Category: Austria

A law implementing, among others, Directive (EU) 2019/878 amending Directive (EU) 2013/36 (Capital Requirements Directive – CRD V) has been passed by the Austrian Parliament and Federal Council, and has been published in the Federal Gazette. CRD V (as part of the package together with Regulation (EU) 2019/876 amending Regulation (EU) 575/2013 – CRR II) aims to close regulatory gaps in the existing financial regulatory framework and, while adding prudential measures as to capital requirements, requires certain entities to comply with new licensing obligations.

Introduction

On 19 May 2021 the Austrian Parliament passed a law implementing, among others, the Capital Requirements Directive – CRD V (which, together with CRR II, forms a significant reformation of the existing CRR/CRD IV regime and is also referred to as Basel IV). After passing the Federal Council on 27 May 2021, the law was published in the Federal Gazette on 28 May 2021, as the last step before its entry into force.

The law addresses a variety of European acts to be implemented into national law, inter alia, also implementing Directive (EU) 2019/879 amending Directive (EU) 2014/59 (BRRD 2), i.e. entailing specifications around determining minimum requirements for own funds and eligible liabilities (MREL), introducing the concept of resolution entities and resolution groups and endowing the resolution authority with extended moratorium powers. Moreover, it implements provisions (set by Regulation (EU) 2019/2115) incentivising investments and liquidity in SME growth markets, inter alia, by reducing administrative (and compliance) burden for issuers of financial instruments.

However, the act in particular serves to implement CRD V, which is set to further improve and harmonise the European financial supervisory framework.

The specifics:

1. Licensing Requirements for (mixed) financial holding companies

Certain financial holding companies and mixed financial holding companies will become subject to a new licensing requirement under the Austrian Banking Act (BWG). By that, CRD V aims to improve supervisory compliance within banking groups on a consolidated basis, for which the financial holding company is responsible (unless designated otherwise by the Austrian Financial Markets Authority (FMA), see e.g. the exceptions below).

(Mixed) financial holding companies will be required to provide the FMA with certain information, inter alia, detailing the organisation and allocation of tasks within the group, and whether they are suitable shareholders of credit institutions held as subsidiaries. Ultimately, a (mixed) financial holding company (and its management) needs to be able to ensure regulatory compliance with capital requirements, but also to prevent conflicts within the group and to ensure enforcing or implementing group wide policies and adequate risk-management (as may be set by the parent financial holding company). Certain (mixed) financial holding companies (e.g. if not participating in group management or financial decisions and if the main business activity is limited to the acquiring of participations in subsidiaries) can be exempt from the licensing requirement if the (mixed) financial holding company does not constitute a resolution entity as part of a resolution group (as provided for under BRRD 2). In such a case, however, another suitable subsidiary credit institution within the group must have been validly designated to ensure regulatory compliance on a consolidated basis.

(Mixed) financial holding companies subject to the licensing requirement need to submit an application to their consolidating supervisory authority; while this will often be the FMA for Austrian (mixed) financial holding companies, the framework allows for certain constellations in which this could be a non-Austrian authority. The FMA is granted additional supervisory rights regarding (mixed) financial holding companies.

2. EU intermediate financial holding requirement

CRD V aims to improve the supervision of EU credit institutions whose parent institution has its primary seat outside of the EU, therefore being part of a third-country group. To achieve this all EU bank subsidiaries of a third-country group with a certain total consolidated balance sheet within the EU shall be bundled within/under one consolidating entity, a single EU intermediate financial holding. The requirement of EU intermediate financial holding is aimed at assessing and supervising the (consolidated) capitalisation of a third-country group’s subsidiaries operating in the EU more easily. This requirement may require a restructuring of EU bank operations of third-country groups.

3. Pillar 2 amendments

The CRD V implementing law is set to increase transparency of regulatory supervisory procedures within the context of Pillar 2 supervision. In this context the catalogue of risks, which are to be assessed in the context of the Internal Capital Adequacy Assessment Process (ICAAP) by credit institutions themselves and by the regulators (generally FMA and European Central Bank) in the context of the Supervisory Review and Evaluation Process (SREP), is adapted. Systemic risks are no longer included and will be addressed by the macroprudential framework (instead). This is expected to prevent multiple addressing of risks with the same capital.

