The Portuguese economy has been recovering strongly since the end of the financial crisis and the successful conclusion of the financial assistance programme, benefiting from healthy dynamics in the tourism sector and improved investment in various other sectors. The improvement of leading indicators, the expansion of industrial production, the existence of low interest rates and a declining unemployment rate have been increasingly contributing to a boost in private consumption.
The Portuguese capital markets framework is substantially in line with the European legislation, which has been responsible for increasing harmonisation within the European Union. Notwithstanding, specific domestic laws and regulations may apply to specific instruments, their form of representation and transactions. Regulations issued by the Portuguese Securities Market Commission (CMVM), the Portuguese central securities depository Interbolsa and Euronext Lisbon should also be considered, since these national regulatory authorities may condense, adapt and interpret European legislation with a certain level of discretion.
The Securities Code (enacted by Decree-Law 486/99, as amended) establishes the framework for financial instruments, offers, financial markets and financial intermediation, and has been the statute used to transpose a variety of important European directives (including any amendments thereto) into national law, such as the Transparency Directive,2 the Takeover Directive,3 the Settlement Directives4 and the MiFID II Directive.5 Other relevant statutes include the Companies Code (as enacted by Decree-Law 262/86, as amended; this governs the corporate rules on shares and bonds) and the Credit Institutions and Financial Companies Framework (enacted by Decree-Law 298/92, as amended, also heavily amended to transpose or adjust to EU legislation).
A considerable number of new or revised regulatory frameworks have affected the capital markets in Portugal during 2019, including:
- the new Prospectus Regulation6 together with Delegated Regulations (EU) 2019/980 and 2019/979, both of 14 March 2019. Among other things, key changes in this context include:
- a prospectus summary as a new content requirement and length restrictions that will make the summary section more concise but more difficult to draft;
- material changes to the rules relating to risk factors, including European Securities and Markets Authority guidelines, to be taken into account; and
- the obligation for financial intermediaries to contact investors on the same day that a supplement is published;
- Law No. 69/2019, of 28 August, which provides for the execution in the Portuguese jurisdiction of Regulation (EU) 2017/2402 of 12 December 2017, which lays down a general framework for securitisations and creates a specific framework for simple, transparent and standardised securitisations; and
- the SIGI regime, approved by Decree-Law No. 19/2019, which creates and regulates real estate investment and management companies (SIGIs) and aligns practices regarding SIGIs with the best international practices on real estate transfer trusts.
In addition to the new regulatory framework of this year, note that 2019 is still a year of implementation of the regulatory framework of the previous year, since 2018 was a year marked by a considerable number of new or revised regulatory frameworks in Portugal (MiFID II, MiFIR,7 Packaged Retail and Insurance-based Investment Products Regulation (PRIPPs Regulation) and Decree-Law 56/2018, which implemented MiFID II and has also modified the general framework for collective investment schemes).
Regulations, notices and instructions issued by the CMVM or the Bank of Portugal may also be relevant. Bearing in mind the banking union that is currently being implemented and EU harmonisation developments, national banking laws are largely in line with EU rules.
The Portuguese capital markets framework still has a number of specificities (increasingly fewer, in light of EU harmonisation) that should be taken into account. The securities ownership regime is one of them. Under Portuguese law, legal ownership is not set immediately at the level of the accounts opened by financial intermediaries at the local central securities depository (CSD), but rather at a second level in the chain of custody, namely at the level of the accounts opened by clients at the respective financial intermediaries. In practice, though, the system works well, and most international investors hold Portuguese securities through indirect custody chains, going through Euroclear and Clearstream or other global custodians.
Another example, with important practical implications, is that the Portuguese tender offers regime is significantly wider in scope when compared to the Takeover Directive given that, in addition to equity securities, debt securities are also comprised within its scope of application (as is the case in some other jurisdictions). This means that typical debt securities tender offers will normally be restricted to professional investors in Portugal unless a securities takeover prospectus (in some cases, where the bonds are listed outside Portugal, a long-form information memorandum translated into Portuguese and resembling a prospectus) is approved and disclosed.
