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The Dutch loan finance market for small and mid-cap corporate borrowers is still mainly handled out of a single bank on a bilateral basis or through a club of banks. For larger mid-cap and large-cap loans, debt financing is either provided by a syndicate of banks, or via private debt providers such as credit funds. Capital and risk management requirements applicable to banks, excess supply of credit, low funding costs and a ‘search for yield’ have led to alternative credit providers increasing their share and becoming more and more prominent in the debt markets. In addition, the use of green loans and sustainability linked loans continues to increase.
Although the financial markets have emerged from the covid-19 pandemic, the recent global political and economic situation has led to uncertainty in the loan and capital markets and an increase in interest rates. In addition, the situation in the loan and capital markets may deteriorate (1) since government stimulus packages are being phased out and (2) because central banks, also in view of the rising inflation, are expected to decrease their quantitative easing as a result of which interest rates are likely to further increase.
Legal and regulatory developments
Dutch legal and regulatory developments from 1 April 2021 until 1 June 2022 (other than through EU regulations) that are relevant for loan finance practice include the following:
A lender to a borrower, resident in the Netherlands, is not subject to any withholding tax with respect to payments due by the borrower under the loan, except if the loan qualifies as a participating loan, in which case payments to the lender are treated similarly to dividend payments and generally are subject to a 15 per cent withholding tax. A loan is qualified as a participating loan if it has no maturity or a maturity over 50 years, is subordinated to all senior debt and is profit participating.
In addition, as of 2021 a withholding tax has been enacted pursuant to which a 25.8 per cent withholding tax on interest paid by a borrower that is resident in the Netherlands or not resident in the Netherlands when the borrower attributes the interest paid to a branch in the Netherlands: (1) to a related entity resident in a low-tax jurisdiction, which is a jurisdiction with a statutory profit tax rate of less than 9 per cent or a jurisdiction that is included in the EU list of non-cooperative jurisdictions; and (2) in abusive situations.
No stamp taxes or duties are due in connection with the issuance of debt by a Dutch borrower.
A borrower who is subject to Dutch corporate income tax generally can deduct on an accrual’s basis any compensation that is due to the lender, insofar as the compensation meets the arm’s-length criterion. Various detailed anti-abuse provisions may apply that could restrict or eliminate entirely the deduction of interest. Certain rules only apply to related party debt; others also apply to third-party loans.
In addition, a generic limitation applies, annually restricting the net amount of deductible interest above €1 million to 20 per cent of the borrower’s taxable profit before interest, depreciation and amortisation.
The Netherlands has entered into an agreement with the United States regarding the implementation of the Foreign Account Tax Compliance Act (FATCA) rules. Loan documentation related to the issuance by Dutch borrowers generally includes standard provisions regarding FATCA rules that are in line with documentation included in similar documentation for issuers in other jurisdictions that have entered into such an agreement.
Credit support and subordination
Under Dutch law, security can be taken over real property, receivables (including trade receivables, intercompany loans, cash deposited in bank accounts and insurance receivables), inventory, intellectual property and certain other asset classes, such as shares in Dutch companies. Whether security can be taken over other asset classes will depend on the types of assets involved. A Dutch law security right can only be vested in assets that are transferable (or assignable). Transferability (or assignability), and thereby pledgeability, of a receivable can be restricted by agreement between the relevant creditor and debtor. A bill is being considered that would prohibit these restrictions for certain types of receivables (see Section II).
Dutch law provides for two types of security rights: (1) security created on registered assets, such as real property, ‘registered’ vessels and aircraft, and on limited rights vested therein (a mortgage); and (2) security created on all other assets, whether tangible (such as movable assets) or intangible (such as receivables and registered shares) (a pledge). In addition, security can be created on financial collateral by a financial collateral agreement.
Security over the asset classes referred to above will be created as follows.
Dutch real property and other registered assets are mortgaged pursuant to a Dutch notarial deed and registration of the deed with the appropriate Dutch public register.
Trade receivables are pledged pursuant to a private deed and registration of the deed with the Dutch tax authorities (or pursuant to a notarial deed), without notification to the debtors of the receivables (an undisclosed pledge). An undisclosed pledge over receivables constitutes a valid right of pledge (but can be invoked against the debtor of the receivable only after it has been notified to it). The pledge will attach only to receivables that exist at the date of the deed or that will be directly obtained from an agreement or other legal relationship existing at that date. To nonetheless maximise the security coverage, the practical solution is that in the deed of pledge the pledgor will agree to periodically (usually around three months, depending on the speed at which the trade receivables portfolio is renewed) enter into an additional deed of pledge. Pursuant to that additional deed, the pledgor will pledge the receivables existing at the date of the additional deed or that will be directly obtained from a legal relationship existing at that date. Each additional deed of pledge must also be registered with the Dutch tax authorities. The original deed of pledge will set out the procedures to be followed (and grant any required powers of attorney) in connection with the signing and registration of each additional deed of pledge.
