Is selling the ultimate solution for banks to handle their nonperforming loans? What can be done if restructuring is not sufficient anymore? In the last couple of years, these were the most critical questions for the Hungarian financial sector. But insecurity regarding the implementation of large scale nonperforming loan sales and how to tackle the (regulatory) difficulties now seem to be over.
Non-performing loans have been on the rise in both the retail and commercial sectors in Hungary, and are causing considerable problems in the Hungarian financial sector. The sale of nonperforming loans was discouraged by an unfavorable legal climate. Working out of such non-performing loans, in turn, is considered an unattractive option as effective legal measures are lacking, with existing options favoring debtors. The purchase of loan receivables is a licensed activity in Hungary, meaning that prospective buyers are expected to have a valid Hungarian banking license (or a license issued by a European Economic Area member state passported into Hungary). The licensing requirement, as the main impediment to the sale of nonperforming loans, was reinforced by the volatility of Hungarian legislation, the lack of effective enforcement measures and the lack of an effective secondary loan market. The deleveraging of non-performing loan portfolios is particularly important for Hungarian banks forced on the one hand by the market, and on the other hand by regulatory pressure. After the financial crisis, banks were confident about their capability to recover claims from non-performing debtors and to enforce their collateral. It is now apparent that, with the steadily increasing pressure on banks, the traditional work-out process does not produce results within the desired time period and, therefore, the banks have turned towards the sale of these non-performing loans. Many large-scale, complex legal problems arise with the sale of nonperforming loans, and, depending on the attributes of the non-performing loan portfolio, other legal difficulties
may arise (e.g. the hands of the parties are tied by the provisions of consumer protection in the case of consumer debtors). We do not have space here to list and introduce all such problems exhaustively. To illustrate the complexity of the issue: the provisions of the Hungarian Civil Code on the transfer of contracts, subrogation of rights and assignment of claims will be confronted with secured transaction regulation, and all of the aforementioned with the terms of the underlying agreements. This requires a thorough due diligence in all cases. The guidelines of the Hungarian National Bank will also need to be taken into consideration when setting up the structure of a sales transaction, besides the provisions of the banking laws. All of these are complemented by the specific rules applicable to the different areas of law depending on the feature of the transaction (e.g. the aforementioned consumer protection) and on the characteristics of the parties (e.g. competition law or labor law), and they also have a decisive effect on the transaction structure. The final structure of the transaction is realized in the form of separate but closely connected contracts that have been developed to address all of the aforementioned factors. The harmonization of such contracts is a particular challenge, even at the stage of preparation of the first drafts, but the more difficult part is maintaining balance throughout the negotiations. Schoenherr has provided an attractive solution to its clients in the last two years in these transactions with its new approach of integrated regional cooperation. That is how we utilize our regional market experience gained in the past years in Hungary and throughout the CEE and SEE regions. We have developed innovative legal structures and efficient procedures to tackle all of the aforementioned legal hurdles. Schoenherr Hungary has used these procedures to enable its clients to conclude transactions effectively and efficiently, both on the seller and buyer sides. In the biggest deal in the banking sector this year, Schoenherr Hungary assisted a major Hungarian bank throughout the sale process of a nonperforming secured retail loan portfolio in Hungary.