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Bond issues

Section 7(3) of the Danish Financial Business Act provides as a general rule that credit and saving institutions, which are subject to a licence requirement, have an exclusive right to receive deposits and other repayable funds from the public. (The Act implements Article 3 of the Credit Institution Directive 2000/12/EC (now replaced by Article 5 of Directive 2006/48/EC) into Danish law.)

As an exemption to this general rule, the section further provides that non-credit institutions may receive other repayable funds (as opposed to deposits) without a banking licence if either: (i) the activities relating to the receipt of other repayable funds; or (ii) the on-lending activities do not constitute a substantial part of the non-licensed undertaking's business activities.

In a recent case presented to the Danish FSA, a holding company that did not have a banking licence intended to issue bonds and on-lend the proceeds to its subsidiaries to finance their operational activities.

The Danish FSA initially concluded that the term other repayable funds should be interpreted to include the issuance of commercial bonds. The FSA also held that, in determining whether a bond issuance constitutes a substantial part of the issuer's business activities, the only relevant criterion to apply was the ratio between the bond issuance and the liabilities on the issuing entity's balance sheet. In a more recent case, the FSA took the position that, in applying this balance-sheet test, it was relevant to make the determination on the basis of the issuer's balance sheet only and not on the basis of a consolidated balance sheet comprising the issuer and its subsidiaries.

The Danish FSA did not find that the determination of whether a specific bond issuance constitutes a substantial part of the business activities of the issuer should include an analysis of the substance of the issuer's commercial activities, including an analysis of to what extent the issuance of bonds constitutes an independent commercial business activity (evidenced for example by a continuing issuance of bonds) or whether it serves mainly or solely to support or finance its (or its affiliated companies') main commercial activities.

The position of the Danish FSA imposes substantial challenges to bond issuances in Denmark, in particular by holding companies and by finance companies that are not heavily equity financed. The FSA is not expected to issue general guidelines on ratios and thresholds to be observed for passing the balance-sheet test.

Peter Lyck

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