Chambers Global Practice Guides: Banking & Finance 2021 Lithuania – Trends & Developments

2021 - 11 - 12
Article by: Eva Suduiko

In 2020, the banking and finance market was busy dealing with the unprecedented shock of the COVID-19 pandemic. Although the pandemic is still ongoing and some businesses are still dealing with its consequences, this year the market is focusing on new initiatives or on initiatives that were set aside in 2020. These include searches for additional financing tools, the development of capital markets, and greater attention on sustainable (green) finance. These trends are reviewed below, alongside some important regulatory developments in the banking and finance area (including anticipated changes to the regulation of pledge/mortgage instruments).

Increasing Significance of Alternative Financing

Due to banks tightening lending conditions, alternative financing was already a hot topic before the outbreak of COVID-19. The need for alternative financing sources remains relevant as, according to a recently published study on the financing problems of small and medium-sized enterprises (SMEs) conducted by the Bank of Lithuania (the Lithuanian supervisory authority) and the Lithuanian Competition Council, portfolios of credit institution loans to enterprises started to contract in 2019, and this trend intensified further in 2020. The banks tend to evaluate certain sectors more cautiously (real estate, construction, etc), showing lower risk appetite in general. As a result, enterprises are searching for alternative funding from credit unions, crowdfunding platforms or the capital markets, with borrowing increasing by 40%, 92% and 29%, respectively, in 2019.

The above-mentioned study provides certain recommendations for improving the financing possibilities of SMEs, including more targeted state aid and increasing the financial literacy and awareness of alternative funding opportunities, and invites the public to provide further proposals.

It is also worth mentioning that local businesses may currently obtain financing from the new alternative lender: the State Aid Fund for Business (the Fund), which was established in October 2020 to provide aid to medium-sized and large enterprises affected by the COVID-19 pandemic. The Fund may provide financial aid in the form of loans or investments through the acquisition of bonds, shares or hybrid instruments (eg, convertible bonds). Based on publicly available information, the Fund has taken 27 positive investment decisions and contemplated investment amounts of approximately EUR160 million, 70% of which will be invested in the form of bonds.

The Fund’s size was targeted at EUR1 billion, which had to consist of:

  • initial investment of EUR100 million by the Lithuanian government;
  • additional investment of EUR400 million by the Lithuanian government, to be raised by issuing bonds with a state guarantee; and
  • additional investment of EUR500 million from private institutional investors.

According to publicly available information, up to date only EUR30 million of the above-mentioned EUR400 million additional investment by the Lithuanian government has been raised (bonds were issued in mid-September 2021) and the total amount of investments of the Fund by 2028 should be around EUR256 million, instead of the targeted EUR1 billion. This shows that the demand for financing by the Fund – which usually serves as a last resort to raise funding and is subject to strict terms – is not so great, and alternative instruments to boost the domestic market need to be investigated.

Enhancing the Capital Markets

To support the development of the Lithuanian capital markets and provide additional financing tools for businesses, the following measures have been or should be taken in the short term.

Compensation of costs for the issuance of securities by SMEs

As of the beginning of August 2021, national promotion institution UAB Investicijų ir verslo garantijos (INVEGA) may implement a new EUR1 million measure to compensate for the costs of issuing corporate shares and bonds. This measure will help micro, small or medium-sized enterprises to list their securities on the Nasdaq Vilnius stock exchange and the alternative market “First North”. INVEGA will compensate 50% of costs incurred in Lithuania in relation to:

  • the preparation and publication of the prospectus, information memorandum and company description;
  • the determination of the applicant’s business strategy and business structure, advertising and company presentation meetings with investors;
  • the due diligence process (financial, tax and legal analysis);
  • the services of external consultants for the transformation of the company into a public limited company;
  • the services of a certified adviser (in the case of the alternative “First North” market); and
  • legal, financial, tax, audit and investment consultancy services.

The maximum amount that INVEGA will be able to reimburse per applicant will be EUR100,000 in the case of the issuance of shares and EUR50,000 in the case of the issuance of bonds.

INVEGA will reimburse the costs if the securities are listed within one year of its decision to declare the issuer eligible for the compensation (this term may be prolonged up to two years) and, in the issuance of shares, if the issuer raises at least EUR500,000 in the stock exchange.