The financial regulation system is composed of three pillars (following the same structure as the European supervisory system, and divided in accordance with the activities and matters at stake), which are supervised by three authorities:
- the Bank of Portugal (the country's central bank), which has a prudential function (in coordination with the European Central Bank, particularly for the largest Portuguese banks) and market conduct powers to supervise matters related to credit institutions and financial companies acting in Portugal;
- the CMVM, which is empowered to supervise the market conduct of financial markets, issuers of securities, and financial instruments and financial intermediaries (investment firms and credit institutions acting under MiFID II capacity; and
- the Portuguese Insurance and Pension Funds Authority (ASF), which supervises the national insurance system.
Finally, the Portuguese authorities may apply sanctions to entities that fail to comply with the applicable laws. In general, resulting fines depend on the type of entity and activities carried out, as well as the seriousness of a breach. A supervisory authority's decision may be contested and submitted to the decision of a special court that exclusively decides on competition, regulation and supervisory matters.
Since the financial crisis, and given the collapse of some important Portuguese economic conglomerates, the supervisory authorities have been much more active in sanctioning market players, and the above-mentioned special court on regulatory matters was set up to enhance the capacity to respond to current regulatory demands. In recent years, authorities have imposed fines on several entities, including banking board members who were accused of hiding relevant accounting information.
II THE YEAR IN REVIEW
i Developments affecting debt and equity offerings
Given the relatively small size of the Portuguese market, with a reduced number of listed companies as compared with the capital markets of larger European economies, takeover bids, voluntary or compulsory, are not very common. The most important ones during the past year are described below.
In May 2018, Chinese state-owned power company China Three Gorges (CTG) preliminarily announced a voluntary takeover bid for the remaining 76.7 per cent of EDP shares that it did not already own. Since EDP controls EDP-Renováveis (EDP-R), CTG would be required, in the event that its offer for EDP were successful, to launch a mandatory bid for EDP-R. Therefore, at the same time, CTG also announced a preliminary takeover bid for EDP-R, which in practice allowed CTG to freeze at that point the cut-off date for the six-month volume-weighted average price of EDP-R shares, which serves to test the fairness of a mandatory bid price.
Under the terms of the respective preliminary announcements:
- the launching of the offer over EDP was subject, among other conditions, to the approval of an amendment to EDP's by-laws to remove the existing voting cap; and
- in turn, the launching of the offer over EDP-R was subject, among other things, to the verification of all conditions precedent for the launching of the offer over EDP.
On 24 April 2019, the general meeting of EDP did not approve the proposal for a resolution to remove the referred voting cap existing in EDP's by-laws, while CTG has confirmed in advance its intention not to waive such condition. For this purpose, a condition precedent for the registration and subsequent launching of the offer over EDP and, consequently, over EDP-R, was not verified. In light of the above, and in accordance with a notice disclosed to the market by CMVM on 12 April 2019, the CMVM's board of directors resolved, on 30 April 2019, to refuse the requests for registration of those takeover bids, thereby extinguishing the respective administrative procedures.
2019 was a strong year in the debt markets for non-financial Portuguese companies, which have continued to seek recourse to the retail capital markets. Government bonds also continued to be placed under public offers, thus allowing retail investors to continue their exposure to this market segment, which had been previously restricted (as far as the primary market was concerned) to institutional investors.
Private placements (both with and without listing) continued to play an important part in the diversification of financing routes for the Portuguese economy.
In October 2019, Mota-Engil, SGPS, SA launched a public subscription offer with a total nominal value of up to €75 million combined with two public exchange offers. This was the first prospectus approved by the Portuguese regulator after the new Prospectus Regulation entered into force. Moreover, this prospectus tackled the challenges imposed by the new framework, in particular in terms of the content of the summary section and given that a supplement was later approved to increase the total amount of the public subscription offer up to €100 million. The financial intermediaries had to contact the investors on the same day that the supplement was published. This communication was made by way of a short message service, which the Portuguese regulator considered to be a suitable means to inform the investors.
Apart from the usual issuers, in June 2019 the Portuguese market witnessed two inaugural public offers: Transportes Aéreos Portugueses, SA, the Portuguese airline company, with €200 million notes due in 2023; and Sociedade Independente de Comunicação, SA in the broadcasting and contents sector. The most innovative feature of these two deals is that it was the first time that it was acknowledged that Article 501 of the Portuguese Commercial Code (PCC) was regarded as equivalent to a corporate guarantee to avoid testing the debt-to-equity ratio. In particular, Article 349(1) of the PCC states that a corporation must comply with a debt-to-equity ratio equal to or higher than 35 per cent after bond issuance. As an exception to this, Article 349(4)(c) also foresees that the ratio is not applicable in cases where special guarantees are provided in favour of noteholders to secure repayment obligations under the relevant issue, and Article 501 of the PCC regime is now deemed equivalent.
