Structured finance and securitisation in Hungary
Szerző: Gárdos István - Tomori Erika - Gárdos Péter - Zrónik Edinaletöltés
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?
The securitisation market is not developed in Hungary. This is partly due to the lack of legislation and the fact that assets which are usually securitised (residential mortgage loans, car loans, credit card loans and trade receivables) have only recently increased to a level that would allow cost-effective securitisation. This may also be due to the fact that German-type mortgage bonds can be used to achieve a similar result. These bonds are widely used in Hungary and are regulated under Act XXX of 1997 on Mortgage Loan Companies and on Mortgage Bonds. The central bank accepts bonds and other securities issued by special purpose vehicles (SPVs) provided they meet the general eligibility criteria, but this in itself has not resulted in any increase in securitisation. Hungarian originators (mostly affiliates of foreign companies) securitise their receivables by transferring them to SPVs seated in foreign countries (often in an EU member state). However, there is only a very small number of these types of transactions.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?
There is no specific legislative regime for securitisation in Hungary. A draft bill was circulated several years ago, but the government did not introduce the bill in parliament. The Ministry of National Economy in co-operation with the Hungarian National Bank (HNB) is currently working on a draft, which is planned to be submitted to the government for consideration.
The transfer of receivables is regulated by the Civil Code (Act V of 2013), and the rules on assignment apply to the transfer of receivables by way of securitisation. The Civil Code which entered into force this March significantly changed the rules of assignment. The purpose of the changes is to clarify some of the issues uncertain under the previous legislation, and to make the legislation more sophisticated, to allow the parties to choose between different solutions. The Civil Code for the first time now contains the rules on factoring, therefore if the transaction qualifies as factoring, these rules also apply.
There is no specific regulatory authority relating to securitisation or SPVs. Purchasing receivables can be regarded as factoring or another type of financial services, if it is carried out in a commercial manner. In this case, the SPV has to be a licensed institution operating under the supervision of the HNB. The public offering of bonds issued by the SPV also requires the HNB's approval.
Reasons for doing a securitisation3. Which of the reasons for doing a securitisation, as set out in the Model Guide, usually apply in your jurisdiction? In particular, 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?
Usual reasons for securitisation
The securitisation market is not developed in Hungary. There have only been a couple of securitisation transactions by Hungarian originators, with significant foreign elements, as the sponsors were foreign banks. The few securitisations that have occurred covered mainly trade receivables or receivables arising from loan agreements.
The need for increasing liquidity and an alternative source of funding will probably force Hungarian banks or other originators to securitise their receivables in the future.
Balance sheet benefits may also play an important role in the future.
No special accounting rules apply to securitisation. As Hungary is a member state of the EU, Regulation (EC) 1606/2002 on the application of international accounting standards (International Accounting Standards Regulation) is directly applicable in Hungary. Under this Regulation, companies listed on a stock exchange must prepare their consolidated accounts in compliance with International Financial Reporting Standards (IFRS). For companies not listed on the stock exchange, IFRS is permitted for the preparation of their consolidated accounts, while annual accounts must be prepared in compliance with the national accounting standards.
Under national accounting standards, receivables are removed from the balance sheet of the seller on selling them to a buyer (for example, a factor) with no recourse. To achieve this result, the right of recourse must be expressly excluded. If not excluded, it qualifies as a contingent liability and is therefore shown in the seller's financial statements.
Capital adequacy requirements and the methods for its measurement are set out in:
Act CCXXXVII of 2013 on Credit Institutions..
Act CXXXVIII of 2007 on Investment Firms.
As a general rule, the capital adequacy ratio is 8%.
Being a member state of the EU, Regulation 575/2013 (Capital Requirements Regulation) is directly applicable in Hungary. The special rules of the Capital Requirements Regulation apply to the measurement and quantification of capital adequacy of originator financial institutions or investment firms.
In a true sale securitisation, the originator can exclude securitised assets from the calculation of risk-weighted exposure amounts and expected loss amounts if significant credit risk associated with the securitised assets (exposures) has been transferred to a third party. This is provided the transaction complies with the requirements set out in the specific legislation, in accordance with Article 243 of the Capital Requirements Regulation. The conditions include a legal opinion proving that the securitised assets are put beyond the reach of the originator and its creditors.