Dutch banks have implemented systems to further maximise their security coverage in relation to such trade or other receivables. Most Dutch banks pledge to themselves on a daily basis the receivables required to be pledged to them by way of a standardised deed covering all pledgors that have granted them a power of attorney to do so (as most will have done). The general validity of this system has been confirmed by case law from the Dutch Supreme Court.
Receivables can also be pledged pursuant to a private deed (or notarial deed) and notification of that deed to the debtors of the receivables (a disclosed pledge). In practice, this type of creation of a pledge is reserved for specific types of receivables, including intercompany loans and insurance receivables. For legal reasons, cash deposited in bank accounts can be pledged only by way of a disclosed pledge. Generally, the pledgor shall not accept a disclosed pledge in respect of other receivables such as trade receivables, to both avoid the hassle of notifying large numbers of trade debtors of the pledge and avoid trade debtors being made aware of the pledge through notification.
Dutch inventory is pledged pursuant to a private deed and registration of the deed with the Dutch tax authorities (or pursuant to a notarial deed). An undisclosed pledge over inventory constitutes a valid right of pledge (but it may not be possible to invoke the pledge against a third party acting in good faith).
Although specific rules exist for specific types of intellectual property rights, as a general rule, intellectual property rights are pledged pursuant to a private deed (but can also be pledged pursuant to a notarial deed). To ensure that the pledge can be invoked against third parties, for some intellectual property rights the pledge must be registered in the appropriate public registers. Because of the international nature of intellectual property rights, creating security over intellectual property rights is rarely simple and cost-effective. Therefore, depending on the business of the company involved, pledges on intellectual property rights tend to be the exception rather than the rule.
Shares in a Dutch private company with limited liability can be pledged pursuant to a Dutch notarial deed, unless the articles of association of the company provide otherwise.
If the company concerned is not a party to the deed (which it usually will be) the pledgee can only invoke the pledge against the company if the pledge has been notified to it. The pledgee shall only have the right to vote, if so provided, whether or not subject to a condition precedent (such as the occurrence of an event of default), at the time of the creation of the right of pledge or thereafter agreed in writing, and provided the transfer of the right to vote is approved by the general meeting. The articles may, however, derogate from these provisions. If the company has a works council, the works council may need to be given an opportunity to advise on the creation of the share pledge.
Registered shares in a Dutch public company that is not listed are pledged in largely the same way as described above, although formalities may differ depending on the company concerned. Pledges on other types of shares (such as bearer shares and shares included in a clearing system) are relatively rare in the context of loan financing and are not discussed in this chapter.
As a deed of mortgage on Dutch real property and a deed of pledge on shares in Dutch companies must be in notarial form, separate notarial mortgages or pledges must be created for these types of assets. The various non-notarial pledges (such as receivables, intellectual property, bank accounts and inventory) can be combined in one deed of pledge (usually referred to as an omnibus deed of pledge).
Mortgages on Dutch real property must be registered in the appropriate public register, where the mortgage deeds are available for public inspection. Pledges on registered shares in a Dutch company must be notified to the company concerned, unless the company is a party to the deed of pledge (which would be the normal situation). The company must register the share pledge in its shareholders register, but the latter generally has no bearing on the validity or enforceability of the share pledge. The shareholders register is not open to public inspection. Undisclosed pledges on receivables and on Dutch inventory (including any supplemental deeds) must be registered with the Dutch tax authorities (unless they are in the form of a Dutch notarial deed). The purpose of the registration is to ensure that the pledge has an officially recorded date and not to facilitate levying taxes. Disclosed pledges on cash in a bank account, intercompany loans or insurance receivables need to be notified to the debtor or debtors concerned. No registration requirements apply. Pledges on intellectual property rights generally do not need to be registered to be valid. However, for some intellectual property rights registered in a public register (including patents, trade and service marks and models), the pledgor can only invoke the pledge against third parties if the pledge is registered in the appropriate register.
No registration involves significant amounts of time or expense. The costs of notarial work required in connection with mortgages on Dutch real property and pledges on shares will usually be charged as part of the legal fees. They are not dependent on the value of the underlying assets. Registration of mortgages with the appropriate public registers and of pledges with the Dutch tax authorities requires payment of nominal registration fees. For the purpose of the registration (if any) of pledges on intellectual property rights, it will often be necessary to involve a registration agency that will charge limited fees. In addition, nominal registration fees must be paid.
