Banking & Finance 2022 Comparisons

A notable uptick in both commercial and retail lending has generated business throughout most sectors.

For instance, the real estate market was experiencing growth due to low fixed interest rates for consumers and historically high amounts of savings deposits among Slovenians, reaching the record level of EUR22 billion. In response, most banks have adopted charges on high bank deposits (amounts exceeding EUR100,000). Coupled with widely available loans with low interest rates, this has compounded demand in the housing market. This trend is expected to be strongly reversed, however, with Euribor having increased over the past months and the banks making fixed interest rates unavailable.

As a natural response to the increased demand for real estate, there has been a slew of new lending aimed at financing consumer demand, but less banking activity for new construction projects due to the continuing rise of the cost of construction materials.

Consolidation of Banks in Slovenia

Banking services are now a lot more concentrated than in the past with only 11 banks being incorporated in Slovenia.

In 2016, NKBM was bought by Apollo and the EBRD, with NKBM then purchasing Abanka in 2019 and subsequently merging with it in September 2020. In May 2021, NKBM was purchased by OTP Bank from Hungary, which previously bought SKB Bank from the French group Société Générale in early 2020. OTP Bank received ECB approval for the acquisition of NKBM and the deal is expected to close before the end of 2022, pending OTP obtaining merger clearance from the Slovenian Competition Protection Agency.

This means that the OTP Group is expected to hold around 29% of the banking sector in Slovenia as per their combined balance sheet and would spell an end to NLB’s reign as the largest bank in Slovenia. However, in 2022, NLB practically acquired Sberbank overnight in the framework of resolutions measures of the Single Resolution Board. NLB and local Sberbank, now renamed N Banka, together have about the same market share as the OTP Group (with NKBM included). Therefore, two big banking groups are expected to head the market: NLB and the OTP Group, both with roughly 30% market share. Other banks have a much smaller footprint, eg, Unicredit with a market share of approximately 7%.

Throughout most of 2020, the loan market was severely stifled due to a reduction in spending and the uncertainty caused by the COVID-19 pandemic. Many projects and transactions were temporarily halted, while participants waited to see how the market would react.

In this vein, the government issued a measured response for banking and loan extension aimed at curtailing the effects of the pandemic. Critics claim that bureaucratisation and overly strict requirements have prevented many companies from obtaining the necessary means for their continued survival. For instance, while the government has provided for loan extensions and loans to be backed by government warranties (via the Slovenian development bank, SID banka), most of the warranty scheme funds have not been used by companies, due to the rigorous documentary requirements and strict conditions.

That being said, and as elaborated in 1.1 Impact of the Regulatory Environment and Economic Cycles, the market in 2021 and the beginning of 2022 was abuzz with retail loans driven by an increase in real estate purchases. At the same time, there has been an increase in insolvency procedures for companies that have not survived the pandemic. A slowdown in construction activities is expected towards the end of 2022 as a result of the increase in construction costs as well as interest rates.

With regard to the commercial sector, there have been almost no new issues of bonds or similar instruments, and the banking sector is also currently not active in this area. The few public bond offerings that have been published are more the exception than the rule, so this cannot be considered a valid form of financing for most companies.

Despite there being practically no such market in the commercial sector, there is a small alternative credit provider market for consumers, but there are some restrictions in terms of consumer credit legislation. However, commercial lending is unregulated, with some companies increasing their factoring activities, and there has also been an increase in intercompany financing in the form of the extension of payment terms and discounts for early payment.

There is a greater focus on standardisation in banking documentation, with most loan documentation being based on LMA standards or local documentation that has become standardised over the years.

Financial restructuring documents have matured and are now more composed, organised, focused and efficient, as developing court practice has clarified outstanding insolvency law issues.

The new Banking Act was adopted in 2021 but has only made minimal changes to the old act, mostly relating to capital requirements and the regulation of financial holding, remuneration and audit power. Thus, the new act is not expected to play a huge role in the market.

