Contributed by: Markus Fellner, Elisabeth Fischer-Schwarz, Veronika Seronova and Mario Burger Fellner Wratzfeld & Partners see p.24
1. Loan Market Panorama p.4
1.1 Impact of the Regulatory Environment and Economic Cycles p.4
1.2 Impact of the COVID-19 Pandemic p.4
1.3 The High-Yield Market p.5
1.4 Alternative Credit Providers p.5
1.5 Banking and Finance Techniques p.6
1.6 Legal, Tax, Regulatory or Other Developments p.6
1.7 Developments in Environmental, Social and Governance (ESG) or Sustainability Lending p.6
2. Authorisation p.7
2.1 Authorisation to Provide Financing to a Company p.7
3. Structuring and Documentation Considerations p.8
3.1 Restrictions on Foreign Lenders Granting Loans p.8
3.2 Restrictions on Foreign Lenders Granting Security p.8
3.3 Restrictions and Controls on Foreign Currency Exchange p.8
3.4 Restrictions on the Borrower’s Use of Proceeds p.8
3.5 Agent and Trust Concepts p.8
3.6 Loan Transfer Mechanisms p.9
3.7 Debt Buy-Back p.9
3.8 Public Acquisition Finance p.10
4. Tax p.10
4.1 Withholding Tax p.10
4.2 Other Taxes, Duties, Charges or Tax Considerations p.10
4.3 Usury Laws p.10
5. Guarantees and Security p.11
5.1 Assets and Forms of Security p.11
5.2 Floating Charges or Other Universal or Similar Security Interests p.13
5.3 Downstream, Upstream and Cross-Stream Guarantees p.14
5.4 Restrictions on Target p.14
5.5 Other Restrictions p.14
5.6 Release of Typical Forms of Security p.15
5.7 Rules Governing the Priority of Competing Security Interests p.15
6. Enforcement p.16
6.1 Enforcement of Collateral by Secured Lenders p.16
6.2 Foreign Law and Jurisdiction p.16
6.3 A Judgment Given by a Foreign Court p.17
6.4 A Foreign Lender’s Ability to Enforce Its Rights p.17
7.
7.1 Company Rescue or Reorganisation Procedures Outside of Insolvency p.17
7.2 Impact of Insolvency Processes p.19
7.3 The Order Creditors Are Paid on Insolvency p.19
7.4 Concept of Equitable Subordination p.20
7.5 Risk Areas for Lenders p.20
8.1 Introduction to Project Finance p.20
8.2 Overview of Public-Private Partnership Transactions p.20
8.3 Government Approvals, Taxes, Fees or Other Charges p.21
8.4 The Responsible Government Body p.21
8.5 The Main Issues When Structuring Deals p.22
8.6 Typical Financing Sources and Structures for Project Financings p.22
8.7 The Acquisition and Export of Natural Resources p.22
8.8 Environmental, Health and Safety Laws p.23
As everywhere in Europe, the regulatory framework – in particular, the determination of riskweighted assets and of own funds – has had a significant impact on overall strategy in the banking sector, which increasingly aims at deleveraging banks’ balance sheets via the disposal of non-core assets.
Fuelled by increasingly expensive energy in the wake of the Ukraine war, consumer prices in the EU recently rose by 8.6%. The European Central Bank (ECB) is thus falling well short of its inflation target, which is aiming for 2% as the optimum value for the economy. Record inflation in the Euro area is forcing the ECB to act. Thus, in July 2022 the ECB abandoned its zero interest rate policy after 11 years and increased the reference rate by 0.5 percentage points. In addition, the ECB raised the deposit rate to 0%. Banks therefore no longer have to pay when they park excess money at the ECB.
The ECB decision will now have far-reaching consequences for borrowers. The time of cheap loans is over, and loans will become more expensive again in the foreseeable future. Domestic banks have already been raising interest rates for some time, and a further increase is expected. Additionally, savings interest rates are expected to rise in the coming months. Although the first major banks increased the fixed interest rate for fixed-term deposits to more than 1% in April 2022 for the first time in a long time, interest rates for overnight deposits are still a meager 0.01―0.45%. High inflation continues to have a negative impact, with the real interest rate remaining in negative territory.
Furthermore, on 1 August 2022 stricter criteria for granting private real estate loans came into force. Under the new rules, buyers will in future have to provide evidence of 20% of the purchase price in the form of equity, the monthly loan instalment may not exceed 40% of the monthly net disposable household income, and the term of the financing may not exceed 35 years. The measures are set to prevent potentially difficult situations on the real estate market. According to the Austrian National Bank, however, Austria is not on the verge of a real estate bubble bursting. The domestic real estate market is still considered stable. However, the momentum of rising prices and the possibility of systemic risk are intended to be curbed by these legal steps.
Overall, the current economic developments – in particular those caused by the COVID-19 pandemic – seem not to have had a significant negative impact on the Austrian lending market, which has generally remained solid. However, it remains to be seen what the full effect of the current economic developments will be.
As a result of the COVID-19 pandemic, the financial situation of many borrowers deteriorated. The Austrian legislature therefore decided to provide relief for borrowers – in particular, to consumers and micro-entrepreneurs (ie, entrepreneurs who employed fewer than ten persons in the last financial year and whose annual turnover and/or annual balance sheet total did not exceed EUR2 million). Consumers and microentrepreneurs who concluded a loan agreement before 15 March 2020, for example, had the right to demand a deferral with regard to liabilities (repayments, interest or principal payments) if the consequences of the COVID-19 pandemic make it unreasonable for them to pay the amounts owed. However, this measure – as
with other measures passed to combat the economic consequences of the COVID-19 crisis –has already ceased.
The Covid-19 measures initially led to a decline in insolvencies in Austria and significantly distorted insolvency statistics over the past two years. However, in the first half of 2022, the number of insolvencies has increased again and nearly is at the same level as before the COVID-19 crisis in 2019.
The Austrian marketplace (Vienna Stock Exchange) has not developed a high-yield market that is as active as those in other jurisdictions.
