SLOVENIAAUSTRIAAUSTRALIACHAMBERSGlobal Practice Guides

Slovenia – Trends & Developments

Contributed by ODI Law Firm

2016

Banking and FinanceBanking and Finance

SLOVENIA TrENdS & dEVELOpmENTSContributed by ODI Law Firm Authors: Uroš Ilić, Suzana Bončina Jamšek

2

TrENdS & dEVELOpmENTS SLOVENIAContributed by ODI Law Firm Authors: Uroš Ilić, Suzana Bončina Jamšek

2

Trends & DevelopmentsContributed by ODI Law Firm

OdI Law Firm is a full-service regional business law firm with offices in Slovenia (headquarters), Serbia, Croatia and Macedonia and desk for Montenegro. In the last decade the firm has gone through both dynamic organic growth and acquisitions of local law firms. ODI has developed into an

independent regional powerhouse and remains one of the fastest growing law firms in the Adriatic region, with a rep-utation for excellence that has secured clients ranging from major commercial organisations to public agencies.

Uroš Ilić is a founding and managing partner at the firm and also head of restructuring. He has published numerous articles on banking and finance, such as bank guarantees in insolvency procedures, financial restructuring and takeovers of insolvency targets.

Suzana Bončina Jamšek is a senior associ-ate specialising in banking and finance, corporate M&A and restructuring and insolvency. A former legal counsel at the Slovenian Central Bank, she advised on potential breaches of banking legislation

and on regulatory matters in the Slovenian financial sector. She has published work on merger regulation in the banking sector.

IntroductionHigh debt leverage of the corporate sector, a substantial in-volvement of the state in the economy and inadequate risk management and corporate governance were all character-istics of the Slovenian economy prior to the crisis. The crisis revealed and reinforced these shortcomings, leading to a sudden increase of non-performing loans (NPLs) in banks. NPLs, together with deteriorating collateral values, quickly impaired capital bases and market confidence. The Slovenian banks (in particular, the state-owned banks) suffered con-siderable losses and have significantly shrunk their balance sheets.

recent developments Establishment of a Bad Bank (BAmC)In order to stabilise the banking sector, Slovenia implement-ed several measures. In 2013, the Bank Asset Management Company (BAMC), the Slovenian “bad bank”, was estab-lished to enable the banks to transfer impaired assets from their balance sheets.  So far, the BAMC has received assets with a total gross value of approximately EUR 5 billion (net value of EUR 1.7 billion) from four state-owned banks (Nova Ljubljanska banka (NLB), Nova Kreditna banka (NKBM), Abanka and Banka Celje) and two smaller domestic banks in wind-down.  Most of these entities are in default and the objective of the BAMC is to acquire the collateral. In cases, where the companies have potentially viable core activities, the BAMC is to act as partner in the restructuring process.

Bank recapitalisation under EU State Aid rulesAnother measure taken by the Slovenian government to sta-bilise the banking sector was the recapitalisation of banks. The stress tests in 2013 identified capital deficits of up to

EUR4.8 billion, and EUR3.2 billion was consequently pro-vided by the state in December 2013. Recapitalisation was undertaken in accordance with EU state-aid rules, and eq-uity, hybrid capital and subordinated debt holders were all fully required to contribute to offset any losses. The former shareholders and holders of equity capital and subordinated debt brought the matter before the Constitutional Court, claiming that their constitutional rights have been violated. The Courts stayed the proceeding and posed a preliminary question to the European Court of Justice, where the matter is pending.

In addition to the conditions mentioned above, the Euro-pean Commission has granted state aid under additional circumstances. Two smaller banks, Probanka and Factor, have been granted a state aid provided that they exit the market on 31 December 2016. NLB, NKBM and Abanka had to limit the scope of their activities to their core business and improve their corporate governance and risk management policy. Furthermore, Slovenia committed to merge Abanka with Banka Celje. In 2014 state aid in favour of Banka Celje has been granted with similar conditions as described above.

privatisation on the riseIn order to restructure the Slovenian economy, the National Assembly has consented to the privatisation of a number of state owned companies. Aerodrom Ljubljana, Fotona, Helios and Žito have already been sold. The privatisation processes of Telekom Slovenije, Adria Airways, Adria Airways Tehni-ka, Cinkarna Celje and Elan are currently ongoing. Since a significant part of the public and politicians objected to the sale of Telekom Slovenije to UK private equity fund Cinven, it is not yet clear whether the transaction will close.

TrENdS & dEVELOpmENTS SLOVENIAContributed by ODI Law Firm Authors: Uroš Ilić, Suzana Bončina Jamšek

3

In parallel to the privatisation process, BAMC and other banks are selling shares gained through enforcement of their security.

