Structured finance and securitisation in Norway: overview

A Q&A guide to structured finance and securitisation in Norway.

This Q&A provides an overview of, among others, the markets and legal regimes, issues relating to the SPV and the securities issued, transferring the receivables, dealing with security and risk, cash flow, ratings, tax issues, variations to the securitisation structure and reform proposals.

To compare answers across multiple jurisdictions, visit the Structured lending and securitisation Country Q&A tool.

This article is part of the global guide to structured finance and securitisation. For a full list of contents visit www.practicallaw.com/securitisation-mjg.

Kristoffer Hegdahl and Tore Mydske, Advokatfirmaet Thommessen AS
Contents

Market and legal regime

1. Please give a brief overview of the securitisation market in your jurisdiction. In particular:
  • How developed is the market and what notable transactions and new structures have emerged recently?

  • What impact have central bank programmes (if any) had on the securitisation market in your jurisdiction?

  • Is securitisation particularly concentrated in certain industry sectors?

Securitisation is not a major component of the debt capital markets in Norway. In fact, the Norwegian securitisation market is for all practical purposes inactive, and Norwegian financial institutions have not securitised loan portfolios to a large extent. There have only been a few Norwegian securitisation transactions, and these have been initiated by the same (and only active) market player, in connection with the securitisation of consumer credits (automobile loans).

Central bank programmes have not been introduced in response to the credit crisis. Instead, Norwegian financial institutions have to a large extent used covered bonds to finance their mortgage lending.

 
2. Is there a specific legislative regime within which securitisations in your jurisdiction are carried out? In particular:
  • What are the main laws governing securitisations?

  • What is the name of the regulatory authority charged with overseeing securitisation practices and participants in your jurisdiction?

New provisions were added to the Norwegian Act on Financing Activity and Financial Institutions (Financial Institutions Act) in January 2004. They enable Norwegian financial institutions to securitise their loan portfolios, by transferring a fixed loan portfolio or other group of claims to a special purpose vehicle for securitisation (SPV), which is then not subject to the licensing requirements for banks or any corresponding capital requirements.

Prior to this, securitisation was deemed to be a regulated activity that triggered a licensing requirement for the SPV. In June 2011, the Norwegian Banking Law Commission proposed to the Ministry of Finance to repeal the Norwegian statutory provisions on securitisations, as there have been only a few transactions using them. This proposal was controversial, but in June 2014, the Ministry concluded that the securitisation provisions should be repealed, as the current regulation has been deemed inadequate. The authors expect Parliament to concur and the current regulation to be repealed in 2015. However, the Ministry has indicated that it may reconsider its position at a later stage (see Question 29).

 

Reasons for doing a securitisation

3. What are the main reasons for doing a securitisation in your jurisdiction? How are the reasons for doing a securitisation in your jurisdiction affected by:
  • Accounting practices in your jurisdiction, such as application of the International Financial Reporting Standards (IFRS)?

  • National or supra-national rules concerning capital adequacy?

  • Risk retention requirements?

  • Implementation of the Basel III framework in your jurisdiction?

There have been very few securitisation transactions carried out in Norway, and the need for securitisation is particularly manifest for financial institutions that are not able to issue covered bonds.

Alternative funding sources, cost savings and balance sheet benefits would be typical reasons for securitisation in Norway.

Although the existing provisions of the Financial Institutions Act on securitisation have been barely used, it is possible that Norwegian financial institutions will use such instruments in the future under a new regulatory regime, to ensure more diversified funding, in line with the recommendations of the Basel Committee and the changes to the capital adequacy rules.

Although the new EU rules on capital adequacy and so on (Directive 2010/76/EU on capital requirements/CRD IV) include provisions on the recognition of the transfer of credit risk to SPVs through securitisation, they have not been deemed by the Norwegian legislator to require specific local provisions on securitisation. However, the authors expect the new EU capital adequacy rules to be taken into account if and when a new regulatory regime for securitisation is adopted in Norway.