Predominantly, new issues of bonds admitted to trading on the Vienna Stock Exchange comprise issuance programmes of credit institutions. There is also a limited number of mid-cap issuers and numerous foreign issuers, largely aimed at admission of their instruments to the non-regulated Vienna multilateral trading facility (MTF), which does not require the approval and publication of a prospectus in line with the Prospectus Regulation.
There is, nevertheless, a solid share of classic corporate bonds that are largely issued by listed blue-chip companies, but which do not constitute a true alternative to bank loans for the larger market.
Traditionally, the Austrian lending market has been dominated by credit institutions licensed in Austria. In terms of “alternative” credit providers, institutions (such as insurance companies) are not regularly seen as original lenders in transactions. Instead, they rely on acquiring existing
exposure from credit institutions that handle the origination.
Austria is a strongly regulated banking market where a banking licence is required for commercial lending as well as the commercial acquisition of receivables (factoring). The latter will only be fully exempted from that licence requirement if the purpose of that acquisition is securitisation of special purpose securitisation vehicles (ie, companies specialising in acquiring loan exposure and transferring it to its financing providers, frequently in the form of bond issues).
Limited exceptions apply in the context of smallcategory financings such as crowdfunding. In addition, the Austrian regulator (Finanzmarktaufsicht, or FMA) has developed a practice according to which the offering of certain very limited alternative structures to classic loan agreements (subordinated loans, sale and lease-back structures, etc) does not require a banking licence.
With only a few exceptions (for example, where applicable to banking secrecy), Austrian banking legislation will not apply to certain companies rendering banking services if and to the extent that these pertain to their original and permitted operations. These include insurance companies, pension funds, non-profit organisations, societies, certain non-EU securities firms and alternative investment funds.
In market practice, these exceptions have not led to significant competition for banks. Rather, in specific areas (eg, where insurance companies wish to act as lenders for investment purposes), credit institutions are involved for purposes of origination and pass on loan portfolios.
In terms of banking and finance techniques, Austrian borrowers rely primarily on local banks and, to a significant degree, on their respective “house bank” for their financing. In those cases, the complexity of the loan and security documentation, as well as reporting obligations and financial governance, are fairly limited and frequently rely on in-house standard documentation.
Additionally, the Austrian lending market has seen an influx of both foreign lenders and Austrian banks seeking to either provide financing as a syndicate in a club deal or aiming at syndication of their relevant loans to international banks. In those scenarios, significantly more complex and voluminous loan documentation (based on the standards made available by the Loan Market Association and adapted for Austrian needs) has become more common.
The legislation passed to combat the COVID-19 pandemic (see 1.2 Impact of the COVID-19 Pandemic) mainly aimed to mitigate the economic consequences of the COVID-19 pandemic and maintain the solvency of borrowers. However, these measures are no longer in force.
The most significant tax development (dating back to 2011) that has strongly facilitated lending to Austrian borrowers was the abolition of Austrian stamp duty, which was imposed on loans with certain connections to Austria.
On 1 August 2022 stricter criteria for granting private real estate loans came into force (see 1.1 Impact of Regulatory Environment).
Other than that, the current regulatory developments concerning capital requirements and risk management may have a significant impact on the loan market in Austria. Since there is still a fair share of non-performing loans in the Austrian lending market, banks will have to reduce these loans in order to be able to comply with the European risk management requirements (minimum coverage). This may lead to more restricted lending and a quick realisation of nonperforming loans, which in turn may impact the Austrian economy. The most recent European regulatory initiatives (Basel IV), which should be implemented by the beginning of 2023, are also expected to have repercussions for the Austrian loan market – especially for major banks, as their minimum capital requirement would increase considerably.
The fight against climate change began several years ago in Austria and throughout the EU. The result so far has been a multilayered, constantly amended legal structure of agreements and commitments under international law (primarily the Kyoto Protocol and the Paris Agreement), in addition to requirements under EU law and national laws.
The EU has decided to restructure the entire financial system to further sustainable finance. The term “sustainable finance” usually refers to the consideration of environmental and social issues (so-called ESG factors) in investment decisions, leading to more investment in longterm, sustainable activities.
In this context, four core regulations are to be observed.
• Under Regulation (EU) No 573/2013 (Capital Requirements Regulation (CRR)), large institutions that have issued securities admitted to trading on a regulated market of an EU member state are required to disclose information on sustainability risks from mid-2022. In addition, far-reaching requirements for the inclusion of sustainability risks in the risk management and supervision of institutions have already come into force.
• Regulation (EU) 2019/2088 (Disclosure Regulation) obliges financial market participants to disclose, on the one hand, their concepts for integrating sustainability risks into their investment decision-making process and, on the other hand, the adverse effects of investment decisions on certain sustainability factors. These extended information and transparency obligations thus also provide for an expansion of sustainability-related accounting. Some of the requirements have already been implemented from March 2021.
• Regulation (EU) 2016/1011 (Benchmark Regulation) ensures better information on the “carbon footprint” of an investment portfolio. In addition to developing minimum standards for low-carbon investments, two new categories of benchmarks have been introduced. Some of the requirements have already been applicable since April 2020.
• Regulation (EU) 2020/852 (Taxonomy Regulation), which was adopted in April 2020, undoubtedly forms the “core” of the EU’s Sustainable Financing Action Plan and further expands on and defines the concept of “sustainability”. In order to be considered sustainable in terms identified by the Taxonomy Regulation, a company must achieve at least one and not “substantially harm” any of the following environmental objectives:
(a) climate change mitigation; (b) adaptation to climate change;
(c) sustainable use and protection of water and marine resources; (d) transition to a circular economy waste prevention and recycling; (e) pollution prevention and control; and (f) protection of healthy ecosystems as environmental objectives.
With regard to disclosure obligations in Austria, the Sustainability and Diversity Improvement Act is of particular relevance. It obliges large companies, which are those of public interest and with more than 500 employees, to report on environmental, social and labour issues in the management report or in a separate report. Measures designed to respect human rights and fight corruption and bribery (ie, the ESG factors) should be included. It is also necessary to outline the concepts pursued and to indicate the results, risks and most important non-financial indicators.
