LEXOLOGY Getting the Deal Through: Secured Lending

Trends and regulatory climate

Trends

What is the current state of the lending market in your jurisdiction and have any new trends emerged over the last 12 months?

The Austrian lending market is buoyant, particularly when commercial real estate is the underlying asset to be financed. Consistent with international trends, the market is largely borrower/sponsor driven, which has led to a loosening of covenants and an increase in drafting by borrower counsel.

Regulatory activity

Is secured lending a regulated activity in your jurisdiction?

Under the Banking Act, the following activities constitute ‘banking business’:

• the entering into of loan contracts;
• the extension of loans; and
• the grant of guarantees on a commercial basis.

Banking activities are considered to be commercial if they are consistently directed at generating revenue. Even single transactions are considered to be commercial if repeated transactions are expected. As regards the question of whether business is undertaken in Austria, banking activity is generally deemed to be conducted in Austria if:

• the lender acts in Austria;
• offers, acceptances or draft agreements are exchanged to or from Austria; or
• the results of such activity are incurred in Austria.

In addition to significant fines (up to 10% of a party’s annual revenue), the Banking Act prescribes that:

• any party which conducts banking business without the necessary licence or passport will not be entitled to – and will not have an enforceable claim in respect of – any compensation connected with such business (including interest and fees); and
• any sureties or guarantees entered into in connection with such a party are null and void.

Although not explicitly set out in law, such nullity could affect the security of other transactions (eg, in rem security interests).

Are there any specific regulatory issues which a prospective borrower should consider when arranging or entering into a secured loan facility?

There are no specific regulatory issues which prospective borrowers should consider.

Are there any specific regulatory issues which a prospective lender should consider when arranging or entering into a secured loan facility?

Lending on a commercial basis qualifies as banking business pursuant to the Banking Act. Where loans are made on a commercial basis in Austria, a prospective lender must have a licence pursuant to the Banking Act. EEA institutions may also ‘passport’ into Austria (ie, conduct the activities listed in Annex I of the EU Capital Requirements Directive (2013/36/EU)) through a branch or by means of the freedom to provide services, provided that they are authorised to do so. 

Are there plans or proposals for reform or significant changes to the regulatory landscape in this area?

Brexit-related issues aside, there are no plans or proposals to reform Austria’s secured lending regulatory landscape.

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Structuring a lending transaction

General

Who are the active providers of secured finance in your jurisdiction (eg, international banks, local banks or non-bank financial institutions)?

Active providers of secured finance in Austria are mainly local and international banks. Non-bank financial institutions (eg, debt funds) occasionally lend in certain situations (eg, financial restructurings).

Is well-established market-standard facility documentation used in your jurisdiction for secured lending transactions?

With respect to larger and syndicated financial transactions, the Loan Market Association standard or a derivative thereof is generally used.

Syndication

Are syndicated secured loan facilities typical in your jurisdiction?

Yes.

How are syndicated facilities normally structured? Does the law in your jurisdiction allow a facility agent to be appointed to act on behalf of other banking syndicate members?

Syndicated facilities used to be structured as sub-participations if no direct legal relationship between the sub-participants and the borrower existed.

This has changed and syndicated facilities are now mainly structured as ‘real’ syndications (ie, where the borrower enters into an agreement with all lenders). In such structures, facility agents are typically appointed to act on behalf of other syndicate members.

Does the law in your jurisdiction allow security and guarantees to be held on trust by a security trustee for the benefit of the banking syndicate?

Yes. However, under Austrian law, certain securities (eg, pledges or sureties) are dependent on the secured debt in the sense that they will be valid only to the extent and as long as the secured obligations are valid claims of the secured party (ie, the security trustee). Because a pledge or surety cannot be separated from the secured obligations and can therefore be held and enforced only by the creditor of such obligations, the security trust structures that are normally foreseen in UK agreements on secured transactions will be recognised only if appropriate clauses (eg, joint creditorship or parallel debt) are included in the respective financial documentation, ensuring that the secured claims vest in the security trustee.

Special purpose vehicle financing

Is it common in secured finance transactions for special purpose vehicles (SPVs) to be used to hold the assets being financed? Would security generally be given over the shares in the SPV or would lenders require direct asset security?

This depends on the type of assets being financed. If a SPV is used to hold the financed assets, lenders usually require securities over the shares thereof.

Interest

Is interest most commonly calculated by reference to a bank base rate or a market standard variable reference rate (eg, LIBOR, EURIBOR or HIBOR)? If the latter, which is the most commonly used reference rate in your jurisdiction?