At the start of the year, and for the first time in the country's history, a Portuguese company requested admission to trading of Portuguese law-governed securities on Alternative Fixed Income Market (MARF): José de Mello Saúde, SA issued commercial paper governed by the maximum outstanding balance of €50 million on MARF. MARF is a multilateral trading facility, and is not a regulated market in accordance with the provisions of MiFID II. This deal was followed by another issue of commercial paper governed by Portuguese law, with the maximum outstanding balance of €50 million issued by Mota-Engil, SGPS, SA. In the second semester of 2019, the first Portuguese bonds were listed on MARF: €58 million notes by Efacec Power Solutions, SGPS, SA, a Portuguese limited liability company. This was the debut issuance in the capital markets of Efacec and the second-largest trade ever made on MARF.
In this context, MARF is a very attractive market for Portuguese law-governed companies as it has a diversified base of investors and allows for additional financing possibilities.
As regards the euro medium-term note (EMTN) programmes of Portuguese issuers, these have been undergoing adjustments to MiFID II and PRIIPs Regulation language requirements in line with other EU jurisdictions, and enabling these programmes to be ready for use in the international markets once the interest rate environment changes.
Liability management exercise: the PTIF BV bonds case
An interesting case that spanned various aspects of the legal regime of public offers is that involving the retail notes issued by Portugal Telecom SGPS.
In brief, in 2012 Portugal Telecom SGPS used the Prospectus Directive8 passporting mechanism to use the prospectus of its EMTN programme in Portugal in a €400 million public offering of bonds with a par value of €1,000 per bond and maturity in 2016, to be placed with and subscribed to by retail investors. This was a public offer of securities under the usual terms.
In 2014, owing to corporate and business events, the issuer launched a consent solicitation process (that is, the calling of a meeting of bondholders to consent to a set of matters), which resulted in the substitution of the original issuer with PT Portugal and the payment of a consent fee to bondholders. In addition, Oi (a company with its registered office in Brazil) became bound as the guarantor of these obligations. In light of the doubts that could arise, and in a process closely monitored by the CMVM, it was concluded that this type of proceeding did not trigger the public offer regime.
In 2015, in the context of the sale of PT Portugal by its shareholder, the then-issuer PT Portugal launched a new consent solicitation process under which it was replaced by a new issuer, PTIF BV. The proceedings included the payment of a new consent fee and the creation of a sale option for investors (put option), with Oi (the parent company of PTIF BV) remaining as the guarantor. Again, this was not a public offering.
In June 2016, Oi filed a judicial recovery procedure in Rio de Janeiro, which was admitted, and PTIF BV defaulted on the due payment at maturity. The CMVM closely monitored this situation to safeguard the interests of retail investors in Portugal and to keep them informed about the process.
In 2017, Oi launched a programme in Brazil for small creditors, which allowed for an advance payment, in a first tranche (prior to the voting and approval of the judicial recovery plan of Oi), and the payment of a second tranche (following approval of the judicial recovery plan) to creditors up to the maximum limit of 50,000 reais. The programme was replicated in Portugal beginning in October 2017 and ending in early December 2017. In this way, thousands of creditors in Portugal (who, unlike the small creditors in Brazil, were creditors of securities issued by PTIF BV and guaranteed by Oi) could enjoy the same benefit.
As mentioned above, this was a partial advance of the outstanding amount, followed by a second additional tranche of payment, which had as counterbalance the blocking (rather than the buying) of obligations. In this way, it was concluded, once again, that the public offer regime in Portugal was not to be applied.
Following approval by creditors and the court of the judicial recovery plan in Brazil in December 2017, it has also been interesting to follow the additional steps that have been taken to consolidate this decision at the securities level, including election processes, consent solicitations and settlement processes, across various clearing systems, including the Depository Trust and Clearing Corporation, Euroclear and Clearstream and, as there were these PT international securities identification number notes involved, also Interbolsa. None of these transactions amounted to public offers.
