Non-Performing Exposures - CEE

The limitations resulting from secrecy obligations (data protection and banking secrecy, the latter of which is enshrined in Austrian constitutional law) at due diligence stages are often addressed by appropriate precautions to avoid customer-specific disclosure to investors. This proves exceedingly difficult for large corporate exposures and in a single-name context, where, on the other hand, the courts' scrutiny of data disclosure consents is less stringent than in a consumer context.

Until late 2012 the general view, which was also confirmed by the Supreme Court with respect to a subrogation structure, was that secrecy obligations should not bar a credit institution from selling and assigning loans, since particularly in respect of non-performing loans, the interests of the bank outweigh the customers' legitimate interests in keeping their data secret. In this context, two Supreme Court judgments, in which the Supreme Court held that an assignment of receivables in violation of Austrian banking secrecy is null and void, took some industry participants by surprise.

While structuring a transaction this risk is usually addressed by using purchasing vehicles that by law are subject to banking secrecy (as is the case for qualifying securitisation SPVs) and that will obtain information and data subject to secrecy only upon consummation (closing) of the transaction. During due diligence stages, customary structures – that admittedly can be cumbersome and costly – seek to avoid direct bidder access to data but rather try to extend banking secrecy to involved (due diligence) advisors.

Finally, the assignment of receivables and other rights may be subject to Austrian stamp duty, if a deed is set up evidencing the transaction. However, certain transactions are exempt, including the assignment of receivables between credit institutions, assignments to securitisation SPVs, and assignments under a factoring contract. In addition, certain strategies are used in order not to trigger Austrian stamp duty (e.g. by avoiding an Austrian nexus).

Each of the two self-governed entities, the Federation of Bosnia and Herzegovina and Republika Srpska, has a separate legal system. While the laws applicable to NPL transactions are to a large extent harmonised, parties may still encounter different obstacles depending on where the transaction takes place. In this overview we focus on challenges common to both legal regimes.

During deal structuring foreign exchange regulations that prohibit a cross-border sale and assignment of loan receivables will have to be considered carefully. Accordingly, a foreign purchaser needs to set up a local acquisition company in order to acquire local customer receivables.

From a licensing perspective, retail loan receivables can be transferred only to a licensed entity, i.e. a bank or a licensed financial organisation, while purchasing of corporate loan receivables is not subject to bank licensing.

The parties will also have to consider limitations in relation to banking secrecy and data protection, which are either novel or not tested before the courts of Bosnia and Herzegovina and which, if not addressed adequately during structuring stages, could result in a true impediment to the effective transfer and assignment of receivables, ancillary rights and related security.

For true sale, NPE receivables and ancillary rights are usually transferred by assignment agreement. To the extent the transaction involves secured loan receivables, however, the transfer of related security (mortgages, pledges, etc.), while presumed to be assigned together with the receivable as an accessory right, will be perfected only upon re-registration with the competent register. In practice this can result in a costly and time-consuming process. In addition, while consents of debtors under the transferred loan are not required, they need to be notified of the assignment.

Under Bulgarian law, data protection and banking secrecy limitations merit particular attention. As far as data protection is concerned, the originating and selling bank's legitimate interest (e.g. to achieve regulatory capital relief by assigning loan receivables) should prevail over the interests of the debtor, especially with respect to non-performing loan receivables. In an NPE context bank secrecy should not be a material obstacle to disclosing information about the receivables. However, any disclosure should be made only at/after completion of the assignment of the receivables. Prior to completion, only loan balances (by law, loan balances are not subject to bank secrecy) and anonymised data should be disclosed.

From a regulatory perspective, the acquisition of loan receivables "on a commercial basis" may be performed only by credit institutions (local or EU/EEA under EU passporting rules) or by Bulgarian or EU/EFA financial institutions registered with the Bulgarian National Bank. While the latter registration does not imply fully fledged supervision (compared to a credit institution), it imposes certain minimum standards on the acquirer (e.g. minimum amount of capital, fit and proper requirements for the management or, in the case of an EU/EEA financial institution, registration with a national regulator).