The new Resolution and Compulsory Winding-Up of Banks Act was also adopted in 2021 and as the act mainly implements EU-level directives and regulations, it does not include any novelties. The act was used for the resolution of the local Sberbank Slovenia entity following a bank run by consumers and corporates at the start of the conflict in Ukraine. The local Sberbank entity could not endure the withdrawal of numerous deposits over a matter of days and, due to the liquidity shock, the Single Resolution Board and the Bank of Slovenia as the local resolution authority sold Sberbank to NLB. NLB ensured the security of all deposits at Sberbank and sufficient liquidity for anyone wanting to withdraw funds. 

On 2 July 2021 the Republic of Slovenia successfully completed the issuance of EUR1 billion sustainability bonds. These are the first-ever sustainability bonds issued by the Republic of Slovenia, the proceeds of which will support the financing of climate, environmental and social projects, among others. The bonds have a maturity of ten years and the principal amount of the bonds is interest bearing at a rate of 0.125% per annum. With this successful issuance, the Republic of Slovenia became the first country in the CEE and the second country in the EU to issue sustainability bonds. Under the Slovenian Sovereign Sustainability Bond Framework, the Republic of Slovenia may issue three types of bonds: green bonds, social bonds and sustainability bonds.

The Slovenian state-owned Export and Development Bank, SID Bank, is very open to green financing, with the possibility of such financing existing across all its programmes, as the SID Bank uses green bonds as a source of financing for projects with a sustainability component. It offers loans for sustainable and green projects. Commercial sustainability lending has not yet been seen.

ESG has become a hot topic at big local corporates.

Slovenia is one of the few countries in which there is no need for a specific authorisation or licence for non-consumer lending. A banking licence is required to accept deposits from the public, and a banking or consumer-lending licence is required to provide financing to consumers.

Therefore, non-banking entities are free to provide financing to companies incorporated in the jurisdiction. If the scope of the activity of a particular foreign entity in Slovenia exceeds individual and one-off transactions, the requirement to establish a branch in Slovenia may be triggered. However, the Bank of Slovenia recently stated that this is not the case in the event of a direct provision of banking or financial services by a licensed bank from an EU member state, subject to said bank notifying its home state regulator of its performance of services in Slovenia.

There are in principle no restrictions regarding foreign lenders, although the rules for the cross-border provision of banking services have to be observed by foreign banks. For example, non-EU banks have to obtain authorisation from the Bank of Slovenia and establish a branch in Slovenia. EU banks can provide their services in Slovenia based on the EU regime on cross-border provision of services.

There are no restrictions or impediments that apply specifically to foreign lenders for the granting of security and guarantees. However, the granting of security and guarantees limitations stemming from corporate law also apply non-discriminately to foreign lenders.

There are no restrictions, controls or other concerns regarding foreign currency exchange.

There are no specific statutory restrictions on a borrower’s use of the proceeds from loans or debt securities as such.

The security agent concept is widely used in Slovenia, but trust structures are not specifically recognised or used. As an alternative to the trust structure, parallel debt structures or joint and several debt structures with a security agent holding the security are commonly used in Slovenia. While such debt structures involving a security agent have not really been tested with the courts, they are widely accepted as being in accordance with the law and sufficiently safe.

The credit relationship (while still active and if the claims are still not due) may only be transferred to a new lender with the consent of the borrower; if consent is granted, all the collateral then passes to the new lender (transfer formalities must be respected with some forms of collateral). Certain loan agreements, such as syndicated loan agreements, already include the relevant consent of the borrower for the transfer of individual lender participations to new lenders.

In cases where only claims are to be transferred, the consent of the borrower is not required and the claims are transferred by a bilateral assignment agreement between the old and new lender, and the borrower is only notified about the assignment. All collateral (except maximum mortgage on real estate and bank guarantees) also passes to the new lender (transfer formalities must be respected with some forms of collateral). Security in the form of a maximum mortgage on real estate is problematic, and the transfer of this security is not possible in the case of assignment of claims. Bank guarantees (serving as security for claims) may also not be transferable.

