Acquisition Finance in the Albanian Legal System
Article by Florian Piperi, Partner, Optima Legal & Financial
This article brought in the form of guideline questions and answers addresses the provisions and obligations for debtors and creditors in a general structuring of financing in the Albanian legal system.
- What territory’s law typically governs the transaction agreements? Will courts in your jurisdiction recognise a choice of foreign law or a judgment from a foreign jurisdiction?
In principle, as a matter of law, the parties are free to choose the law governing their transactions unless choice of foreign law is made for purpose of evasion of law and that foreign law is compatible with imperative norms of Albanian law and with public policies. In case of transactions with foreign elements, the Parties may choose to regulate their transaction pursuant to foreign law and in this case, the Albanian courts are obliged to recognize such choice. Albanian courts subject to Civil Procedure Code shall recognise a final judgment of a foreign jurisdiction and render it enforceable in Albania provided that it is a result of a due process of law, does not constitute res judicata, or is not under court review in Albania and is compatible with basic principles of Albanian law.
- Does the legal and regulatory regime in your jurisdiction restrict acquisitions by foreign entities? Are there any restrictions on cross-border lending?
In general, acquisitions by foreign entities are not restricted, except a prohibition imposed on foreign entities and/or subjects to acquire agricultural land in Albania. Albanian Law does not impose any restriction on cross-border lending, but such transactions may be subject to restrictions imposed by sanctions regimes if any. It is crucial that no foreign lending institution may solicit Albanian public to take loans or financing unless registered in Albania as per the strict banking regularity regime overseen by the Bank of Albania. Furthermore, cross-border financial leasing is governed by international law, however, the Albanian law does not elaborate on the international act applicable for specific cases and also Albania has not yet signed the UNIDROIT Convention on International Financial Leasing (Ottawa 1988).
- What are the typical debt components of acquisition financing in your jurisdiction? Does acquisition financing typically include subordinated debt or just senior debt?
Debt components in case of acquisitions in Albania vary depending on the size and specifics of the transaction and the parties involved. Most common cases of acquisition financing use bank loans mostly secured term loans or revolving loans. A loan can be secured or unsecured. Secured loans are categorized as first lien loans, grant a prime security interest on the assets of the borrower. Failure of the Borrower to pay the loan in due time entitles the lender to execute the collateral. Less common are unitranche facilities mezzanine facilities, public securities and bridge facilities.
- Are there rules requiring certainty of financing for acquisitions of public companies? Have ‘certain funds’ provisions become a market practice in other transactions were not required?
Purchaser is required by law to provide proof of finance capabilities as a condition precedent to become part of competitive procedures and also preliminarily pay, or provide bank guarantees usually calculated as a percentage of the value of the bid offer. This is a common requirement of tendering and procurement procedures but is also widely used in the private sector where the acquiring company provides certain evidence, representations and/or undertakings confirming its ability and possibility to enter into the transaction. One such provision may be considered the obligation of the shareholders to pay at least one-fourth of the par value of the subscribed share capital when establishing new joint stock companies, or one-fourth of the subscribed capital increase, in case of an increase of the share capital.
- Are there any restrictions on the borrower’s use of proceeds from loans or debt securities?
Most loan agreements contain a non-default clause whereby the parties restrict or specify the purpose for use of the proceeds by the borrower. The Bank of Albania has further underpinned this practice by requiring second-tier banks to specify the scope of the loan and of use of proceeds in several types of loan agreements, such as mortgage and consumer loans. There are no legal restrictions on the use of proceeds resulting from debt securities unless the debt instrument provides otherwise.
- What are the licensing requirements for financial institutions to provide financing (whether individually or in a syndicated financing) to a company organised in your jurisdiction?
Every institution aiming to offer bank and/or financial services in Albania must be licensed by the Bank of Albania for the specific financial activity intended to be performed. The applicant entity must be registered in the Republic of Albania as a joint stock company and have a minimum capital of ALL 1,000,000,000.00 (approximately EUR 7.2 million) to provide bank services. For non-bank financial institutions, the requirements vary depending on the specific type of activity required to be performed.
