Romania: Embracing change

Author: | Published: 1 Jun 2011
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After two years of recession, Romania looks forward to the development of major projects in the infrastructure and energy sectors, which, if implemented, could boost the economy and cause a significant rise in its GDP during the next years.

Meanwhile, on the legislative front unprecedented changes are about to be enacted, with the entry into force of a New Civil Code. The magnitude of these changes is unlikely to be surpassed decades from now, as this code stands as the fundament of legal relations in Romania's private sector.

At the same time, recent legislation was passed in further support of public-private partnership (PPP) projects, and the Romanian government has sought to streamline the rules regarding this area, with a view to encouraging infrastructure projects.

How will all these legislative changes affect project financing in Romania? Are these changes better for business, and particularly for the development of major projects? The answer is one that is obviously complex and requires careful analysis of all implications as the multiple legislative changes start taking effect during the course of 2011.

The Romanian market remains interesting for project finance, given its potential. But one has to wonder when this potential will start to transform into a significant reality, with a sizeable number of bankable projects running. Particularly during the last year, there have been many announcements concerning potential projects, predominantly in the infrastructure and energy sectors, but decisive progress is yet to be seen.

Accordingly, project financing is nowadays relatively low, and only the more optimistic take the view that things are about to change dramatically (for the better) in the very near future.


Admittedly, the Romanian roads and highway infrastructure is notoriously under-developed, and of course there is significant potential in this area, with a number of motorways, national roads, local roads and ring roads being earmarked for construction or refurbishment.

In terms of priorities, the most important appear to be the motorway sections which are part of the Pan-European transport corridor IV, and the finalisation of the Bucharest-Brasov highway.

Besides road infrastructure, there are opportunities in other areas as well, both in hard infrastructure (including water and energy) as well as soft infrastructure (including regional hospitals, health centres and other social infrastructure such as prisons).

Energy projects

Various energy projects are also being discussed (thermal, hydro, nuclear, as well as renewables), a part of these projects being of an unprecedented large scale for Romania – nuclear facilities and a hydropower facility which could exceed in aggregate a total investment of €8 billion ($11.3 billion).

It is not likely that all these projects will start to move soon; but the reality is that a significant part of them will eventually start to move, as long as there is a solid demand behind them. Such demand is obvious in certain sectors.

Because most of Romania's new infrastructure is yet to be built (as well as many of the more important projects in the energy field), there is much promise ahead, but there is also a challenge.

Anyone interested in taking part in projects in Romania, including lenders, sponsors, project companies, off-take purchasers and input suppliers, would be well advised to understand the changes brought by the new legislation, which is very likely to shape relationships between parties for decades to come.

The new Civil Code

The new Civil Code represents a giant leap towards modernisation with a (positive) impact on project finance.

The Romanian Civil Code, inspired by the Napoleonic Code of 1804, dates back to 1865. The Romanian Civil Procedure Code dates back from 1865 as well, although there have been several important amendments made since.

The Romanian Commercial Code is also quite an old piece of legislation, dating back to 1887 (several sections have been amended or removed since and replaced with modern legislation, but there are still fundamental provisions which apply to this date).

Given the time elapsed since the adoption of these Codes and the many changes which have occurred, in business and in the social and political realm, it should come as no surprise that today their provisions are considered by many, and in many ways, outdated, and their application relies heavily on the interpretations given by Romanian scholars and courts over time.

But the time for a historic change has finally come: on October 1 2011, the Romanian Civil Code and the Romanian Commercial Code, along with an overwhelming list of legislation governing the private sector, will be all repealed and replaced by a New Romanian Civil Code (NCC).

Enactment of the NCC

Many concepts are changing or are being updated in the NCC, and many others are being introduced by the new legislation, sometimes as an absolute novelty in Romania. These changes are likely to affect many processes, and it is rather normal to expect that in the short term all relevant parties will need to make a significant effort to adapt, particularly with respect to documentation. But in essence, and particularly in the long run, the answer should be yes, these changes are favourable to project finance.

The main reason behind this answer is that the NCC includes, reflects or allows the application of some important modern concepts, which are quite useful in structuring project financings, and also gives better comfort to lenders in a project (albeit there are some concerns as well, as mentioned below).

There are a number of points which can be counted on the plus side when going through the NCC.

As mentioned above most of them are related to acknowledging, as a matter of Romanian law, and giving some form of recognition to, various types of documentation, structures, methods, and approaches which are more or less widely used in large syndicated financings and project finance internationally.

The introduction of the trust concept

One of the main downsides reported with respect to the current legislation was the lack of flexibility when it comes to the treatment of groups of creditors such as the finance parties in large and complex syndicated transactions.