This would appear to cover only a very small number of companies. However, many smaller companies will also be affected by the “leveldown” effect – according to which a company can only fulfil its disclosure obligations itself if it can rely on corresponding reliable information from its suppliers.
Banks are authorised to provide loan financing on a commercial basis to companies domiciled in Austria via the following three basic routes:
• application for an Austrian banking licence, which is certainly not viable for one-off transactions and typically involves meticulous,
in-depth preparation over an extended period – in particular, fulfilling legal requirements for credit institutions and preparing an appropriate business plan for the regulator to review;
• establishment of a branch (Zweigstelle) by a credit institution from another EU member state by way of “passporting” (ie, having the competent regulator from the home member state notify the requisite banking licence to the Austrian regulator); and
• direct rendering of services under the EU freedom of services, which is the most common approach for non-Austrian banks who wish to commercially engage in the lending business in Austria without establishing a permanent presence.
Non-banks may generally only engage in the lending business in Austria if and to the extent that such activity does not require a banking licence for an Austrian entity – for example, via the acquisition of loan portfolios by special securitisation purpose entities.
In terms of absolute restrictions on granting loans, subject to the fulfilment of the regulatory criteria (see 2.1 Authorisation to Provide Financing to a Company), foreign lenders intending to provide debt financing to Austrian borrowers face no specific restrictions.
There are no legal impediments or restrictions on granting securities or guarantees to foreign
lenders that deviate from the rules applicable to Austrian creditors.
There are no restrictions, controls or other concerns regarding foreign currency exchange that deviate from the rules that would apply to an Austrian creditor.
There are no restrictions on the borrower’s use of proceeds from loans or debt securities.
Austrian civil law implements agent and trust structures in Austria in the form of an agency agreement (Auftragsvertrag). This may be combined with the granting of a power of attorney (Stellvertretung), and it is also possible for a trustee to hold certain rights in its own name but for the account of a third party (trustor).
As a consequence, the documentation of loans governed by Austrian law frequently features agency and trust concepts in the form of customary security agency agreements.
A certain degree of complexity (and potential insecurity) is entailed by these structures, as Austrian civil law differentiates between socalled “accessory securities” (akzessorische Sicherheiten) and “non-accessory securities” (nicht-akzessorische Sicherheiten). The former provide for a stringent link between the existence/validity of the security and the underlying (secured) claim. By way of example, pledge (and mortgage) agreements are strictly accessory; therefore, any defect in the underlying legal relationship (such as the invalidity of the loan claim) would automatically result in the lapse
of the relevant security right – as would the full redemption of the claim.
Structures providing for the grant of accessory security rights to a security agent, which typically hold parts of (but not the entire) loan claim, are customary in Austria. However, these have not been tested or expressly accepted by the courts.
This risk does not apply to so-called nonaccessory security, which includes the transfer of property for security purposes (Sicherungsübereignung).
These uncertainties are known by domestic – and widely accepted by foreign – participants in the Austrian lending market and the relevant qualifications are customarily included in enforceability opinions as a standard market practice.
Austrian civil law recognises the concept of assignment, pursuant to which lenders’ rights (but not obligations) may generally be unilaterally transferred from the original or former creditor (assignor) to a new creditor (assignee). However, there are regulatory limitations to this procedure stemming from the fact that Austrian banking secrecy (Bankgeheimnis) prohibits the disclosure of customer data by banks to third parties. Some exceptions apply (eg, for the conduct of legal disputes with a borrower or for the purposes of certain investigations by authorities) but these will generally not apply to performing loans.
Waiver and consent language – for example, permitting disclosure of information on a loan and lender to a potential syndicate partners or assignee – is therefore frequently used in nonconsumer loans and is standard market practice for loans designed for syndication.
As this is not a satisfactory structure in practice (particularly in the case of performing loans), the entirety of any rights and obligations arising from a loan agreement may be transferred by way of transfer of contract (Vertragsübernahme); such transfer requires the consent of all parties involved. It is customary, however, that the loan documentation contain the relevant consent of the borrower in advance, which is permissible under certain circumstances.
Austrian law-governed security rights will typically transfer alongside the underlying legal relationships. Statuary law provides for a claim of the new lender to have any such security rights transferred from the former lender.
Specific to Austrian law is the possibility of a new creditor, with the consent of the borrower, redeeming outstanding debt with the former creditor, thereby causing (against payment) an ex lege transfer of any related security rights. This would, however, require that any such outstanding payments are due. As a result, this redemption (Einlösung) structure would typically not be a viable option in relation to performing loans. The method is frequently used in restructuring scenarios because it permits the swift and secure transfer of security rights.
As an alternative, Austrian law also permits risk transfer structures such as sub-participations, which do not result in a transfer of the position of the lender of record. However, this would not imply a technical transfer of a claim or security right.
Debt buy-back by a borrower or a sponsor is generally permitted under Austrian law, provided that either a repayment is due or voluntary early prepayments are permitted on a contractual
basis. In addition, consumer borrowers have (as a general rule) a mandatory right of early repayment.
Austrian law does not recognise or regulate the concept of “certain funds”.
Subject to the Austrian Takeover Code (Übernahmegesetz), which implements the European Takeover Directive, public takeover transactions require debt or equity funding for the acquisition of the target shares (under the hypothesis of a full acceptance of an offer) to be available and to be certified by an independent expert. That certificate must be included in the published offer documentation.
Other than that, “certain funds” provisions are not mandatory in public transactions but may be used by way of contractual arrangement on a case-by-case basis.
In terms of documentation, there is a divide in the Austrian lending market. On the one hand, major and local Austrian banks often provide debt financing to their new and existing customers on the basis of in-house standard “shortform” documentation (in conjunction with their general terms and conditions). On the other hand, international banks targeting the Austrian market, as well as Austrian banks aiming at the syndication of their lending engagements, increasingly refer to “long-form” documentation that is frequently structured and drafted along the lines of the standard provided by the Loan Markets Association.
In the context of public M&A takeover transactions, no public filing or other disclosure of the underlying financial documentation is required. Including the independent expert’s attestation/
confirmation regarding the available funding in the offer document will suffice as a matter of law.