 

The special purpose vehicle (SPV)

Establishing the SPV

4. How is an SPV established in your jurisdiction? Please explain:
  • What form does the SPV usually take and how is it set up?

  • What is the legal status of the SPV?

  • How the SPV is usually owned?

  • Are there any particular regulatory requirements that apply to the SPVs?

At the outset, the SPV must be a Norwegian private limited company or public limited company. The Financial Supervisory Authority of Norway (FSA) can, however, grant exemptions from this requirement.

In terms of licensing, the SPV is exempt from the licensing requirements (see Question 2), but the SPV:

  • Cannot conduct any other business than to acquire, own and collect on the loan portfolio.

  • Must finance the acquisition of the loans by issuing bonds.

Norwegian securitisation provisions (including the provisions on the SPV) are expected to be repealed in 2015 (see Question 2).

 
5. Is the SPV usually established in your jurisdiction or offshore? If established offshore, in what jurisdiction(s) are SPVs usually established and why? Are there any particular circumstances when it is advantageous to establish the SPV in your jurisdiction?

Under current law, the authors would normally expect the SPV to be established in Norway, in line with the main rule of the current provisions in the Financial Institutions Act. However, in terms of the few Norwegian securitisation transactions that have been carried out, the SPV has been a company incorporated with limited liability under the laws of Ireland approved by the Financial Supervisory Authority of Norway (FSA).

 

Ensuring the SPV is insolvency remote

6. What steps can be taken to make the SPV as insolvency remote as possible in your jurisdiction? In particular:
  • Has the ability to achieve insolvency remoteness been eroded to any extent in recent years?

  • Will the courts in your jurisdiction give effect to limited recourse and non-petition clauses?

Insolvency remoteness is achieved by following the principles in the Financial Institution Act, and measures under current law include:

  • Establishing the SPV as a limited liability company (Aksjeselskap) in line with the Financial Institutions Act.

  • Limiting the activities of the SPV so that it cannot conduct any other business than to acquire, own and collect on the loan portfolio.

  • The SPV must finance the acquisition of the loans by the issue of bonds.

 

Ensuring the SPV is treated separately from the originator

7. Is there a risk that the courts can treat the assets of the SPV as those of the originator if the originator becomes subject to insolvency proceedings (substantive consolidation)? If so, can this be avoided or minimised?

A true sale (see Question 16) will ensure that the assets no longer belong to the originator, and that the originator is not in any way liable for the debt securities issued by the SPV. The Financial Institutions Act does not use or contain the wording "true sale", but the regulations set out in it reflect this principle.

The main rule under current law concerning the originator's relationship to the SPV and the bondholders is that the originator cannot assume liability as against the SPV, the bondholders or others in relation to the loan portfolio or pool of claims.

However, insolvency proceedings can impact a securitisation transaction in a number of ways. If the securitisation is structured as a true sale, it is important to ensure that the assignment of the securitised assets is not subject to clawback as a result of the insolvency of the originator. For this reason, the seller must not retain any significant risk for the quality of the debt and the purchase price must be on an arm's-length basis.

The Norwegian Creditors Recovery Act establishes several circumstances in which transactions can be set aside (see Question 17).

 

The securities

Issuing the securities

8. What factors will determine whether to issue the SPV's securities publicly or privately?

Under current Norwegian law, the SPV must finance the acquisition from the originator by issuing bonds (obligasjoner). These can be issued publicly or privately depending on, among other things, the size and type of the transaction and the relevant targeted investors.

 
9. If the securities are publicly issued:
  • Are the securities usually listed on a regulated exchange in your jurisdiction or in another jurisdiction?

  • If in your jurisdiction, please identify the main documents required to make an application to list debt securities on the main regulated exchange in your jurisdiction. Are there any share capital requirements?

  • If a particular exchange (domestic or foreign) is usually chosen for listing the securities, please briefly summarise the main reasons for this.

Bonds issued in the Norwegian market can be listed on the Oslo Stock Exchange (OSE) or the Nordic ABM. As the OSE is a regulated market, a listing of bonds on the OSE will require a listing prospectus prepared in accordance with Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading (Prospectus Directive). A less extensive listing document is required for a listing on the Nordic ABM.

