Security arrangements for project financing in Finland
While recourse to the project owners and sponsors is generally excluded in project financing, a project financer will expect to receive a comprehensive security package covering the project company (SPV) and its assets, particularly such assets that are of central importance to the project.
Generally speaking, all assets that have economic value and are capable of being transferred are also capable of serving as security under Finnish law. The procedure varies by asset type, as does the efficiency of the security interest to be granted under Finnish law. With certain assets, the required procedures are prohibitively cumbersome for a project with ongoing operations. This is commonly taken into account when defining the security package.
Real property and land leases
In Finland, security over real property is taken in the form of a mortgage. The mortgage is a registered pledge that is accessory to the secured receivable.
The creation of the mortgage requires the mortgage to be registered in the land register. Upon registration, an electronic mortgage certificate will be issued by the registry authority. The perfection of the mortgage requires that the mortgage certificate is “handed over” to the creditor by registering the new beneficiary in the title and mortgage register.
Registered leaseholds and other rights of use that meet certain criteria can also be mortgaged. If a project relies on leased land, it is essential for eventual project financing to ensure that the leases fulfil the requirements for being mortgaged. In this case, they will provide the financing bank with the same comfort as land ownership.
Mortgages provide the lenders a high degree of protection against third-party creditors. However, enforcement is somewhat cumbersome, always requiring a court judgment or arbitral award, after which the actual enforcement is performed by a bailiff in an execution procedure regulated by law, usually through a public auction or a private sale.
Movable property such as machinery and equipment can be used as security in several ways.
If movable property (including, under Finnish law, buildings) serves the purpose of the real property and is sufficiently integrated therein, it can be regarded as components or accessories of the property. In these cases, the security over the real estate covers the movable property, which is generally favorable from the lenders’ point of view. It may not be obvious whether certain movable property is accessory to the property. It is possible (and in many cases advisable) to clarify the accessory relationship in the land register.
Security over other movable property could basically be created by way of a pledge. However, the perfection of the pledge requires delivery of the respective asset to the possession of the creditor (the lenders). Obviously, this defeats the purpose of financing ongoing business operations. Therefore, individual pledges on movable property are not usually applied in project financing.
Instead, movable property is usually included in the security package by way of a so-called business mortgage. The business mortgage is created through registration in the relevant register and covers all movable property of a business that is not capable of being mortgaged otherwise. The business mortgage does not provide full security, but in case of bankruptcy it will give the pledgee a right to receive with priority half of the proceeds out of the realization of the covered assets.
Receivables and bank accounts
Pledges over the rights emerging from central project agreements are an essential part of the security package. Security over receivables can be created with a pledge agreement between the pledgor (i.e., the creditor of the pledged receivable) and the pledgee. The pledge will be protected against third parties only from the moment when the debtor is notified of the pledge.
In practice, it is commonly agreed that the pledgor is free to collect the receivables in the absence of default. It is important to note that in such case, the security is not fully protected until the debtor is instructed not to make payments to the original creditor. This effect is generally accepted by project financers in Finland, as routing the flow of payments through the lenders would often obstruct the project to a prohibitive degree.
A bank account can be pledged in a similar way as receivables. Again, full perfection of the pledge would require that the bank is instructed not to make any payments to the pledgor, i.e., the account holder. It is common market practice to defer this instruction and to allow the use of the pledged bank account until an event of default occurs.
In project financing, the project owners will be expected to use their shares in the project vehicle as security. Security can be taken over shares by simple agreement.
The method of perfection of the pledge depends on whether share certificates have been issued to the shareholder. If this is the case, the share certificate must be endorsed and handed over to the pledgee. Otherwise, the perfection of the pledge requires that the company whose shares have been pledged is notified of the pledge and registers the same in the shareholder register.
Enforcement of share pledges is substantially easier than in the case of mortgages. Parties may generally agree upon the method of enforcement, and project financing arrangements commonly include the lenders’ right to sell the shares directly in the context of their agreed step-in rights.
While Finnish law does not know the concept of a trust, using security agents for syndicated loans has long been common practice and has now (as of 2017) also been recognized explicitly by law.
The security agent can act as a representative and enforce the security on behalf of the secured creditors if so agreed in the relevant finance documents. One will often find the role of security agent defined even in loan arrangements with only one lender, with the purpose of facilitating later syndication of the loan.