Principal repayments under loan transactions are not subject to withholding tax.
Interest payments made to lenders are not subject to withholding tax as a general rule. Rather, such payments will have to be taken into account for the purposes of the (corporate) income tax of the lender.
There are certain types of security arrangements – for example, suretyships (Bürgschaften) and assignments (Zessionen) – that, on a standalone basis, would be subject to stamp duty. There is an exception, however, when these transactions are entered into for purposes of securing loan obligations (which are themselves exempted from stamp duty).
If debt funding is structured by way of the acquisition of loan receivables on a commercial basis, which Austrian banking law qualifies as “factoring”, then such assignment may also be subject to Austrian stamp duty (applied at a rate of 0.8 %, calculated on the basis of the consideration for the acquisition of such loan).
There are no regulatory limitations on interest charged to customers (borrowers). However, there are certain basic limitations under Austrian civil law prohibiting “usury” (Wucher). Such interest agreements may only be considered prohibited and unenforceable if and to the extent that
the agreed interest rate is clearly disproportionate to market terms and conditions, owing to the weakness, predicament or inexperience of the borrower. In the retail sector, various information duties and formal requirements apply to consumer loans.
In commercial lending, relevant examples are almost non-existent.
Security rights over shares are the most common security instrument in certain types of financing transactions under Austrian law. Perfection and enforcement vary among the different types of legal forms, of which the limited liability company (Gesellschaft mit beschränkter Haftung,or GmbH) is by far the most common.
GmbH
Security rights over GmbH shares are typically created in the form of a pledge. Although the full title transfer in a GmbH share requires the form of an Austrian notarial deed, this does not apply to a share pledge; therefore, this is done only in written form. In addition to the GmbH share pledge agreement and in order to facilitate enforcement, the pledgor typically grants:
• a notarised power of attorney, which authorises the pledgee to sell and transfer the shares on their behalf; and
• a written voting power of attorney, which will normally only be used in case of default.
The perfection of a GmbH share pledge requires the notification of the company. Separate confirmation letters, either counter-signed or with con-
firmation of receipt, were common in the past. However, in intra-group scenarios, the company frequently co-signs the share pledge agreement proper in order to document proper notification (and perfection).
Given that shares in joint stock corporations (Aktiengesellschaft, or AG) are typically certificated as securities, which is legally prohibited in the case of GmbH shares, the major difference between a GmbH and an AG share pledge is the perfection requirements. As is the case with the GmbH, the AG share pledge agreement requires no specific form and is therefore customarily drawn up in simple written form.
As a basic rule, the perfection of in rem security over movables requires that the pledgee obtains direct or indirect possession, which may be mediated by a third party (such as an account bank) but not the pledgor. Only shares in stockexchange listed companies (or companies envisaging such admission) and shares traded on an MTF may be certificated in bearer form. This is effected through a global share certificate, followed by the introduction of the shares into an electronic clearing system. In that case, a pledge may be created by transferring the shares to the pledgee’s securities deposit account or blocking the pledgor’s account in the pledgee’s favour.
Registered shares that are certificated in physical form must be transferred to the pledge. Shares that are not certificated may only be pledged in accordance with the rules on assignments (ie, notification of the company).
Pledges over shares in partnerships – both limited partnerships (Kommanditgesellschaft, or KG) and unlimited partnerships (Offene Gesellschaft,
or OG) – do not require a specific form and are therefore commonly drawn up in writing and perfected through notification of the company.
Companies’ articles of association frequently provide for transfer restrictions that may include a shareholder consent/resolution requirement for the pledge or a transfer of shares/interest in those companies. In order to avoid risks such as unenforceability or delays during enforcement, it is advisable to have these requirements removed from the articles or to obtain the requisite consent in advance.
Austrian law provides for court-conducted enforcement proceedings unless there is a specific contractual enforcement arrangement in place between the security holder and the security provider that, inter alia, requires a valuation of the asset prior to its commercialisation (except where there is a defined market or stock exchange price). The requisite rules aiming at preserving the pledgor’s interest during enforcement must be followed meticulously when drafting security agreements. Overall, direct enforcement by the pledgee is standard market practice in financing transactions in Austria.
Security rights over receivables may be effected either by pledge or full transfer (assignment) of rights for security purposes. Although both forms occur in practice, security assignments are more common as they provide full title to the secured party.
The transfer of receivables requires an assignment agreement between the assignor and the assignee, unless the assignor and the obligor have agreed on a valid assignment restriction.
However, if an assignment is effected for security purposes, the same requirements as for pledges will apply and disclosure of the pledge/ transfer is necessary. In the case of receivables not recorded in the creditor’s/assignor’s books and records (which is rare in business practice), the notification of the obligor is considered sufficient. In the case of receivables being so recorded, Austrian case law has developed an increasingly stringent approach that requires the pledge/assignment to be annotated in both the list of obligors of the assignor and the list of open accounts.
Given the requisite legal restrictions, the notification of the obligor of an assignment/pledge is mostly withheld until an enforcement event occurs.
Pledges and security transfers are not restricted to present receivables of the assignor but may extend also to future receivables or certain classes thereof, if and to the extent that such receivables are properly described in the security agreement.
Cash collateral is most commonly granted in the form of account pledges, which are not subject to specific formal requirements and are therefore typically drawn up in written form. Perfection requires the notification of the account bank. The standard business terms and conditions of Austrian banks contain a pledge arrangement over any and all assets of the customer transferred to the bank’s custody, including accounts with a positive balance. In order to create an effective third-party pledge (to a pledgee other than the account bank), this standard pledge agreement is customarily waived or subordinated.
Real property can be provided as security in the form of a pledge (Hypothek) under Austrian law.
In addition to a pledge agreement, which does not require a specific form, the registration of the pledge in the land registry is required. For this purpose, the pledgor/owner of the property needs to provide a specific consent declaration regarding the registration, which must be notarised.
Multiple pledges over one individual property are possible and will rank towards each other in terms of priority, as per registration in the land register.
