Syndicated Loans in Denmark
Updated: May 18, 2021
A brief overview of syndicated lending and secured finance in Denmark
Bilateral and Syndicated Loans
Loan transactions are commonly divided into bilateral and syndicated loans. A basic "plain vanilla" loan is a loan provided by a single lender to a single borrower. This is commonly referred to as a bilateral loan. In order to spread the risk, lenders may join forces in a syndicated loan. The syndicated loan market is the predominant market for large corporations to receive large-cap loans from banks and institutional lenders. In a syndicated loan, two or more banks agree jointly to make a loan to a borrower. Each member of the syndicate maintains a separate claim against the corporate borrower, although there is a single loan agreement in place. The lenders may be divided into two separate groups. The first group consists of the senior syndicate members and is led by one or several lenders acting as mandated lead arrangers (MLA). The MLAs are mandated by the borrower to arrange the syndicate prepared to advance funds at the terms specified by a term sheet. The junior members of the syndicate will be invited by the MLA to participate in the syndication, but they will have a limited input on the terms or the structure. Their decision making process will therefore be more binary in nature, i.e. whether to join the syndicate on the proposed terms or not. The participating junior syndicate members will often not have the commercial clout to arrange syndications on their own and will often regard the investment in the syndication as an opportunity to place funds in an investment-grade syndication to expand their loan portfolio or as an opportunity to engage in more ancillary banking business with a corporate borrower. The size of the syndicate and the identity of the participating lenders may vary depending on the corporate borrower and the size, complexity and pricing of the credit facility as well as the willingness of the borrower to increase the range of its potential banking relationships. Conceptually, syndicated credits can be classified somewhere between credits provided by relationship banks and disintermediated debt.
Danske Bank, Nordea Bank, SEB and Nykredit Bank are the leading banks for large corporates in Denmark. Danske Bank has the largest market share for corporate and institutional lending, closely followed by Nordea Bank, SEB and Nykredit Bank. Danske Bank does not only have the highest market penetration rate for large corporates, it is also ranked as the leading corporate and institutional bank in Denmark overall, with total assets amounting to approximately DKK 4.1 trillion. Whereas Nordea Bank is domiciled and headquartered in Finland and SEB is domiciled and headquartered in Sweden, Nykredit Bank ranks as the fourth largest domestic bank in Denmark in terms of total assets, after Jyske Bank and Sydbank.
Syndicated loan structures have a long history in Denmark. Early examples are investors investing in ships sailing to overseas markets to purchase goods such as tea, spices, porcelain, or silk. Investors would pool their funds to finace ships undertaking the voyage to the Far East and return with exotic goods purchased in far flung markets. To limit the risk of ships being lost on the high seas, investors would invest in shares in several ship voyages on a portfolio basis. Merchants and ship-owners would court investors with lavish parties to entice them to invest in shipping voyages to East India, the West Indies and the Far East. The architecture of Copenhagen still bears the hallmarks of this trade in the form of the historic warehouses but also in form of the palais of the merchants that were built for entertaining to attract investors. One prime example is the Erichsen Mansion where Danske Bank is headquartered. The historic rooms where the merchant and shipping magnate Erich Erichsen would entertain investors in the late 18th century are today maintained by the National Museum of Denmark but still in use today by Danske Bank since the original acquisition in 1888.
Fully Underwritten Syndication
An underwritten syndication is a transaction for which the mandated lead arrangers guarantee the entire commitment to the borrower and then syndicate the investment-grade loan. If the mandated lead arrangers are unable to fully subscribe the syndication, they may end up having to absorb the discrepancy, the rump, on their own books in excess of their desired hold levels unless they can subsequently down-sell tranches or participations to other investors at a discount. The situation may be tempered by appropriate market flex-language in the mandate. In purely domestic transaction, market flex is not a common feature. However, the larger the ticket size, the more common it becomes.
For a best-efforts syndication, the MLA agrees to use its best efforts (or its commercially reasonable efforts) to arrange a syndicate of lenders that will make the loan. However, the MLA itself undertakes no obligation to advance funds by way of a loan. The MLA may however at times commit to fund a part of the credit facility, provided it is fully subscribed. If the loan is undersubscribed, the syndication may not close or it may need to be adjusted on a market flex basis.