Other than certain other technical requirements (including an audit committee and listing agreement in respect of the OSE), the process for listing bonds on the OSE is in all material aspects the same as listing bonds on the Nordic ABM. Through a listing, the SPV gains access to a larger investor base.

 

Constituting the securities

10. If the trust concept is not recognised in your jurisdiction, what document constitutes the securities issued by the SPV and how are the rights in them held?

Norwegian law does not contain the English law concept of trust. Agency is a recognised concept in Norwegian law. Trust arrangements are not required for the issuance of bonds under a Norwegian securitisation. The bonds will constitute direct obligations of the issuer, and will benefit from security granted over the issuer's assets to a security agent/trustee by a contractual agent/trustee arrangement.

 

Transferring the receivables

Classes of receivables

11. What classes of receivables are usually securitised in your jurisdiction? Are there any new asset classes to have emerged recently or that are expected to emerge in the foreseeable future?

The receivables which have been securitised in the few transactions carried out in Norway are vehicle/automobile loans.

 

Transferring receivables from the originator to the SPV

12. How are receivables usually transferred from the originator to the SPV? Is perfection of the transfer subject to giving notice of sale to the obligor or subject to any other steps?

The customary method would be for the seller to sell receivables to a buyer by transferring ownership, and perfection is generally done through notice to the obligor.

If a seller agrees to sell all of its receivables to the buyer automatically as they come into existence, rather than selling specific identified receivables (continuous sale), registration in the Norwegian Movable Asset Registry (Løsøreregisteret) is necessary to obtain perfection. However, a perfected continuous sale agreement will in certain cases not be effective against a third party which, acting in good faith without notice of the sale and exercising due diligence in this respect, has been granted a perfected security interest over, or has acquired an individual trade receivable covered by the continuous sale agreement.

In addition, it is recommended that the seller is deprived of control over the receivable and the income/payment of the receivable. If the seller retains control over the receivable and the income, the arrangement risks being re-characterised as an assignment for security purposes rather than a sale (see Question 16).

Once notice has been received by the obligor, the notice is also effective against subsequent good faith buyers of the receivables.

 
13. Are there any types of receivables that it is not possible or not practical to securitise in your jurisdiction (for example, future receivables)?

As a general rule, any non-negotiable debt claims/receivables (enkle pengekrav) can be freely assigned (separately or together) by way of ownership or as security, unless prohibited by law or contract (see Question 15).

Physical possession is necessary to obtain perfection in terms of receivables that are expressed in negotiable debt instruments. However, it is very unlikely that Norwegian receivables will be expressed in a negotiable debt instrument, as consumer loans cannot take the form of a negotiable document (Section 55, Chapter 3, Financial Contract Act).

Under Norwegian law, it is possible for a registered business (registered in Norway) to sell, assign for security purposes, or pledge all or part of its existing or future claims arising in the business due to the sale of goods or services (trade receivables as opposed to, for instance, tax refunds) (see Question 19).

If future claims are sold and perfected by way of notice to the obligor, such claims will not form part of the insolvency estate, provided that the seller has no collection control over these receivables (which has the effect that the buyer collects and the receivables will not be affected by the seller's insolvency). If the seller has retained collection control over the receivables, any receivables collected by the seller/seller's insolvency administrator after the seller's insolvency risk forming part of the insolvency estate.

 
14. How is any security attached to the receivables transferred to the SPV? What are the perfection requirements?

Security attached to the receivables is transferred by transferring the position of the security holder/pledgee. If related security is to be transferred concurrently with the sale of the receivables (for instance, insurance or guarantees), the transfer of the related security must also be perfected (usually by notice to the pledgee, but for some asset classes, by way of registration).

 

Prohibitions or restrictions on transfer

15. Are there any prohibitions or restrictions on transferring the receivables, for example, in relation to consumer data?