Loan receivables (whether performing or not) and related security interests can be transferred either by assignment or, likely, by contractual subrogation (in any case, a notification of the debtor would be required). Assignments need to be registered to be effective with respect to certain types of security interests (notably real estate mortgages and non-possessory pledges) and, depending on portfolio size, such registrations may be time-consuming and costly. Contractual subrogation, which was not, to our knowledge, tested before Bulgarian courts, is supported by legal scholars and would not require any registration.

NPE transactions are often structured as an assignment (asset deal) in Croatia; however, share deals have also been seen in practice. NPE assignment documentation will have to comply with the requirements imposed by the Croatian National Bank. Also, in case a Croatian bank sells a "material amount of placements", the NPE assignment documentation will have to be approved in advance by the Croatian National Bank.

To the extent the assignment of an NPE involves secured loan receivables, the transfer of related security (mortgages, pledges, fiduciary assignments, etc.) will be, in general, perfected only upon re-registration with the competent public registers.

As regards bank secrecy obligations, banks are by law relieved from confidentiality to the extent necessary to conclude and perform transfers of receivables (to a regulated or non-regulated entity). This statutory secrecy exemption usually also applies at due diligence stages; however, it is recommended to conduct a prior assessment of this aspect before each transaction.

When it comes to servicing the purchased NPEs, pending court procedures will have to be carefully considered. For example, the buyer stepping into active litigation may be critical, since in certain instances this could require the debtor's consent. As to enforcement proceedings, the situation may vary depending on whether the enforcement is conducted under the pre-2014 or post-2014 enforcement rules.

As far as banking secrecy is concerned, Czech Supreme Court decisions support the view that banking secrecy obligations do not prevent a credit institution from assigning its receivables. Similarly, data protection legislation limiting disclosure of data must be considered, especially when consumer credit portfolios are being handled. As the Czech Office for Personal Data Protection is known for its strict enforcement practice, anonymising customer information for due diligence purposes is highly recommended.

NPE transactions usually take the form of an assignment of receivables (an asset deal). While notification is not a requirement for the validity of the assignment, until the debtor is notified, it may successfully discharge the assigned receivables to the assignor.

The change of creditor also must be notified to the parties granting the security (until notified, no effects of the assignment arise towards them) and to the respective registry if the security is registered in the public registers. Such notification, however, does not constitute a re-registration and security interests can therefore be enforced by the assignee based on an assignment agreement without additional perfection or re-registration steps required.

The acquisition of NPE portfolios is not regarded as a regulated activity. Servicing and collection, however, require a local trade licence.

The major hurdle of operating on the Hungarian market is the licensing requirement. Purchasing of loan receivables, even if non-performing, requires a banking licence. While passporting is also theoretically available for EU-based investors, establishment is generally required in Hungary if Hungarian NPEs are purchased and serviced.

Banking secrecy regulation is favourable to the prospective purchasers. Pursuant to the guideline of the Hungarian National Bank, the data (even client's data) necessary for the purchase may be transferred to a prospective purchaser in the course of due diligence. Thus, there is no need for structured data rooms and complicated data transfers in the due diligence and negotiation phases.

Nevertheless, data subject to banking secrecy and data protection can only be transferred when enforcing the loan receivables if this is in the best interest of the credit institution. From a deal structuring perspective, this mainly means that the purchaser services the portfolio itself, which is rather common on the Hungarian market.

Apart from maximum amount mortgages created before 15 March 2014, collateral, as a rule, transfers together with the secured receivable. Nevertheless, it is common market practice that the security is re-registered to the purchaser.

Although not market practice, the parties may elect to transfer the entire contractual position to the purchaser (as opposed to a standard assignment of receivables). This transfer of contract would require the consent of each individual debtor. However, the parties may turn to the Hungarian National Bank and obtain its approval to the transaction, which substitutes the consent of each debtor.

In 2017, the Parliament of Montenegro enacted the Law on Financial Leasing, Factoring, Purchase of Receivables, Micro-Lending and Credit-Guarantee Operations (the "Law").