Smaller syndicated loans are usually referred to as club deals. A club deal is a loan provided by around 2-3 banks that frequently act as relationship banks to the borrower. Club deals are usually simpler in structure and documentation and they are usually so-called 'take and hold' transactions, i.e. not intended for the secondary loan market and the lenders will not spread the risk further by selling off tranches of the club deal. The risk stays on the lenders balance sheet without any sell-down opportunities and the margins are usually competitively priced on the lower side of the scale. The club deals are usually entered into by relationship banks to secure further banking business in the form of ancillary business with the corporate borrower. Club deals are a common feature in the Danish lending market and are usually arranged informally by the handful of relationship banks to a 'blue chip' corporate borrower. Club loans tend to be short form and are usually prepared by the lender's inhouse legal departments. There is no fixed precedent for the documentation in the Danish market and it is common for the lenders to reuse the documentation from the most recent transaction. On that basis, the documentation will rarely include participation language and any subsequent assignment of the loan participation will have to rely on the underlying law of assignment in Denmark to assign interest in a loan.
Whereas club deals are already premarketed between the relationship lenders, the mandated lead arranger(s) will seek to market the large-cap syndication to interested parties. The role of setting up syndicated investment-grade loans differ from deal to deal but generally, the process will be initiated by the borrower's main relationship bank. For purely domestic or club loans, the role of the mandated lead arranger will be held by one of the leading Danish banks. For large-cap syndications, the Danish banks will commonly team up with an international bank with a more extensive global reach in order to syndicate the credit facility. This role as co-arranger will commonly be held by London-based banks with large syndication desks. The arranging banks will market the loan based on a mandate from the corporate borrower. The proposed financial terms for an investment-grade credit facility will be set out in a proposed term sheet which states the loan amount, the term of the loan, the repayment schedule, interest margin, the various fees, any special terms, and the initial representations and warranties.
Unlike the capital markets, where pricing is closely linked to credit quality and institutional investor interest, the investment-grade corporate lending market is dominated by the commercial banks and pricing is therefore not capital markets driven. The loan syndication desks of the mandated lead arrangers may seek to assess the interest of potential investors informally before pricing the syndication and its tranches. Once the proposed pricing, or the initial spread over a base rate (e.g. previously LIBOR or CIBOR), has been determined, it is then a question of selling the syndication in the market. If the loans risk being undersubscribed, and the arrangers estimate that they may exceed their proposed hold level, pricing may be adjusted using market-flex, which allows the arrangers to adjust the pricing of the loan based on investor demand. Depending on the term sheet, the mandate and the commercial positions, this may be limited to changes within a predetermined range, changes to the security package, the repayment schedule, the financial covenants, or simply to shift amounts between various tranches of the syndicated credit facility. As a result of market flex, loan syndication functions very much as a book-building exercise in capital markets transactions.
In Denmark, banks have historically dominated the debt markets because of the regional nature of the domestic market. Domestic and regional banks have traditionally funded domestic corporates because they are familiar with the borrowers and better able to fund in the domestic currency. Since the introduction of the Eurozone, the growth of the European leveraged loan market has been propelled by the efficiency provided by the common European currency as well as an overall growth in merger & acquisition activity, particularly driven by leveraged acquisitions in the private equity sector. However, Denmark has opted out of the common currency and maintains the Danish kroner pegged to the Eurozone via the Danish National Bank. This has amongst other things had the effect of stabilising the position of the domestic Danish banks in a European market context. Given the increase of leveraged finance activity and the significant growth in aggregate ticket size as mandated lead arrangers have been able to raise bigger pools of capital to support larger and larger investment-grade cross-border transactions, domestic transactions exceeding the scale usually funded by domestic banks in bilateral or club deals are increasingly being syndicated internationally via London or to a lesser extent via Frankfurt or New York. In Denmark, the domestic diversity allows the Danish banks and financial institutions to maintain a significant market share of the investment-grade corporate and institutional lending market.
Syndicated credit facilities may largely be divided into two broad categories: revolving credit facilities and term loans.
A revolving credit facility (RCF) allows the borrower to draw-down, repay and reborrow committed fuds within a certain set of parameters as required by the borrower. The RCF facility is akin to an overdraft facility, except that the borrower is charged a "ticking fee" in the form of an annual commitment fee on unused amounts of the RCF, i.e., the borrower must pay for the committed funds being available to draw down over the course of the RCF. An RCF is primarily intended to fund working capital or capital expenditures (capex) of a corporate borrower. It is therefore not intended for acquisitions or other projects. For this reason, an RCF will commonly include a so-called clean-down or clean-up clause where the RCF borrower will have to pay down the balance of the RCF to zero at specified intervals.
A term loan is loan that runs for a specified term and will be repaid over the course of the loan in a scheduled series of instalments or in the form of a one-time payment at maturity, commonly referred to as a bullet repayment.
