Poland's ruling Law and Justice Party (Prawo I Sprawiedliwość) ("PiS") stormed to victory in the European Parliament elections on 26 May 2019 with over 45 per cent of the vote. The European Parliament elections are considered a key indicator of not just Poland's, but Eastern Europe's future direction, with Poland holding parliamentary elections this autumn. Reuters notes that PiS "framed the European ballot as a battle against Western liberal ideals, which it says threaten the traditional way of life in Poland". PiS faced the European Coalition, a group comprised of the Polish moderate right, the centre-left and the Green party which came second in the election with over 38 per cent of the vote. Shortly before the election, Kamila Gasiuk-Pihowicz of the European Coalition surmised that "if the Coalition wins, Poland still has the chance to be a democratic country. If PiS wins, Poland will drift towards an eastern model of government. We can take either the Europe Express or the Trans-Siberian railroad".
The PiS government has had an uneasy relationship with the European Union (the "EU") and European Council President Donald Tusk, formerly Poland's Prime Minister prior to PiS's 2015 victory. Bloomberg reported that the EU "has taken a harsh stance on the nationalists' justice reforms" which will result in Poland losing around 23 per cent of its EU funding (circa. EUR 19.2bn) from 2021 to 2027. However, the European Commission still forecasts solid GDP growth in 2019 and 2020 of 4.2 per cent and 3.6 per cent respectively. The Commission’s spring macroeconomic forecast reports that “[h]igh capacity utilization levels, low interest rates and a favourable demand outlook are projected to act as incentives for rising private investment” and that this should in part offset the slowdown in public investment supported by EU funding.
Poland is once again seen as one of the biggest markets for investment in Central and Eastern Europe (the "CEE") and at the recent LMA Developing Markets Conference, 27.4 per cent of the audience suggested that, after Turkey, Poland is the CEE country that offers the most opportunities for syndicated lending in 2019. This was mirrored at the LMA Real Estate Finance Conference where 28.6 per cent of delegates agreed that Poland was the CEE country that holds the greatest investment opportunity in 2019.
This month's Trade Alert considers key legal risks for traders in the Polish loan market.
POLISH LEGAL SYSTEM
The Polish legal system is a civil law legal system. Legislative power is vested in the Polish Parliament made up of the lower house (Sejm) and the upper house (Senate) while executive power currently vests in the hands of Andrzej Duda, the President of Poland, alongside the Council of Ministers.
Polish law is broadly divided into two categories, universally binding law and internal law. Universally binding laws are stated in the Constitution, statutes (ustawa), ratified international agreements and regulations (rozporzadzenie). Any law falling outside these categories, forms part of the internal law and will generally only bind the relevant public administrative bodies or apply only as local law in the province within which it was enacted.
The other major source of law in Poland is EU law following Poland's accession to full membership of the EU on 1 May 2004.
KEY POINTS FOR TRADERS
· Banking licence not required for transfers under “loan agreements” or non-Polish law governed "credit facilities"; banking licence required for transfers of Polish-law governed “credit facilities”.
· Assignment of rights and assumption of obligations is the recommended transfer method; participation in Non-Standardised Securitisation Closed-Ended Investment Fund ("NSFIZ") should be used by non-bank lender to purchase Polish-law governed "credit facility".
· Notification to borrower of transfer recommended.
· 20 per cent withholding tax on interest payments to non-residents subject to the relevant double tax treaty benefits.
BANKING LICENCE REQUIREMENTS
Polish law distinguishes between a loan agreement and a credit facility.
· Loan agreement: regulated by the Polish Civil Code whereby a lender agrees to transfer a specific sum of money to the borrower and the borrower commits to return an equal amount. Borrower does not need to specify the purpose for which the money is borrowed and lender cannot control what funds are utilised for. The parties decide whether the loan is provided for consideration or free of charge. No banking licence is required.
· Credit facility: special-purpose agreement regulated by the Polish Banking Law whereby the funds must be utilised for a specific purpose detailed in the facility agreement and the lender controls what the funds are used for. Credit facilities are always provided for consideration (most notably in the form of interest).
Credit facilities can only be granted by banks as a banking licence is required. Large syndicated deals are generally structured as "credit facilities" as opposed to "loan agreements". The financing documentation will expressly categorise the agreement between parties as either a loan agreement or a credit facility.
The governing law of the credit facility is significant if a non-bank lender intends to purchase Polish debt in the secondary market. A non-bank lender should consider the following:
· Polish law-governed credit facility: it can participate through an NSFIZ but cannot acquire directly due to the licensing requirement.
· Non-Polish law-governed credit facility: it can purchase in the secondary market from either a Polish or non-Polish bank; no banking licence required.
· Loan agreement: it can purchase in the secondary market or participate in a primary syndication; no banking licence required.
If a non-bank lender purchases a Polish law-governed credit facility in the secondary market then the transfer is invalid. There may be civil law sanctions and officers of the entities involved (e.g., directors) may face criminal charges.
METHOD OF TRANSFER
Assignment of rights and assumption of obligations is the recommended method of transfer of indebtedness (whether under a loan agreement or credit facility) in Poland and should be in writing. Borrower's consent does not need to be obtained for a transfer to a third party unless it is required by law or the credit agreement. Any security attached to such debt does not expire upon an assignment, but it should be transferred to the transferee.
Although not a requirement, it is strongly recommended to notify the borrower of such assignment. If the borrower has not received such notification, it may satisfy its repayment obligations to the transferor. Furthermore, such notification perfects the transfer and makes it enforceable against third parties. It is also recommended (but not a requirement) to notify the guarantor if any guarantee is transferred.