Contractual restrictions

A loan agreement will typically allow the lender/originator to transfer its claim to a third party. If the agreement is silent on the issue of assignment/sale, the main rule is that the receivable can be assigned without specific consent from the obligor. The rule is based on the general principle that money claims are transferable unless this is specifically prohibited.

If the agreement expressly prohibits assignment, a sale in violation of the prohibition means the seller risks liability for breach of contract to the obligor, and that the transfer to the buyer will not be valid against the obligor.

Legislative restrictions

Chapter 3 of the Financial Contract Act and regulations issued under it contain detailed regulations of consumer credit. In particular, the consumer obligor must consent to the transfer of a loan to an entity other than a finance institution (typically, it must consent to the transfer to a SPV). However, under the current regulation in the Financial Institution Act, the seller can rely on a debtor's passive consent with respect to securitisation involving a sale of that debtor's loan, provided that the debtor is notified and has been given reasonable time to object to the sale, in any case at least three weeks.

 

Avoiding the transfer being re-characterised

16. Is there a risk that a transfer of title to the receivables will be re-characterised as a secured loan? If so:
  • Can this risk be avoided or minimised?

  • Are true sale legal opinions typically delivered in your jurisdiction or does it depend on the asset type and/or provenance of the securitised asset?

Norwegian courts look at the substance of a transaction, and the label the parties have given to a transaction is not decisive. Therefore, there is a risk that a transfer of title can be re-characterised as a secured loan.

In general, Norwegian law distinguishes between:

  • Ordinary transfers of title/ownership.

  • Transfer of title/ownership for security purposes (sikringscesjon).

  • Establishing an outright security interests by way of a pledge (panterett).

If a title transfer agreement in substance has effects materially similar to a pledge agreement (see Question 19), there is a substantial risk that the arrangement would be treated as the grant of a security interest by the courts.

A sale of receivables risks being re-characterised as a security arrangement, that is, a secured loan rather than an outright sale, depending on what has been agreed between the seller and the buyer with regard to:

  • The transfer of credit risk of the obligor.

  • Interest rate risk.

  • Control over the collection of the income from the receivables.

However, a re-characterisation will not result in the agreement being deemed void by the courts and/or lacking perfection (provided that the perfection is carried out), since:

  • Both security interests and transfers of title/ownership must be perfected according to identical requirements under Norwegian law, to enjoy protection against later established third party contractual rights and creditor rights.

  • The Pledge Act provides for the establishment of security interests over most assets.

 

Ensuring the transfer cannot be unwound if the originator becomes insolvent

17. Can the originator (or a liquidator or other insolvency officer of the originator) unwind the transaction at a later date? If yes, on what grounds can this be done and what is the timescale for doing so? Can this risk be avoided or minimised?

The Creditors Recovery Act establishes several circumstances in which transactions can be set aside. The periods in which transactions can be challenged by the bankruptcy estate depend on what criteria the challenge is based (with longer periods if the challenge is based on subjective, rather than objective criteria).

Norwegian courts can only set aside a transaction entered into before the originator's insolvency if the transaction falls within certain statutory provisions. In respect of securitisations, the relevant provisions relate to:

  • Transactions at an undervalue (a relevant period of up to two years for connected persons).

  • Preferences in bad faith (with a time restriction of ten years).

Generally, there are two transactions which could be affected by clawback:

  • The transfer of assets between the originator and the SPV. It is possible, depending on the facts, that the transfer of assets could be challenged as a transaction at an undervalue. There is no rebuttable presumption that the transfer is undervalued and no further guidance under the relevant provisions with regard to valuation. However, the assessment would have to take the principle of commercial reasonableness into account. However, it is unlikely that a transfer would be challenged as a preference, as the SPV generally will not be a creditor of the originator.

  • On the insolvency of the SPV, the granting of security by the SPV to a security trustee on behalf of investors could also in theory be challenged as a preference. However, given the nature of SPVs as bankruptcy remote entities and of securitisation transactions generally, this would typically be unlikely.