Preparing market for the activities of special purpose acquisition companies (SPACs)

In July 2020, the Bank of Lithuania (the Lithuanian supervisory authority) announced that it intends to prepare necessary conditions for the operation of SPACs – ie, publicly traded investment vehicles that raise funds via an IPO in order to complete a future acquisition. It is anticipated that the required updates to the laws, which include amendments to the Lithuanian Companies Law and the Nasdaq Vilnius Listing Rules, should be ready by the end of this year. According to unofficial explanations, the Nasdaq Vilnius Listing Rules should, in principle, follow the requirements for SPACs set by the Nasdaq Nordic Listing Rules, which have been in force since the beginning of this year. Although this is a novelty in Lithuania, some corporates are starting to explore the options of a SPAC (even though the legislative changes have not yet been prepared), which are increasingly popular in European markets.

Greater Attention on Sustainable Finance

Lithuania is becoming more active in green finance and, taking into account its success in becoming a regional fintech centre, has declared ambitions to become a leader of sustainable finance in the Baltics. On the other hand, the Lithuanian green finance market is still in an early stage compared to more developed countries, and the initiative to become a regional hub in the Baltics needs to be supported by effective development of a favourable environment for both business and investors.

Recent activities in the area of green finance include the following.

Green bonds

Lithuania is one of the leading countries to have issued green bonds – it was the first in the Baltics, the third in Europe and the seventh in the world. The initial issue of EUR20 million government bonds in 2018 was tapped twice to reach a total amount of EUR68 million in 2020.

There have been several issues of corporate bonds as well. In particular, state-owned company Lietuvos Energija UAB (currently Ignitis Grupė AB) issued bonds in a total amount of EUR900 million, and privately owned company Auga group AB issued a first tranche of bonds in the amount of EUR20 million.

There are some contemplated issuances of green bonds as well. State-owned railway company Lietuvos geležinkeliai AB (LTG), has recently announced its intentions to enter the capital markets. According to publicly available data, LTG will aim to issue green bonds of at least EUR300 million and will use their proceeds to finance green projects.

Green banking products

In 2020, one of the banks operating in Lithuania launched green loans for businesses. In spring 2021, another bank announced that it is preparing sustainability-linked loans to offer to the market. Although these types of loans are already well known in foreign markets, they are still novel in Lithuania.

Investment into sustainable businesses

It is increasingly common for public and private entities to take environmental, social and governance (ESG) factors into account before deciding to invest. For example, one of the objectives of the recently established State Aid Fund for Business is to focus on green and sustainable investments. Furthermore, national promotion institution INVEGA has officially declared that it is already paying attention to how companies manage their environmental impact before making any investments.

National action plan for green finance

In 2019, an EU-supported project was launched in Lithuania to promote sustainable (green) investment. In co-operation with the EBRD, experts will prepare a country action plan on green finance. As one of the milestones in this project, in April 2021 the experts prepared the draft Assessment and Impact Report, which maps the current legal and regulatory framework and identifies the main gaps delaying the development of green finance. It also provides detailed recommendations to create an environment that is favourable to sustainable investments, promote the development of sustainable instruments, and involve the public in the implementation of sustainable development goals.

Legislative Developments

Upcoming changes to the regulation on security interest perfection and release

Certain amendments relating to Lithuanian law-governed pledges and mortgages will enter into force on 1 January 2022. The main changes are briefly described below.

No separate register for mortgages and pledges

According to Lithuanian law, mortgages and non-possessory pledges (ie, where the collateral remains with the owner or is transferred to a third party) have to be registered with the Lithuanian Mortgage Register. In certain cases, the fact of the mortgage/pledge is additionally registered with the Lithuanian Real Estate Register.

Following changes to the laws, the Lithuanian Mortgage Register will be liquidated. As of 1 January 2022, existing mortgages/pledges will be transferred and new mortgages/pledges will be registered in either the Lithuanian Register of Contracts or the Lithuanian Register of Real Estate.

The following types of security interests will be registered in the Lithuanian Register of Contracts, which will be renamed the Register of Contracts and Restrictions (hereinafter, the Register of Contracts):

  • pledges of movable property and property rights (except for pledges of property rights related to real estate);
  • mortgages over ships and aircraft, which are subject to mandatory registration;
  • enterprise mortgages; and
  • conditional mortgages.

The Lithuanian Real Estate Register will be used to register these security interests:

  • mortgages of real estate (except for mortgages that are subject to registration with the Register of Contracts, as described above); and
  • pledges of property rights related to real estate.

