other third parties.

A factoring arrangement may also entail a subrogation mechanism, whereby a creditor, having received payment from a third party, subrogates the latter in all its rights against the debtor. A subrogation must be express and, in order to be enforceable against third parties, it must be made in writing.

In legal terms, the difference between these two transfer mechanisms is that, if in an assignment of claims the transfer of the receivables may take place before actual payment, a subrogation is effective only as of actual payment of the claim.

Whilst the assignment of receivables produces effects between the assignor and the assignee as of the date of its conclusion, it will however only become enforceable against third parties as of the date the enforcement formalities have been accomplished.

In particular, an assignment becomes enforceable against the debtor of the receivable, meaning that the debtor will become liable to pay the assignee as of the date on which the debtor acknowledges the assignment in writing, or receives a written notice of the assignment (including information on the identity of the assignee, the assigned claim and the request to pay the assignee directly) either from the assignor or from the assignee.

Finally, an assignment becomes enforceable against all other third parties by way of registration with the electronic archive for secured transactions.

As mentioned above, in order to become enforceable, a subrogation only needs to be made in writing.

Under Romanian law, there are no special insolvency proceedings for ordinary corporations whereby certain safe-harbours would apply in the context of a factoring transaction, like those applicable, for instance, to securitisation schemes, which are insolvency-remote operations (ie, an insolvency receiver cannot file for the annulment of the assignment of receivables).

That being said, bearing in mind that a factoring operation actually entails a sale of the receivable to the factor, in principle, a Romanian court should accept the validity of the purchase and assignment of the receivable to the factor, to the extent that it is not fraudulent. However, there may be a difference in the treatment of a factoring operation in the seller’s insolvency, depending on whether the factoring is with or without recourse against the insolvent seller.

There are no pending reforms that will have an impact on factoring transactions.

Statutory covered bonds are governed by Law 304/2015 on mortgage bonds and NBR Regulation 1/2016 on the issuance of mortgage bonds. The key elements of the Romanian mortgage bonds legal framework include:

  • the issuer can only be a credit institution falling within one of the following categories: banks, credit co-operative organisations (with the exception of credit co-operatives) and mortgage loan banks;
  • the NBR has the central role in assessing the potential issuer, approving bond issuances and providing supervision of compliance with prudential requirements;
  • the cover pool is segregated by law from the general insolvency estate of the issuer and is dedicated to satisfying any claims of the bondholders arising from the bond issuance;
  • real estate receivables, other financial assets and financial derivatives securing the mortgage bonds are structured by the issuer into a single cover pool;
  • apart from real estate receivables, the issuer can include other financial assets and also financial derivatives in the cover pool;
  • real estate loans must fulfil several eligibility or performance criteria in order to be included in the cover pool.

We are not aware of issuances of contractual (structured) covered bonds in Romania.

Mortgage bonds are debt instruments issued on the basis of a pool of receivables which may include receivables arising from real estate loans, other financial assets and derivatives, and secure the issuer’s obligations towards bondholders under one or several mortgage bonds’ issuances.

The criteria for including the receivables within the pool securing mortgage bonds include:

  • the amounts granted under the real estate loans must have been fully released;
  • the receivables must be free of any encumbrance;
  • the rights in rem securing the loan must be created solely for the benefit of the issuer; and
  • the loan-to-value (LTV) ratio may not exceed 80% for residential real estate loans, and 60% for other real estate loans.

Financial derivatives may be included in the cover pool only if the agreements related thereto do not include a clause according to which the bankruptcy or the resolution of the issuer is deemed to be a termination event.

According to Law 304/2015, a first-ranking security interest over the entire pool securing the mortgage bonds is registered in favour of the investors/mortgage bondholders with the electronic archive for secured transactions. Hence, the mortgage bondholders have priority against all other creditors of the issuer in respect of the forced execution of the pool of receivables securing their claims.

According to Law 304/2015, the mortgage bonds issuer may only be a Romanian credit institution which has granted, or taken over by assignment or otherwise, real estate receivables and which has issued, is issuing or intends to issue mortgage bonds or to which obligations related to mortgage bonds are being transferred, together with the relevant pool of receivables. Therefore, as opposed to securitisation structures see 3.3 Issuance Vehicle, above), a mortgage bond issuance cannot entail the use of an SPV to insulate the cover pool from the financial risk of the originator, since according to the law the issuer, as owner of the portfolio, holds the assets on its balance sheet. 

