A Q&A guide to structured finance and securitisation law in Hungary.
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 Q&A is part of the PLC multi-jurisdictional guide to structured finance and securitisation. For a full list of contents visit www.practicallaw.com/securitisation-mjg.
How active and/or developed is the market and what notable transactions and new structures have taken place recently?
To what extent have central bank liquidity schemes assisted the securitisation market in your jurisdiction? Were retained securitisations common in the last 12 months?
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.
What are the main laws governing securitisations?
Is there a regulatory authority?
There is no specific legislative regime for securitisation in Hungary.
The transfer of receivables is regulated by the Civil Code (Act IV of 1959). A new Civil Code is currently being prepared, which will modify the current rules on assignment, but it will not enter into force before 2013 (see Question 29).
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 businesslike manner. Authorisation from the Hungarian Financial Supervisory Authority (HFSA) is required to provide financial services. The public offering of bonds issued by the SPV requires the HFSA's approval.
Accounting practices in your jurisdiction, such as application of the International Financial Reporting Standards (IFRS)?
National or supra-national rules concerning capital adequacy (such as the Basel International Convergence of Capital Measurement and Capital Standards: a Revised Framework (Basel II Accord) or the Capital Requirements Directive)? What authority in your jurisdiction regulates capital adequacy requirements?
The securitisation market is not developed in Hungary (see Question 1). 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 are mainly trade receivables securitisations.
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 (see below, Accounting Practices) may also play an important role in the future (see Model Guide, Reasons for doing a securitisation (www.practicallaw.com/resource.do?item=http://crossborder.practicallaw.com/2-501-2997?q=*&qp=&qo=&qe=)).
No special accounting rules apply to securitisation. As Hungary is a member state of the EU, Council 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 while statutory accounts conforming to national accounting standards are required.
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 CXII of 1996 on Credit Institutions.
Act CXXXVIII of 2007 on Investment Firms.
Government Decrees 380/2007 and 301/2008.
As a general rule, the capital adequacy ratio is 8%.
Being a member state of the EU, Hungary has implemented Council Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions and Council Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions (together, the Capital Requirements Directive), and the Basel II Accord provisions. These special rules 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 at least 75% of the 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 section 1.1, Part 2, Annex IX of the Capital Requirements Directive. 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 Directive.
The regulatory authority relating to the capital adequacy of credit institutions and investment firms is the Ministry of Finance, and compliance is supervised by the HFSA.
What form does the SPV usually take and how is it set up?
What is the legal status of the SPV?
How is the SPV 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 (Companies Act IV of 2006) apply. For an SPV 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 trust concept is not recognised in Hungarian law. Limited liability companies can only issue bonds. Companies limited by shares can issue either bonds or shares. The initial capital of a limited liability company must be at least HUF500,000 (as at 1 November 2010, US$1 was about HUF197). In companies limited by shares the initial capital must be at least:
HUF5 million in a private company.
HUF20 million in a public company.
Purchasing receivables can be regarded as factoring or another type of financial service, and providing financial services requires a licence from the HFSA. To obtain this licence, the initial capital of the SPV must be at least HUF50 million.
Because an SPV may qualify as a financial service provider, which must meet certain criteria (see Question 4), 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.
One of the ways to achieve insolvency remoteness is to limit the scope of the SPV's authorised 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 both:
The SPV only participates in securitisation transactions.
Any amount repaid by the debtors of the receivables is used solely to perform obligations arising from the securities issue.
On the originator's insolvency, only the assets owned by the originator can be used to satisfy the creditors. Therefore, 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.
Securities can be issued either publicly or privately, and different procedures apply to each. However, it appears that no SPV has issued securities in Hungary.
Are the securities usually listed on a regulated exchange in your jurisdiction or in another jurisdiction?
If in your jurisdiction, please briefly summarise 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 of public limited companies on the Budapest Stock Exchange (BSE). The minimum share capital of a public limited company is HUF20 million. The issuer must prepare a prospectus that must be approved by the HFSA before publication.
The trust concept is not recognised in Hungary. Therefore, it is uncertain whether securities issued by the SPV can be held by a third party on behalf of the investors.
Securities can be issued in paper form or in dematerialised form. A Hungarian registered SPV can:
Choose either form in the case of a private offering.
Only issue dematerialised securities in a public offering in Hungary under Hungarian law.
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).
To date, the number of securitisations is very limited. Most of these involve the securitisation of trade receivables.
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 not possible under Hungarian law. In an assignment, the receivable is transferred to the assignee by the mere agreement of the assignor and the assignee. Notification of the debtor, or registration of the assignment, is not necessary to transfer the receivables. To make the transfer effective against the debtor, the debtor must be notified of the assignment.
Until the debtor is notified, the assignor can assign or create a charge on the same receivable more than once. The second (and any subsequent) assignee or chargee obtains no title in this case. However, based on the principle of debtor protection, if the subsequent assignee or chargee notifies the debtor first, the debtor is discharged by performance in accordance with the notice. Although there is no published 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.
No special rule applies to the transfer of receivables in a securitisation transaction.
Generally, claims are transferable, unless either:
By their nature they are tied to a specific person.
Transfer is specifically prohibited.
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 Civil Code contains no provision on the assignability of future receivables. Court practice is ambiguous on this question. The Supreme Court stated in a decision in 1996 that due to the requirement that receivables be specified exactly in the assignment contract, future receivables cannot be assigned. The Supreme Court later seems to have overruled this decision, but it is still uncertain to what extent future receivables are assignable.