- Are principal or interest payments or other fees related to indebtedness subject to withholding tax? Is the borrower responsible for withholding tax? Must the borrower indemnify the lenders for such taxes?
The gross amount of interest is subject to a 15% withholding tax unless a double tax treaty provides for a lower rate. Payment is withheld at source and usually, the lender is held liable for such tax. No withholding tax is applied on principal repayment installments.
- Are there usury laws or other rules limiting the amount of interest that can be charged?
Yes, the regulations approved by the Bank of Albania contain the general instructions and methods for calculating and setting interest to be charged on loans of clients by banks and non-bank financial entities and the time during which the banks can charge and calculate such penalties.
- What kind of indemnities would customarily be provided by the borrower to lenders in connection with a financing?
Subject to the specific provisions of the agreement, there are various types of indemnities borrowers may provide to lenders. In relation to the execution of the agreement borrowers may undertake to pay in case of non-performance, such as failure to pay the instalment in time, or repay the credit, the borrower is obliged to pay full indemnity to lender, comprising due amounts, accrued interest, penalties, lost profit and any cost lender has sustained to enforce its rights provided by the agreement.
- Can interests in debt be freely assigned among lenders?
Creditors may assign their interests in debt freely to any third party without the consent of the debtor, provided the interest is not related to rights of a strictly personal nature (especially cause of death and non-levy credits), or the transfer is not prohibited by law. In any case, the agreement is made in written and the assignment is not obligatory upon the debtor unless it has been duly notified on the deed. All kinds of interest and privileges related to a debt may be transferred, except for the pledge which requires the approval of pledger, such as the case of credits secured through securing charges. However, parties may contractually prohibit assignment of interests (rights and obligations) arising from their mutual agreements, or restrict it to be allowed only for specific stakeholders.
Companies may also sell their account receivables invoices on basis of a factoring transaction, which is regulated by the Law on Factoring. The factoring activity may be performed only by banks or specified companies licensed by the Bank of Albania.
- Do rules in your jurisdiction govern whether an entity can act as an administrative agent, trustee or collateral agent?
In 2013 the Albanian legislation has introduced the role of a collateral agent in financial collateral agreements. The law also vaguely provides for the possibility of lenders to authorize third parties to execute loans, without however providing specific regulations on the matter. Regarding transactions with bonds, the respective law does regulate the function of administrative agent and trustee which need to be licensed by the Albanian Financial Supervisory Authority (AFSA) to exercise their activity.
- May a borrower or financial sponsor conduct a debt buy-back?
Subject to Albanian Civil Code, when the capacity of lender and borrower falls under the same person, the underlying obligation is annulled. The obligation is restored if borrower and lender become again separated persons. This practice, however, cannot be used to harm usufruct or pledge interests of any third party. Furthermore, the Albanian law regulates the agreement on repayment of securities applying to financial transactions whereby at least one of the parties is a bank institution, or non-bank financial institution, providing the general framework applying to this kind of transaction. The law “On Bonds” also provides the possibility of an issuer to buy back its own bonds prior to maturity date, but it must notify AFSA and may not exercise the rights associated with these bonds.
- Is it permissible in a buy-back to solicit a majority of lenders to agree to amend covenants in the outstanding debt agreements (ie, exit consents)?
By law, the parties are allowed to an agreement to renew their obligation through new arrangements (which usually imply a reduction of the sale price), but there are no provisions regulating exit consent practices. Sectorial laws do however provide to the parties of a buy-back transaction the possibility to replace existing securities with new ones, but there is no extended legal elaboration on this matter. In case of transactions with bonds, the group of bondholders may not undertake decisions discriminating among bondholders.
Article by Florian Piperi, Partner, Optima Legal & Financial