The pool securing mortgage bonds represents an autonomous patrimony, which is solely affected for this specific purpose, being thus segregated from the issuer’s patrimony. Hence, the pool of receivables is not affected by any proceeding regarding the insolvency of the issuer and the liquidation of its assets. Any sale-purchase agreements entered into in breach of the above principle are null and void.

Furthermore, in the event of the issuer’s insolvency, by exception to the Romanian insolvency law, the mortgage bondholders continue to receive the amounts to which they are entitled, in the amounts and at the dates set forth in the prospectus. 

There is no pending reform that will have an impact on covered bond transactions. Nonetheless, it should be mentioned that although Law 304/2015 marked progress as regards Romanian mortgage bonds legislation, since efforts were made to align such legislation with the European mortgage bonds legislation, the Romanian market has still not made great use of the new mortgage bonds framework as banks adopted prudent behaviour further to the enactment in 2016 of a new law allowing debtors to close their debts under loan agreements by giving out the mortgaged properties to their lenders. 

Aside from covered (mortgage) bonds referred to in 4.2 Covered Bonds, above, bond issuances in Romania may take the form of corporate bonds and municipality bonds, which are in most cases unsecured.

Together with credit default swaps and total return swaps, credit-linked notes (CLNs) are one of the three main types of credit derivatives currently used by banks to help them manage both their exposures to credit risk and their balance sheets.

Structurally, a CLN is a debt security with a credit default swap embedded within it, its main purpose being the transfer of credit risk from the issuer to the investors via the issuance of a security (usually a medium-term note).

Under a CLN, interest payments and repayment are contingent on the financial solvency of the underlying debtor. In the case of a so-called credit event (usually insolvency, default on payment or debt restructuring), the CLN is repaid prematurely and instead of the nominal value, either the liabilities of the underlying debtor (bond or loan) are allotted or the value of a reference liability is determined and paid out. If there is no such credit event, the noteholder receives attractive interest payments and upon maturity, the principal of the CLN is repaid at the nominal value.

The issuer of CLNs is typically a credit institution (as protection buyer and the party transferring the credit risk), whilst the protection sellers are investors in securities.

These structures usually involve SPVs which hold the CLNs, collect commissions relating to the default swaps and distribute the income upon maturity of the titles.

Reference portfolios typically include bank loan or bond portfolios.

According to EU Regulation 575/2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) 648/2012 (which is directly applicable in Romania), banks may use as eligible credit protection, inter alia, credit-linked notes, to the extent of their cash funding, as an eligible form of credit risk mitigation.

Where an institution conducts an internal hedge using a credit derivative, in order for the credit protection to qualify as eligible credit protection for the purposes of credit risk mitigation, the credit risk transferred to the trading book shall be transferred out to a third party or parties.

Where an internal hedge has been conducted by way of buying credit protection through a CLN, and all relevant requirements set out in EU Regulation 575/2013 have been met, institutions shall apply the following rule for the calculation of risk-weighted exposure amounts and expected loss amounts where they acquire unfunded credit protection: “Investments in credit-linked notes issued by the lending institution may be treated as cash collateral for the purpose of calculating the effect of funded credit protection in accordance with this subsection, provided that the credit default swap embedded in the credit-linked note qualifies as eligible unfunded credit protection. For the purpose of determining whether the credit default swap embedded in a credit-linked note qualifies as eligible unfunded credit protection, the institution may consider the condition in point c of Article 194(6) of the Regulation to be met.”