The last developments include acknowledgment by the Portuguese courts of the decisions taken in Brazil regarding the judicial recovery plan, which was a first-time achievement in the Portuguese jurisdiction.
ii Developments affecting derivatives, securitisations and other structured products
After the big challenge of adjusting to variation margin requirements for financial counterparties and non-financial counterparties above the clearing threshold (NFC+) and clearing requirements for certain interest rate derivatives and credit default swaps (under the European Market Infrastructure Regulation framework) in 2017, and also adjustments to tackle MiFID II challenges in 2018 that included, inter alia, obligations to trade certain classes of derivatives through trading venues and certain pre and post-transaction information requirements, Regulation (EU) 2019/834 of 20 May 2019 entered into force on 17 June 2019 with significant amendments aiming to simplify the documentary process, introducing a new counterparty category (the small financial counterparty) and reducing certain burdens, including of reporting for small non-financial counterparties, as the financial counterparty should be responsible for reporting on behalf of both itself and the NFC.
The securitisation market has been active during the past three years, and a variety of transactions have already been completed. These included transactions listed on the regulated market of Euronext Lisbon, both retained and placed in the market (at least some tranches of the transactions), with a variety of assets or receivables being securitised, including electricity receivables and traditional banking loans (for instance, mortgage-backed loans and consumer loans – both performing and non-performing). The transaction structure is, in certain cases, becoming more complex, and we have seen again derivatives being used to hedge interest rate risks (but in the form of a cap rather than an ordinary swap).
Non-performing loans (NPLs) are still a hot topic in the Portuguese financial system, and securitisations have been playing a role in solving this, even though most of the transactions are still made in a whole loan sale format. In November 2017, Caixa Económica Montepio Geral, having been successful in disposing to investors the mezzanine and junior tranches of its rated (and without government support) NPL securitisation Évora, the senior €123 million tranche was successfully placed in the market in June 2018, and the notes were listed in Euronext Lisbon under the first NPL listing prospectus in southern Europe. This type of structure, which is particularly complex, includes the need to incorporate in the structure a real estate asset manager company and a monitoring agent and servicing committee. Given it has been proven that it works and at competitive pricing, in 2018 and 2019 similar deals were also launched: Guincho Finance in November and Gaia Finance in May 2019. Guincho Finance was originated by Banco Santander Totta. This was the first NPL made in Portugal in compliance with the new General Data Protection Regulation.
This deal was followed by Gaia Finance originated by Caixa Económica Montepio Geral. This was the first deal under which the assignor was not the original lender, and also the first transaction compliant with the new Securitisation Regulation in Portugal.
Finally, for the first time in years, a synthetic securitisation was also launched in May 2019 by a Portuguese bank in compliance with the Capital Requirements Regulation (CRR), including the requirement that the proceeds from the notes are deposited or otherwise controlled. In respect of securitisations, and now more in relation to performing loans, the STS Regulation,9 which establishes a general securitisation framework at the EU level that is already, and will continue to be, particularly relevant, and became applicable for all securitisation products from 1 January 2019 onwards. Also to be noted is Regulation (EU) 2017/2401, amending Regulation (EU) 575/2013, which will make the capital treatment of securitisations for banks and investment firms more risk-sensitive and better suited to properly reflect the specific features of simple, transparent and standardised securitisations.
Covered bonds continue to play a part in the Portuguese capital markets, with some issuances on the banking side, including syndicate issuances. Pass-through covered bonds programmes have also been set up by Portuguese issuers. By the end of October 2017, the first issue of pass-through covered bonds (i.e., covered bonds that in certain events convert the redemption structure into a product more like asset-back securities) placed in the market by a Portuguese issuer had taken place.
The result of the work developed by the European Commission on a directive proposal for a common EU minimum covered bonds framework has accelerated, and on 18 April 2019, the European Parliament provisionally adopted the covered bonds harmonisation package (a directive on covered bonds that replaces the provisions of Article 52 of the UCITS Directive and a Regulation that amends Article 129 of the CRR). The proposed directive is essentially designed to set a common legal ground (not so heavily based on rules as the market feared) and to legally acknowledge existing market practices (leveraging significantly on the work done by the European Covered Bonds Council). Some of the predicted changes include, inter alia, investors' access to information regarding the cover pool, a baseline covered bonds definition (dual recourse, segregation of assets, bankruptcy remoteness, public supervision, liquidity buffer) and the use of a European Covered Bonds Label. Given that the proposed directive appears to be substantially aligned with Portuguese law and market practices, we would not expect it to materially affect the market, but we will be seeing Portuguese issuers having to adapt theirs covered bonds programmes to include specific adjustments regarding objective and specified triggers, namely regarding the soft bullet and pass through structures.