The law also differentiates between supervisory expectations (Pillar 2 guidance (P2G)) addressing losses from advanced stress scenarios, and additional capital requirements (Pillar 2 requirement (P2R)), which is to address all other risks (incl. risks arising from baseline stress testing) which are not (sufficiently) addressed by Pillar 1 measures (i.e. capital structure). Non-compliance with a supervisory expectation may lead FMA to impose sanctions.

4. Capital Buffers and macroprudential instruments

Not only does the CRD V implementing law centralise statutory measures around microprudential supervisory instruments such as capital buffers, or macroprudential instruments or instruments combining both (such as restrictions on distribution or combined buffers), but also aims to prevent credit institutions using Pillar 2 measures to address systemic or macroprudential risks, thus aiming to prevent a double allocation of capital requirements to address (the same) risk. While the competence of the FMA to issue ordinances is reduced in cases where methods to address macroprudential risk are already regulated on a European level, the act also provides for more flexibility: on the one hand, the threshold of capital buffer requirements which can be imposed under the Austrian framework is increased before having to be greenlighted by the European Commission; on the other hand different capital buffer requirements may be mandated cumulatively (Additivität). When not complying with capital buffers in relation to the leverage ratio (as set out in CRR II), distributions may be restricted by the regulator.

5. Remuneration and governance arrangements

In accordance with CRD V, the law defines additional categories of employees whose work has a material impact on the risk profile of the credit institution. Beside members of the supervisory and managing board and staff of the senior management (i.e. Board-1), other
staff members with managerial responsibility over the institution’s control functions or material business units, not yet covered by the framework, qualify as well. As a consequence, when laying out its remuneration policy incl. salary and voluntary pension payment for these categories of staff, the credit institution is required to adhere to the regulatory limitations (e.g. deferral of payments or retention requirements). Certain alleviations may apply to ‘small’ CRR institutions with a certain maximum balance sheet total and employees not exceeding a certain salary.

Moreover, when concluding certain legal transactions with its members of the managements and/or related parties (reaching a certain amount), a credit institution is subject to strict regulatory and diligence requirements. In addition to the already existing framework, a credit institution will now be required to document data on loans granted to members of the managing or supervisory board and their affiliated persons. This also applies if the loan is granted to a business enterprise in which one of these persons holds a stake in the share capital or voting rights (of 10 % or more), or holds a managing (or supervisory) position (incl. senior management position, Board-1), or may exert material influence.

Conclusion:

The CRD V implementing law builds on supervisory and regulatory practice of the last years. It aims to close a range of regulatory gaps, among others, by extending supervisory compliance within a consolidated banking group to (mixed) financial holding companies through introducing licensing requirements to certain of them and by requiring third-country groups to consolidate their EU banking operations under a single EU intermediate holding company. The law harmonises the provisions centered around capital buffers and macroprudential instruments, but also addresses potential double allocation of systemic and macroprudential risk by adapting risks to be addressed by Pillar 2 measures. Moreover, the CRD V implementing law will also further refine the remuneration framework.

By Henri Bellando, Associate, and Matthias Pressler, Counsel, Schoenherr

Herbst Kinsky has advised property technology startup Propster on its EUR 3 million seed financing round led by Austrian AWS Grunderfonds, Axeleo from France, and Pi Labs from the UK, joined by new and existing private investors. AWS was advised by Wiedenbauer Mutz Winkler & Partner.

Launched in 2017 as Sonderwunsch Meister, the Vienna-based property technology company now operates under the Propster brand and offers a platform that enables buyers, tenants, and investors to purchase, configure, and manage real estate online. 

Herbst Kinsky’s team was led by Attorney Felix Kernbichler.

The WMWP team was led by Partner Paul Koppenwallner.

Herbst Kinsky and Sidley Austin have advised ESIM Chemicals on the spin-off and sale of its Intermediates & Specialty Chemicals division to Vertellus and Pritzker Private Capital. Binder Groesswang advised the buyers on the transaction.

Financial details were not disclosed. The deal is expected to close in the second half of 2021.

ESIM Chemicals is a supplier of agricultural and crop protection chemicals, intermediates, and maleic anhydride derivatives. Vertellus is a supplier of specialty chemical products. Pritzker Private Capital is a family-owned private equity firm.

Herbst Kinsky’s team included Lawyers Christoph Wildmoser, Wolfgang Schwackhofer, Alexander Weber, Sonja Hebenstreit, Valerie Mayer, Matthias Konrad, Christoph Ludvik, and Tanja Lang.