For credit derivatives to qualify as an eligible form of credit risk mitigation, the following requirements set out in EU Regulation 575/2013 should be met:

  • the credit events specified in the credit derivative contract include:
    1. the failure to pay the amounts due under the terms of the underlying obligation that are in effect at the time of such failure, with a grace period that is equal to or shorter than the grace period in the underlying obligation;
    2. the bankruptcy, insolvency or inability of the obligor to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and analogous events; and
    3. the restructuring of the underlying obligation involving forgiveness or postponement of principal, interest or fees that results in a credit loss event;
  • where credit derivatives allow for cash settlement:
    1. institutions have in place a robust valuation process in order to estimate loss reliably; and
    2. there is a clearly specified period for obtaining post-credit-event valuations of the underlying obligation;
  • where the protection purchaser's right and ability to transfer the underlying obligation to the protection provider is required for settlement, the terms of the underlying obligation provide that any required consent to such transfer shall not be unreasonably withheld;
  • the identity of the parties responsible for determining whether a credit event has occurred is clearly defined;
  • the determination of the credit event is not the sole responsibility of the protection provider; and
  • the protection buyer has the right or ability to inform the protection provider of the occurrence of a credit event.

According to Article 213 of EU Regulation 575/2013, credit protection deriving from a guarantee or credit derivative shall qualify as eligible unfunded credit protection where all the following conditions are met:

  • the credit protection is direct;
  • the extent of the credit protection is clearly defined and incontrovertible;
  • the credit protection contract does not contain any clause, the fulfilment of which is outside the direct control of the lender, that:
    1. would allow the protection provider to cancel the protection unilaterally;
    2. would increase the effective cost of protection as a result of a deterioration in the credit quality of the protected exposure;
    3. could prevent the protection provider from being obliged to pay out in a timely manner in the event that the original obligor fails to make any payments due, or when the leasing contract has expired for the purposes of recognising guaranteed residual value under Articles 134(7) and 166(4); or
    4. could allow the maturity of the credit protection to be reduced by the protection provider;
  • the credit protection contract is legally effective and enforceable in all jurisdictions which are relevant at the time of the conclusion of the credit agreement.

CLNs may be either privately placed or publicly offered.

The main transparency requirements are set forth under Directive 2014/65/EU on markets in financial instruments ('MiFID II'), EU Regulation 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) 648/2012 ('MiFIR') and the related Commission Delegated Regulation (EU) 2017/583 supplementing MI

iFIR with regard to regulatory technical standards on transparency requirements for trading venues and investment firms in respect of bonds, structured finance products, emission allowances and derivatives.

Please note that MiFID II has just been transposed into Romania under Law 126/2018. , which has been in force since of 6 July 2018.

There is no pending reform that will have an impact on CLN transactions.

According to a report issued by the FSA in 2017, the structured products issued and offered in Romania comprised mainly structured products having as underlying market indices (over 44% of the total transactions), oil (25% of the total transactions) and shares (24% of the total transactions).

Currently, structured products issued by Erste Bank Group AG and Raiffeisen Centrobank AG are available in the Romanian structured products market. These are Austrian issuers specialised in the development of structured products and their trading on internationally recognised exchanges. 

There are two procedures to be implemented for the issuance and offering of structured products: one with the FSA and one with the market operator, Bucharest Stock Exchange ('BSE'), competent with respect to admission to trading on the BSE.

The main legal framework governing the offering includes:

  • EC Regulation 809/2004 of 29 April 2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards information contained in prospectuses as well as the format, incorporation by reference and publication of such prospectuses and dissemination of advertisements;
  • Law 24/2017 on issuers of financial instruments and market operations transposing, inter alia, Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC;
  • FSA Regulation 5/2018 on issuers of financial instruments and market operations;
  • Law 126/2018 on markets in financial instruments (transposing MiFID II),and
  • the MiFIR.

According to the recently enacted Law 126/2018 on markets in financial instruments, structured products are defined by reference to the relevant definition set forth in the MiFIR, ie, as those securities created to securitise and transfer credit risk associated with a pool of financial assets entitling the security holder to receive regular payments that depend on the cash flow from the underlying assets.

Furthermore, according to Articles 8 and 10 of the MiFIR, pre-trade and post-trade transparency requirements for trading venues apply in respect of structured products. As such, market operators and investment firms operating a trading venue shall:

  • pre-trade:

(i)       make public current bid and offer prices and the depth of trading interests at those prices which are advertised through their systems for bonds, and structured finance products, emission allowances, derivatives traded on a trading venue and package orders.

(ii) give access, on reasonable commercial terms and on a non-discriminatory basis, to the arrangements they employ for making public the information referred to above to investment firms which are obliged to publish their quotes in bonds, structured finance products, emission allowances and derivatives pursuant to Article 18 of the MiFIR.       