The registration of a pledge over real property in the land register is subject to a significant registration fee (1.2% of the secured amount), which is typically borne by the pledgor. Under certain circumstances (eg, where there is abundant other security or impeccable financial standing), lenders may temporarily refrain from the registration while having readily executed pledge documentation in place for immediate registration at their discretion.
Although security arrangements relating to movable goods such as equipment or inventory are not subject to specific formal requirements, Austrian law imposes stringent standards on perfection that require either the physical transfer of the pledged goods or equivalent measures. In the case that a physical transfer is too onerous, transfer “by way of token” will be considered sufficient.
A full title transfer for security purposes will be possible in such cases but is subject to identical perfection requirements in order to avoid circumvention.
Given these requirements, pledge over movable assets is not common – in particular, when related to assets that are necessary for the daily operations of the pledger.
In individual cases, lenders and borrowers agree on pledges on the contents of warehouses. These are, however, subject to strict requirements under case law that entail signage of the goods affected and the engagement of a special guardian. The latter will be bound by instructions solely of the pledgee and assure that no goods are removed from a warehouse without the pledgee’s consent or in the case of direct replacement.
Intellectual Property Rights Trade mark pledges do not require a specific form. In terms of perfection, a registration of the pledge is considered necessary and standard; however, this requires notarisation of the pledgor’s consent declaration.
Patent pledges require a registration in the patent register.
Copyrights may not be pledged or transferred as such. However, licences may be established or be the subject matter of security rights to achieve an equivalent economic result.
The concept of a “floating charge”, or other universal or similar security interest over all present and future assets of a company, is not recognised by Austrian law. Rather, security arrangements must be made specifically with respect to each and every asset and type of asset and take into account observation of the relevant perfection requirements, which vary significantly.
Austrian law does not restrict downstream guarantees (or other security). However, there are stringent limitations on upstream and crossstream security.
Distributions to direct or indirect shareholders may only be effected by corporations – such as an AG, a GmbH or a GmbH & Co KG (ie, a limited partnership in which the only unlimited partner is a GmbH) ‒ in the form of:
• formal dividend distributions, based on a balance sheet and appropriate shareholders’ resolution, in the case of a capital decrease (which also requires a shareholders’ resolution); or
• potential liquidation surplus.
In addition, a company and its shareholders or affiliates may enter into transactions with each other on arm’s length terms and conditions. This requirement entails that the company will only enter into such transactions with its shareholder or affiliates if and to the extent that it would equally (but hypothetically) enter into the transaction on identical terms and conditions with any unrelated third party.
Austrian case law on these restrictions is based on a case-by-case evaluation and has become increasingly stringent during the past 20 years.
In practice, it is advisable to have the management of the company assess the proposed transaction under the business judgement rule in accordance with the aforementioned criteria, with particular attention paid to the risks involved. The existence of the company must not, in any event, be threatened by entering into such a transaction. A breach of the capital main-
tenance rules would lead to personal liability of the management and nullity of the transaction.
In order to mitigate the relevant risks, limitation language restricting the potential enforcement of upstream or cross-stream security arrangements is common in Austria. As there are no clear guidelines on the admissibility of upstream or cross-stream guarantees (eg, the limitation to certain financial criteria), any type of proposed limitation language is necessarily ambiguous to some extent and decreases the commercial value of upstream or cross-stream security significantly.
For joint stock corporations (AGs), there is an outright prohibition on providing financial assistance in relation to the acquisition of their own shares, including granting advance payments, loans or providing security to a third party in order to provide such assistance. Exceptions only exist for transactions that take place in the ordinary course of business by credit institutions.
Austrian legislation on other corporations (GmbH) does not contain comparable restrictions. As to substance, however, these restrictions are similar to those for the AG in view of the Austrian capital maintenance rules, as per Austrian case law.
The most relevant risks in relation to the grant of security guarantees are valuations of the principles of accessoriness and capital maintenance rules.
In addition to that, Austrian insolvency law provides for an elaborate set of provisions permitting an insolvency administrator to challenge
and void certain transactions entered into prior to the opening of the insolvency proceedings of a security provider. The insolvency administrator is entitled to rescind acts of the bankrupt company if a specific rule (subject to additional criteria) on such rescission applies and where such acts:
• have been completed prior to the opening of insolvency proceedings;
• affect the assets of the estate; and
• are detrimental to the estate’s creditors.
In Austria, there are no significant costs associated with the grant of security or guarantees for credit or loan agreements. Besides, no specific prior consent by authorities or statutory interest representation (eg, works council) is required.
5.6
of
es are accessory securities. The deletion of a mortgage from the land register, for instance, will only be possible if the pledgee consents to the release and this is executed in an authenticated form.
These requirements and documentary deliverables may cause significant complexity in certain refinancing transactions, such as where:
• an outgoing lender/security holder only agrees to a release of security (or the issuance of confirmations) upon full repayment; and
• a new lender/security holder insists on the creation/perfection of the security as a condition precedent for drawdown.
of
Formalities on the release of security depend on the type of security that has been granted.
Accessory security (eg, pledges or suretyships) will automatically lapse in the event of a full satisfaction of the secured liabilities. In these cases, no specific formal requirements would apply to the “release” of security. Nevertheless, release agreements or confirmations on repayment (which may take the form of pay-off letters issued in advance of such payment) are customary.
In the case of non-accessory securities, depending on the type of security, a formal re-transfer or similar act may be required in order to reverse the original creation of a security right.
In case of securities recorded in registers (such as mortgages or trade mark pledges), certain formal requirements may apply to the deletion of the relevant security right – even if the pledg-
In these scenarios, escrow arrangements are common market practice.
5.7
Austrian rules on the creation of securities generally follow the principle of priority when it comes to the in rem perfection of security rights.
Contractual arrangements varying this principle are permissible among creditors – for example, intercreditor agreements in syndicated loan transactions. This, however, would not have to be observed by an insolvency administrator and/ or court in the case of enforcement and/or insolvency proceedings.
In syndicated financing transactions, the appointment of a joint agent/security agent constitutes significant mitigation for larger groups of creditors against this legal concept. This is because the proceeds from an enforcement or insolvency proceedings would be disbursed to the agent/ security agent for the account of a larger group
of creditors so that internal distribution could be effected as per the agreed terms (and outside the insolvency proceedings).