The Law introduced, among other things, a distinction between factoring and purchase of receivables. Thus, depending on the type of receivables, factoring and purchase of receivables transactions can be used in the context of NPEs, but under different legal regimes.

Both factoring and the purchase of receivables (when performed as commercial activities) are in principle reserved for regulated entities, i.e. factoring companies, or companies for the purchase of receivables, which are licensed by the Central Bank of Montenegro ("CBM") or Montenegrin banks with a special approval from the CBM.

Purchasers are also obliged to submit data to the credit register of the CBM and have a reporting obligation towards the CBM. Furthermore, banks planning to sell or purchase receivables worth more than EUR 50,000 are required to obtain a CBM opinion confirming that the sale/purchase is justified. In order to issue the above opinion, the sale/purchase agreement and information on how the price was determined must be submitted to the CBM.

The relevant authorities have yet to sufficiently clarify data protection and banking secrecy rules in the context of NPE transfers. The Law on Credit Institutions does, however, envisage that the disclosure of data in aggregate form in such a manner that individual or business data on the client cannot be identified does not represent disclosure of a banking secret.

Absent a non-assignment clause, receivables can be assigned, but the assignor is bound to notify the assigned debtor of the assignment. The transfer of related security (mortgages, pledges, etc.) will be perfected only upon re-registration with the competent registers.

NPE transactions have not been common in North Macedonia. Historically, Macedonian banks have rarely opted for disposals as means of resolving NPEs, preferring instead to enforce NPEs.

Nevertheless, non-residents (i.e. non-Macedonian entities) may legally acquire NPEs, but such transactions must be notified to the National Bank of North Macedonia.

Special attention must be given to banking secrecy rules. The letter of the law does not provide for clear exemption/application criteria with respect to NPEs and no regulatory or court guidance is available in this respect. Proactive safety measures will be advisable in practice.

Generally, NPEs governed by Macedonian law may be transferred from banks to any third party by way of assignment. Additional perfection requirements will be required (e.g. appropriate re-registrations with the competent security registers).

NPE transactions are facilitated in Poland by enabling banks to freely trade in distressed receivables without the debtor's consent and relieving them from banking secrecy obligations, along with a favourable regulatory regime that does not subject purchasers to financial services licensing requirements.

In terms of structuring, sale to a special type of closed-end investment fund called a "securitisation fund" seems to be the most popular and advantageous structure for NPE portfolio transactions on the Polish market. Fund managers usually entrust servicing of receivables purchased, including debt collection, to special servicing companies, which require authorisation from the Polish Financial Supervision Authority.

Polish law further allows trades in receivables without the debtor's consent in case of so-called "lost receivables" (i.e. mainly receivables overdue for more than 12 months or receivables where the bank has initiated enforcement proceedings) as well as in a procedure referred to as "public sale of bank receivables". These two possibilities may have less practical significance, though, because of the tax benefits available to banks when selling portfolios to securitisation funds.

Banking secrecy regulations follow the above transaction mechanisms. While the secrecy exemption does not yet apply at the due diligence stage, this could be structured in a way that the bank mandates/endorses "clean-team" advisors.

The time-consuming and relatively costly transfer of receivables secured by mortgages or registered pledges is clearly the main difficulty for true sale transactions in secured Polish NPEs. As an alternative, Polish law provides for bankruptcy remote synthetic transfers (sub-participations).

Due to developments in regulations and case law concerning receivables which may be challenged by consumers (e.g. under loan/credit agreements denominated in currencies other than PLN), the relevant risk of challenge and unsuccessful enforcement of the receivable should be addressed in the documentation.

Once the adverse tax regime that was introduced in 2017/2018 will be put aside (likely in 2021), we expect several (larger) sale projects may quickly come to market. In addition to tax aspects, regulatory, disclosure, consumer protection and true sale considerations still warrant particular attention.