Participation agreements (secured and non-secured) are also often used to effect loan sales.

Debt buy-backs are typically not limited.

The borrower also usually has the right to make a voluntary prepayment of the loan, but must notify the lender of this in advance; however, the borrower must pay a fee to the lender for the early repayment (unless it is a consumer credit). It is customary for the loan agreements to specify the amount to be paid in these circumstances (eg, 1% of the current exposure that is repaid).

Before a public takeover bid can be announced, the bidder is required to obtain the authorisation of the Securities Market Agency (SMA). The precondition for this authorisation is either the deposit of the whole potential purchase price for outstanding shares with the KDD (Central Clearing House), or the bidder must provide the KDD with an irrevocable bank guarantee on first demand for the whole potential purchase price. The potential purchase price is calculated by multiplying the offered price per share by all the issued shares of the target that are not owned and deposited with KDD by the bidder. In this respect, “certain funds” must be provided even before the bid is made.

Long-form documentation is normally used for acquisition financing, but the documentation is not publicly filed despite the frequent need for it to be presented to the SMA.

Generally, there is a withholding tax of 15% on interest payments if the interest is paid to a lender who is not a Slovenian resident. Various particularities are applicable, including exemptions, depending on the circumstances. The applicable rate can be lower under different tax treaties currently in force, depending on the residency of the lender.

There are no other taxes, duties, charges or tax considerations, except withholding tax on interest.

The interest rate for consumer financing is limited by law for non-bank institutions. The rate is limited to 200% of the average effective interest rate of Slovenian banks for consumer credits, depending on the grade in which the credit falls.

Interest rates are deemed usurious if they are 50% higher than the legally prescribed default interest (currently 8% per annum), but this is only the case for non-commercial agreements.

Typically, lenders take security over real estate, shares, inventory (stock), production equipment, trade receivables, bank accounts and trade marks.

Security assets are either pledged to the benefit of the lenders or the lenders themselves acquire fiduciary ownership over the security assets. Trade receivables and movables are often transferred into the fiduciary ownership of lenders (tacit assignment), whereas shares, real estate and trade marks are pledged.

The formalities for creating and perfecting security interests depend on the type of security interest and the security assets in question. There is often a requirement to execute the security agreement in the form of a notarial deed (such as in the case of a pledge of business shares in Slovenian limited liability companies and the fiduciary assignment of receivables); even if there is no such requirement, execution of the security agreement in the form of a notarial deed may afford further rights to the security taker (such as the right of direct enforceability if a mortgage over the real estate is entered into through a directly enforceable notarial deed). Where security assets are entered into a public register, the registration of the security interest in the public register is required either to create or perfect the security interest. For example, a mortgage is created once it is registered in the land register. Debtor notifications are sometimes also required in order to create or perfect the security interest. Failure to meet the required formalities usually results in no security being created (as opposed to there being only imperfect securities) or the security not being valid in the case of insolvency proceedings.

Asset security in Slovenia can typically be created within the envisaged timeframes that are of interest to foreign lenders, and most formalities and perfection steps represent the conditions precedent to commence the drawdown of the facilities. When compared to the financing provided by foreign lenders, the costs of creating security are very low to negligible.

Floating charges over all present and future assets of a company are not permitted in Slovenia. However, a pledge over inventory has some of the characteristics of a floating charge because all inventory located at the specified real estate at any given time is considered to be pledged. General fiduciary assignment of all trade receivables is also possible.

Downstream guarantees are not problematic and are typically allowed. Cross-stream guarantees have to be assessed on a case-by-case basis (based on the same set of rules applicable to upstream guarantees). Limitations on upstream guarantees apply, some of them depending on the type of company providing the guarantee. Joint stock companies are severely limited in granting upstream guarantees, whereas much more relaxed limitations apply to limited liability companies.