Sidley’s Munich-based team included Lawyers Jan Schinkoth, Markus Feil, Andreas Steiger, Sebstian Walczak, Stefan Buhrle, and Folko Moroni.

Binder Groesswang’s team was led by Partners Thomas Schirmer and Philipp Kapl and included Senior Associate Wolfgang Guggenberger and Associates Felix Fuith and Pia Havel.

The following article addresses a random first choice of civil law, contractual aspects to be precise, which the authors think are worth considering before you buy (or sell) your first NFT. However, given the novelty of the underlying technology, there is room for dissenting opinions.

1. Random topic 1: Which law applies?

If a potential NFT collector deep-dives into the world of NFTs, they will hardly ever stick to their home territory. NFTs are usually traded on online platforms. Purchasers and sellers are frequently from different countries. Payment might even be demanded in cryptocurrency rather than in the currency of a state. Thus, the agreement that is about to be concluded when purchasing an NFT is “international”. In a preliminary step, the applicable law should be assessed.

The general rules

Private international law deals with the question of which national legal system must be applied to an international dispute. The purpose of conflict of laws rules is clear: in disputes with a “foreign connection”, a judge is not allowed to choose any discretionary principles to decide this matter but has to apply the laws of a specific legal system. To add to the complexity, a distinction must be made between the laws of obligations (Schuldrecht) and property law (Sachenrecht) aspects of the case.

In Austria, this question is primarily answered either by the EU’s “Rome I” Regulation or by the Austrian International Private Law Act (“IPRG”). In terms of the laws of obligations (Schuldrecht), applying those rules (most likely) leads to the law of the country where the seller (for purchase agreements) or the service provider (for service agreements) resides.

In terms of property law (Sachenrecht), the general catch-all provision¹ of the IPRG applies. According to it, the “closest relation to the matter” decides the question of which law is applicable. In practice this assessment is naturally quite difficult, in particular in view of the blockchain’s decentralised design.

The good news is that there sometimes is an easy way out, because instead of those complex rules the parties are also free to agree on the applicability of a specific law. Such a choice of law clause is frequently included in general terms and conditions (GTC). However, this freedom to choose the law meets its limits in the consumer protection area.² If a consumer concludes the agreement, any national provisions of their country of residence favouring the consumer overrule any “chosen” provisions provided that the entrepreneur (i) pursues his professional or commercial activity in the State where the consumer has his habitual residence; or (ii) directs such activity in any way to that State or to several States, including that State, and the contract falls within the scope of this activity.

In summary, a choice of law seems useful when it comes to NFT transfers. Before any transaction is made, if and which GTC are concluded and what those GTC say about the applicable law should be carefully checked.

2. Random topic 2: Speaking of consumer protection…

2.1. …which agreement is concluded?

In addition to the above, the specific provisions of the Austrian Distance Selling Act (Fern- und Auswärtsgeschäfte-Gesetz) might apply. The Distance Selling Act (and the underlying EU directive, Directive 2011/83/EU) regulates certain aspects of distance, off-premises and on-premises agreements between consumers and traders. Distance selling seems obvious. Pursuant to the prevailing legal opinion, the Distance Selling Act covers purchase agreements (Kaufverträge), exchange agreements (Tauschverträge) and service agreements (Dienstleistungsverträge). Thus, if a trader sells an NFT to a consumer, the Distance Selling Act will be applicable, irrespective of whether the payment is made in cryptocurrency (which would indicate the conclusion of an exchange agreement) or in fiat money (which would indicate the conclusion of a purchase agreement). One could even argue that the concluded agreement is a service agreement, since the NFT is not really transferred but just the allocation of the ownership is changed by adding a new transaction in a block to the blockchain. A service agreement within the meaning of the Distance Selling Act is defined as “any agreement other than a purchase agreement under which the trader supplies or undertakes to supply a service to the consumer and the consumer pays or undertakes to pay the price thereof“. The seller of the NFT arguable undertakes to supply the service of “triggering” the change of ownership in the blockchain. The consumer pays the price.

2.2. …how to deal with withdrawal rights?

The Distance Selling Act aims at ensuring transparency of information, in particular pre-contractual information that the consumer will be provided with. When selling NFTs, the seller is advised to double-check those transparency obligations. The Distance Selling Act further ensures withdrawal rights of consumers. This topic requires specific attention, because once an NFT is sold, the allocation of the NFT to the purchaser is recorded in the blockchain. Since the blockchain is designed to be irreversible, withdrawal rights might cause some issues (even though there might be some workaround options).

