1. Loan Market Panorama

Contributed by: Markus Fellner, Elisabeth Fischer-Schwarz, Veronika Seronova and Mario Burger, Fellner Wratzfeld & Partners

1.1 Impact of the Regulatory Environment and Economic Cycles

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.

1.2 Impact of the COVID-19 Pandemic

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

Contributed by: Markus Fellner, Elisabeth Fischer-Schwarz, Veronika Seronova and Mario Burger, Fellner Wratzfeld & Partners

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.

1.3 The High-Yield Market

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.

1.4 Alternative Credit Providers

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.

Non-bank Lenders 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.

Contributed by: Markus Fellner, Elisabeth Fischer-Schwarz, Veronika Seronova and Mario Burger, Fellner Wratzfeld & Partners

1.5 Banking and Finance Techniques

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.

1.6 Legal, Tax, Regulatory or Other Developments

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.

1.7 Developments in Environmental, Social and Governance (ESG) or Sustainability Lending

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.