The Romanian parliament has recently adopted a package of four laws that aims to develop the Romanian capital market. The package consists of: (i) Law 31/2006 on securitization; (ii) Law 32/2006 on mortgage bonds; (iii) Law 33/2006 on mortgage lending banks; and (iv) Law 34/2006 amending Law 190/1999 on mortgage loans for real estate investments.
The main provisions of Law 32/2006 on mortgage bonds (the Mortgage Bond Law) relate to the procedure and elements of bond issuance and the protection of bondholders.
Procedure and elements of bond issuance
Mortgage bonds may only be issued by banks and mortgage lending banks acting in accordance with Law 58/1998 on banking. For mortgage lending banks, Law 33/2006 also applies. According to this law, mortgage lending banks are entities that specialize in granting loans guaranteed by a mortgage right. They are authorized to issue mortgage bonds, but they are not authorized to attract deposits.
Given that mortgage bonds are securities that are sold and traded on the Romanian capital market, the issuance of mortgage bonds must be preceded by the issuance of a prospectus, which must contain information such as the financial situation of the issuer, the number of bonds in the issuance, the total value of the issuance, the nominal value of the bonds, the maturity date and the interest rate on the bonds. The prospectus must be approved by the National Securities Commission (the NSC) and must be issued in accordance with the provisions of Law 297/2004 on capital markets. The bonds can only be issued through a bank or through an intermediary that is authorized by the NSC.
The Mortgage Bond Law places an obligation upon issuers to maintain an internal registry in which any change in the structure of the pool of receivables must be recorded. The internal registry is controlled by the National Bank of Romania (the NBR), which may also issue rules for its proper maintenance.
The bond issuer must also appoint an agent, whose main duties are: (i) to verify whether the internal registry is correctly maintained; (ii) to register the security over the pool of receivables with the Electronic Archive for Secured Transactions; and (iii) to represent the mortgage bond holders. The law provides that an agent may be chosen from law firms, notaries, financial auditors, credit institutions or investment firms. In addition, before becoming an agent, such entities must be authorized by the NBR.
Protection of bondholders
The Mortgage Bond Law contains provisions that aim to make mortgage bonds an attractive instrument and to protect bondholders from the effects of the issuer's bankruptcy. To accomplish this, the law uses several mechanisms: (i) priority of bondholders over other creditors; (ii) restrictions regarding assignments or creation of security interests; (iii) general meeting of the bondholders; (iv) prohibition to dissolve the issuer; and (v) prohibition to sell the pools of receivables during liquidation procedures.
(i) The Mortgage Bond Law grants mortgage bond holders priority with respect to the satisfaction of their claim over any other creditor that has claims against the pool of receivables, provided that the other creditors have not publicly registered their rights with the Electronic Archive for Secured Transactions before the bondholders' rights are registered.
(ii) The Mortgage Bond Law specifies that any assignment of receivables deriving from mortgage loans as well as the creation of security interests over the receivables in favour of third parties is null and void if the assignment or the security interest is not mentioned in the prospectus.
(iii) The Mortgage Bond Law further stipulates that bondholders representing at least 25% of the total number of bonds from a specific issuance may convene a general meeting of bondholders: (a) whenever they consider it necessary to revoke the agent and appoint a new one; (b) if the issuer fails to comply with obligations undertaken towards the bondholders; (c) if the issuer becomes bankrupt or assigns the pool of receivables to another entity; or (d) whenever issues related to the protection of the bondholders arise.
(iv) Also, for the duration of the bond issuance, the general meeting of the shareholders cannot decide to dissolve the issuer unless the pool of receivables and the obligations towards bondholders are transferred to another authorized issuer. The transfer must be authorized by the NBR and by bondholders representing at least 25% of the total number of bonds issued.
(v) According to the law, if the issuer becomes bankrupt, the pools of receivables that back the issuance cannot be sold during the liquidation procedure until all claims that the bondholders have against the issuer have been satisfied. Infringement of this prohibition leads to absolute nullity of the sale. The pools of receivables can only be sold during liquidation procedures if: (1) the latest monthly report approved by the syndic judge provides that the payment towards the bondholders can be made in full, before the sale and independently of the sale of the pools; and (2) the general assembly of the bondholders approves payment in advance of their claims against the issuer, with the vote of bondholders representing at least 25% of the total number of bonds in the issuance. Moreover, bondholders can only initiate enforcement over a pool of receivables if the issuer fails to fulfil its obligations towards the bondholders.
The secondary legislation issued by the NBR and by the NSC is expected three months after the Mortgage Bond Law goes into effect (that is, April 22 2006), so it remains to be seen how the new laws concerning securitization and mortgage bond financing will be integrated into the Romanian capital and real estate markets.
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