In general, under the Distance Selling Act, a consumer usually has the right to withdraw from a distance agreement or off-premises agreement without giving a reason within (at least) 14 days. However, the withdrawal right has some limits. With respect to an NFT purchase, two exceptions could potentially be relied on:  

• there is no right to withdrawal under the Distance Selling Act with respect to “the supply of goods or services for which the price is dependent on fluctuations in the financial market which cannot be controlled by the trader and which may occur within the withdrawal period“; and

• there is also no right to withdrawal under the Distance Selling Act with respect to “the supply of digital content which is not supplied on a tangible medium if the performance has begun with the consumer’s prior express consent and his acknowledgment that he thereby loses his right of withdrawal“.

Let’s have a look at the first exception: the consumer has no right of withdrawal in distance agreements for goods or services whose price depends on fluctuations in the financial market beyond the trader’s control and which may occur within the withdrawal period. On first glance, this exception seems suitable, since NFTs are traded and there is a certain market fluctuation beyond the trader’s control.

However, closer scrutiny should be given to the term “goods” before jumping to a conclusion: goods are not defined in the Distance Selling Act, but in the underlying EU Directive as “any tangible movable item […]” with the exception of items sold based on compulsory execution or other judicial measures. Water, gas and electricity are also deemed to be goods within the meaning of the Directive if they are offered for sale in a limited volume or in a certain quantity.

Since an NFT is not a moveable tangible thing, but rather an intangible thing, one could try to argue to exclude the consumer’s withdrawal rights by way of analogy to investment gold, precious metals or even to energy. Alternatively, the above-mentioned qualification of the agreement as a service agreement could be reconsidered. Regarding the agreement of the “volatile” NFT as a service agreement would allow the consumer’s right of withdrawal to be excluded. This conclusion could be underpinned with teleological considerations. The aim and purpose of the specific provision of the Distance Selling Act (Sec 18 [2] [2] Distance Selling Act, Art 16 [b] Directive 2011/83/EU) is to prevent the right of withdrawal from being misused as an instrument for market speculation.

The Distance Selling Act contains a second exception which might be applicable: According to Section 18 (1) (11), the consumer has no right of withdrawal from distance agreements for “the supply of digital content which is not supplied on a tangible medium if the performance has begun with the consumer’s prior express consent and his acknowledgment that he thereby loses his right of withdrawal.” Compared to exception no. (i), this provision has considerable disadvantages for the seller, because it does not exclude the possibility of withdrawal ex ante, but only from the beginning of the performance of the agreement/delivery. Furthermore, the right of withdrawal is only excluded if the trader fulfils certain strict requirements: (i) prior express consent of the consumer; (ii) the consumer’s knowledge of the loss of the right of withdrawal; (iii) the trader commenced the delivery before the expiry of the withdrawal period; and (iv) the provision of a copy or confirmation of the concluded agreement (pursuant to section 7 (3) Distance Selling Act). Simply put, relying on this exception bears the risk that consumers might successfully claim their withdrawal rights provided that the trader does not fulfil one of those requirements.

3. Conclusion

As these examples have shown, transactions must be analysed in their “new” technological but “classic” legal contexts. This analysation process is the lawyer’s playground. Since we only touched the tip of the iceberg of unresolved legal questions with this article, please stay tuned!

¹ Specific provisions of the IPRG address, e.g. the transfer of movable tangible property. However, looking at an NFT as an “intangible thing” (unkörperliche Sache) the applicability of this specific provision fails.

² If a natural person concludes an agreement for non-professional purposes (as a consumer) with another (natural or legal) person in the exercise of their professional activity (as a trader).

By Veronika Wolfbauer, Counsel, and Peter Ocko, Associate, Schoenherr

Dorda, working with lead counsel Kirkland & Ellis, has advised Boston-based growth equity fund Guidepost as lead investor on the USD 35 million investment in Austria’s Tractive GmbH. 42Law reportedly advised Tractive on the deal.

Tractive, which is a developer of GPS trackers for dogs and cats, will use the investment to expand and further develop its market presence in Europe.