European led changesSingle Supervisory mechanismIn 2014, the Single Supervisory Mechanism was established and the European Central Bank consequently became the supervisor for the major Slovenian banks and now cooper-ates with the Bank of Slovenia in the supervision of smaller banks.

New Banking ActEuropean Regulation 575/2013 and Directive 36/2013 came into force. Consequently, a new Banking Act has been adopted, implementing the Directive and introducing some country-specific changes. One of the most striking changes proposed was the introduction of a licence for members of supervisory boards. Most Slovenian banks have a two-tier system of corporate governance. Members of the manage-ment boards of banks have to obtain a licence, whereas members of the supervisory boards are not required to hold one. At present the proposed change has been only partially adopted. Future members of the supervisory board do not have to obtain a license prior to their mandate; however, the Bank of Slovenia may prohibit them to act as a member of the bank’s supervisory board immediately after the begin-ning of their term of office. Therefore, in practice, a candi-date for a supervisory board member must meet the Bank of Slovenia’s criteria to serve a full term of office. 

Establishment of a Bank resolution Fund As a consequence of the European legislation at the end of 2014, the Bank Resolution and Fund Act came into force and a special fund for bank resolution was thereby established. The fund has been established for a period of 10 years with assets that should amount to 2.3% of the total guaranteed deposits of all banks in Slovenia (which amount to approxi-mately  EUR15 billion). All operative Slovenian banks have been obliged to pay in assets (1.3% in cash contributions and 1% through liquid investments). These funds represent an investment of that bank, although all funds paid into the fund can only be used for purposes specified by the law.

Furthermore, only banks established in Slovenia are obliged to pay into the fund and all foreign banks operating on the Slovenian market, through their subsidiaries or branches, have no such obligation.

TrendsConsolidation of the Banking Sector The Slovenian banking sector, with 19 banks and three sav-ings banks, is expected to consolidate in the near future.  Two banks (Factor and Probanka) are expected to exit the market by the end of 2016 and another two (Abanka and Banka Celje) are required to merge, both in accordance with the European Commission’s requirements for granting state aid. Two banks (NKBM with Poštna banka) have just been sold; others (NLB, Raiffeisen, Gorenjska banka, Hypo) are looking for an appropriate investor.

BAmC Becoming the Influencer BAMC has become a significant player in the Slovenian banking market and, following the changes to the legislation that have been announced, its influence will increase even further.  Since the majority of non-performing loans have been transferred to BAMC, it has been involved in almost all restructuring processes. Without its cooperation, the re-structuring has little chance of success. The aforementioned changes to the legislation envisage that the restructuring of companies shall no longer be a primary goal of BAMC, but subordinate to other BAMC goals, such as to maximise its (taxpayers’) profit. Furthermore, the purchasing of NPLs by foreign funds is becoming more popular. BAMC is again acting as a market leader and other banks seem eager to fol-low. Claims are usually transferred via either an assignment of claims, or via a transfer of contract. In the first option, the obligations of the assignor are not transferred and a transfer is valid without the debtor’s consent. In the second option, if a transfer of contract obligations is transferred together with its rights, a debtor’s consent is needed (however, it is often given in advance in the contract, subject to the trans-action). When the buyers are foreign entities, the contracts governing the transfer of claims are often governed by for-eign law (or, for example, LMA standard terms), which is a valid option in accordance with Rome I Regulation. How-ever, it should be that the Slovenian law (with Slovenian for-mal requirements) is required for most transfers of security associated with the claims in question.

Stricter Financial Assistance rules Although mergers and acquisitions are on the rise (privatisa-tion, public tenders by BAMC, etc) the Ministry of Econom-ic Development and Technology announced changes to the Takeover Act by limiting the possibility for financing such takeovers. So far, shares of the target companies (except for shares subject to the takeover bid) could have been given as security for the acquisition loan. The Slovenian banks were discouraged from doing so, but it was not prohibited. There is a possibility that the amended Takeover Act will contain

OdI Law FirmDavčna ulica 1LjubljanaCentral SloveniaSlovenia1000Tel: +386 590 86 600Fax: +386 590 86 600Slovenia@odilaw.comwww.odilaw.com

SLOVENIA TrENdS & dEVELOpmENTSContributed by ODI Law Firm Authors: Uroš Ilić, Suzana Bončina Jamšek

4

stricter financial assistance rules by prohibiting the possibil-ity to collateralise any shares of the target company (includ-ing shares owned prior to the takeover bid). The new act, however, has not been adopted yet and is therefore subject to potential changes.

ConclusionIn conclusion, the banking market in Slovenia is consoli-dating and internationalising. The State influence on the economy is expected to decrease, which will hopefully lead to  better corporate governance and a lower debt leverage for the corporate sector.