Interest is usually calculated by reference to a market standard variable reference rate (eg, EURIBOR).

Are there any regulatory restrictions on the rate of interest that can be charged on bank loans?

The EU Benchmark Regulation (2016/1011) entered into force on 1 January 2018. It aims to ensure that benchmarks produced and used in the European Union are robust, reliable, representative and fit for purpose and not subject to manipulation. The regulation will affect reference interest rates.

In view of recent Supreme Court judgments in consumer cases and a June 2018 first-instance judgment in a dispute between a bank and a corporate borrower, it cannot be ruled out that clauses in facility agreements which set the reference interest rate (eg, EURIBOR) at a minimum of zero will be held valid – even if such reference interest rate is negative (the so-called ‘zero floor’) – only if such minimum reference rate is combined with a maximum reference rate.

Use and creation of guarantees

Are guarantees used in your jurisdiction?

Yes.

What is the procedure for their creation?

This depends on the type of guarantee. In general, a written agreement between a guarantor and a beneficiary is required.

Do any laws affect or restrict the granting or enforceability of guarantees in your jurisdiction (eg, upstream guarantees)?

Under Austria’s capital maintenance rules, the granting of upstream/side-stream loans, facilities, financings, guarantees (including the assumption of joint and several liability) or security interests is subject to strict limitations. These limitations apply to corporations (GmbHs) and stock corporations (AGs) and partnerships in which no natural person is a general partner (no unlimited personal liability), such as a limited partnership in the form of a GmbH & Co KG. Pursuant to this prohibition, shareholders (or partners of a partnership) cannot claim more than the net profit as evidenced in the latest annual financial statements of the corporation or partnership. Any transfer of ‘corporate assets’ (understood in its broadest sense, which includes benefits such as the granting of guarantees or security interests) which exceeds such net profit (as shown in the approved financial statements) and is not based on a proper shareholders' resolution approving such distribution will be null and void. This nullity may also affect a third-party lender if it knew or should have known (gross negligence) that the respective transaction was prohibited the capital maintenance rules. In view of the ample Supreme Court jurisprudence in this respect, lenders should be aware of these limitations and the fact that the standard of care is high.

Further, under the Stock Corporation Act, the granting of a loan or security by a stock corporation (AG) to another party for the purpose of acquiring shares in the stock corporation or its parent is prohibited financial assistance. No ‘whitewash’ procedure is available.

Subordination and priority

Describe the most common methods of structuring the priority of debts and security.

Apart from structural subordination (ie, lending to different entities in a capital structure), subordination and priority matters are normally dealt with in a contract between creditors (ie, an inter-creditor agreement).

Documentary taxes and stamp duty

Are any taxes, stamp duty or other fees payable on the granting of a loan, guarantee or security interest, or on its enforcement?

Value added tax

Loan and credit agreements and services thereunder are generally exempt from value added tax (VAT). However, under certain circumstances, some services which fall outside the scope of the VAT-exemption may still be subject to VAT.

Withholding tax

Interest payments are generally subject to withholding tax. However, exceptions may apply (eg, interest payments between corporations should not be subject to withholding tax). Whether withholding tax is levied depends on the specific structure and the applicable double tax treaties.

Stamp duty

The Stamp Duty Act lists certain transactions that are potentially subject to ad valoremstamp duty (eg, assignments of rights or receivables, sureties and guarantees, mortgages, bills of exchange and promissory notes). For these transactions to be stampable, a document evidencing a sufficient link to Austria must be produced.

Loan and credit agreements, as well as abstract first-demand guarantees, are not subject to stamp duty. However, such agreements may still be stamp-duty sensitive if they contain or refer to other stampable transactions (eg, assignments, sureties or bills of exchange).

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Cross-border lending

Governing law

Is it more common for local law to govern the terms of the facility documentation or is the law of another jurisdiction often elected by the parties (eg, English law or New York law)?

In addition to Austrian law, facility documentation is often governed by English law and, particularly in the context of buy-out financings driven by US sponsors, New York law (but this is an exception). Further, German law is often chosen as the law governing facility documentation. The choice of law depends on the parties to the transaction and whether the financial transaction has an international context.

As regards security documentation, the Act on Private International Law and the Rome I-Regulation (593/2008) recognise a contractual choice of law governing the obligation to create security. However, no choice of law is possible with respect to the creation and perfection of rights in rem (eg, security interests). The applicable law will be determined in accordance with Austrian conflict of laws rules.