  • post-trade:       

(i) make public the price, volume and time of the transactions executed in respect of bonds, structured finance products, emission allowances and derivatives traded on a trading venue. Market operators and investment firms operating a trading venue shall make details of all such transactions public as close to real-time as is technically possible.

(ii) give access, on reasonable commercial terms and on a non-discriminatory basis, to the arrangements they employ for making public the above information to investment firms which are obliged to publish the details of their transactions in bonds, structured finance products, emission allowances and derivatives pursuant to Article 21 of the MiFIR (in particular, investment firms which, either on their own account or on behalf of clients, conclude transactions in bonds, structured finance products, emission allowances and derivatives traded on a trading venue shall make public, through an approved publication arrangement (APA), the volume and price of those transactions and the time at which they were concluded.

According to the rule book of the BSE, structured products are defined as financial instruments such as securities based on an underlying asset, issued in compliance with the base prospectus and with the other documents relating to the prospectus, which may be admitted to trading on the spot regulated market administered by BSE. The structured products may take the form of certificates or warrants, as well as other types of structured products.

The issuers of structured products may be credit institutions, investment firms, or other financial institutions authorised by and functioning in accordance with the regulations of the competent authorities in EU member states and non-member states.

The offering prospectus must be approved by the FSA.

As regards product intervention authority, the provisions of MiFIR directly apply in Romania.

The FSA may prohibit or restrict the following in or from a member state:

  • the marketing, distribution or sale of certain financial instruments or structured deposits or financial instruments or structured deposits with certain specified features; or
  • a type of financial activity or practice. 

Please note in this context that, according to Article 104 of the recently enacted Law 126/2018 on markets in financial instruments, it is forbidden to market, sell or distribute in Romania, on a professional basis, to one or more retail or consumer customers, financial derivatives such as binary options or, subject to certain conditions set forth in Law 126/2018, financial contracts for differences or any derivatives  traded through an electronic trading platform if these instruments have a maturity of up to 48 hours and involve, directly or indirectly, a leverage established on the basis of the underlying at a level above the maximum set forth in the secondary regulations issued by FSA or if certain other conditions set forth in Law 126/2018 are met. 

In order to approve the issuance and offering of structured products, the documents that must be submitted to the FSA typically include:

  • the base prospectus;
  • documents evidencing any encumbrances over the issuer’s assets;
  • documents evidencing the guarantees offered in relation to the bond issuance;
  • documents related to decision of the statutory corporate body approving the respective issuance if there is a primary sale offer made to the public or copy of the proof that they hold the securities subject to the offer if there is a secondary sale offer made to the public, and financial auditor’s reports relating to the financial statements provided thereunder;
  • financial and accounting statements for the past three financial years or, as applicable, over a shorter period, in accordance with the applicable regulations; 
  • last quarterly report, if applicable;
  • subscription form template;
  • a copy of the intermediation contract, as well as of syndication and distribution contracts, if applicable; and
  • legal documents certifying the current structure of the offeror’s shareholding, if applicable.

According to the legal provisions, distribution to the public of securities subject to public offering is made via intermediary and/or by a distribution group. Where intermediation is made by an intermediation syndicate, the contracts concluded between the offeror and the intermediation syndicate’s manager and between the intermediation syndicate’s manager and members of the intermediation syndicate, respectively, shall be submitted to the FSA. Where distribution is made by a distribution group, the contract concluded between the intermediary/intermediation syndicate and the distribution group shall also be submitted to the FSA.

There is no standard form of a distribution agreement.

The main duties of a distribution group in public offerings for the sale of financial instruments on the basis of distribution contracts concluded with investment firms are:

  • collecting forms and amounts for subscriptions;
  • allocation after the end of the subscription period; and
  • preparing reports for the issuer of financial instruments on the results of the subscriptions.

Distributors are compensated by the issuer for their distribution activities.

Structured products may be listed and traded on the regulated market (BSE) or on a multilateral trading facility (MTF) or an organised trading facility (OTF).

The debt securities for which admission to trading on the BSE is sought must be freely negotiable and fully paid-up.

The application for admission to trading on a regulated market must cover all debt securities of the same class already issued.