Dorda’s team consisted of Partners Christian Ritschka, Bernhard Rieder, Tibor Varga, and Nino Tlapak, Attorneys Bernhard Heinzl, Elisabeth Konig, and Lisa Kulmer, and Trainee Lawyers Mike Schaunig, Gunther Posch, Michael Hardt, and Anneliese Keinrath.

The Kirkland & Ellis team included Boston-based Partner Christian Atwood and Munich-based Partner Mark Aschenbrenner and Associate Samuel Frommelt.

The Vienna office of Schoenherr has advised joint lead managers Commerzbank Aktiengesellschaft, Credit Agricole Corporate and Investment Bank, DekaBank Deutsche Girozentrale, Landesbank Baden-Wurttemberg, and Raiffeisenbank International AG, on the placement of EUR 500 million 0.5% mortgage covered notes due 2041 issued by Raiffeisen-Landesbank Steiermark AG. Wolf Theiss reportedly advised the issuer.

According to Schoenherr, “the notes were successfully issued under Austrian law on May 27, 2021 under Raiffeisen-Landesbank Steiermark AG’s Notes Programme (Angebotsprogramm fur Schuldverschreibungen) and placed with professional clients and eligible counter-parties.” Furthermore, according to the firm, the notes have a denomination of EUR 100,000 each and have been admitted to trading on the Vienna Stock Exchange.

Schoenherr’s team consisted of Partner Christoph Moser and Associates Angelika Fischer and Hubertus Forsthuber. 

Brandl Talos has advised Riddle&Code FinTech Solutions on its registration as a virtual currency service provider with the Austrian Financial Market Authority.

Riddle&Code FinTech Solutions is a developer and provider of hardware and software stacks that empower funds, crypto exchanges, and regulated financial institutions to manage all aspects of key generation, custody, AML, regulatory compliance, and token management.

According to Brandl Talos, Riddle&Code is focused on the tokenization of industrial services. According to the firm, “following successful registration, Riddle&Code and its Token Management Platform — which have already been fully audited and accepted by Switzerland’s regulator FINMA — are now licensed to safeguard and issue payment and utility tokens.”

The Brandl Talos team was led by Associated Partner Raphael Toman.

CMS Banking & Capital Markets specialist Philipp Mark has been made a Partner at the firm.

According to CMS, “in his more than ten years at CMS, Philipp Mark has advised Austrian and internationally active banks, MiFID firms, payment and e-money institutions as well as various other companies, including numerous high-profile mandates, on corporate and regulatory aspects. His core areas also include, above all, advising on EU-wide regulatory initiatives and requirements in connection with payment services. This is an absolute growth market that will continue to be of great importance in the future.” 

Mark completed his law and postgraduate studies at the University of Vienna.

 

The increasing use of electric vehicles (EVs) in Austria means the supporting infrastructure requires constant development. The Austrian federal government program 2020-2024 envisages expanding the Austrian network of charging points for alternative fuels as an essential pillar of its drive towards implementing sustainable mobility solutions. In September 2020, the Austrian government followed through with its agenda by proposing the Austrian Renewable Energy Expansion Act (Erneuerbaren-Ausbau-Gesetz, EAG), which includes an amendment of the Austrian Act on Uniform Standards for Alternative Fuels Infrastructure Developments (Bundesgesetz zur Festlegung einheitlicher Standards beim Infrastrukturaufbau für alternative Kraftstoffe, BGFS). The EAG has recently been approved by the government and is now subject to discussions/approval by the Austrian parliament. The cornerstone of the amendment, which is expected to enter into force in the second half of 2021, involves establishing a public charging point register so that EV drivers can locate publicly accessible charging points when they need them and obtain other relevant information.

Given the rapid development of and innovation in electric mobility, instituting appropriate infrastructure measures is becoming ever more important. With this step forward, the Austrian government has given the starting signal for accelerating the implementation of a comprehensive Austrian charging point network.

Status Quo

In Austria, electrifying road traffic has been identified as one of the most important contributions the country can make to reaching the 2030 EU climate targets. Recent measures implemented on the basis of the Austrian national “Clean Energy in Traffic” policy framework (derived from Directive 2014/94/EU on the deployment of an alternative fuels infrastructure, aimed at achieving a resource-efficient transport system and reducing fossil fuel use), such as increasing public subsidies, exempting certain taxes, and reducing the cost of the private or commercial purchase of alternative-fuel vehicles and charging points, triggered a significant demand for EVs in Austria. The Austrian Statistics Office reports that the number of new EVs registered in Austria increased by 391% in 2020, to a total of over 60,000 (compared to approximately 5 million vehicles with combustion engines). 