As a starting point, pursuant to the Act on Private International Law, the creation of rights in rem in tangible assets will be governed by the laws (including the private international law rules) of the state in which such assets were situated at the time of completion of the transfer of rights in rem. If that law refers to another law, such reference must be considered.

With respect to book entry securities, the acquisition of rights in rem to such collateral is governed by the substantive laws of the jurisdiction in which the relevant register or custody account is maintained.

With respect to rights in rem over receivables (including bank accounts), according to the prevailing Austrian interpretation of the Rome I-Regulation, the law governing the receivables will, among other things, govern the steps to be taken to create security thereover.

Restrictions

Are there any restrictions on the making of loans by foreign lenders or the granting of security or guarantees to foreign lenders?

No restrictions apply other than those regarding banking regulation.

Are there any exchange controls that restrict payments to a foreign lender under a security document, guarantee or loan agreement?

No.

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Security – general

Security agreements

Is it possible to create a security interest over all assets of an entity? If so, would a single security agreement suffice or is a separate agreement required for each type of asset?

Austrian law does not recognise security interests over all assets of an entity (ie, a floating charge or enterprise pledge type of security). Rather, security interests attach to specific assets (or classes of assets). In order to serve as collateral, an asset must be specified or at least specifiable.

Under Austrian law, a single security agreement can cover various (to be specified) assets or categories of asset of an entity. However, it is standard market practice in Austria to have separate agreements for each type of asset. The reason for this approach is that under Austrian law, perfection requirements for different types of security interest deviate from each other (eg, registration requirements for mortgages, physical transfer of movable assets or notification requirements to third-party debtors with respect to intangible assets, such as receivables).

Release of security

What are the formalities for releasing security over the most common forms of assets?

In general, releasing securities requires contrarius actus (ie, the steps taken to create and perfect security should be reversed).

For example, in case of real estate mortgages, the release must be registered with the respective land register, meaning that the respective register entry regarding the mortgage must be deleted.

As a general rule (to which limited exceptions exist), pledges cease to exist on full and complete satisfaction of the secured obligations by operation of Austrian law. In such cases, contrarius actus is not required. However, in practice, it is typically obtained to establish legal certainty.

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Asset classes used as collateral for security

Real estate

Can security be granted over real estate? If so, what are the most common forms of security granted over real estate and what is the procedure?

Yes. Security can be granted over real estate in the form of a mortgage. Mortgages can be granted to secure obligations up to a maximum amount or a fixed amount plus interest and ancillary costs. A notary public must authenticate the mortgage agreement for registration purposes. For perfection, the mortgage over real estate must be registered in the respective land register.

Machinery and equipment

Can security be granted over machinery and equipment? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes. Security over machinery and equipment can be granted in the form of a pledge or security transfer of title. The security agreement requires no specific form. However, to perfect a pledge or security title transfer over movable property, delivery (ie, handover) of the respective asset to the secured party is usually required. Where such physical delivery is not feasible (as defined by case law), delivery of the asset via a declaration can be used to perfect the pledge or security title transfer (eg, the Supreme Court held that a piece of machinery weighing 600kg to 800kg could be pledged without having to be physically delivered).

Receivables

Can security be granted over receivables? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes. Security over receivables can be granted in the form of a pledge or a security assignment. Receivables (also future receivables) can be pledged under Austrian law if they are determined or at least determinable (ie, the pledgor and the legal cause from which they arise is clear; the third-party debtor need not necessarily be known). However, a pledge over such future receivables will arise only when they come into existence. Pursuant to Austrian law, a pledgor must record the pledges or security assignments over the receivables in its books and accounts in respect of each relevant third-party debtor and in every list of outstanding receivables in accordance with Austrian law to create and perfect the security. Alternatively, the pledge or security assignment can be perfected by notifying the respective third-party debtors of the security interest. 

Financial instruments and cash

Can security be granted over financial instruments? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes. Security over financial instruments can be granted in the form of a pledge or title transfer of financial collateral. As to the question of creation and perfection, a distinction must be made with respect to the different types of financial instrument and whether the Financial Collateral Act applies.

Book entry securities and credit claims 

Where the Financial Collateral Act applies, the financial collateral agreement must be evidenced in writing and be sufficiently clear to identify the financial collateral. For this purpose, it will be sufficient for book entry securities to be entered into a register or custody account. In case of credit claims, inclusion in a list of credit claims communicated to the collateral taker in writing or in a legally equivalent form is sufficient to identify the claim and demonstrate its creation as financial collateral between the parties. With respect to book entry securities, rights in rem may be transferred by means of an entry in the register or custody account.

Where the Financial Collateral Act does not apply, the general rules outlined below will apply, depending on the type of security.