The acquisition of (not accelerated) loan receivables is in principle reserved to regulated entities, either licensed locally or passported. Licensing requirements are more relaxed, however, with respect to (i) corporate NPEs, and (ii) "non-performing" consumer loans (i.e. DPD in excess of 90 days and whose repayment was accelerated by the lender or is already in enforcement proceedings). Conversely, certain mortgage (consumer) loans, even if they qualify as "non-performing", may only be acquired by licensed credit institutions.

Unlicensed purchasers of consumer loan receivables must be registered with the Romanian consumer protection authority (mostly an administrative registration and subject to periodic reporting obligations). Foreign acquisition vehicles will also be required to have at least a representative appointed in Romania. To our knowledge, assignments to securitisation vehicles have not been used to date in Romania. 

Servicing consumer loans is a licensed activity since 1 January 2017, subject to supervision and sanctioning by the Romanian consumer protection authority. Servicing corporate loans is not yet regulated.

Romanian law does not contain an express exemption from data protection and banking secrecy requirements in relation to NPE assignments. Past practice has relied heavily on the "legitimate interest" exemption. In both areas, careful due diligence of the applicable contractual provisions in the underlying loan documentation will be required.

For true sale, NPE acquisitions are traditionally structured as an assignment of (monetary) loan receivables. The assignment of an NPEs portfolio must be registered in the National Registry for Movables Publicity. In addition, the registrations of security interests will have to be amended to reflect the assignment as well. Amendments in the Land Book registrations require that the assignment agreement concerning the underlying receivables be concluded in the form of an authentic deed in front of a Romanian public notary, subject to payment of certain ad valorem fees (up to 3 % of the face value of the assigned receivables).

Serbia still has an inflexible foreign exchange regime that prohibits cross-border sales and assignments of loan receivables. As such, a local acquisition company needs to be set up to acquire local customer receivables.

The sale of banking NPEs is subject to strict banking regulations. Serbian banking rules regulate in detail the assignment of banks' loan claims and receivables from clients. A Serbian bank may assign its Retail Loans to another bank only. There are no exceptions to this rule. Corporate Loans may exceptionally be sold and transferred to a non-bank (non-licensed entity) if those are bad-performing assets, i.e. (A) if such loans are past due (NPEs); or (B) if the loans are not yet past due, but (i) they are qualified as problematic, and (ii) they were classified as a problematic receivable on the most recent classification cut-off date preceding the assignment.

For true sale, receivables and ancillary rights are usually transferred by assignment. The re-registration of the ancillary security interests is recommended but is rarely done in practice. If the transaction relates to receivables deriving from foreign (cross-border) credit transactions, Serbian FX rules set out that the respective assignment agreement has to be concluded either as a tripartite agreement involving not only the originating lender and purchaser but also the debtor of the underlying receivable, or it is necessary to obtain consent to the assignment from the specific debtor, who in practice will have little to no incentive to become a party to such a transaction or to provide its consent.

The National Bank of Serbia has issued its guidance and regulator's interpretations of the rules on banking secrecy in the context of NPE sales in Serbia, aiming to facilitate the exchange of information. Under this guidance, all pre-signing efforts – notably the phases of due diligence review and negotiations – are interpreted as safe harbour exceptions from the strict rules of the banking secrecy regime. While this interpretation still needs to be confirmed by courts or made law, the existence of the regulator's guidance alone has significantly facilitated the NPE transactions.

From a regulatory perspective, corporate NPE transactions are not considered a banking activity and the loans can generally be acquired by anyone. Since 2017, NPE transfers of housing and consumer loans is subject to a much stricter regime – these loans can be acquired only by banks, foreign banks, a branch of a foreign bank or creditors holding a special licence to provide consumer loans.

Pursuant to the Slovak Act on Banks, a bank may assign its loan receivable against clients and provide the assignee with the necessary documentation without the client's consent (bank secrecy exemption), but only if the debtor is, despite a written warning, in default for more than ninety (90) calendar days (again, stricter rules apply for housing and consumer loans). However, the law does not provide any exemption with respect to a potential due diligence by the buyer before the actual purchase, which therefore requires careful structuring. Adhering to these strict requirements – unless consents of clients were obtained – makes any due diligence exercise and the preparation of the documents for the review by the potential purchaser quite burdensome. Due to similar concerns, data protection laws must be considered.