A Dutch mortgage or pledge can only be enforced in the case of a payment default under the secured obligations. However, in the case of a disclosed pledge on receivables, subject to any limitations agreed between the pledgor and the pledgee, the pledgee may at any time exercise the right to collect the receivable, and may apply the proceeds towards satisfaction of the secured obligations as soon as they are due and payable. The same applies in the case of an undisclosed pledge of receivables, except that in this case the debtor under the receivable must first be notified of the pledge. The moment as of which the pledgee becomes entitled to disclose the pledge is generally agreed in the deed of pledge.
In practice, undisclosed pledges on receivables are enforced by the pledgee first giving notice of the pledge to the debtors of the receivables and then collecting the receivables, whereas disclosed pledges on receivables are enforced by the pledgee giving notice of enforcement of the pledge to the debtors of the receivables and then collecting the receivables. In the case of an undisclosed pledge over inventory, again subject to any limitations agreed between the pledgor and the pledgee, the pledgee may take control of the pledged property if the pledgor or debtor does not, or if the pledgee has good reasons to fear that the pledgor or debtor will not meet its obligations. The deed of pledge may provide that the pledgee will have this right at an earlier or later stage.
Pledges on inventory are (and pledges on receivables may also be) enforced by way of a public sale. The sale requires compliance with certain procedural requirements. As an alternative, the pledgee (as well as the pledgor, unless otherwise agreed in the deed of pledge) may request the competent court to approve a private sale or to determine that the assets shall accrue to the pledgee. After a payment default under the secured obligations has occurred, the pledgor and the pledgee may also agree on an alternative manner to enforce the pledge (such as the assets accruing to the pledgee without court approval).
Mortgages on Dutch real property are enforced by way of a public sale. The sale requires compliance with certain procedural requirements that may be time-consuming. The mortgagee and the mortgagor may request that the competent court approve a private sale of the property.
Pledges on registered shares in a Dutch company are enforced in the manner set out for pledges on inventory. However, any transfer restrictions in the relevant company’s articles of association must be complied with, provided that for private companies with limited liability the pledgee may exercise all rights vested in the shareholder with regard to the transfer and perform the latter’s obligations in respect thereof.
A pledge on intellectual property rights is in principle enforced through sale of the rights in the same way as described above for inventory (and receivables). For certain intellectual property rights, however, specific rules apply, requiring, for example, the involvement of a civil law notary and imposing specific procedural rules.
The prevailing view is that Dutch law does not facilitate the granting of security on Dutch assets to more than one secured party by way of trust structures. For that reason, in almost all syndicated financings that include security interests governed by Dutch law, a ‘parallel debt’ structure is used. Under that structure, each obligor undertakes to pay to the security agent in its own name (and not as the finance parties’ representative) amounts equal to the amounts owed by that obligor to all lenders under the finance documents (that undertaking being the parallel debt). Dutch security interests are then created in the name of the security agent only (and thus not also in the name of the other finance parties) to secure the payment of the parallel debt. Each finance party subsequently has a contractual claim against the security agent for payment of an amount that is determined under an intercreditor arrangement from the proceeds of the enforcement of the security interests.
A less common alternative is the surplus collateral agreement, which enables a lender (A) to seek recovery from a security interest provided by an obligor to another lender (B). Any surplus existing after enforcement of the security interest by that other lender (B), could be transferred to the lender (A), if the pledgor is a party to the surplus collateral agreement.
There are many other forms of credit support available under Dutch law. Guarantees are commonly included in Dutch law-governed LMA-based (syndicated) credit facilities. The wording, with a few exceptions, generally follows the LMA standards. Technical changes often agreed are mainly made to ensure that the guarantee is not to be considered as a suretyship or joint and several liability. To avoid a situation – which will usually only occur if the group is in distress – where a guarantor has not benefited from the facility but has made a payment to the finance parties under its guarantee, and cannot take recourse against the borrower whose debts it has serviced, it is (from a guarantor’s perspective) advisable to create a specific arrangement on recourse between obligors. There are various options available, but whichever alternative is chosen, recourse claims between obligors generally have limited practical relevance as long as the finance parties are not fully paid, as an LMA-based guarantee typically requires the obligors to refrain from exercising any recourse rights for as long as any amount under the facility agreement remains outstanding.