 

Establishing the applicable law

18. Are choice of law clauses in contracts usually recognised and enforced in your jurisdiction? If yes, is a particular law usually chosen to govern the transaction documents? Are there any circumstances when local law will override a choice of law?

A Norwegian court will give effect to a choice of foreign law by the parties provided the chosen foreign law does not contravene:

  • Norwegian public policy.

  • Norwegian mandatory laws (typically relevant in relation to security interests, where Norwegian law is mandatory in terms of security assets located in Norway).

 

Security and risk

Creating security

19. Please briefly list the main types of security that can be taken over the various assets of the SPV in your jurisdiction, and the requirements to perfect such security.

Under the Pledge Act, a security interest can only be validly established over assets which, according to Norwegian law, can be subject to a security interest. This provides for creating security by a pledge over various assets, such as:

  • Movable property.

  • Real property.

  • Negotiable securities.

  • Financial instruments.

  • Monetary claims.

The Pledge Act permits security interests to be established over a pool of assets that can be subject to change/fluctuation. They are perfected by way of registration in the Register of Movable Assets (including inventory, operational equipment and trade receivables, whether current or future).

It is possible for a registered business (registered in Norway) to sell, assign for security purposes, or pledge all or part of its existing or future claims arising in the business due to the sale of goods or services (trade receivables as opposed to, for instance, tax refunds). In such sales, it is not required to disclose the name of the obligor and no notice to the obligors is required. The sale, assignment for security purposes or pledge is perfected by registering a factoring agreement as a charge on the seller in the Movable Asset Registry. However, this registration will not protect the buyer against another buyer who has acquired in good faith a competing right to a receivable included in the registered sale/assignment or pledge, and who has perfected this right by giving notice to the obligor.

Registration of a factoring arrangement will be protected against the seller's other creditors or its insolvency administrator.

A security interest over real property is established by way of a pledge, and perfection is obtained by registering such charge in the Norwegian land registry.

Individual monetary claims (current and future) against a named debtor can be pledged and are perfected through notice to the debtor.

Financial instruments registered in the Central Securities Depositary can be pledged, and perfection is obtained by way of registration on the relevant securities account.

The nature of the security taken will depend on the specifics of a transaction.

 
20. How is the security granted by the SPV held for the investors? If the trust concept is recognised, are there any particular requirements for setting up a trust (for example, the security trustee providing some form of consideration)? Are foreign trusts recognised in your jurisdiction?

Norwegian law does not contain the English law concept of trust. Agency is a recognised concept in Norwegian law, and the security is typically held by a security agent on behalf of the investors. The agency contract will have to specify the duties and authority of the agent.

 

Credit enhancement

21. What methods of credit enhancement are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the credit enhancement techniques set out in the Guide?

In the few securitisations that have been carried out, credit enhancement has been provided through subordination and allocation of cash flows generated by the relevant assets. Certain notes have had the benefit of reserve funds to provide additional credit enhancement.

 

Risk management and liquidity support

22. What methods of liquidity support or cash reservation are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the provision of liquidity support as set out in the Guide?

In the few securitisations that have been carried out, specific liquidity reserves have been established to cover shortfalls in collections to pay senior expenses and interest to senior notes.

 

Cash flow in the structure

Distribution of funds

23. Please explain any variations to the cash flow index accompanying Diagram 9 of the Guide that apply in your jurisdiction. In particular, will the courts in your jurisdiction give effect to "flip clauses" (that is, clauses that allow for termination payments to swap counterparties who are in default under the swap agreement, to be paid further down the cash flow waterfall than would otherwise have been the case)?

There are no specific variations applicable and such waterfalls are negotiated on a case-by-case basis.

 

Profit extraction

24. What methods of profit extraction are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the profit extraction techniques set out in the Guide?

The profit extraction techniques set out in the Guide have been used in the few securitisations that have been carried out.

 

The role of the rating agencies

25. What is the sovereign rating of your jurisdiction? What factors impact on this and are there any specific factors in your jurisdiction that affect the rating of the securities issued by the SPV (for example, legal certainty or political issues)? How are such risks usually managed?