Another downside reported was the lack of recognition for legal mechanisms allowing a flexible approach with respect to taking security and exercising creditors' rights in Romania.

For example, current legislation does not recognise the concept of the trust, and does not permit (according to most legal practitioners) the application of parallel debt structures.

This means that, in practice, all the finance parties need to be party to the security agreements, and each change in the syndicate (by way of a transfer of the relevant participation to another finance party) may trigger a requirement to amend the security document and to amend the registration with the relevant local registrars (mainly the Romanian Agency for Cadastre and Real Estate Registration and the Romanian Electronic Archive for Security Interests over Movable Assets).

The NCC recognises the concept of the trust, and gives credit institutions the possibility to act as trustees.

In principle, this means that it should be possible for the security agent to act as a trustee under Romanian law and take the security over assets located in Romania for the benefit of the other finance parties.

Changing security ranking between secured and unsecured creditors

Under the current legislation, agreements between creditors allowing them to exchange the rank of their security over movable assets, or to transfer the security to another creditor, are not permitted. This reduces the flexibility of solutions available for introducing new creditors in a particular project, and the range of options available to mobilise an exposure in a particular project.

However, according to the NCC, a secured creditor may transfer to an unsecured creditor the security created in its favour, and can exchange the ranking of its security with other secured creditors.

Independent guarantees

Letters of guarantee and comfort letters are not regulated by the current Civil Code. Particularly with respect to letters of guarantee governed by Romanian law, there have been debates as to whether these documents should be treated or not by reference to the legal regime of personal guarantees. Admitting the parallel with personal guarantees would have meant a higher degree of uncertainty with respect to the payment obligation of the issuer under the letter of guarantee, and the reasons which can be invoked that could block the payment.

This is no longer the case under the NCC, which includes explicit provisions concerning letters of guarantee and comfort letters, under a specific chapter dealing with independent guarantees.

According to the newly-introduced provisions, letters of guarantee are construed as on demand (absent of contrary provisions) and the issuer may refuse payment only on account of abuse or fraud.

Statutes of limitation

Statutes of limitation under the Civil Code are now regulated by law, and they cannot be amended by the parties.

Interestingly enough, the NCC gives additional flexibility in this area, providing that, within certain limits, the periods of limitation can be reduced or extended by the parties, by mutual consent.

Moreover, the parties can agree as to the reasons for suspension or interruption of the periods of limitation, which means that in practice there will be more freedom for the finance parties, sponsors, the project company, sub-contractors and others to negotiate customised provisions which would better fit their own risk profiles.

Priority between general and specific security

There was a question under Romanian law whether security over all movable assets of the borrower (somewhat similar to a floating charge under English law) would rank above or below a security interest taken over a specific asset or assets of that borrower. The concern for lenders in a particular project was that given the generality of the former, the latter would be deemed to rank above it.

The NCC provides specifically that in such cases the security which is registered first will have priority, which means that once a general security agreement would be validly concluded with the relevant SPV such security would rank above any future security created over particular assets in the project.

Security over accounts/Cash-flow control

An important concern in project finance transactions is the control of the cash flow in the project. Experience has shown that the current regulations have gaps which could allow in extreme circumstances either the project company or certain competing creditors to take actions with respect to the amounts standing to the credit of the project accounts, irrespective of the fact that the finance parties have a first ranking security interest over the relevant accounts.

The NCC now specifically provides that publicity requirements with respect to holding security over a bank account can be met also by having control over the relevant account (and this is assumed if the secured creditor is also the account bank), and further explains that taking such control may be achieved by written agreement between the security grantor (the project company), the account bank and the creditor.

Specific points for consideration by lenders

Lenders (and particularly Romanian banks) will be well advised to consider in full the implications of the NCC, as these affect their relationships with borrowers. This is to say that, besides the overall huge effort in changing documentation and integrating new concepts, several provisions in the NCC need to be carefully analysed by lenders, with a view to mitigate risks which may arise.

Potential liabilities

The NCC introduces rules concerning negotiations, establishing that negotiations must be held in good faith. According to the rules, a party is potentially liable for breaking off negotiations. This point needs to be carefully considered, particularly by reference to pre-contract documentation (such as term sheets and indicative offers).

The NCC introduces a new concept of "professional" and increases the likelihood of a party being held liable if that party was a "professional" acting in the course of its business.

The NCC now defines the concept of "standard agreement", and further stipulates that unclear provisions included in such agreements are to be interpreted against the proponent. The likely implication is that bank documentation will be under an increased level of scrutiny, and provisions which are not clear may be interpreted against the bank.