Provisions regarding capital adequacy in the case of synthetic securitisation also fully comply with the Capital Requirements Regulation. The regulatory authority relating to the capital adequacy of credit institutions and investment firms is the President of the HNB, and compliance is supervised by the HNB.
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?
There is no special regulation relating to the establishment of an SPV, so the general corporate rules of the Civil Code apply. If the SPV intends to issue bonds or similar securities, it must be an organisation with legal personality, typically a limited liability company or company limited by shares.
The type of securities that can be issued by the SPV is not regulated either. Shares can only be issued by companies limited by shares. Bonds can be issued by almost all types of legal entities. The Civil Code significantly changed the rules relating to securities. Before 2014 there was a closed list of securities, but under the Civil Code any document may qualify as a security if it fulfils certain general conditions.
The initial capital of a limited liability company must be at least HUF3 million. In companies limited by shares the initial capital must be at least HUF5 million in a private company and HUF20 million in a public company.
Since the new Civil Code entered into force, Hungarian law also recognises the trust concept, therefore theoretically securitisation by way of trust is also possible. Due to various problems with trust rules, which enable the settlor's creditors to seek enforcement against the trust, only two trust companies have been established.
Purchasing receivables can be regarded as factoring or another type of financial service, and providing financial services requires a licence from the HNB. To obtain this licence, the initial capital of the SPV must be at least HUF50 million.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?
Because an SPV may qualify as a financial service provider, which must meet certain criteria, SPVs are usually established offshore. If the SPV is a supervised institution in an EU country, it can also operate in Hungary, without meeting any additional requirements. It can be advantageous to set up an SPV in Hungary, if it is planned that the SPV will conduct several securitisation transactions, in which case it can be worthwhile to also meet the financial service provider requirements.
Ensuring the SPV is insolvency remote6. 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?
Normally, the general insolvency rules apply to an SPV. Therefore, if the SPV does not meet its obligations, enforcement and insolvency procedures may be initiated against the SPV. One of the ways to achieve insolvency remoteness is to limit the scope of the SPV's activities. The constitutional document (articles of association or deed of foundation) of a company must designate the primary activity of the company. This restriction, however, does not have any effect against third parties.
The company can carry out any activities not prohibited or restricted by law, that is, ultra vires restrictions do not apply. Therefore, it remains the shareholders' duty to ensure that the SPV is operated on a solvent basis:
The SPV only participates in securitisation transactions, and does not incur liabilities outside the scope of the contemplated securitisation.
Any amount repaid by the debtors of the receivables is used solely to perform obligations arising from the securities issue.
Ensuring the SPV is treated separately from the originator
On the originator's insolvency, only the assets owned by the originator can be used to satisfy the creditors. As the receivables were transferred to the SPV, except for fraudulent transfers, assets of the SPV do not belong to the insolvency assets of the originator, even if under the applicable accounting rules the two companies must prepare consolidated balance sheets. For the risks of the transfer being unwound in case of the originator's insolvency, see Question 17.
Issuing the securities
Securities can be issued either publicly or privately, and different procedures apply to each. However, it appears that no SPV has issued securities publicly in Hungary.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.
There is currently no practice to comment on. However, there are no legal barriers to listing the securities on the Budapest Stock Exchange (BSE). The issuer must prepare a prospectus that must be approved by the HNB before publication.
The prospectus must also be published on the BSE's website. The SPV must further publish, among other information, the statutes and the ownership structure of the company and the name and address of the registrar of shares.
Detailed terms of listing on the BSE are available in English on the BSE website (http://bse.hu/topmenu/issuers/listingBSE/termsoflisting).
Constituting the securities10. 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?
The trust concept is recognised in Hungary since the Civil Code entered into force on 15 March 2014. Therefore, securities issued by the SPV can be held by a third party on behalf of the investors. Due to certain problems (see Question 4), only two trust companies have been established.