Upstream Guarantees

In addition to classic corporate law limitations on upstream support, Slovenian law also introduces the concept of so-called factual groups and rules applicable to them. Under the factual group rules a controlling company may not influence a controlled company to do something detrimental to the controlling company unless certain rules are followed (eg, on compensation, preparation of a report, etc).

Upstream guarantee limitations are sometimes addressed by entering into a “control agreement” (pursuant to which the controlling company can give binding instructions to the controlled company but is also obliged to cover any of the controlled company's P&L account losses) or converting the joint stock company into a limited liability company. In relation to joint stock companies, the provision of any kind of upstream non-acquisition support can theoretically also be considered legal if made for sufficient consideration.

Joint stock companies are completely prohibited from providing any kind of support or financial assistance for the acquisition of their own shares. However, limited liability companies may – under certain conditions – provide support for the acquisition of their own shares and may also acquire their own shares without any strict limitations.

The Takeovers Act provides that, as one of the conditions for authorising a takeover bid, the offeror may not – for the purpose of securing takeover bid financing – directly or indirectly offer to pledge any shares in a target company that it does not own at that time (ie, it may not offer to pledge any shares that are the subject of the takeover bid) or any of the target company's assets. This provision of the Takeovers Act is interpreted broadly by the relevant regulatory authority, and all economically comparable transactions are considered to be subject to this rule.

Security interests are typically ancillary to the secured obligations and automatically cease to exist upon the repayment of secured obligations. However, security release statements issued by the security holder are usually required to effect a full release of the security.

A security interest is typically considered to have a priority ranking if it is created, registered or notified before others. For example, the ranking of a mortgage over real estate is obtained with the time effect as of filing for the registration of the mortgage. In the event of multiple assignments of the same receivables, the date of entry into the assignment agreement or the notification of the debtor may play a role in determining the level of priority.

Slovenian law generally recognises two types of subordination:

• subordination in the event of insolvency, where the parties agree that certain claims will be subordinated to all other regular (secured or non-secured) claims in bankruptcy proceedings; and
• contractual subordination between two lenders, which creates subordination obligations only between those lenders; such contractual subordination is typically not recognised in insolvency proceedings, but the lenders can agree on mechanisms that lead to the same effect.

Enforcement of Loans

Typically, a lender may enforce claims through the court system or, in certain cases, without recourse to the courts, such as in an out-of-court sale of collateral, which may be possible for certain types of collateral, depending on the circumstances. Such out-of-court sales are especially common for the sale of shares (and dematerialised securities in general), typically either through an organised market (eg, stock exchange) or, if such securities are not traded on an organised market, through a public auction. Out-of-court sales of movables are also common, provided that the prerequisites for such a sale are met.

Enforcement of Collateral

In order for a secured lender to enforce its collateral, the lender's claim is usually required to have matured and in the event of enforcement through the courts, a proper title for enforcement is required. In Slovenia, loan agreements and security documents are often confirmed in the form of a directly enforceable notarial deed before a notary in order to attempt to achieve direct enforceability of the claims through the court system and to try to simplify enforcement in the event of default. Special rules apply in cases where bankruptcy proceedings have been commenced in relation to a debtor or, for example, a pledgor or another (legal or natural) person who has provided security, and the timely and proper registration of the claim and the security interest (eg, registration of the right of separate settlement) is normally required.

Appropriation of Collateral

In certain cases, such as financial collateral arrangements (where certain specific requirements have to be fulfilled regarding, eg, the lender and the borrower), the lender may even be allowed to appropriate (retain) the collateral (eg, by setting off the value of such collateral against – or applying the value in discharge of – the relevant financial obligations). In bankruptcy proceedings, it may also be possible – in some circumstances and if the prerequisites are met – for the secured creditor to acquire ownership of the relevant collateral. In any case, it should be noted that court enforcement proceedings and the sale of collateral by the court or in insolvency proceedings may take a considerable length of time.