The second part of the harmonisation package (the amendments to the CRR) includes additional requirements that covered bonds have to fulfil to benefit from preferential capital treatment and foresees credit risk-related features (eligibility of cover assets, loan-to-value limits, minimum over collateralisation).
In terms of timing, according to the European Covered Bonds Council, it is unlikely that the new covered bond package will apply before 2022 as, following publication of the new covered bonds directive in the official gazette, national lawmakers will have 18 months to transpose the directive into national law. The provisions of national laws shall apply at the latest 12 months after the transposition deadline. On the other hand, CRR amendments do not have to be transposed into national law, as the CRR is directly applicable and should apply from the date the covered bonds directive is applied.
Own-funds regulations and senior non-preferred instruments
After the first Additional Tier 1 capital instruments issuance placed in the market (€500 million by Caixa Geral de Depósitos) in 2017, with a write-down (and up) feature, rather than a conversion, later that year and in 2018, banks have started to issue Tier 2 capital instruments to the market, with Banco Comercial Português, Caixa Geral de Depósitos and Novo Banco having successfully approached the market. On January 2019, Banco Comercial Português also issued successfully €400 million Additional Tier 1 capital.
The CRR2,10 the CRD V,11 both of 20 May 2019, and BRRD 212 entered into force on 27 June 2019. As regards CRD V, Member States shall adopt and publish by 28 December 2020 the measures necessary to comply with CRD V, although the majority of provisions will only apply from 28 June 2021. Regarding senior non-preferred instruments, Directive (EU) 2017/239913 of 12 December 2017 was finally transposed into the Portuguese legal framework by Law No. 23/2019, and has established that claims in respect of all deposits shall benefit from a general credit privilege over the movable assets of an insolvent entity and a specific credit privilege over its immovable assets. In this respect, Portuguese issuers have been updating their programmes in terms of eligible instruments in accordance with the new CRR rules as provided by Regulation (EU) 2019/876 of 20 May 2019.
The MiFID II and MiFIR legislative package entered into force in 2018 and is know in an advanced stage of implementation. Whereas MiFIR was directly applicable in Portugal, MiFID II was, after months of delay in the legislative process, finally transposed into Portuguese law by means of Law 35/2018 of 20 July, which entered into force on 1 August 2018. This law has amended various legal regimes that form the basis of the organisation and functioning of Portuguese financial markets, among which is the Securities Code.
The aim of this new regulatory package was to ensure greater transparency for all market participants, while also increasing market safety, efficiency and fairness, implementing enhanced governance for trading venues, on-exchange trading of standardised derivatives, more intensive regulation of commodity derivatives and greater consolidation of market data.
Investor protection has been stepped up through the introduction of new requirements on product governance and intervention and independent investment advice, improved pre and post-trade transparency, the extension of existing rules on structured deposits and an improvement in requirements in a variety of areas, such as the responsibilities of management bodies, cross-selling, staff remuneration, inducement and information, more extensive transaction reporting, conflicts of interest and complaints handling. For independent discretionary portfolio management and investment advice segments, for instance, this implies revisiting the fee structures and arrangements that have been in place up to now, and a global review of their procedures and documentation. Product governance has also been a very significant challenge.
The PRIIPs Regulation
According to the PRIIPs Regulation, a packaged retail and insurance-based investment product constitutes any investment where, regardless of legal form, the amount payable or repayable to the retail investor is subject to fluctuations because of exposure to reference values or to the performance of one or more assets that are not directly purchased by the retail investor.
The PRIIPs Regulation pursues the objective of increasing the transparency and comparability of investment products through the issue of a standardised short-form disclosure document – the PRIIPs key information document (KID) – thereby making it easier for retail investors to understand and compare the key features, risks and costs of different products within the PRIIPs scope.
Law 35/2018 has been the instrument used for adapting the PRIIPs Regulation to the internal legal order in Portugal. The new regime defines, inter alia:
- the competent supervisory authorities, depending on the nature of the investment product in question (the CMVM, the Bank of Portugal or the ASF);
- a prohibition on the advertising of PRIIPs without the prior approval of the competent supervisory authority;
- a prohibition on making the execution of deposit contracts dependent upon the acquisition of financial instruments, insurance contracts or other financial savings and investment products that do not ensure the invested capital at all times; and
- the obligation to notify the competent supervisory authority of the PRIIP-related KID prior to the date it will become available to the public or modified.
