Vol. XV No.4
April 2010



Restructuring Credit Agreements in Romania...

It is common knowledge that Romania has been deeply affected by the global economic crisis. In such circumstances, the survival of many businesses depends upon their ability to obtain financing. The blockage of the possibility to obtain requisite financing has proven disastrous for many Romanian companies, making it impossible for them to find other solutions to avoid insolvency. Moreover, even those companies that had previously obtained loans in support of their businesses with ease have faced financial difficulties, including the impossibility to repay such loans, leading to the enforcement of the guarantees established within the credit agreements and the commencement of insolvency procedures against some of these companies. However, since the price of real estate in Romania has fallen, the enforcement of the guarantees set forth in the credit agreements did not cover the debts to the banks, since such guarantees could not be enforced at a price that would ensure the recovery of the credited amounts. In this context, the restructuring of the credit agreements was perceived by Romania as a potential solution which could support companies in their efforts at financial redress.

Besides the restructuring of the credit agreements, other financing solutions were sought in order to ensure and maintain the financial stability of the economical environment. Among these, we mention financing obtained from non-banking financial institutions, as well as other alternative financing possibilities, as intra-group loans and cash-pooling.

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Restructuring of Credit Agreements

General Aspects
The restructuring of credit agreements actually allows borrowers facing financial difficulties in reimbursing their loans to amend, together with the banks, certain aspects of those agreements. This has been perceived as a viable solution for both banks, able to recover the entire loan amounts from their clients, as well as companies, thereby able to avoid enforcement procedures and insolvency and continue their businesses.

The restructuring of the credit agreements may be commenced both at the request of the client, which must admit its impossibility to reimburse the loan under the conditions of the existing credit agreement, or at the request of the bank, which, in turn, has assessed its client’s financial difficulties in repaying the due amounts at the due dates. In either situation, in order to be able to restructure the credit agreements, clients must prove that they are facing financial difficulties. Moreover, they must commit to comply with the new conditions set forth in the newly restructured credit agreements. The restructuring of the credit agreements cannot become a means for companies to continuously avoid insolvency. On the contrary, after the execution of the new restructured credit agreements, following the implementation of a specific restructuring scheme, the borrower must be able to reimburse the amounts due under normal reimbursement parameters, according to the new reimbursement parameters.

At the end of 2009, in order to facilitate the implementation of certain restructuring schemes to credit agreements, and aware that it was also in the best interest of the banks for their clients to fully repay their loans, instead of enforcing the guarantees set forth in the credit agreements, the Romanian Banking Association (“RBA”) published a list of the most commonly used restructuring schemes applicable to credit agreements concluded with small and medium sized enterprises.

The Rescheduling of the Credit Agreement
The rescheduling of credit agreements represents either the amendment of the due date and/or of the amount of one or more credit installments due to be paid, but without exceeding the initial duration of the credit.

Basically, the rescheduling of the credit agreement is performed by concluding a deed of addendum to the credit agreement, based on which new parameters, including new due dates or the new amounts of installments, will be issued. A grace period may be granted to the borrower.

The Re-planning of the Credit Agreement
Through this restructuring scheme, the company may amend the due dates/amounts of one or more installments due to be paid, exceeding the final due date of the credit amount. Also, this restructuring scheme may also mean the reclassification of the loan into another category, but without exceeding the maximum initial duration of the credit. Similar to the rescheduling scheme, a grace period may be granted to the borrower.

The Refinancing of the Credit Agreement
Another potential scheme is represented by the refinancing of the credit agreement, a method according to which a new credit shall be granted by the bank, in order to reimburse the amounts which were due to be paid based on the existing credit agreement.

The new refinancing scheme may have as its purpose the refinancing of one or more already existing credits, based on the specific situation of the company in question. In case of a refinancing scheme, a new credit agreement must be concluded between the parties.

Short-term credit facilities
Another potential short-term solution for companies facing financial difficulties in repaying their loans is represented by short-term credit facilities which may be granted to banks, according to the specific financial situation of the company.

Other solutions allowed by the Romanian Civil Code
The Romanian Civil Code contains certain possibilities which, although they do not release the borrower from repaying the loan, allow for the transfer of the claim to a third party, under conditions which may be more beneficial for the borrower. Such a potential solution is represented by the claim assignment, which is an agreement based on which the bank transmits its claim to another natural person or legal entity, together with all of its guarantees.

Another potential solution is represented by subrogation, where the creditor bank is replaced by a third person that, by paying the debt of the client, actually acquires the rights of the creditor.

Furthermore, the Civil Code also envisages a novation, based on which the existing obligation is extinguished, and is replaced with a new obligation, by replacing either the subject matter, i.e. the credit itself, the creditor or the debtor.

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Loans Granted by Non-banking Financial Institutions
In order to ensure and maintain the financial stability of the economical environment, the Romanian Parliament adopted in April 2009, Law 93 regarding non-banking financial institutions, which regulates the minimum access conditions to credit activities in Romania through non-banking financial institutions.