It seems to follow from these decisions that receivables can only be assigned if the legal basis out of which the receivable will arise already exists at the time of the assignment.
There are two types of mortgages under Hungarian law: accessory and independent mortgage. 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 is still advisable. The importance of registration is that any bona fide third party can rely on information registered in the Land Registry, and as long as the new mortgagee is not registered, the registered mortgagee can allow the mortgage to be terminated.
An independent mortgage is not an accessory security right, so the above rules of automatic transfer do not apply to it. Therefore, the transfer documentation must explicitly include these mortgages. There is some uncertainty in the relevant statutory provisions as to whether an independent mortgage passes directly as a result of the transfer agreement, or whether registration is also required to actually acquire this right. The majority view is that registration is only necessary to create the mortgage, and the mortgage can be transferred by mere agreement between the parties without registering the new mortgagee. However, registration of the new mortgagee is advisable for the same reasons as in relation to accessory mortgages (see above).
The creditor and borrower can agree that the creditor cannot assign the receivable arising from their agreement. Such agreement is considered by the courts as effective against third parties, so any assignment in breach of this agreement would be null and void. To avoid the risk, the assignee is recommended to examine the assignability of the receivables.
The new Civil Code would make contractual non-assignment clauses valid but ineffective in relation to third parties (that is, the assignee acquires the receivables, but the transfer would be a breach of contract between the assignor and the borrower).
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 LXIII of 1992 on the Protection of Personal Data and the Civil Code 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 CXII of 1996 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.
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), re-characterisation 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 re-characterisation, it is particularly important that:
The receivables are transferred at a realistic market price.
The assignee's recourse to the assignor is restricted.
The assignor does not retain control over the receivables.
Unless otherwise provided in the assignment, the assignor is liable to the assignee, up to the amount of the purchase price received for the transfer, for the debtor's failure to fulfil his obligation (Civil Code). If this liability for the solvency of the debtor is not excluded, it can increase the risk of re-characterisation.
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.
The choice of law is recognised in contracts with a foreign element (that is, which involve foreign persons or assets). 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.
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.
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 out of and in insolvency procedures. A charge over receivables can be created by the mere agreement of the chargor and the chargee. 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. Under the new Civil Code, to create a charge over receivables, registration in the charges registry will be necessary in addition to the charge agreement.
In addition to a charge, in practice a security right over receivables is also created by assignment. However, the assignment of future receivables by way of security is not insolvency-proof. The Supreme Court has ruled that, after the start of the insolvency procedure if the assignment was for security purposes, outstanding assigned claims belong to the insolvency estate of the assignor, and the assignee can neither seek performance from the obligors nor dispose of the assigned claims in any other way.
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.
Charge Registry, if the collateral is movable property.
The trust concept is not recognised in Hungarian law. It is not possible to give security in favour of a trustee or a fiduciary acting on behalf of the beneficiaries of the security. The new Civil Code will introduce the concept of collateral agent, whose role and status will be similar to that of a security trustee. Foreign trusts are recognised. The relationship between the foreign trust and its beneficiaries will not be governed by Hungarian law.
There is currently no practice available to comment on.
There is currently no practice available to comment on.
There is currently no practice available to comment on.
There is currently no practice available to comment on.
S&P rates Hungary BBB-, which is S&P's lowest investment grade. The Moody's rating is Baa1. When the IMF and EU suspended talks with the government on 17 July 2010, S&P stated that Hungary's credit rating may be downgraded to junk if in the coming year it approves government policies which are unlikely to result in a meaningful decline in public debt. However, the original ranking has been preserved following the government announcement of plans in relation to decreasing public deficit.
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?
Value added tax (VAT) is imposed on sales of goods or services. However, the sale of receivables is not subject to VAT, as it is not the sale, but the purchase of receivables, which is treated as a taxable service.
Payments on receivables are not subject to withholding tax, provided neither the seller nor the buyer is a private person subject to personal income tax. 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.
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 interest income is 20%. In relation to publicly traded securities, capital gains income qualifies as interest income, and is therefore taxed at the rate of 20%. In other cases, the tax rate on capital gains income is 25%.
There is no practice for synthetic securitisations. However, derivatives are used by professionals, so there are no legal barriers that would prevent synthetic securitisation in Hungary.
There is currently no practice to comment on.
Currently there are no plans to introduce specific legislation for securitisation transactions. It seems that the financial crisis of 2008/2009 swept away any earlier plans, at least temporarily. However, the works on the new Civil Code are at an advanced stage. According to the current plans, the new Civil Code should be accepted by the Parliament at the end of 2011, and become effective in 2013. The new Civil Code would introduce changes in the law relating to assignment. These changes aim at providing a more solid basis for securitisation transactions.
T +36 1 327 7560
F +36 1 327 7561
E gardos.istvan@gfmt.hu
W www.gfmt.hu
Qualified. Hungary, 1982
Areas of practice. Banking and securities law; commercial law; litigation.
Recent transactions
T +36 1 327 7560
F +36 1 327 7561
E tomori.erika@gfmt.hu
W www.gfmt.hu
Qualified. Hungary, 1986
Areas of practice. Banking and securities law; corporate law; business law.
Recent transactions
T +36 1 327 7560
F +36 1 327 7561
E gardos.peter@gfmt.hu
W www.gfmt.hu
Qualified. Hungary, 2003
Areas of practice. Banking and securities law; commercial law.
Recent transactions