The enforcement of contractual security rights varies significantly depending on the type of specific securities and any contractual arrangements in place. Although statutory law provides for enforcement of security rights through the courts as a general principle, deviations by way of contractual arrangements between the parties are permissible.
Regarding the most relevant types of security, the following statutory rules and market practice observations apply.
In the case of shares in a GmbH, it is common market practice to agree on out-of-court enforcement, which entails information to the pledgor, a valuation of the shares and subsequent disposal to the best bidder. In principle, the same applies to shares in an AG; however, if these have a market or stock exchange price, they must be sold at such price without public auction.
In principle, mortgages must be enforced through court enforcement proceedings, which require a public auction of real property, and the involvement of the court is prone to cause delays with the enforcement procedure.
In the case of receivables, there is no specific enforcement procedure; rather, the pledgee will be entitled to directly claim payment from the debtor.
For this type of “personal security”, there is no specific type of enforcement procedure. Rather, depending on the terms and conditions agreed in the relevant security arrangement (eg, “first demand guarantees”), payment may be requested directly from the security provider (guarantor).
It is common market practice that the court enforcement procedure provided for under statutory law is modified to permit out-of-court enforcement. Movable goods may be sold at public auction following notification to the pledgor and a cooling-off period of one month. Disposal without such auction is permissible and, in the case of securities, mandatory if a stock exchange or market price exists (see the above-mentioned information about share pledges).
The same principles would apply to the enforcement of security rights over intellectual property rights.
Austrian law and conflict of laws rules generally permit the choice of a foreign law as the governing law of a contract, even if that contract is to be enforced in Austria. In terms of market practice, this would frequently apply to loan agreements governed by German or English law.
Restrictions apply, however, to the granting and perfection of security rights, which – depending on the type of security – is governed by Aus-
trian law in most instances. By way of example, this would apply to pledges over the shares in Austrian companies, pledges over or security assignments of receivables governed by Austrian law, and the creation of pledges/mortgages over Austrian real properties.
Therefore, it is common market practice that security rights over assets located in Austria and/or provided by Austrian-domiciled transferors/pledgors are documented in security documentation that is governed by Austrian law.
Immunity waivers are typically upheld in Austria.
As regards the enforcement of non-Austrian judgments or awards, there are three basic categories.
Owing to the Brussels Ia Regulation, which applies in Austria, judgments from other EU member states are generally recognised and enforced in Austria without any additional procedures or retrial of the merits of the case. Limited exceptions may apply in the case of substantial deviations from Austrian law (ie, those that contravene the Austrian ordre public).
Outside the scope of applicability of the Brussels Ia Regulation, enforceability of a foreign court judgment depends on whether there is a bilateral treaty between the home state of a lender/security holder and Austria. As a substantive criterion, Austrian law on the enforcement of court judgments requires reciprocity to be ensured under bilateral treaties or regulations. In addition, it is required that the defendant in the
enforcement proceedings had the opportunity to participate in the original proceedings before the foreign court and that the relevant judgment may no longer be challenged before the courts and/ or authorities of the foreign state.
Enforcement of a foreign (non-EU) court judgment may nevertheless be denied if aimed at an action that may not be enforced or is not permissible under the laws of Austria or if the ordre public would be violated as a result.
Austria has ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Arbitral proceedings and the enforcement of arbitral awards are common in Austria, which maintains a leading international arbitral institution (the Vienna International Arbitral Centre, or VIAC).
Impediments for a foreign lender enforcing security in Austria are largely technical and administrative. Competent courts may request cost advances in civil law court proceedings, unless the relevant claimant is domiciled in the EU or in a state that is a party to the Hague Convention on Civil Procedure of 1 March 1954. In addition, translation requirements will apply if the transaction is not documented in German.
The Austrian legislator introduced “reorganisation proceedings”, which should be initiated if a “need for reorganisation (Reorganisationsbedarf)” is identified, in 1997. However, this regime
was and continues to be without any practical relevance.
Besides that, since July 2021 the new Restructuring Act provides a pre-insolvency restructuring regime in line with the EU Directive 2019/1023 on Restructuring and Insolvency. A debtor may use the procedures provided by the Restructuring Act to avert insolvency and ensure the viability of its company in the event of “probable insolvency”, which is the case if the existence of the debtor’s company would be at risk without restructuring. The procedure is not available to companies that are illiquid within the meaning of the Insolvency Act.
The core of the restructuring procedure under the Restructuring Act is a restructuring plan that defines classes of “affected creditors”. In order for the restructuring plan to come into effect, the majority of the creditors in each class is required in the first instance; a cram-down is also possible. In addition, the court has to confirm the restructuring plan.
Therefore, other than insolvency proceedings, out-of-court restructuring efforts constitute the prevailing market procedure in Austria. Unless there are specific lending arrangements (for example, syndicated loans with market-standard majority rules), effective out-of-court restructuring efforts that seek a uniform pro rata debt reduction require the consent of all lenders to:
• a definitive settlement (typically requiring a haircut); or
• organised contractual arrangements with a view to:
(a) the implementation of a restructuring under a standstill agreement; and (b) restructuring contractual provisions.
If such a settlement and/or regime is established with majority consent, the dissenting lenders will fully retain their legal position and remain entitled to full repayment, subject only to a quota reduction in insolvency proceedings.
The same considerations apply to liabilities incurred under bonds. Unlike other European jurisdictions, Austrian legislation has not yet adopted collective action clauses. Therefore, in principle, the restructuring of a bond by way of, for example, a possibly temporary moratorium or haircut would require the consent of all bondholders. Recent Austrian practice has seen individual cases where a special joint representative (Kurator) has been appointed in order to represent bond creditors if their joint interests are affected.
In any structuring of such out-of-court settlements/restructuring, the potential risks of an ensuing insolvency and related legal action (such as a challenge to or voidance of pre-insolvency contractual arrangements by an insolvency administrator) must be considered.