According to Law 93/2009, non-banking financial institutions are those entities, other than credit institutions, which perform crediting activities under a professional title, according to the provisions set forth in this law.

Also, Law 93/2009 provides that the National Bank of Romania (“NBR”) is the only authority competent to decide whether the activity performed by an entity represents a crediting activity under a professional title, thus being subject to the law.

In assessing whether an activity represents a crediting activity performed under a professional title, the NBR will take into consideration certain matters such as: the performance of these activities as independent economic activities oriented towards the achievement of income on a continuous basis; and the existence of certain internal specialized structures in the crediting field which have the role of analyzing and managing these activities in particular. In case the crediting activities performed by legal entities comply with the criteria set in the law, such entities are then considered as non-banking institutions, and they must perform these activities only in accordance with Law 93/2009, including the obligation to register themselves as non-banking financial institutions with the NBR.

These institutions are generally set up as joint-stock companies, and they usually include, in their name, the expression “non-banking financial institution” or the abbreviation “IFN”. According to law, they are entitled to perform certain crediting activities such as: the awarding of credits, including, without limitation, consumption credits, real estate credits, financing for commercial transactions, factoring operations and so on; financial leasing; issuance of guarantees, undertaking of guarantee commitments, undertaking of financing commitments; awarding of credits together with the receipt of pledged assets; other financing forms similar to credits.

Consequently, companies facing financial difficulties may look for such companies registered with the NBR as IFNs, which may grant them the necessary funds to recover during difficult times.

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Alternative Financing Methods
Even through banks are implementing restructuring schemes for credit agreements, and even though companies in financial need may also resort to loans granted by IFNs, this may not be enough for companies having to permanently look for alternative financing means in order to survive the current economic crisis.

Intra-Group Loans
One such potential alternative financing method is represented by intra-group loans. There was a period, after 2006, when the crediting activity between companies that are members of the same group, became more and more uncommon, because of certain legislative discrepancies. At that point in time, Government Ordinance no. 28/2006 regarding the regulation of certain financial-fiscal measures was in force. According to this ordinance, such crediting activity was restricted to the crediting activities performed under “a professional title” only to credit institutions and non-banking financial institutions. However, this law did not provide any definition of the criteria based on which a crediting activity could be considered as performed “under a professional title” or not.

In order to clarify these discrepancies, the NBR provided various official interpretations on the criteria based upon which a crediting activity was to be considered as performed under a professional title. According to the NBR’s interpretations, intra-group loans were not considered as crediting activities performed under a professional title, and they were therefore possible even subject to the provisions of the aforementioned ordinance.

However, in order to further clarify the matter, Law 93/2009 expressly mentions criteria used by the NBR in order to qualify the crediting activities as activities performed under a professional title. As the intra-group loans do not represent activities oriented towards the achievement of income on a “continuous” basis, and also considering the fact that the lending company does not regularly have an internal specialized structure in the crediting field, having the role of analyzing and managing crediting activity, such intra-group loans cannot be regarded as crediting activities performed under a professional title and, consequently, they are not bound to comply with the provisions of Law 93/2009.

In such a context, intra-group loans represent a lawful and viable solution for companies that are members of the same group, based on which companies having a more powerful financial status may provide the necessary financial support to other companies facing difficulties.

Although cash-pooling is not regulated as such under the Romanian law, it has been increasingly used lately as a financing alternative for companies in need of cash. Basically, this method compensates for the lack of cash of a company that is a member of a group, with the cash of another company of the same group. It can represent a good method of cash management, and it has proved to be a viable solution for companies in times where there is a strong need for liquidity.

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In their attempt to find solutions in difficult financial times, businesses have had to diversify their functions and roles on the market. Companies have had to find more flexible financing schemes which could ensure that they obtain the necessary funds to continue their activity. Especially for small and medium sized enterprises, the lack of financing may lead to severe obstacles which could make the activity of that company impossible to continue. Companies in financial need may now resort to any of the financing alternatives described above if they are unsuitable to obtain credit from banks, they may try to obtain loans from IFNs; if that is not possible, and those companies are members of groups of companies, they may make use of that capacity and obtain the necessary financing through an intra-group financing means. However, finding the most appropriate financing scheme requires taking into consideration the actual financial status of the company, as well as any other relevant data regarding the company, and consequently companies in need of funds should first opt for competent counseling to find the most suitable financing scheme applicable to them.

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Editors Note: It is our policy not to mention our clients by name in The Romanian Digest™ or discuss their business unless it is a matter of public record and our clients approve. The information herein is correct to the best of our knowledge and belief at press time. Specific advice should be sought from us, however, before investment or other decisions are made.

Copyright 2010 Rubin Meyer Doru & Trandafir, societate civila de avocati. All rights reserved. No part of The Romanian Digest™ may be reproduced, reused or redistributed in any form without prior written permission from the publisher.

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