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.
Market and legal regime
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.
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
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
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).
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
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
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).
Issuing the securities
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
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
Transferring receivables from the originator to the SPV
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.
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.
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
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.
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
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
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
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
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:
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.
Risk management and liquidity support
Cash flow in the structure
Distribution of funds
The role of the rating agencies
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
See Question 29.
Other securitisation structures
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.
Norwegian Financial Supervisory Authority
Description. The official website of the Financial Supervisory Authority of Norway.
Kristoffer Hegdahl, Senior Associate
Advokatfirmaet Thommessen AS
Professional qualifications. Lawyer, Norway
Areas of practice. Debt financing; restructuring and insolvency; financial regulation.
Tore Mydske, Partner
Advokatfirmaet Thommessen AS
Professional qualifications. Lawyer, Norway
Areas of practice. Financial regulation; capital markets; compliance and investigations.