Admission to trading of some securities on a regulated market shall be made on the basis of an application accompanied by the following:

  • prospectus for admission to trading on a regulated market; and
  • the decision of the statutory body approving the admission to trading of the securities to the operator of the regulated market concerned after publishing a prospectus approved by the FSA.

Convertible debt securities may be admitted to trading on a regulated market only if the securities into which they may be converted are listed on a regulated market.

According to Law 24/2017, the following persons shall be liable for violation of the legal provisions on the accuracy, consistency and correctness of the information contained in the prospectus/offer document and notice, as appropriate:

    1. the issuer;
    2. the members of the issuer’s board of directors;
    3. the offeror, if it is different that the issuer;
    4. the members of the offeror’s board of directors;
    5. the founders, in the case of public subscription;
    6. the person that requests the admission to trading, if it is different than the issuer or the offeror;
    7. the financial auditor who certified the financial statements, on the basis of which information was taken over to the prospectus;
    8. the intermediary of the offering or, as the case may be, the member of the responsible intermediation syndicate;
    9. any other person, including the intermediaries of the offering, that has accepted in the prospectus the responsibility for any information, study or assessment inserted or mentioned in the prospectus. In this case, this person is responsible only for the reality, exactness and accuracy of the information, study or assessment indicated expressly by it and only to the extent to which the information, study or assessment was included in the prospectus in the form and context expressly agreed by the responsible person.

Moreover, the following persons shall be held jointly and severally liable:

  • the issuer, if any of the entities referred to in letters d) to f) is liable;
  • the offeror, if any of the entities referred to in letters b), g) and h) is liable.

According to Law 24/2017, non-observance of the legal provisions regarding the public offerings, or launching an offering without the authorisation of FSA, are considered administrative offences; different sanctions may be applied depending on each such offence. For instance, failure to observe the legal provisions regarding the content of the prospectus may be sanctioned:

  • for natural persons, by warning or fine ranging between RON10,000 (approximately EUR2,000) and RON9,000,000 (approximately EUR 2 million) or twice the amount of the profits gained or losses avoided because of the breach, where those can be determined; and
  • for legal entities, by warning or fine ranging between RON15,000 (approximately EUR3,200) and RON45,000,000 (approximately EUR 9.7million) or 5% of the total annual turnover as provided by the last available annual financial statements approved by the administrative body or twice the amount of the profits gained or losses avoided because of the breach, where those can be determined.

As regards criminal liability, Law 24/2017 generally states (but not with particular reference to prospectus matters) that the intentional presentation by a member of the board of directors, director, manager, general manager, member of the supervisory board, member of the management board or legal representative, or, alternatively, by members of the administrative, management or supervisory bodies of the issuer, to the holders of securities, of inaccurate financial statements or unreal information regarding the economic conditions of the issuer is considered a criminal offence and shall be punished by a prison sentence of between six months and five years, and with the interdiction to certain rights.

Finally, please note that, according to Law 126/2018, the breach of the marketing and distribution limitations set forth under Article 104 (as detailed in 6.2 Documentation above) triggers criminal liability sanctioned by a fine or imprisonment between three months and one year, whilst the non-observance of the legal provisions regarding pre-trade and post-trade transparency requirements is an administrative offence to which different sanctions apply:

•       for natural persons, a warning or a fine ranging between RON1,000 (approximately EUR 212) and RON22,000,000 (approximately EUR4.7 million); and

•       for legal entities, by warning or fine ranging between RON10,000 (approximately EUR2,128) and RON22,000,000 (approximately EUR4.7million) or 10% of the total annual turnover as provided by the last available annual financial statements/consolidated financial statements approved by the administrative body.

Starting in 2017, Romania began a process of updating and reforming the entire capital markets legal framework. In this process, Law 24/2017 and Regulation 5/2018 were issued and a new Law 126/2018, on markets in financial instruments (transposing MiFID II), has been enacted, which has been in force as of 6 July 2018.

Romanian law does not include restrictions on any Romanian entities entering into OTC derivatives transactions, as long as the corresponding prior authorisations are obtained.

Thus, Romanian corporations do not require special licences to enter into OTC derivatives transactions, subject to obtaining all corporate approvals necessary to enter into such transactions.