Restructuring within Insolvency Proceedings
Other than typical insolvency proceedings aimed at the full liquidation of a company’s assets, Austrian law provides for restructuring proceedings in the course of insolvency proceedings based on a so called “restructuring plan” (Sanierungsplan).
These proceedings provide for a certain minimum (at least 20%) of the debtor’s liabilities to be repaid during a maximum period of two years. As an additional differentiation, these proceedings may be opened by an insolvency court providing for self-administration of the debtor, in which the management bodies would retain their operational responsibility, as opposed to the
withdrawal of self-administration, which would mean a restructuring administrator (similar to an insolvency administrator) takes over day-to-day management.
Such insolvency court restructuring proceedings can be and frequently are initiated without a prior agreement among the creditors of the debtor. However, it is common in Austrian restructuring practice that the key terms and conditions of such a restructuring settlement before the court are pre-agreed among the majority of the debtor’s creditors.
As a general rule, any and all claims against a debtor will immediately become due upon the opening of insolvency proceedings. Therefore, there is no requirement for separately terminating a loan agreement, for example. Any agreement on rescission or termination rights, which would apply in the case of the opening of insolvency proceedings, are also generally null and void under Austrian insolvency law.
In relation to assets that are within the possession of the obligor in an insolvency proceeding but subject to in rem rights of third parties, Austrian insolvency law provides for specific rights of segregation that permit the relevant proceeds to be passed on to secured creditors following the enforcement of security. If this segregation right is asserted, but disputed by the insolvency administrator on behalf of the estate, the administrator has the option of redeeming the outstanding debt or initiating separate enforcement proceedings.
In cases where turning over an asset to a secured creditor would put the continuation of the debtor’s business at risk, the claim for the returning of the asset is suspended for period of
six months from the opening of the insolvency proceedings – unless such moratorium would cause an undue hardship to the party holding the security interest.
On a separate note, it must be considered that security rights may be challenged or voided by the insolvency administrator if they have been created within certain time limits applied to the opening of insolvency proceedings and are subject to additional criteria.
There are two basic categories of creditors: senior creditors (ranking pari passu) and junior creditors. A junior ranking of debt may be agreed in lending documentation on junior/hybrid financial instruments or subordinated loans, as well as via retroactive subordination waiver (Rangrücktritt), which would result in the relevant creditor not being repaid in the course of insolvency or liquidation proceedings until and unless any and all non-junior creditors have been repaid.
Other than that, statutory law may order mandatory subordination in the case of certain shareholder loans deemed to qualify as equity financing. This equitable subordination will apply if and to the extent that financing is provided by a qualified shareholder to an Austrian company during a “crisis”, whch is assumed if certain financial ratios are fulfilled.
“Quotas” (ie, proceeds obtained in the course of insolvency proceedings) obtained by unsecured senior creditors are typically fairly low. Junior debtors, along with equity holders, do not typically receive proceeds from insolvency proceedings.
The Act on Substitution of Equity Capital (Eigenkapitalersatzgesetz) governs the treatment of shareholder loans to companies in financial distress, except in the case of short-term loans. If the lender has a significant stake or influence over the borrower and the shareholder loan is granted while the borrower is in a “financial crisis” (eg, over-indebted or illiquid or meeting certain financial indicators), the loan will be treated as equity capital of the company for as long as the financial crisis persists. Neither the principal amount nor the interest may be paid to the shareholder. The same applies on collateral granted by the shareholder for loans granted by a third party.
Although the Act on Substitution of Equity Capital automatically re-qualifies the loan as equity, creditors may also – within the meaning of Section 67(3) of the Insolvency Act – subordinate their claims in rank in such a way that the claims must be honoured in case of the debtor’s insolvency or its liquidation only if all non-subordinated creditors have been satisfied. In both cases, the claim may be disregarded when assessing the (over-)indebtedness status of a debtor.
The key risk or impact of the insolvency proceedings over the assets of a borrower lies in the fact that the responsibility for enforcing any contractual rights and/or securities is no longer with the creditor or ordinary courts but with the insolvency administrator instead. Although this may not in all instances be a detriment in terms of substance, it typically causes significant delays.
As per their specific set of duties under the insolvency legislation, prior to the opening of insolvency proceedings the insolvency administrator will typically closely scrutinise any and all con-
tractual and, in particular, security arrangements entered into by the borrower for the benefit of a creditor. This may not only result in delays in enforcement but also in alleged claw-back of claims on the grounds of the nullity/avoidance of contractual arrangements, including the creation of security rights.
On a general note, there is no specific legal framework for project financing in Austria. Therefore, which laws and regulations apply for a specific transaction will largely depend on the type (and industry sector) of that project.
If special purpose vehicles are engaged in a project finance transaction, these are largely in the legal form of a GmbH. In terms of practical application, project finance transactions are employed in the fields of infrastructure, energy and real estate. As an additional specific, PPP transactions are increasingly common in Austria.
It is a matter of the individual circumstances and negotiations among the parties involved whether a transaction is agreed on a recourse or nonrecourse basis – that is, whether the sponsors or shareholders of the special purpose vehicle will assume personal liability and/or provide security for liabilities incurred in connection with the project.
The relevant legislation for the implementation of PPP transactions in Austria involves numerous areas of law, both at the Austrian federal level and in provincial laws and municipal regulations. Areas of interest include corporate law
(regarding the structuring of a project), general civil law, public procurement, subsidies, zoning and permissions, and administrative law in all its variations (eg, environmental, health, other industry-specific laws).
The legal structure of PPPs will largely depend on the type and sector of the project implemented. Possible structures include all standard models, with variations dependent on the project’s property and legal title, and whether the operation and funding is provided by either the private investor, the public sector or a combination of both. As is commonly recognised in the PPP field, these forms of co-operation could take the form of the operating model, the co-operation model, the concession model, the contracting model or the leasing model.
In terms of market practice, PPP models are applied for a variety of transactions, including areas such as roads, logistics, education and – most recently and increasingly – healthcare. Prior to structuring a project finance transaction in Austria, a full analysis of any and all risks involved would be required, including operational risks, design, development and construction risks, and political risks. In addition, from a commercial perspective, the repayment and/or credit risks need to be taken into account.