More flexibility in pledge perfection

Under current Lithuanian law, a security right in movable property and rights is created by a pledge agreement. If the collateral is transferred to the possession of the creditor (possessory pledge), a simple written form agreement is sufficient. If the collateral is transferred to the third party or remains with the pledgor (non-possessory pledge), the pledge agreement has to be certified by the notary and registered with the Lithuanian Mortgage Register. Registration of pledge agreements with said register is carried out by the notaries, who fill in relevant requests, provide all data to the Lithuanian Mortgage Register and communicate with its representatives.

As of 1 January 2022, the following main changes will be introduced:

  • The possibility to register a possessory pledge with the Register of Contracts. For the time being, this type of pledge is not registerable with the existing Lithuanian Mortgage Register, and a mere transfer of the collateral to the creditor’s possession serves as a disclosure of security interest. Once the anticipated changes to the law come into effect, it will be possible to additionally disclose the fact of the creation of the possessory pledge in the Register of Contracts.

It is anticipated that the above-mentioned registration could be achieved in two ways: the parties to the pledge agreement may submit a registration request directly to the Register of Contracts, or they may create the possessory pledge by using relevant IT tools, where such a pledge will subsequently be registered with the Register of Contracts.

  • The possibility of legal entities entering into a non-possessory pledge without a notary’s involvement. As mentioned above, any non-possessory pledge transaction currently has to be certified by a notary and registered with the existing Lithuanian Mortgage Register. The notary confirms the validity of the pledge (checks title to and encumbrances over collateral, checks the capacity and authority of the parties, makes sure that the terms of the pledge comply with Lithuanian law requirements, etc). Failure to comply with a notarial form requirement makes the pledge invalid. From 1 January 2022, notarial certification of a pledge will not be mandatory, where the pledge agreement is entered between the parties being legal entities. Such pledge will be created by using relevant IT tools and thereafter registered with the Register of Contracts so that it is valid against third persons.

Although the above-mentioned changes will come into effect shortly, it is not yet clear how entering into pledge agreements by using IT tools will work in practice. The explanatory notes to the draft law indicate that, in such cases, the parties should be able to use the template pledge agreements available at the self-service portal of the Register of Contracts. These templates have not yet been published. It is also not clear whether it will be possible for the parties to introduce amendments to such templates or whether such amendments will result in the need to formalise the non-possessory pledge at the notary’s office.

According to the regulations of the Register of Contracts, this register will not verify the validity of pledges created via IT tools (this function is now performed by the notary). Accordingly, even though legal persons will be able to create pledges without notarial certification, they might be willing to proceed with notarial certification of the pledge in order to have more legal certainty.

Simplified procedure for the release of mortgages and pledges

According to Lithuanian law, the security interest (mortgage/pledge) is released once the secured obligation is duly performed or discharged, or if other grounds set out in the law exist. However, such release does not automatically result in the removal of the mortgage/pledge from the Lithuanian Mortgage Register. In order to remove it from the register, the notary has to be provided with a relevant request and supporting documents (eg, creditor’s confirmation about the discharge of the secured obligation, if the request is submitted by the pledgor or debtor), and then checks the documents and submits them to the Lithuanian Mortgage Register.

As of 1 January 2022, the request to remove the mortgage (where the secured obligation is duly performed or discharged otherwise) or pledge may be submitted either through the notary (as is possible now) or by using the relevant IT tools. If the request is submitted by the pledgor or debtor, the creditor has to provide confirmation about the security release via the relevant IT tools.

Securitisation and covered bonds law to be adopted shortly

The initial draft Law on Securitisation and Covered Bonds was prepared and presented for public consultation in July 2018. However, due to a number of remarks received from the market, and taking into account the most recent EU developments and implementation of the pan-Baltic covered bond aspects (ie, to ensure similarity of laws in the Baltic states in all material ways and the ability to use assets in all three countries), the draft needed significant adjustments. The new draft has been prepared just recently, in mid-August 2021. Although the final wording of the draft is not yet ready, the Law on Securitisation and Covered Bonds is planned to be adopted by the end of 2021. The current draft foresees that the Law on Securitisation and Covered Bonds should enter into force as of 8 July 2022.

Once adopted, the Law on Securitisation and Covered Bonds should provide an opportunity for credit institutions to become more active in the capital markets, and to have an additional source of funding. The recent successful inaugural issuance of EUR500 million covered bonds and other subsequent issues of covered bonds by Luminor bank (a bank established in Estonia and having branches in Lithuania and Latvia) demonstrates that this type of financial instrument is of high interest for the investors. The above-mentioned law should also set a clearer regulation for the securitisation process for credit and financial institutions.

Contributed by: Eva Suduiko, Partner and Co-Head of Banking and Finance Practice Group