The PRIIPs Regulation shall be read in conjunction with Law 35/2018 and CMVM Regulation 8/2018, which applies exclusively to PRIIPs whose issuance, trading or provision of consulting services is supervised by the CMVM. This Regulation regulates the information and trading duties of PRIIPs, specifically:
- the information to be made available;
- the language and features of the KID;
- the content of PRIIP advertising and the prior notification of the KID;
- protection measures for non-professional investors; and
- communication and registration duties.
iii Cases and dispute settlement
Besides derivatives litigation and a prospectus case, discussed below, we would highlight that the application of the resolution measure to Banco Espírito Santo (BES) (and to Banif) entailed a significant amount of litigation, for various reasons and involved different stakeholders, but this did not prevent the sale process of Novo Banco being concluded in October 2017. We expect to report on the outcomes of these disputes in the coming years. Nevertheless, in an important case in the United Kingdom, Goldman Sachs International v. Novo Banco SA, it was confirmed that litigation regarding this particular resolution measure, including regarding English law contracts, should be decided by the Portuguese courts. It was decided that it was not for the court to interfere in the exercise of resolution powers by the Bank of Portugal (the national resolution authority), and thus that were no grounds to pursue the case in the English courts.
More recently, two legal proceedings related to the sale of Novo Banco have been judged, one initiated by a shareholder of BES and another by several holders of subordinated bonds issued by BES, before the Lisbon Administrative Court, which were aggregated and designated as pilot proceedings. In both legal proceedings the plaintiffs challenged the validity of the Resolution Measure applied to BES on the basis of alleged illegalities and unconstitutionalities. On 12 March 2019, the Lisbon Administrative Court fully dismissed the claims of the plaintiffs.
Highlighted case law
As context on derivatives, banks operating in the Portuguese market have been contracting swaps with clients during the past decade as follows: under master agreements governed by Portuguese law, based on the International Swaps and Derivatives Association (ISDA) master agreement principles, but shorter and less complex; and under standard ISDA master agreements. The latter alternative has been typically adopted by larger corporations (or public sector entities, as mentioned above) with wider experience in the financial markets, while the former has been more frequently used for smaller clients and by small and medium-sized enterprises (SMEs) that are relatively less experienced in the financial markets and more tempted to sue banks when an underlying asset evolves negatively.
During the past few years, several cases involving interest rate swap agreements have been analysed and decided by the Portuguese Supreme Court of Justice (STJ), essentially those related to disputes with SMEs.
In 2013, the STJ acknowledged the validity of derivative contracts and the applicability of a swap termination because of an abnormal change in circumstances, and also highlighted the importance of securing a balanced contract.
Following this decision, in 2015, two cases proved noteworthy in clarifying a range of issues that had been extensively discussed within the legal community, as reported in this chapter in the 2016 edition. The STJ affirmed the standing of derivatives as legally valid financial instruments, recognised as such under EU and national law, and thus not qualifying swaps as gambling or betting contracts. This represented a clear contribution to the stability of the financial system.
Case law has also addressed choice of forum clauses, having decided that choice of jurisdiction based on the applicable EU civil procedure rules (notably, Regulation (EU) No. 1215/2012) prevails over Portuguese domestic law, therefore acknowledging the validity of clauses attributing jurisdiction to the courts of England.
In another judicial decision, the Lisbon Court of Appeals ruled that not only shareholders that have decided to tender their shares to a bidder in a takeover are protected by prospectus liability. Any investor, either buyer or seller, that relied on the information inserted by a bidder in a prospectus may claim for damages against the bidder.
iv Relevant tax and insolvency law
The relevant tax issues will naturally depend on the kind of transaction at stake.
In particular in respect of corporate finance-type transactions, it is important to remember that, whenever some sort of financing with links to Portugal is contemplated, certain tax contingencies must be considered. In particular, account should be taken of any withholding tax on interest payments (as a general rule, 28 per cent for natural persons and 25 per cent for legal persons), including for non-residents (i.e., individuals, companies and even financial institutions). Another important aspect is the possible application of stamp duty when some sort of financing is granted (up to 0.6 per cent of the capital, depending on the maturity) and when paying interest (4 per cent of each payment).