Danish banks and financial institutions will often provide credit facilities in a bundle referred to as a multi-option facility (MOF). The MOF may also include a so-called term-out loan, which is a RCF that will be converted into a term loan at some point and then repaid in accordance with a repayment schedule in a number of instalments or rolled over into a refinancing. In Denmark, a MOF is frequently an unsecured credit facility or at best secured by a corporate guarantee. The documentation for the MOF is mostly prepared by the lenders' inhouse legal departments and there is no general market standard between lenders and borrowers for the documentation.
It goes without saying, that there are numerous bells and whistles to the main categories and credit facilities are constantly tailored to the needs of the corporate borrowers. Second lien financing is possible under Danish law, but infrequently used in domestic syndicated loan transactions, other than in the leveraged finance shpere. A feature of the Danish loan market is that the lack of standardisation of the loan documentation means that the secondary market in loans and non-performing loans is small compared to the London loan market and secondary loan trading desks are an exception at most Danish banks.
Notwithstanding this, there is a clear trend towards using the recommended forms for credit facilities of the Loan Market Association as a basis for large-cap credit facilities.
In general, the majority of Danish corporate credits are typically based on traditional short-form loan agreements setting out the basic commercial terms of the loan (i.e. loan amount, interest rate, repayment and any security or guarantees) together with a set of standard terms and conditions applicable to all credits from the relevant bank. Simple overdraft facilities are also quite commonly used in lieu of a corporate credit facility. These bilateral credit facilities are generally uncommitted and repayable on demand (or at short notice, typically fourteen days), irrespective of whether an event of default has occurred or not. Apart from the commercial terms, the loan agreements are standard short-form loan agreements with very little leeway, if any, to negotiate terms. As such, they do not provide the corporate borrower much comfort in terms of long-term commitment. Committed facilities are primarily used in leveraged finance transactions, large-scale investment-grade transactions and large real estate finance transactions. The credit facilities are often evidenced by facilities agreements based on the standard templates published by the Loan Market Association and then tailored appropriately to fit the individual transaction and local law in Denmark. Certain major banks and banks which are other-wise very active within the corporate lending market will have their own standard LMA-based loan agreements which they seek to impose on the borrower as a starting point for the negotiations. Depending on the size of the transaction, whether it is syndicated or not and the bank(s) in question, some banks may instruct external lawyers to draft the loan documentation. Often, such loan documentation will also be based on the LMA’s recommended forms of loan agreements, although they may be shortened a bit, a so-called “LMA light” or "Danish LMA" (without being approved or supported by the LMA). In most cases, the governing law of the loan agreement will be Danish law, especially if the bank or the syndicate banks are Danish. However, the loan agreement will often be drafted and negotiated in English, even where all participants to the transaction are Danish. The reason for this is often the convenience of using established market practices and wording while also permitting the internal auditors of the lenders' to review documentation if the banks' corporate language convention is English, as is the case with a number of leading Nordic banks in the Danish market.
The loan agreements will often be comprehensively negotiated by the parties, especially by the borrower to ensure that it is fit for purpose. Some major corporate borrowers, primarily borrowers with an excellent credit rating, have started introducing their own standard loan agreements and terms on which they are prepared to borrow. Often, this loan documentation will also be based on the LMA recommended forms but will only have a few basic representations and warranties, a few covenants and a reduced set of events of defaults with substantial grace periods and materiality tests.
For a fully-fledged syndicated credit facility with syndication in and outside Denmark, the documentation will be based on a LMA standard credit facility documentation to enable syndication and predominantly governed by the laws of England & Wales and to a lesser extent by US/New York law, or German law with jurisdiction in Frankfurt or Munich.
The domestic reference rate is CIBOR, the Copenhagen Interbank Offered Rate. In line with the LIBOR transition, a new Danish reference rate, DESTR, Denmark Short-Term Rate, is scheduled to be launched in 2022 following a test period in 2021. DESTR is to be administered by the Danish National Bank. Given that reference rates are used in a wide range of financial products, including bank loans, mortgage bonds and interest-rate swaps, it is vital for the Danish financial market to ensure the proper functioning and introduction of a short-term transaction-based reference rate in Danish kroner in line with international standards. DESTR will be based on the data from overnight borrowing transactions, to be collected by the Danish National Bank from a broad group of banks and financial institutions pursuant to a new statistic for 1-day money market rates. The new statistic is intended to be expanded into a wider range of market rates and foreign exchange transactions in due course.