Generally novation (odnowienie) is not used to transfer indebtedness in Poland as this would extinguish any security or guarantee relating to the transferred asset.
Sub-participation by way of Securitisation Fund (Fundusz Sekurytyzacyjny) or NSFIZ is the most common way of investing in Polish debt, as well as being the method by which non-bank lenders participate in Polish law-governed credit facilities. Polish banks are generally disincentivised from selling distressed debt in the secondary market due to unfavourable tax implications and the constraints imposed on them by banking secrecy laws.
SECURITY AND TRUSTS / AGENCY
Polish law does not recognise the trust concept, including foreign law trusts. However, there are similar Polish law concepts utilised for both loan agreements and credit facilities:
· "trust-management" structure: owner of property (the "entruster") entrusts it to another person (the "trustee") in order for the trustee to store or manage the property for the benefit of the entruster. This trust contract is used in relation to innominate contracts (i.e., contracts which are not standardised and have no set name). Regulations in respect of contracts for the provision of services apply.
· agency relationship: agent receives remuneration to act in a regular capacity as an intermediary. The agent is permitted to engage with third parties, execute contracts and receive declarations (such as payments) on behalf of such person. Agency relationships are used in relation to nominate contracts (i.e., a standardised contractual relationship that has a special designation attached to it such as a loan agreement/credit facility or a purchase and sale agreement) and are regulated under Polish law. Syndicated lending transactions often have an administrative agent that holds security on behalf of all lenders.
Other methods used under Polish law include:
· lenders and borrower agree to a joint creditorship (solidarność wierzycieli): borrower may discharge its obligations to all lenders by paying one lender; and
· foreign-law governed parallel debt structure.
TAX AND STAMP DUTY CONSIDERATIONS
Entities that are not resident in Poland are subject to 20 per cent withholding tax on any interest paid on loans under both loan agreements and credit facilities. This may be reduced if there is a relevant double tax treaty.
Under Polish law, the purchase of receivables (which includes the transfer of rights and obligations under a loan agreement or a credit facility) is generally subject to 1 per cent stamp duty. However, if extending loans is a core business of the lender, then all transactions (including the transfer of loans/credit facilities) are subject to a VAT exemption and, as such, no stamp duty will apply.
If the underlying debt under either a loan agreement or credit facility being transferred is secured by Polish law governed mortgages over real estate, registered pledges on shares or a financial pledge, then the assignment agreement should be notarised. Furthermore, the transfer of Polish law governed mortgages over real estate or registered pledges, should be registered with the relevant public registry.
Notarisation is also recommended where any insolvency proceedings have been initiated against an obligor.
The transferee should ensure that the security in question can be created in its favour. Certain types of security interest, such as financial pledges, are only available to a defined group of lenders specified in the Act on Certain Financial Collateral.
BANKING SECRECY REQUIREMENTS
Banks cannot disclose (without specific consent) any data regarding customers. This affects the ability of Polish banks to sell distressed debt in the secondary market. There are, however, exceptions to these requirements which include (i) if the bank enters into a securitisation transaction; (ii) if the bank sells loans that have been written off; or (iii) if the bank sells loans to other domestic or EU banks.
GERMAN REAL ESTATE TRANSFER TAX ("RETT") UPDATE
On 8 May 2019, the German Federal Ministry of Finance published a draft legislative bill on the future treatment of share deals for RETT purposes.
The main changes of the draft legislative bill are as follows:
· reduction of shareholding ownership thresholds from 95 per cent to 90 per cent in the case of a transfer of shares to new shareholders (i.e., if 90 per cent of a company's shares are transferred within the cooling period, then RETT will be triggered on the full tax value of the real estate held by that company);
· extension of the cooling period from 5 years to 10 years (or even 15 years in some circumstances); and
· extension of change of ownership/shareholdings rules for companies holding real estate to bring them in line with partnerships (i.e., RETT will be triggered if 90 per cent of a real estate holding company's shares are transferred either directly or indirectly within a 10 year cooling period).
In principle, the new provisions should apply to share transfers from 1 January 2020. As such, the proposed changes should be taken into consideration for both new and existing structures. Purchase and option agreements which are already concluded as well as partnership agreements should also be adjusted. These changes are likely to make transactions involving property-related shares more costly and complex for investors.
RISKS OF TRADING ENGLISH LAW LOANS USING LSTA DOCUMENTATION
The LSTA published a market advisory article on 22 May 2019 on risks that parties may face when trading loans governed by English law on a LSTA Par/Near Par Trade Confirmation (an "LSTA Par Confirm"). The LSTA recommends that certain other terms of trade should be added to an LSTA Par Confirm such as:
1. a clean title representation;
2. a due authorisation representation;
3. a no defaulting lender representation; and
4. a provision transferring third party claims.
In an LMA trade, these provisions would be provided in the trade confirmation and are not included in the English law transfer document. However, in an LSTA par/near par trade, these provisions are provided in the LSTA form of assignment agreement, not the LSTA Par Confirm. As such, if an LSTA Par Confirm is used in a secondary loan trade of an English law-governed loan where an English law transfer certificate/assignment agreement is used, the buyer will not automatically receive these provisions from the seller in either the trade confirmation or the transfer documentation.
ARE SYNDICATED TERM LOANS SECURITIES?
The LSTA recently submitted an amicus brief to a court in New York alongside the Bank Policy Institute arguing that syndicated loans should not be considered securities. The LSTA and the Bank Policy Group weighed in on this case regarding the classification of loans not being securities due to what they see as the "materially negative consequences to borrowers and other stakeholders…were a court to reach the opposite conclusion", and the effect that this could have on the USD 1.2tr market for institutional term loans and USD 600m plus market for CLOs.