Securities can be issued in paper form or in dematerialised form. Dematerialised securities are registered with the Central Depository, and the rights of the investors in the securities are proven by book entries in securities accounts held by investment service providers. In paper-based securities, the rights are proven by the certificate. Therefore, investors hold their bonds directly, either in paper form (that is, the securities are issued in a series of individual printed documents and each investor receives one or more printed securities) or in dematerialised form (that is, the securities are credited to the securities account of each investor) and the bonds represent their rights in relation to the issuer (SPV).
Transferring the receivables
Classes of receivables11. 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?
To date, the number of securitisations is very limited. Most of these involve the securitisation of trade or loan receivables. The need for increasing liquidity and an alternative source of funding will probably force Hungarian banks or other originators to securitise their receivables in the future.
Currently new legislation is underway which affects a large class of receivables potentially eligible for securitisation (mortgage loans and certain other consumer loans of financial institutions). Until this issue is settled, and the legal situation around these receivables becomes clear, it is not expected that these assets are going to be securitised.
Transferring the receivables from the originator to the SPV12. How are the 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?
Receivables are usually transferred under Hungarian law by assignment. Novation is rarely used, as it also requires the participation of the debtor. A declaration of trust is also possible since the Civil Code entered into force.
The Civil Code regulates different legal causes for the transfer of receivables. The two most relevant legal causes are sale and purchase and factoring:
In case of a sale and purchase agreement, the seller assigns the receivables for consideration permanently.
In case of factoring, the receivables are transferred merely as security. The factor provides a loan to the assignor, and accepts that repayment of the loan will primarily take place by the payment of the debtors of the assigned receivables, provided that if the debtors of the assigned receivables fail to pay, the assignor will be obliged to repay the loan.
Although the legal cause is different, the method by which the receivables are transferred is the same (assignment). Assignment is regulated as a contract in the Civil Code, the purpose of which is to fulfil the obligation arising from the agreement which serves as the legal cause of the transfer (mainly sale and purchase agreement or factoring agreement). The receivable is transferred to the assignee by the mere agreement of the assignor and the assignee.
Notification of the debtor is not necessary to transfer the receivables. However, this agreement in itself does not have any effect on the obligations of the debtor. To make the transfer effective against the debtor, the debtor must be notified of the assignment. The main effects of the notification are:
Following notification of the debtor, the terms of the receivable cannot be amended.
The debtor can only raise any defence against the assignee and can set-off any counterclaim which already existed at the time of receiving the notice.
The assignor can assign the same receivable more than once.
Based on the principle of debtor protection, although following an assignment the assignor can neither validly assign nor create a charge on the same receivable, the debtor's obligations (until he is notified of the first assignment) are discharged by performance, in accordance with the notice of any subsequent assignee or chargee. Although there is no published court decision on this issue, this scenario should be regarded as unjust enrichment, and the first assignee or chargee can request the amount paid by the debtor.
In case of sale and purchase transactions, there is no registration. However, if the receivables are transferred in a factoring transaction, the factoring agreement has to be registered in the online securities registry. Lack of registration does not affect the validity of the contract, but the receivables will not transfer to the factor: the factor will obtain a mere in personam right against the debtor.
No special rule applies to the transfer of receivables in a securitisation transaction.13. Are there any types of receivables that it is not possible or not practical to securitise in your jurisdiction (for example, future receivables)?
Generally, claims are transferable, unless either:
By their nature they are tied to a specific person (personal receivables).
Transfer is prohibited by law.
Therefore, any type of debt receivable (such as mortgage loans, commercial or consumer loans, hire-purchase receivables, trade receivables or credit card receivables) can be securitised regardless of the currency of the debt.
The transferability of future receivables is acknowledged by the Civil Code, as long as the legal basis from which the receivable will arise (for example, in case of loan receivables the loan agreement) already exists at the time of the assignment.
The sale and purchase agreement and the factoring agreement could provide for the obligation to transfer receivables even if the legal basis does not exist, but assignment of such receivables is not possible.
Non-assignment clauses do not hinder securitisation either, as such clauses are ineffective against third parties. This means that assignment will be effective, even if the assignor and the debtor of the assigned receivable agree that receivables arising from their contract cannot be assigned. Such an assignment would be a breach of contract between the debtor and the assignor, but would not affect the transfer of the receivables to the assignee.
