A general introduction to loans and secured finance in the Netherlands
All the questions
The Dutch loan finance market for small and medium-sized business borrowers is still mainly managed by a single bank on a bilateral basis or through a banking club. For larger mid- and large-cap loans, debt financing is either provided by a syndicate of banks or through private debt providers such as loan funds. Capital and risk management requirements for banks, excess credit supply, low funding costs and the “search for yield” have led alternative credit providers to increase their share and become increasingly important in the debt markets. In addition, the use of green loans and sustainability-linked loans continues to increase.
Although financial markets have emerged from the covid-19 pandemic, the recent global political and economic situation has led to uncertainty in loan and capital markets and an increase in interest rates. In addition, the situation in the loan and capital markets could deteriorate (1) as government stimulus plans are phased out and (2) because central banks, also in view of rising inflation, are expected to reduce their quantitative easing as a result of which interest rates are expected to rise further.
Legal and regulatory developments
Dutch legal and regulatory developments from April 1, 2021 to June 1, 2022 (other than through EU regulations) that are relevant to the practice of debt financing include the following:
- As of 9 January 2022, the public version of the Dutch out-of-court restructuring plan (WHOA) falls within the scope of the European Insolvency Regulation recast (the EIR recast). This means that any decision and legal effect resulting from a Dutch public scheme, opened in accordance with the REI recast, is automatically recognized and enforceable throughout the EU. This includes court orders regarding the appointment of plan experts, the classification of creditors, a reprieve (moratorium) and, most importantly, a restructuring plan sanctioned by a Dutch court with a cross-class crackdown on dissenting minority creditors and shareholders. This is relevant for cross-border restructurings, in particular because the effect of a Dutch public scheme will automatically be recognized in the EU (with the exception of Denmark and Ireland, which are not parties to the amendment) . Since the Dutch regime offers great flexibility in the design of the restructuring plan and offers various tools to reach a consensual agreement with a qualified majority of creditors, the automatic recognition will make the public version a powerful cross-border restructuring tool. The private version of the Dutch regime remains outside the scope of the REI recast, but could be recognized on the basis of other treaties or national private international law.
- On May 29, 2020, the bill, which prohibits restrictions on the transferability and pledge of claims arising from the exercise of a profession or business and which are transferred or pledged for financing purposes, has been submitted to Parliament. By expanding the base of assets that can be transferred or pledged to financiers, the bill aims to increase the credit potential of (mainly) small and medium-sized enterprises and create a level playing field with neighboring jurisdictions. On January 28, 2021, the bill was discussed in parliament and was not considered controversial. The bill has not yet been put on the agenda for parliamentary debate and therefore it is unclear when the bill will come into force.
- On April 9, 2021, the Dutch Supreme Court ruled that it is possible to adjust the priority of pledge rights. When determining the priority of liens, the general rule is that the moment of the creation of the lien is decisive. Consequently, a right of pledge constituted previously has priority over the rights of pledge constituted later on the same property. Although not explicitly provided for in the Dutch Civil Code, following the judgment of the Dutch Supreme Court, a right of pledge created later may rank higher than a right of pledge created earlier on the same property, provided that the pledgee of the right of pledge has given his consent.
Perspectives and Conclusions
The ongoing covid-19 pandemic and related government restrictions, as well as the global political landscape, have severely affected the economy. The companies affected have weathered these uncertain times in a variety of ways, including: agreeing with their lenders to certain changes and waivers to their financing agreements; ensuring adequate levels of liquidity through government support programs; draw on their revolving lines of credit; and look to debt capital markets where possible. So far, Dutch companies have found contracting parties (including lenders) to be relatively flexible in granting payment holidays. Additionally, Dutch courts have extended the use of temporary guidelines that allow the pandemic and the state of the economy to play a significant role in a court’s decision whether or not to declare a business bankrupt. Consequently, the number of bankruptcies has been low since the beginning of the crisis. Despite all these efforts, these liquidity measures are gradually being phased out and, in addition, central banks are expected to reduce their quantitative easing (in light of rising inflation), which should lead to a further increase in interest rates. . So, in the coming months, more businesses in the Netherlands are expected to face liquidity or continuity issues due to the pandemic and the global political landscape.
In the Netherlands, constant attention has been paid to different ways to extend the life cycle of a business and make it more resilient in the event of a downturn. Various initiatives taken by both the EU and the Dutch legislator support this trend. First, the introduction of the Dutch scheme last year has given rise to a new restructuring tool for companies in financial difficulty which is regularly used in practice. Furthermore, the Dutch draft law implementing the Restructuring and Insolvency Directive in Dutch bankruptcy law was submitted to the Dutch House of Representatives for consultation on February 21, 2022. Using this framework, companies can avoid bankruptcy proceedings. The objective of the Restructuring and Insolvency Directive is similar to that of the WHOA. Finally, the draft law on the new Dutch prepack and the related bill on the transfer of companies in bankruptcy proceedings are also in preparation. Parliamentary debate on these bills has been suspended pending a decision by the European Court of Justice in a case relating to the bills. The court delivered its judgment on April 28, 2022, so debate on these bills is expected to begin soon. Each of these initiatives has the potential to affect – and benefit – companies in financial difficulty.
So far, covid-19 has not had a real impact on the loan funding market (i.e. the low interest rate environment, the associated decline in the cost of bank financing, loans at more competitive rates and conditions, more favorable loan agreements for borrowers and a gradual move towards alternative financing methods for corporate borrowers). However, the current global political landscape has led to changes in the loan funding market, and the expected decline in European Central Bank quantitative easing and macroeconomic developments will generally drive secured loan and funding volumes and margins. on the Dutch market in the near future. Although banks are still expected to maintain a dominant position in the short term, it is therefore fair to say that the Dutch debt financing market will continue to be a moving market and will also increasingly focus more about sustainability.