As regards Romanian regulated entities, specific authorisations are required from their supervisory authorities. For instance, Romanian credit institutions require a specific authorisation, issued by the NBR, listing transactions with financial derivative instruments under their permitted activities. Similarly, financial institutions regulated by the FSA (eg, investment firms, insurance companies, investment funds, pension funds, etc) require a specific authorisation issued by the FSA, in accordance with the activities of each type of financial institution.

Whilst certain Romanian counterparties benefit from an unrestricted capacity to enter into OTC derivatives, other Romanian counterparties must observe the restrictions included in the specific legislation governing their activity when entering into OTC derivatives.

For instance, investment funds may enter into OTC financial derivatives subject to limitations and restrictions set out in the law as to the type of assets in which they may invest and the exposure to counterparty risk.

Similarly, pension funds’ managers may only invest in certain types of assets, with the observance of certain thresholds. Furthermore, pension funds’ managers may protect the pension funds' investment portfolio only against foreign exchange and interest rate risks and only through transactions with derivative financial instruments, such as futures and options agreements, traded on regulated markets and only by exception, in limited circumstances and subject to restrictive conditions, the manager may protect the pension funds' investment portfolio against foreign exchange and interest rate risks by using OTC derivative financial instruments such as forward and swap agreements, provided that such transactions are carried out in compliance with certain legal obligations.

Insurance companies may enter into derivatives only if such operations are related to their activity and contribute to a reduction of risks or facilitate efficient portfolio management, and subject to legal limitations and restrictions as to their investment policy.

Sovereign counterparties, such as the NBR or the Romanian Ministry of Public Finance, may also enter into OTC derivatives subject to certain restrictions included in the specific legislation governing their activities.

There are no local standardised master agreements/security agreements governed by the laws of Romania for derivatives other than the standard ISDA and GMRA documentation governed by and adapted to Romanian law, which is used in practice when OTC derivatives are traded between two Romanian counterparties.

Legal opinions on the enforceability of such agreements, in particular on the enforceability of their close-out netting provisions, are commonly sought. See 7.3 Netting and Close-out Provisions, below.

Generally, subject to certain limitations applying to credit institutions, investment firms and insurance companies under the recovery and resolution frameworks, the netting and close-out provisions set forth in the 1992 ISDA Master Agreement and the 2002 ISDA Master Agreement are enforceable under Romanian law.

Romanian insolvency laws do not restrict the rights of the parties to stipulate the conditions for the occurrence of early termination under a bilateral netting agreement and, therefore, subject to the same limitations applying to credit institutions, investment firms and insurance companies under the recovery and resolution frameworks, the provisions of automatic early termination would operate in accordance with their terms. However, since the non-defaulting party is allowed to terminate by notice all the transactions upon the insolvency of the Romanian counterparty, the election of automatic early termination by the parties is generally not recommended.

The first Romanian close-out netting opinion was issued on 30 September 2016 by Leroy si Asociatii. This opinion was updated in light of recent legislative developments and published by the ISDA on 18 July 2018. Furthermore, the ISDA Collateral Provider and Collateral Taker Insolvency opinions, commissioned by the ISDA to Leroy si Asociatii, were published on 31 July 2018.

Material qualifications under the Romanian netting opinion mainly relate to:

  • Eligibility of transactions for close-out netting: given that under the Romanian Insolvency Act, close-out netting may take effect in respect of one or several qualified financial contracts (ie, contracts covering operations with derivative financial instruments, repos and reverse repos, buy-sellbacks and sell-buybacks and securities lending agreements), it is of utmost importance to clearly determine the scope of transactions that may be subject to close-out netting. For instance, certain transactions, such as those settled on a spot or two-day basis or physically settled transactions on commodities, unless the respective commodities are traded on a regulated market, a multilateral trading facility (MTF) or an organized trading facility (OTF), may not amount to “transactions on derivative financial instruments” and, hence, cannot be subject to close-out netting.
  • Recovery and resolution frameworks applicable to certain types of regulated entities: in light of the recovery and resolution framework under the Bank Recovery and Resolution Directive, which was transposed in Romania with respect to Romanian credit institutions and investment firms, as well as given a special resolution framework applicable to Romanian insurance companies, specific qualifications apply to these types of regulated entities, given the resolution tools that may be applied and the resolution powers of the NBR/FSA (such as the transfer of some but not all of the assets, rights or liabilities of an institution under resolution to another entity or the power to cancel or modify the clauses of a contract to which the institution under resolution is a party ('contractual modification power')), which are subject, of course, to appropriate protections and safeguards, as set out in the relevant legislation. 
  • Absence of case law and official interpretations: netting provisions and OTC derivatives transactions under the ISDA framework have been introduced in the Romanian market rather recently and, therefore, the netting regime and the situations contemplated under such transactions have not been subject to any case law or official interpretations by the authorities.