The credit rating for Norwegian sovereign bonds is currently AAA (S&P and Moody's). No political factors should affect the rating of securities issued by a Norwegian SPV, and there should not be any issues of legal certainty which have a material adverse effect on the rating.

 

Tax issues

26. What tax issues arise in securitisations in your jurisdiction? In particular:
  • What transfer taxes may apply to the transfer of the receivables? Please give the applicable tax rates and explain how transfer taxes are usually dealt with.

  • Is withholding tax payable in certain circumstances? Please give the applicable tax rates and explain how withholding taxes are usually dealt with.

  • Are there any other tax issues that apply to securitisations in your jurisdiction?

  • Does your jurisdiction's government have an inter-governmental agreement in place with the US in relation to FATCA compliance, and will this benefit locally-domiciled SPVs?

A capital gain generated through the transfer of the loans is taxable in Norway. It is included in the ordinary income of the originator in the year of the transfer and taxed at a rate of 27%.

Payments of receivables by obligors to the buyer or the seller are not subject to Norwegian withholding taxes, provided that:

  • The buyer/seller does not have a permanent establishment in Norway with regard to the sale of the receivables.

  • The debt is not considered as equity for Norwegian tax purposes in accordance with thin capitalisation rules.

As a general rule, a sale of goods and rendering of services in Norway is subject to Norwegian value added tax (VAT) at an ordinary rate of 25%. However, the sale/transfer of receivables is exempt from VAT in Norway.

 

Recent developments affecting securitisations

27. Please give brief details of any legal developments in your jurisdiction (arising from case law, statute or otherwise) that have had, or are likely to have, a significant impact on securitisation practices, structures or participants.
 

Other securitisation structures

28. What other structures, including synthetic securitisations, are sometimes used in your jurisdiction?

The alternative to securitisation under Norwegian law is covered bonds.

 

Reform

29. Please summarise any reform proposals and state whether they are likely to come into force and, if so, when. For example, what structuring trends do you foresee and will they be driven mainly by regulatory changes, risk management, new credit rating methodology, economic necessity, tax or other factors?

In June 2011, the Norwegian Banking Law Commission proposed to the Ministry of Finance to repeal the Norwegian statutory provisions on securitisations (see Question 1). The Ministry has noted suggestions from several of the consulting bodies that it will be appropriate to adopt new rules on securitisation. New securitisation provisions will be considered by the legislator at a later stage, and no details are available to date.

 
30. Has the nature and extent of global, regional and domestic reforms had a positive or negative affect on revitalising securitisation in your jurisdiction?

There have been no targeted reforms to revitalise the securitisation market in Norway.

 

Online resources

Norwegian Financial Supervisory Authority

W www.finanstilsynet.no/en

Description. The official website of the Financial Supervisory Authority of Norway.



Contributor profiles

Kristoffer Hegdahl, Senior Associate

Advokatfirmaet Thommessen AS

T +47 23 11 13 08
E keg@thommessen.no
W www.thommessen.no

Professional qualifications. Lawyer, Norway

Areas of practice. Debt financing; restructuring and insolvency; financial regulation.

Tore Mydske, Partner

Advokatfirmaet Thommessen AS

T +47 23 11 12 52
E tmy@thommessen.no
W www.thommessen.no

Professional qualifications. Lawyer, Norway

Areas of practice. Financial regulation; capital markets; compliance and investigations.


{ "siteName" : "PLC", "objType" : "PLC_Doc_C", "objID" : "1248106677060", "objName" : "Structured finance and securitisation in Norway overview", "userID" : "2", "objUrl" : "http://uk.practicallaw.com/cs/Satellite/resource/8-597-6326?null", "pageType" : "Resource", "academicUserID" : "", "contentAccessed" : "true", "analyticsPermCookie" : "2-605a14e:15af51f9872:26b0", "analyticsSessionCookie" : "2-605a14e:15af51f9872:26b1", "statisticSensorPath" : "http://analytics.practicallaw.com/sensor/statistic" }