Securities not registered in a book entry system

In order to perfect a valid and enforceable security interest, certificated bonds in bearer form and certificated securities that are payable to order and already bear a blank endorsement must be effectively handed over to the secured party or its custodian. Certificated securities that are payable to order and do not bear a blank endorsement must be endorsed and handed over to the secured party or its custodian. In case such securities are already stored with a third party (eg, a custodian – for instance, another credit institution), in order to create a pledge, the third party must be:

• notified of the pledge by the pledgor; and
• instructed by the pledgor to hold the securities for the benefit of the pledgee.

Securities in registered form 

A security interest over rights (including the rights embodied in securities in a registered form) will be perfected by:

• notifying the debtor; or  
• entering them into the pledgor’s commercial books.

Can security be granted over cash deposits? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes. Security over cash deposits can be granted in the form of a pledge. Cash credited on an account is qualified as a receivable due from the account bank to the account holder. Where the Financial Collateral Act applies, a financial collateral agreement must be evidenced in writing and be sufficiently clear to identify the financial collateral. For this purpose, it will be sufficient for cash collateral to be credited to a designated account. Where the Financial Collateral Act does not apply, the pledge agreement requires no specific form.

For the creation and perfection of a pledge, the account bank (in its capacity as the third-party debtor) must be notified about the account pledge. Alternatively, the pledgor must record the pledges over the pledged cash deposits in its books and accounts and in every list of outstanding receivables in accordance with Austrian law to create and perfect security.

Intellectual property

Can security be granted over intellectual property? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes. Security can be granted over certain types of intellectual property (eg, patents, trademarks or utility models) in the form of a pledge. With respect to the perfection of a pledge of a trademark, Austrian trademark law allows the recording of pledges in the trademark register. However, it is unclear to what extent a right in rem is acquired thereby or whether an entry in the books of the owner of the pledged trademark right is also required.

The legal situation with regard to pledges over patents and utility models is clearer; such rights will be created and perfected on registration in the relevant register.

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Enforcement

Criteria for enforcement

What are the common enforcement triggers for loans, guarantees and security documents?

Default events which trigger the enforcement of loans are to be agreed between the parties. Common triggers are:

• non-payment of an amount payable under a finance document;
• certain misrepresentations;
• cross-default clauses; and
• insolvency-related events with respect to a party.

In order to enforce security interests – other than financial collateral, where parties are free to agree the trigger – the secured obligations must be due. This can be at their stated maturity or as result of acceleration due to another default event.

Process for enforcement

What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?

Under Austrian law, secured parties may realise a pledge over movable and tangible assets by:

• judicial alienation; or 
• out-of-court enforcement.

Unless the parties have agreed on out-of-court enforcement, pledges over intangible assets may be realised only by judicial alienation. Mortgages must be realised via judicial administration or sale.

As regards out-of-court enforcement, the most common procedure is the realisation of a pledge by private sale or public auction. In general, a pledgee must notify the pledgor of a pledge’s upcoming realisation. With respect to the private sale of collateral, absent a stock exchange price, an appraisal of the fair market value of the collateral is mandatory.

Specific rules apply to the realisation of financial collateral within the scope of the Financial Collateral Act (eg, no notification of the pledgor of the upcoming realisation of the pledge is required).

Ranking in insolvency

In what order do creditors rank in case of the insolvency of a borrower?

Creditors' claims are satisfied in the following order:

• Secured creditors (eg, pledgees) and the rights of creditors with a right of separation of assets (eg, creditors with retention of title) remain unaffected by the opening of insolvency proceedings. They are entitled to preferential satisfaction with respect to the proceeds of the relevant assets.
• Privileged creditors are creditors with claims that lawfully arise against an insolvency estate after the opening of insolvency proceedings (privileged claims). Where the insolvency estate is insufficient to settle all privileged claims, the privileged claims will be settled in a certain order (ie, costs of the insolvency proceedings; certain claims by employees; and all other privileged claims).
• Unsecured creditors are creditors whose claims arise prior to the opening of insolvency proceedings (so-called ‘insolvency claims’) and who have no right to preferential satisfaction. They are satisfied only pro rata according to the insolvency quota.
• Creditors with subordinated claims rank after all other creditors. Subordination can be based on a contractual agreement or may result from the applicable law (eg, equity-replacing shareholder loans). Creditors with subordinated claims may participate in insolvency proceedings only where the claims of all other senior (secured and unsecured) and privileged creditors have been fully settled.

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Correct as of­­ 14 March 2019.

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