In general, NPE transactions take the form of an assignment of receivables. Accessory rights (such as interest or default interest) as well as security instruments are automatically transferred by operation of law. Transfer of other related rights, if any, must be explicitly agreed.

Enforcement of claims involves Slovak courts and enforcement officers, except for enforcement of pledges, where a direct out-of-court sale or auction is also possible. Banks do not enjoy any enforcement privileges compared to other non-regulated private creditors.

Since 2014, Slovenian banks have enthusiastically embraced disposal of non-performing exposures – portfolios and single tickets alike. The Slovenian NPE market has matured considerably since then.

Various legal transaction mechanisms have been tried and tested in practice. Debt can be transferred by means of (i) assignment (used most frequently), (ii) transfer of contract (very robust but requires debtor consent), (iii) synthetic (contractual) transfers, and (iv) demerger / spin-off by acquisition (typically used for complex portfolios). Difficult-to-transfer security often drives the choice of the mechanism. Structuring an effective transfer of the so-called "maximum mortgages" (a popular security interest with certain limitations on transferability) will typically be a matter of discussion.

Prospective purchasers (other than credit institutions) generally do not need a special licence to acquire corporate debt. In contrast, when acquiring retail exposures, purchasers need to be mindful of certain transferability restrictions attached to consumer debt. Some investors choose to establish locally licensed acquisition SPVs.

As in other jurisdictions, Slovenian banking secrecy and personal data protection rules need to be considered in deal structuring, particularly during the due diligence phase. Anonymised and selective (or staged) disclosure is often employed in this respect.

Customary post-closing deliverables include (i) notification of debtors (typically per-formed by the seller), and (ii) issuance of a notarised omnibus "confirmatory transfer deed" document, the purpose of which is to document the occurrence of transfer for use in various legal proceedings and to re-register security. The latter generally transfers automatically with the claim, but registers are nevertheless updated in this manner to ensure publicity effects. Post-closing steps also play a role in an attempted enforcement. Debtors sometimes employ a range of defences against the new creditor, including denying any business relationship with the new entity. Having the occurrence of the transaction properly documented helps to streamline the proceedings in these cases.

In terms of court enforcement mechanisms, banks generally do not enjoy special enforcement privileges. If no out-of-court enforcement has been agreed, secured claims will need to be enforced under regular enforcement procedures before Slovenian courts. To reduce time to collection, lenders often require that the loan agreements are entered into as a directly enforceable notarial deed.

In the aftermath of its most severe banking and financial crisis in 2000 – 2001, Turkey has initiated an ambitious structural reform programme aimed at sanitising its banking and financial sector. As part of such structural renovation efforts, transactions in NPE portfolios have been introduced.

Asset management companies (AMC), defined in the Banking Law in 2005, are authorised entities that are permitted to engage in NPE transactions. Following the establishment of AMCs, financial institutions started consistently selling NPEs to AMCs. In 2019, the total amount of NPEs sold to AMCs reached TRY 9.3bln. A legislative change in 2017 is expected to further boost the NPE market, as the amendment paved the way to state-owned banks also being able to sell their NPE portfolios. State-owned banks currently represent more than 40 % of the domestic loan market; hence their entry into the NPE market (for which they have been rather hesitant in times of crisis) will considerably enlarge the supply-side of the equation.

Non-performing loan portfolios are transferred in the form of an assignment of receivables (asset transfer), for which the consent of the debtor is not required. Blanket assignments are not recognised, and the agreement providing for the assignment of receivables needs to set forth the specifics of each transferred receivable in the form prescribed by applicable legislation.

Turkish AMCs are recognised as important tax exemptions, including from value added taxes. However, exemptions applicable to transactions carried out by AMCs in respect to stamp tax and other banking and loan-related taxes (such as the local resource utilisation fund) are only available for a period of five years following the incorporation date of the corresponding AMC.