Before the Civil Code entered into force, non-assignment clauses were not regulated, and the courts interpreted such clauses so that such assignments were null and void. Because the Civil Code, as a general rule, only applies to contracts concluded after 15 March 2014, non-assignment clauses in contracts concluded before this date could hinder securitisation.14. How is any security attached to the receivables transferred to the SPV? What are the perfection requirements?
In an assignment, accessory security rights securing the assigned claims automatically transfer to the assignee, without any specific agreement or other act. Registration of the new mortgagee in the Land Register or in the security register is still advisable. The importance of registration is that any bona fide third party can rely on information registered, and as long as the new mortgagee is not registered, the registered mortgagee can allow the mortgage to be terminated.
If the obligation was secured by surety, the surety also automatically follows the receivable but, similarly to the assignment, it is advisable to give notice to the surety about the assignment of the debt.
Prohibitions or restrictions on transfer
15. Are there any prohibitions or restrictions on transferring the receivables, for example, in relation to consumer data?
Non-assignment clauses do not hinder securitisation, as such clauses are ineffective against third parties. For the effects of non-assignment clauses, see Question 13.
The Civil Code prohibits the assignment of personal receivables, and there are certain laws which prohibit the transfer of specific receivables, for example, the assignment of wages is null and void.
Act CXII of 2011 on information self-determination and freedom of information provides that personal data relating to private individuals can usually only be processed if the affected person gives his consent. This requirement, if strictly applied, can create an effective restriction on the transfer of receivables, at least where the debtors are private individuals. However, the authors believe that if the given receivable is otherwise transferable, the related information can also be transferred (the same data protection and confidentiality rules will apply to the transferee).
Act CCXXXVII of 2013 on Credit Institutions provides for special protection of confidential bank information. This Act, however, provides an explicit exemption under the bank confidentiality prohibitions, when the credit institution transfers its debt receivables to third parties.
Avoiding the transfer being re-characterised16. 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?
In principle, the legal cause of an assignment can be any kind of agreement. The Civil Code however renders an assignment null and void if it is made with the purpose of providing security to the assignee. As there is no clear distinction between a sale of receivables and a loan secured by receivables in the form of a transfer of receivables, a recharacterisation risk exists. To decide whether a transaction falls under one or the other category, the court would thoroughly consider the circumstances of the case.
To avoid recharacterisation, it is particularly important that:
The receivables are transferred at a realistic market price.
The assignee's recourse to the assignor is restricted (that is, the risk of the debtor's non-performance has to be borne by the assignee).
The assignor does not retain control over the receivables.
If the transaction is concluded at market value and on arm's-length terms, the transaction cannot be unwound even in the insolvency procedure of the originator.
Fraudulent, undervalued and preferential transactions concluded within the suspect period can be challenged by the insolvency officer on the basis of either the Civil Code or the Act XLIX of 1991 on Insolvency Procedure. The suspect period is:
Five years in fraudulent transactions.
Two years for undervalued transactions.
90 days in preferential transactions.
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?
Choice of law clauses are recognised. However, in relation to an assignment of receivables, the choice of law is only recognised in relation to the internal relationship between the assignor and the assignee, and does not affect the rights and obligations of the obligors and other third parties. The law governing the assigned right applies to these external relationships (see Article 14, Regulation (EC) 593/2008 on the law applicable to contractual obligations (Rome I)).
The application of foreign law is also disregarded if it conflicts with Hungarian public order. A foreign law attached to a foreign component created by the parties artificially or by deception, for the purpose of avoiding the law otherwise applicable (fraudulent attachment), does not apply.
Security and risk
Creating security19. 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.
The assets of the SPV mainly consist of receivables. The only relevant security right regulated in Hungarian law is a charge. A charge is a proprietary security right attached to the collateral, which ensures priority enforcement of the secured obligation, both outside of and in insolvency procedures. A charge over receivables can be created by the agreement of the chargor and the charge and the registration in the online securities register. Notification of the debtor or registration is not necessary for the creation of the security interest. Enforcement and priority is regulated by the Civil Code and the insolvency legislation.