In the absence of any specific legal provisions on project finance transactions, there are equally no requirements, government approvals, taxes, fees or charges. The requisite requirements instead follow the regime for other financing transactions.
Depending on the type of projects funded under such transactions, specific regulatory approvals
(such as environmental, building, planning/zoning, antitrust, competition and health permits) may be required. In addition, depending on the identity of the co-sponsor/co-investor, laws and regulations on public procurement and subsidies may apply.
Regarding the financing documentation for PPPs, there is no general requirement for a public filing and/or publication.
In terms of governing law, there are no specific rules as compared to “normal” financing transactions. Therefore, there is a certain degree of flexibility as to the governing law for the lending arrangement proper. For security arrangements, it is customary to agree on the applicability of Austrian law.
Regulatory approvals are generally subject to the laws of Austria.
With regard to the oil and mining sector, the Federal Minister of Sustainability and Tourism is the competent authority. The primary legislation for the oil and mining sector is the Federal Mineral Raw Materials Act 1999.
The competent regulators in the gas sector are Energie-Control Austria (E-Control) and the Federal Minister of Sustainability and Tourism. The main legislation for the gas sector is the Federal Gas Industry Act 2011.
For the generation, transmission, distribution and supply of electricity, the competent regulators are E-Control and the Federal Ministry of Sustainability and Tourism. Together with provincial electricity statutes, the Federal Electricity Industry and Organisation Act 2010 sets out the principal regulatory framework.
The main issues, both legal and non-legal, to be considered when structuring a project finance transaction include:
• the technical design, development and construction of the project;
• risks involved in its factual operation;
• any political risks (which, apart from surprising changes of legislation, are largely absent in Austria);
• the risk of disputes; and
• the overall credit and repayment risk from a commercial perspective.
Risks are typically mitigated by conducting due diligence in the requisite areas (legal, financial, technical, environmental, etc).
The preferred legal form for project companies in Austria are the GmbH or the GmbH & Co KG. The principal difference between these is the direct attribution of profits and losses to limited partners (ie, the tax transparency of the GmbH & Co KG). Also, it must be noted that a GmbH provides great flexibility from a corporate law perspective, in that the majority requirements and composition of corporate bodies are largely flexible and rights of direction for the management of a project company are statutory.
In Austria, the classic bank or savings bank loan is the most widely used form of financing. In the case of a loan, a distinction must be made between an investment loan and an working capital loan. The investment loan is granted to finance property, plant and equipment (eg, buildings, machinery, vehicles and office furniture), whereas the working capital loan is to pre-
finance the purchase of raw materials, goods or suppliers.
For the refinancing of exports, Austrian companies can resort to a number of instruments. Flexible mechanisms are available, such as:
• commercial financing with the principal bank;
• framework credit or export financing procedures by the Oesterreichische Kontrollbank (OeKB); or
• soft loans for selected markets.
Further sources of financing are equity investments or participation in companies, as well as subordinated shareholder loans. Private business angels or professional venture capital providers can also be considered as investors.
The issuance of bonds constitutes another alternative to bank debt financing for projects. However, this is rarely practised in Austria, likely owing to the typically small size of projects by international standards and the fact that capital markets financing is normally taken out by sponsors/operators on a corporate (but not project) level.
Austrian law does not provide for general restrictions on the export or import of natural resources to or from Austria. Exceptions may apply, however, in specific circumstances, such as:
• where environmental protection laws apply (in particular, if such resources qualify as waste);
• arms control;
• restrictions on the export of products qualifying for “dual use”; or
• sanctions concerning specific jurisdictions (current examples being Iran and Russia).
Any environmental, health and safety laws that may apply to projects are not governed by a uniform set of rules or supervised by one specific authority. Rather, given Austria’s federal structure and EU membership, the relevant provisions may be found in federal and provincial laws, regulations, technical directives or EU legislation.
The competence for the enforcement of the relevant provision lies with numerous authorities at federal or provincial level (including municipalities).
Fellner Wratzfeld & Partners (fwp) has a team of more than 120 highly qualified legal personnel. The firm’s major areas of specialisation include banking and finance, corporate/M&A, real estate, infrastructure and procurement law, changes of legal form, reorganisation and restructuring. fwp advises renowned credit institutions and financial services providers on financing projects, representing mainly Austrian
Markus Fellner was admitted to the Austrian Bar in 1998 and has been a partner at Fellner Wratzfeld & Partners since 1999, where he now heads the firm’s banking and finance practice group. He specialises in banking and finance, insolvency law and restructuring, corporate/M&A, and dispute resolution.
Markus has published a considerable number of articles and essays on topics related to these areas of expertise, including capital maintenance rules in Austria, M&A, and business restructuring and insolvency. He speaks German, English and Italian.
and international private companies, but also has clients from the public sector. The firm’s expertise has proven its worth repeatedly, not only in connection with project and acquisition financing, but also in regard to financing company reorganisations. fwp is also able to draw upon substantial experience gained in the financing of complex consortia in the past few years.
Veronika Seronova was admitted to the Austrian Bar in 2016, and has been an attorney at law with Fellner Wratzfeld & Partners since that year. She has particular experience and knowledge in the areas of banking and finance, labour law, and dispute resolution. Veronika speaks German, English, Slovak and Czech.
Elisabeth Fischer-Schwarz was admitted to the Austrian Bar in 2017, and has been an attorney at law with Fellner Wratzfeld & Partners since that year. She has particular experience and knowledge in the areas of banking and finance, insolvency law and restructuring, and dispute resolution. Elisabeth speaks German, English and French.
Mario Burger has been an associate with Fellner Wratzfeld & Partners since 2020. He has particular experience and knowledge in the areas of banking and finance and corporate/M&A. Mario speaks German and English.
Contributed by: Markus Fellner, Elisabeth Fischer-Schwarz, Veronika Seronova and Mario Burger, Fellner Wratzfeld & Partners
Fellner Wratzfeld & Partners
Schottenring 12
A-1010
Vienna Austria
Tel: +43 1 537 70 351 Fax: +43 1 537 70 70 Email: marketing@fwp.at Web: www.fwp.at
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