Through a bond issue, these taxes may not apply or may be applied to a lesser extent. Under Decree-Law No. 193/2005 of 7 November, there is an exemption from withholding tax on interest payments to be made to non-residents if the requirements and formalities therein are met, including being registered in a CSD recognised by law (such as Interbolsa). On the other hand, and since bonds are a capital market instrument, stamp duty is not applicable to bond financing or to applicable interest payments, since that would restrict the free movement of capital within the European Union. In any case, it should be borne in mind that in the case of secured financing and if no stamp duty is levied on the financing, stamp duty may be payable on the security package.
Outline of the Portuguese insolvency regime
The Portuguese Insolvency and Companies Recovery Code, which was established under Decree-Law 53/2004, has been amended and updated regularly, and contains provisions similar to those that can found in the insolvency regimes of most jurisdictions, aimed at tackling the usual concerns arising in insolvency cases. Besides regulating insolvency proceedings, the Code also sets forth a special recovery proceeding, the aim of which is to promote the rehabilitation of debtors facing financial difficulties but that prove to still be economically viable, by providing a moratorium on any creditor action while a recovery plan is being agreed. This special recovery proceeding constitutes a standalone urgent judicial proceeding based on out-of-court negotiations that are later confirmed by a court.
As usual, the law provides for hardening periods (which are backwards-counting periods from the insolvency proceeding and in respect of which legal contracts may be resolved or terminated with retroactive effect), which notably depend on the date of contracting and the particular circumstances under which the relevant legal contracts were entered into; this includes a 60-day hardening period in respect of security provided with the relevant financing commitment (if these are after the financing, the period is six months). Financial collateral arrangements are excluded from the scope of the Code.
There have been recent legal amendments and additional statutes to enhance the recovery prospects of viable companies, which should be analysed in the context of potential restructurings.
v Role of exchanges, central counterparties and rating agencies
The Target 2 Securities system has entered into force and is already applicable. For this purpose, Interbolsa published Regulation 2/2016. Interbolsa also became eligible as a securities settlement system for the purposes of the short-term European paper (STEP) and step label,14 the aim of which is to enhance the market and collateral prospects for Portuguese commercial paper issuers.
vi Other strategic considerations
Certain negative developments in the market during the past few years underline the importance for systemic entities and listed companies to have robust compliance and risk management systems in place. Increased public pressure on official institutions has resulted in more intense scrutiny by the supervisory authorities, including the CMVM, regarding:
- prospectus review and approval, but there is now a relevant trend at the CMVM to focus on quicker and more predictable reviews and calendar planning;
- complex financial products placement and relevant documentation;
- rules of conduct; and
- corporate governance.
The internal governance arrangements of listed firms and financial institutions, and the assessment of the suitability of those who hold positions in credit institutions and corporate bodies, increasingly tend to be on the regulators' radar.
Investor activism and securities law litigation have also increased in recent years, as mentioned above. As noted above, it should always be borne in mind that in Portuguese corporate finance transactions there may be relevant tax issues to be taken into account, and the bond route may be a way to overcome the hurdles encountered.
III OUTLOOK AND CONCLUSIONS
The current economic environment in Portugal seems to be increasingly positive, with healthy dynamics, a current spike in the tourism sector and improved investment in various other sectors.
1 José Pedro Fazenda Martins is a partner, Orlando Vogler Guiné is a managing associate and Soraia Ussene is an associate at Vieira de Almeida.
2 Directive 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market.
3 Directive 2004/25/EC on takeover bids.
4 Directive 98/26/EC on settlement finality in payment and securities settlement systems.
5 Directive 2014/65/EU on markets in financial instruments.
6 Regulation (EU) 2017/1129 of 14 June 2017.
7 Markets in Financial Instruments Regulation (No. 600/2014).
8 Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading.
9 Regulation (EU) 2017/2402 laying down a general framework for securitisations and creating a specific framework for simple, transparent and standardised securitisations.
10 Regulation (EU) 2019/876.
11 Directive (EU) 2019/878.
12 Directive (EU) 2019/879.
13 See Directive (EU) 2017/2399 as regards the ranking of unsecured debt instruments in the insolvency hierarchy.
14 STEP programmes must fulfil certain criteria to be STEP-compliant, and therefore eligible to apply for a step label.