Moreover, the NCC refers to the concept of "unusual provisions" and determines that certain standard clauses which, among others:

  • provide in favour of the proponent certain prerogatives, such as limitations of liability, the right to terminate the contract, or the right to suspend performance of obligations; or
  • increase the contractual burden for the other side, by way of waivers of rights, limitations to the right to oppose, restrictions on freedom to contract with other parties;

are valid only if expressly accepted in writing by the other party.

The new legislation seems to introduce new potential reasons which may be raised by a debtor with a view to be released from its obligations, or to have its obligations reduced/adjusted by a court of law, by reference to an equitable or similar standard.

Accordingly, if one party takes advantage of the other party's state of need, lack of experience or knowledge, there is the possibility to annul the relevant contract or to reduce the obligations of the weaker party. It remains to be seen whether such provisions could be raised in practice by borrowers to obtain a reduction of their obligations.

Further, the NCC explicitly introduces the hardship theory, stipulating that, although parties are normally obliged to perform the obligations assumed, even if such obligations have become more burdensome, there is still the possibility to require a court of law to adjust or terminate the contract if there are exceptional changes which make the performance by a debtor excessively burdensome and which would cause the performance to be obviously unjust for the debtor.

New PPP legislation

At the end of 2010, a new law regulating PPP was introduced. The adoption of this law was considered necessary by its initiators, by reference to already established legislation in Romania governing concessions, which was deemed as "not having produced the expected results in terms of development of major projects based on PPP". The intention was to set a separate regime for PPP in Romania, and also to clarify and simplify the process for PPP in Romania.

Since its inception, the regulation has faced both international and domestic criticism, mainly on grounds of violation of the EU rules on public procurement, breach of the Romanian constitutional principles and legislative parallelism.

In 2011, the government amended the regulation in order to achieve compliance of the law with the EU public procurement framework, therefore reducing the risk of an infringement procedure being initiated by the European Commission against Romania.

Rules for PPP contracting

The PPP legislation expressly provides that it does not apply in a number of cases, including concession agreements governed by existing legislation and classic joint-venture agreements. However, provided that the conditions for a PPP are met and there is no public order infringement, the law can be applied to other relevant activities in different sectors such as water, energy, and transportation.

Basic conditions and issues

According to the new legislation conditions for a PPP arrangement are met if:

  • projects are financed integrally or partially by a private investor;
  • projects are developed at the level of a project company owned by the public and the private partners managed by both partners (proportionally with their participation), with the public partner participating with an in-kind contribution;
  • risk allocation and responsibilities for the public and private partners are proportional and reasonably agreed in the PPP agreement;
  • assets belonging to the public partner which are used for the purpose of the project (non-government assets) are to be registered on the balance sheet of the project company (and off balance sheet for the public partner, for the duration of the project); and
  • at the end of the project, public assets resulting from the project will be transferred to the public partner in good condition, and free and clear from any encumbrances.

The basic timeline is:

  • conclusion of project agreement with selected private investors by way of an open procedure or a competitive dialogue;
  • negotiation (based on pre-established criteria) with each of the selected investors; and
  • conclusion of the PPP agreement.

All PPP projects are overseen by a Central Unit for PPP Coordination, a public institution under the coordination of the General Secretariat of the government.

The National Council for Dispute Resolution is the legal body entitled to rule on challenges regarding the award of PPP projects, following a procedure similar to the one applicable to general public procurement processes.


The new legislation states that, except for public property, finance parties can take security over any other assets of the project company, for the entire duration of the PPP agreement.

The parties to a PPP arrangement can agree that:

  • part of the public services for which the responsibility is incumbent on the contracting authority can be transferred to the private partner; and
  • the private partner can be entitled to receive the income derived from the relevant public services.

However, there are some issues still worth exploring: It is not clear whether direct agreements and step-in rights will be available to lenders financing PPP projects.

It is also unclear how limited recourse and/or non-recourse principles of structuring which are typical to project finance are impacted by the new legislation.

About the author

Valentin Voinescu is a senior finance lawyer specialising in project finance, cross-border and domestic syndicated finance transactions, and debt restructuring.

During the course of the past seven years, Voinescu has accumulated a wealth of experience on the Romanian market, having acted for lenders and large corporates on a wide range of finance transactions (with an aggregate value exceeding e3 billion).

His experience covers all sides of the business cycle, and includes spending a significant amount of time advising lenders on structuring projects in Romania, as well as re-structuring and managing distressed debt.

Voinescu is a regular lecturer and trainer for the firm on project finance and debt restructuring issues.

Contact information

Valentin Voinescu
Nestor Nestor Diculescu Kingston Petersen

Bucharest Business Park,
1A Bucuresti-Ploiesti National Rd,
Entrance A, 4th Floor, 1st District,
Bucharest 013681, Romania
t: +40 21 201 1200,
f: +40 21 201 1210,