Payments in Danish kroner (DKK) between financial institutions in the interbank market are handled in Kronos, while EUR payments are handled via the trans-European Target2 system. Kronos2 is the real-time gross settlement (RTGS) system of the Danish National Bank for DKK payments and constitutes one of the main pillars of the Danish payment infrastructure. It is primarily used by the account holders of the Danish National Bank for large, time-critical DKK payments, either as customer or interbank payments. Kronos2 is also used for the settlement of DKK payments for other settlement systems in the Danish payments infrastructure. Kronos2 is open on Danish banking days for DKK payments between 07:00 CET and 16:45 CET. In addition, Kronos2 is open at 17:30 for transfers to settlement accounts for the night-time Sum Clearing and VP settlement for the settlement of securities transactions by VP Securities. Target2 is the RTGS-system for EUR payments owned and operated by Eurosystem. The Danish National Bank and approximately thirty Danish banks are participating in Target2.
Danish law recognises two different forms of security interests: mortgages and pledges.
A mortgage is a non-possessory security, which comes in the form of either a fixed mortgage over a specific asset or a floating mortgage (a charge) over a number of non-specified assets within a certain group of assets. Fixed mortgages will often be taken over the following assets:
intellectual property rights
certain electronic, registered securities (dematerialised securities)
Floating mortgages/charges can only be granted in respect of:
certain business inventory (e.g. inventory, operating machinery, tools, vehicles etc.)
receivables originating from the mortgagor’s business.
The security is granted by way of an electronically filed mortgage which may either specify the loan being secured and the terms of the loan (an ordinary mortgage) or may just specify the amount which is being secured, in which case the terms of the loan follow from an underlying loan agreement (an owner’s mortgage or an indemnity mortgage).
The mortgage itself has to be registered with a central register in order for the security to be perfected. Depending on the asset used as security, the mortgage will have to be registered with either (i) the Land Register (real estate), (ii) the Car Register (certain vehicles), (iii) the Chattels Register, sometimes referred to as the Persons Register (chattels, intellectual property rights, business inventory and receivables in relation to a floating mortgage etc.) and (iv) the VP Securities services (electronic registered securities). In general, an official registration fee of DKK 1,730/1,750 + 1.45/1.5 per cent of the nominal value of the mortgage is payable upon registration (the exact amount will depend on the underlying asset being secured by the mortgage). A mortgage is in general enforced through the local bailiff’s court by way of a public auction, although other enforcement mechanisms may be agreed upon between the parties. In case of the debtor’s/mortgagor’s bankruptcy, the enforcement process must be initiated by the bankruptcy trustees. However, a creditor may demand that the enforcement process is initiated within six months after the bankruptcy.
A pledge is a possessory form of security where the pledgee (or the pledgee’s representative) either takes possession of the asset (chattels, negotiable securities, etc.) or notifies the debtor of the security (receivables, non-negotiable shares). The pledge is granted on the basis of a pledge agreement between the pledgor and the pledgee specifying the asset being subject to the pledge and the additional terms of the pledge. The following assets will often be pledged:
physical securities (shares, promissory notes, etc.)
Since the security is perfected by taking possession of the assets or giving notice to the debtor (receivables etc.), there is no need to register the security and no registration fees apply. Enforcement of a pledge would be either by way of a public auction or (depending on the assets in question, the terms and the security agreement) by way of a private sale. In case of bankruptcy, the enforcement process remains in the hands of the creditor irrespective of the bankruptcy.
While Danish law does not as such recognise the concept of a trust and consequently the concept of a security trustee, security agents are commonly used in secured syndicated transactions. Following the amendment of the Danish Securities Trading Act (now the Capital Markets Act) in 2013, the security can be granted directly to the security agent as such for and in favour of the existing lenders/bondholders from time to time. Thus, the old practice of granting the security directly to the individual lenders/bondholders has been abolished to a certain extent.
In relation to bond issues, the security agent inter alia needs to be registered with the Danish Financial Supervisory Authority in order to benefit from the amended agency rules in the Danish Capital Markets Act. If no registration has been made, it will depend on general principles of agency law whether the security agent can represent the bondholders and if so to what extent.
There are no registration requirements for security agents in relation to syndicated loans.
Further Information & Resources
For further information on Danish banking and finance law, please consult our publications on Danish banking and finance law or contact Michael Carsted Rosenberg, Andreas Tamasauskas at Carsted Rosenberg. In addition, information and guidance on Danish banking and finance law and the regulation of the Danish financial sector in general is available from the Danish Financial Supervisory Authority. Further legislative information on Danish banking and finance law is available in English via unofficial translations made available by the Danish FSA. It is should however be noted that some acts may have been updated or amended since the translation and that only the original Danish versions of the applicable Danish banking and finance law are binding and valid.
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