To a lesser extent, joint and several liability is assumed by obligors under Dutch law syndicated financings. That is often the case in the context of ancillary agreements relating to, for instance, cash management. In such an event, the creditor is entitled to claim payment in full from each obligor. If an obligor pays a greater share than required, that obligor is, for that greater share, entitled to take recourse against the other obligors who paid less than they were required to in their relation to the paying obligor. The obligor shall be subrogated for the excess against the co-obligors and third parties, in each case up to the share of the co-obligor or third party in accordance with the relationship with that obligor.
Also, contractually a form of credit support can be created. That can, for instance, be done by agreeing to (extensive) negative undertakings limiting various activities that the borrower may not engage in without the lender’s consent (as is common in the vast majority of financings in the Dutch market (including LMA-based financings)). In essence, these negative undertakings contractually enhance the risk profile of the borrower towards the finance parties. Examples of those undertakings are negative pledge undertakings that are routinely included in any credit facility and that also restrict the entering into of quasi-security (such as sale and leaseback transactions) and, although more common in leveraged transactions, covenants preventing dividend and other shareholder payments, which lenders will require to ensure that there is no ‘cash leakage’ from the borrower’s group.
In principle, creditors of Dutch debtors have, among themselves, an equal right to be paid from the net proceeds of all assets of their debtor in proportion to their claims. Their claims thus rank pari passu. Dutch law, however, accepts the possibility of a first ranking security right, second ranking security right, etc., with respect to both mortgage and pledge, and provides for other grounds for preference (such as rights of retention, and privileges of the Dutch tax authority and a trustee in bankruptcy). Similarly, a contractual arrangement between a creditor and a debtor may stipulate that a claim of a creditor shall take, in respect of all or certain other creditors, a ranking lower than that conferred by law.
Under Dutch law, as a general rule security that was created first in time has the highest priority. The Dutch Civil code provides for the change in rank of mortgages. On 9 April 2021, the Dutch Supreme Court confirmed that also a change of rank for pledges is possible (see Section II). With respect to ‘invisible’ security rights (such as an undisclosed pledge on receivables) it is, therefore, important that conclusive evidence can be provided as to the date when a security right was created. This evidence is provided through the execution of a pledge in the form of a notarial deed or by registration of a private deed with the Dutch tax authorities.
In the Netherlands, no public register exists in which pledges can be filed. As a result, there is no public basis on which a creditor can verify whether any assets of a debtor are encumbered with a pledge. Therefore, a creditor cannot determine in advance whether its debtor’s assets have been pledged previously. However, mortgages are registered in a public register and thus their ranking can be determined by checking the appropriate register. Pledges on shares in a company are required to be recorded in that company’s shareholder register. However, shareholder registers are often incomplete and do not provide conclusive evidence.
Subordination can arise directly from the law or may be agreed upon contractually between parties. An example of a subordination arising from the law is a subordination of claims of the shareholders of a company to the claims of other creditors of the company. More relevant for Dutch financing practice are forms of subordination contractually agreed as part of intercreditor arrangements. In determining the scope of a contractual subordination, the wording of the subordination clause or clauses is important, specifically to determine whether it will have an effect inside bankruptcy, outside bankruptcy or both.
Contractual subordination can be distinguished in statutory subordination and non-statutory subordination. Non-statutory subordination has effect only outside bankruptcy and comes in many varieties. In the case of non-statutory subordination, the subordination may, for example:
In the event of statutory subordination, the debtor and creditor can, however, only contractually agree that the claim of the creditor against the debtor will be subordinated in rank to all or certain other creditors of the debtor. This specific type of subordination is laid down in the Dutch Civil Code and, necessarily, applies only in the case of insolvency (but may be combined with non-statutory subordination that applies outside insolvency). It also applies accordingly in cases of other types of concursus, particularly in the event of enforcement of security rights or attachments.
To invoke a statutory or non-statutory subordination against a debtor (in particular, to prevent that the debtor can discharge its payment obligation towards the junior creditor), a subordination agreement needs to have been entered into between the junior creditor and the debtor. From a senior creditor point of view, it is preferable that it is a party to the agreement as well. Depending on the terms agreed in a subordination agreement (such as a full subordination towards all creditors), senior creditors that were not a party to the subordination agreement may nevertheless rely on it.
A variation on the subordination described above is a type of (non-actual) subordination to which a debtor is not a party. As part thereof, it may be agreed, for instance, to not enforce certain rights or to agree on a waterfall. Such agreement cannot be invoked against the debtor and only affects the creditors that are a party thereto.