As Slovenia is a member of the European Union, EU regulations should generally be taken into account. These include Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, and Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I). Typically, the choice of a foreign law as the governing law of the contract and the submission to a foreign jurisdiction are upheld in the jurisdiction of the Republic of Slovenia, subject to certain limitations and exceptions.

If the prerequisites are fulfilled, and with certain exceptions, a judgment handed down by a foreign court or an arbitral award against a company may typically be enforced in Slovenia without a retrial of the merits of the case. Special rules governing the recognition and enforcement of judgments handed down by a foreign court and foreign arbitral awards should also be taken into account, and follow typical reasons for denying recognition (eg, a breach of procedural rights and/or an ordre public).

There is no particular impediment on a foreign lender’s ability to enforce its rights that is unique to its status as a foreign subject.

The Slovenian Insolvency Act (Zakon o finančnem poslovanju, postopkih zaradi insolventnosti in prisilnem prenehanju or ZFPPIPP) allows for pre-insolvency proceedings – ie, a pre-emptive restructuring procedure (postopek preventivnega prestruktuiranja). Such a procedure is intended for circumstances where there is a likelihood that the debtor will (within a period of one year) become insolvent. The commencement of the proceedings may result in a “standstill” for secured and unsecured financial claims, and the creditors may be limited in terms of initiating enforcement and/or interim protection proceedings, provided that the relevant prerequisites are met. As far as insolvency proceedings are concerned, Slovenian legislation differentiates between bankruptcy proceedings (stečajni postopek) and compulsory settlement proceedings (postopek prisilne poravnave), with the main difference being that compulsory settlement is intended (if such proceedings are successful) for restructuring the debt of the company without the company being terminated as a legal entity.

Borrowers in Slovenia also sometimes engage in direct negotiations with lenders outside the framework of the regulated pre-emptive restructuring procedure.

The commencement of insolvency processes may have different effects on a lender’s right to enforce its loan or any security or guarantee. For example, there is typically an automatic set-off of the claims of individual creditors against the insolvent debtor, and the counterclaims of the insolvent debtor against such individual creditors are envisaged (with certain limitations). Typically, non-monetary claims are converted to monetary claims (with certain exceptions), claims expressed in a foreign currency are converted to claims expressed in euros (with certain exceptions), interest rates are affected, etc.

The ability to initiate enforcement proceedings before the court is usually very limited in the event of ongoing insolvency proceedings (eg, individual enforcement proceedings cannot usually be commenced, and existing proceedings are suspended and/or terminated), and with bankruptcy proceedings there is a tendency for the sale of collateral and the division of the proceeds from the sale to be carried out within the scope of bankruptcy proceedings (with some exceptions).

As far as monetary claims are concerned, the ZFPPIPP generally differentiates between different types/categories of creditor, as follows:

• secured creditors (ločitveni upniki, which would be more closely translated as creditors with the right to separate settlement) which, in general, have the right for their claims to be settled separately from the relevant collateral (taking into account the rank in which various security interests were created if there is more than one security interest on the same collateral), provided that certain prerequisites are fulfilled – eg, typically the timely and proper registration of the claim and the security interest are required, while such claim and the right to separate settlement must also be recognised in the bankruptcy proceedings;
• creditors with priority claims (prednostne terjatve), as some claims should typically have higher priority than ordinary claims – eg, certain claims from workers (to a limited extent) and certain claims in relation to taxes and contributions (to a limited extent);
• creditors with ordinary claims (navadne terjatve), which are typically ranked lower than priority claims; and
• creditors with subordinated claims (podrejene terjatve), which are typically ranked lower than ordinary claims.

In addition to these categories, certain creditors may have claims that are considered to be a cost of the insolvency proceedings, and the costs of the proceedings may have priority in relation to other claims. This is because certain costs may be deducted prior to the division of proceeds, even in the case of secured creditors and the sale of collateral in bankruptcy proceedings.