Assignment by way of security is prohibited by the Civil Code, and such contracts are therefore null and void.
A security interest over any other intangible or tangible assets of the SPV can be created by a charge. To be perfected, a charge requires registration in the:
Land registry, if the collateral is real property.
Securities registry, if the collateral is movable property (including receivables or other intangible assets).
Specific registry, if the collateral is listed in certified public registries (for example, ships, quotas in limited liability companies, and IP rights).
The Civil Code recognises the trust concept since 15 March 2014. It is possible, therefore, to give security in favour of a trustee. Trust is regulated as a contract between the settlor and the trustee, whereby the settlor transfers certain assets to the trustee, who manages the trust for the beneficiary.
The Act on Trustees (Act XV of 2014) requires in certain cases that the trustee obtains a licence from the HNB and registers its activity.
Foreign trusts are recognised, but the relationship between the foreign trust and its beneficiaries will not be governed by Hungarian law.
The Civil Code further introduced the concept of a collateral agent, whose role and status is similar to that of a security trustee.
Credit enhancement21. 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 Model Guide?
There is currently no practice available to comment on.
Risk management and liquidity support22. 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 Model Guide?
There is currently no practice available to comment on.
Cash flow in the structure
Distribution of funds23. Please explain any variations to the cash flow index accompanying Diagram 9 of the Model 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 is currently no practice available to comment on.
Profit extraction24. 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 Model Guide?
There is currently no practice available to comment on.
The role of the rating agencies25. 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?
S&P rate Hungary BB stable, Moody's rating was changed in November from Ba1 negative to Ba1 stable, and Fitch rate Hungary BB+ stable. This shows a slight consolidation, after S&P warned in 2010 that Hungary's credit rating may be downgraded to junk. The ranking is influenced by economic issues and issues affecting legal certainty.
Tax issues26. 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?
Value added tax (VAT) is imposed on sales of goods or services and its rate is 27%. However, the sale of receivables is not subject to VAT if the consideration paid for the receivable is money.
Hungary does not impose stamp duty or other documentary taxes on sales of receivables.
SPVs do not enjoy specific tax treatment. Therefore, general corporate tax also applies to SPVs. The rate of the general corporate tax is 19%, with a limitation to 10% in cases where the positive tax base does not reach HUF500 million. Further, in 2014 the financial institutions were subject to an extra tax which might be extended to the following years.
Payments on securities issued by the SPV are subject to withholding tax under Hungarian law if the owner of the security is a private person. The tax rate on capital gains income, including interest income and income after publicly traded securities, is 16%.
The bilateral agreements on double taxation and the prevention of fiscal evasion should always be taken into consideration regarding tax issues.
Hungary has concluded the FATCA Model 1 agreement with the US, based on which investment entities, such as entities that trade transferable securities, can qualify as reporting financial institutions. To determine whether an SPV qualifies as a reporting financial institution, the circumstances of the case needs to be analysed. If the SPV qualifies as a reporting financial institution and performs its obligations in due course, it will be treated as complying with and not subject to withholding under section 1471 of the US Internal Revenue Code.
Recent developments affecting securitisations27. 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.
The entering into force of the Civil Code has a significant impact on rules that could influence securitisations. For example:
The new rules on assignment provide clear provisions on how future receivables can be assigned and make non-assignment clauses ineffective against third parties.
The creation of the new securities register makes the creation of charge over receivables transparent.
The Civil Code further introduced the trust, but problems with the implementing rules make this new regime less attractive.
Other securitisation structures28. What other structures, including synthetic securitisations, are sometimes used in your jurisdiction?
There is no practice for synthetic securitisations. However, derivatives are used by practitioners, so there are no legal barriers that would prevent synthetic securitisation in Hungary.
Reform29. 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?
The Ministry of National Economy in co-operation with the HNB is currently working on a draft bill for securitisation, which is planned to be submitted to the government for consideration. The HNB is conducting interviews in the market to understand the needs of market participants. The first draft is planned to be circulated in Q4 of 2014.30. Has the nature and extent of global, regional and domestic reforms had a positive or negative affect on revitalising securitisation in your jurisdiction?
There is currently no practice available to comment on.