Under the Romanian recovery and resolution framework, the NBR/FSA may, with respect to a credit institution or an investment firm, temporarily suspend the termination rights of any party to a contract with an institution under resolution from the publication of the notice pursuant to the BRR Act until midnight, official Romanian time, at the end of the business day following that publication, provided that the payment and delivery obligations and the provision of collateral continue to be performed.

Such termination rights may, however, be exercised at the expiry of the period of suspension (subject to the provisions relating to the prohibition of contracts’ termination by reason only of a measure taken in early intervention or resolution), as follows:

  • if the rights and liabilities covered by the contract have been transferred to another entity, a counterparty may exercise termination rights in accordance with the terms of that contract only on the occurrence of any continuing or subsequent enforcement event by the recipient entity triggering termination in accordance with the contract; and
  • if the rights and liabilities covered by the contract remain with the institution under resolution and the NBR/FSA has not applied the bail-in tool to this institution, a counterparty may exercise termination rights in accordance with the terms of that contract on the expiry of the period of suspension mentioned above.

Aside from the above-mentioned powers, there are no other specific regulations requiring the inclusion of an acknowledgment of the stay powers of any regulator/governmental body.

Note, however, that in the context of the bail-in tool, the Romanian recovery and resolution framework requires the contractual recognition of bail-in by providing that credit institutions and other financial institutions covered by the scope of the enactment "must include a contractual term by which the creditor or party to the agreement creating the liability recognises that liability may be subject to the write-down and conversion powers and agrees to be bound by any reduction of the principal or outstanding amount due, conversion or cancellation that is effected by the exercise of those powers by the NBR," provided that such liability is, inter alia, not excluded from the bail-in tool and governed by the law of a third country.

Aside from the stay powers of the resolution authorities in the context of the recovery and resolution framework applicable to credit institutions and investment firms, as set out above, the FSA may take certain measures and benefits from specific powers:

  • in the case that measures for the financial turnaround of an insurance/reinsurance company are applied;
  • in the case that special supervision measures or special administration measures are imposed upon pension funds; or
  • in the case that special administration measures are taken against investment firms and other entities supervised by the FSA.
Leroy si Asociatii

10-12 Maior Gh. Sontu st
District 1
011448

+40 21 223 03 10

+40 21 223 03 42

office@leroylaw.ro www.leroylaw.ro
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Law and Practice

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Leroy si Asociatii SCA (Bucharest - HQ) is one of Romania’s leading independent firms. With 20 years’ experience in the Romanian market, the firm, which emerged from the Bucharest office of the international law firm Gide Loyrette Nouel, has worked on ground-breaking transactions across multiple practice areas, notably in M&A, capital markets, banking and finance, and projects and infrastructure. It has four partners and 16 lawyers, who work closely with international law firms on cross-border transactions, and it acts as lead counsel on regional transactions in the CEE. Having advised on several privatisations of state-owned enterprises in the manufacturing, energy and financial sectors, the firm has been involved in high-profile acquisitions of private and public companies, and was instructed to act on the first Romanian law-governed syndicated credit facility, the largest real estate financing in Romania and the first motorway concession project in the country at that time. Clients include MNCs, credit institutions, international financial institutions (IFIs), investment funds, SMEs and state-owned companies. Leroy şi Asociaţii’s departmental structure covers corporate M&A and capital markets; banking and finance; competition, distribution and consumer law; real estate; energy and natural resources; projects and infrastructure; IP and data protection; employment; dispute resolution; and insurance and aviation. Over the past ten years, the team have advised the International Swaps and Derivatives Association (ISDA) on derivatives-related issues.

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