Legal reservations and opinions practice
Banks entering into a financing documented in LMA form (whether bilateral or syndicated) routinely require that legal opinions are provided to them. If multiple jurisdictions are involved (e.g., if the financing has foreign obligors), opinions from each relevant jurisdiction will be required. Customarily, opinions will be provided by counsel to the banks, although in some cases banks may accept an opinion from counsel to the borrower, or agree to a split between a capacity opinion (to be provided by counsel to the borrower) and an enforceability opinion (to be provided by counsel to the banks).
Dutch opinion practice closely follows international and European practice. Dutch opinion givers tend to limit their opinions strictly to legal matters, and therefore tend to assume all facts that cannot be independently ascertained. For the same reason, Dutch opinion givers tend not to give ‘no breach of agreements’ and ‘no violation of judgments’ opinions, which are uncommon in the Dutch market.
Most of the syndicated loans that are governed by Dutch law are documented using standard forms published by the LMA. LMA forms will typically also be utilised to document a transfer or assignment of commitments (at par or distressed) outstanding under any such Dutch law-governed syndicated credit facilities. These credit facilities also provide to which financial entities commitments may be transferred and to what extent consent from the borrower (and within which time frame) may be required. For Dutch law-governed investment-grade credit facilities, it is often agreed that for each assignment or transfer the borrower’s consent is required unless the assignment or transfer is to another lender or its affiliate, or an event of default is continuing. In more leveraged situations, the lenders are generally allowed to more freely assign or transfer any loan commitments and with less consent requirement being applicable. The cooperation of a Dutch borrower with a transfer or assignment may also be needed if know-your-client rules require investigation of the obligors, and because the borrower will need to countersign the transfer or assignment agreement.
The parallel debt structure briefly described in Section IV also facilitates secured loan transfers. That is because security interests created in favour of the security agent on the basis of a parallel debt will continue to secure the participation of the new lender in the secured loan following any transfer or assignment, and does not require any further documentation to be entered into or formalities to be completed.
There are currently no other issues of note.
Outlook and conclusions
The ongoing covid-19 pandemic and the related government restrictions, as well as the global political landscape, have severely affected the economy. Affected companies have navigated these uncertain times in a variety of ways, including: agreeing with their lenders to certain amendments and waivers of their financing agreements; ensuring adequate levels of liquidity through government support schemes; drawing under their revolving credit lines; and turning to the debt capital markets where possible. So far, Dutch companies have found contracting parties (including lenders) to be relatively flexible in granting payment holidays. In addition, Dutch courts have prolonged the use of the temporary guidelines that allow the pandemic and the state of the economy to play an important role in a court’s decision whether or not to declare a company bankrupt. Consequently, the number of bankruptcies has been low since the start of the crisis. Despite all of these efforts, these liquidity measures are being phased out, and, in addition, central banks are expected to decrease their quantitative easing (in light of the rising inflation) as a result of which interest rates are likely to further increase. As such, in the coming months, more businesses in the Netherlands are expected to face liquidity or continuity problems as a result of the pandemic and the global political landscape.
In the Netherlands, there has been ongoing attention on the various ways to extend a company’s life cycle and make it more resilient during a downturn. Various initiatives taken by both the EU and the Dutch legislature support this trend. First, last year’s introduction of the Dutch scheme has resulted in a new restructuring tool for companies in financial distress that is regularly utilised in practice. Further, the Dutch bill implementing the Directive on Restructuring and Insolvency in the Dutch Bankruptcy Act was submitted to the Dutch House of Representatives for consultation on 21 February 2022. By using this framework, companies can avoid bankruptcy proceedings. The Directive on Restructuring and Insolvency’s objective is similar to that of the WHOA. Finally, the bill on the new Dutch prepack and the related bill on the transfer of undertakings in bankruptcy proceedings are also being prepared. The parliamentary debate on these bills was stayed awaiting a decision of the European Court of Justice in a case relevant to the bills. The court rendered its judgment on 28 April 2022, hence the debate on these bills is expected to start shortly. Each of these initiatives is likely to affect – and benefit – companies in financial difficulties.
So far covid-19 has not had a real impact on the loan finance market (i.e., on the low interest rate environment, the related decrease in banks’ funding costs, lending at more competitive rates and conditions, more borrower friendly loan agreements and a gradual shift towards alternative ways of financing for corporate borrowers). However, the current global political landscape has led to changes in the loan finance market, and the anticipated decrease of the European Central Bank’s quantitative easing and macroeconomic developments generally will determine lending and secured finance volumes and margins in the Dutch market for the near future. Though banks are still expected in the short term to retain a dominant position, it is, therefore, fair to say that the Dutch loan finance market will continue to be a market in motion and will also increasingly focus on sustainability.
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