There is no direct concept of equitable subordination in Slovenia. However, shareholder loans granted at the time that the company needed equity, which the shareholder failed to provide, can in bankruptcy proceedings be requalified as share capital. In such circumstances, shareholder loans do not get repaid in insolvency unless there are sufficient funds to settle all creditors.

Claims paid to the detriment of other creditors (which regularly include payments to affiliated or insider creditors) may also be subject to claw-back actions brought on by the bankruptcy administrator (if the borrower is in bankruptcy proceedings) or any creditor affected by a reduction of claims.

If the borrower, security provider or guarantor were to become insolvent, the main risk for the lender would probably be the fact that the enforcement of loans (vis-à-vis a debtor in bankruptcy), guarantees (vis-à-vis a guarantor in bankruptcy) and security interests (eg, in the case of bankruptcy of the legal or natural person that provided the security interest, such as a pledgor) would typically run through bankruptcy proceedings. In cases where the lender has the right to an out-of-court sale of collateral, however, such lender would retain its right to an out-of-court sale, even after the commencement of bankruptcy proceedings against the pledgor.

Such sales in bankruptcy proceedings may take a considerable length of time (depending on the bankruptcy administrator and various circumstances), and the cost of the proceedings and sale may be significant. Lenders should therefore be aware of their responsibilities and duties and the procedure in relation to, inter alia, the registration of claims, rights of separate settlement and other rights, and the monitoring of publications in the bankruptcy proceedings, in order not to make their position worse and in order not to lose their rights.

One of the risks of insolvency is the possibility of claw-back in relation to the actions of an insolvent debtor.

Also, breaches of corporate law rules on upstream support may result in the invalidity of granted guarantees or security. Therefore, lenders should take precautions to make sure that the guarantees and security they are taking are valid and fully effective.

Although not specifically regulated (apart from public-private partnerships or PPP), project finance is often discussed but rarely used in practice in Slovenia. Limited recourse project finance is more common than proper non-recourse project financing. In recent years, the energy sector has witnessed the strongest increase in project financing.

PPPs are still not at the desired level in Slovenia, despite the Public-Private Partnerships Act being in force since 2007. The Act allows for various forms of public-private partnerships based on a contractual or corporate structure. In the last couple of years, PPPs have been growing at the municipal level, especially for transit projects. However, the regime is still plagued by the administrative burden and negative public perception of PPP projects as being corrupt. Moreover, the 2007 Act is starting to show its age and there is talk about modernising the legislative framework.

A typical project finance transaction does not involve any specific government approvals. Infrastructure PPPs are regulated separately and requirements such as, inter alia, the governing law and the language of the documentation apply.

The Ministry of Infrastructure is in charge of transport and energy infrastructure.

The Energy Agency is the national regulatory authority of the Republic of Slovenia, which directs and supervises electricity and gas energy operators and carries out tasks regulating energy operators' activities in the field of heating, etc.

At the primary legislative level, mining (including oil and gas extraction) is regulated by the Mining Act (Zakon o rudarstvu), while energy is regulated by the Energy Act (Energetski zakon).

Typically, a limited liability company is used as the project vehicle, with key matters being agreed in its articles of association and shareholders’ agreements. Funding of the project company is often on an equity and limited debt recourse basis. Foreign and Slovenian investors are generally subject to the same restrictions.

Slovenia is a party to the Energy Charter Treaty and several bilateral investment treaties.

Government project financing is done via national budget finances. For other projects, bank financing is most typical. Projects bonds are not popular due to the inactivity of the high-yield market.

Natural resources do not play a significant role in Slovenian project finance transactions. There is currently an ongoing hydrocarbons exploration project in the north-east of Slovenia, however, which was recently the subject of an investment dispute against Slovenia.

Environmental, health and safety laws apply regardless of the nationality of the investors. Slovenia has similar environmental laws and standards in place as those in force throughout the EU. The main relevant bodies are the Ministry for the Environment and Spatial Planning and the environmental inspectorate. Depending on the project in question, other bodies may also be involved in the process.