In line with Directive 2014/94/EU, the Austrian legislator introduced the BGFS, which took effect in July 2018. The BGFS introduced binding rules on constructing and operating publicly accessible charging points for vehicles with alternative fuel systems (including electricity, hydrogen, biofuels, synthetic and paraffinic fuels, natural gas, and liquefied petroleum gas). The BGFS thus sets out the technical requirements for publicly accessible charging points and alternative fuel stations, enables charging point operators to supply electricity from third-party energy producers, and obliges operators to let users charge their vehicles without entering into a continuing contractual relationship (on-demand charging).

Establishment of an Austrian Charging Point Register

Although not mandated on a European basis, Austria had already paved the way for a public charging point register in 2018 by requiring the Austrian Energy Control Authority (“E-Control”) to develop one. In November 2019, E-Control presented the beta version of its public charging point register (Ladestellenregister). Finally, by passing the EAG, the Austrian legislator will provide the legal basis for the register’s further deployment, maintenance, and operation. Subject to details still to be determined by the Austrian Climate Change Minister, the charging point register shall contain certain user-relevant information on publicly accessible EV charging points (including location, technical parameters, and the price for punctual charging) that must be made available to users in an open and non-discriminatory manner. To ensure the completeness and accuracy of the data, operators must submit relevant information about their publicly accessible charging points directly to the charging point register and update such information on a regular basis. If an operator discontinues a publicly accessible charging point, they must report it within two weeks. E-Control has to implement further measures to improve price transparency of publicly accessible EV charging points, which are still to be determined.

Outlook

With the upcoming BGFS amendment, the Austrian legislator has taken a further step towards the mobility turnaround and a climate-neutral society. Based on the rather narrow scope of the rules, the new Austrian charging point register will, however, also raise interesting legal and practical questions for the operators of publicly accessible charging points in Austria. These include, for instance, questions regarding the addressee of the obligations targeted at the operators of publicly accessible charging points (i.e., is it the landowner, the lessee, or the technical operator?), the inclusion of charging points other than EV charging points (e.g., hydrogen, biofuels), the prevention of discriminatory treatment of operators, and the scope and form of data to be submitted to the register. The answers to these and other questions will need to be sought in practice.

By Thomas Hamerl, Partner, and Georg Gutfleisch, Attorney at Law, CMS Vienna

This Article was originally published in Issue 8.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The Vienna Stock Exchange was founded in 1771, during the reign of Empress Maria Theresa. Initially launched as a market for state-issued bonds – only bonds, bills of exchange, and foreign currencies could be traded – it expanded rapidly. In 1818, the Austrian central bank – which had itself been founded only two years earlier – became the first joint-stock company to be listed on the exchange (and one of the first shareholders was Ludwig van Beethoven, who bought eight shares in 1819). In 1863, the Suez Canal Company had become the first foreign company to be listed on the Vienna Stock Exchange, and in 1865, there was a further foreign listing with premium bonds issued to fund Turkish railway lines (“Turkenlose”). When the Frankfurter Bankverein applied for a listing of the Turkenlose bonds on the VSE, the Exchange Chamber decided to introduce rules for the admission of foreign securities, and thus, in 1873, the “Italian bond” became the first official foreign listing by means of a formal application. In December 1997, the Vienna Stock Exchange Chamber was merged with the Austrian Futures and Options Exchange to form a new exchange operating company, Wiener Borse AG, and in subsequent years the business spectrum of the Vienna Stock Exchange broadened to include market data dissemination and index calculation as well as IT services and central securities depository services.

Now, on the occasion of its 250th anniversary, the Vienna Stock Exchange, which is owned by Austrian banking institutions and listed companies, also owns and operates the Prague Stock Exchange and lends market infrastructure to the stock exchanges of Budapest, Ljubljana, and Zagreb. Next to the Deutsche Borse Nasdaq and the ever-growing Euronext, it is perhaps the most prominent exchange in Europe.

The VSE has a market capitalization of EUR 108.18 billion, with 88 trading members (including 62 from outside Austria), and it is a market data hub for the Vienna, Albania, Banja Luka, Belgrade, Budapest, Kazakhstan, Ljubljana, North Macedonia, Prague, and Zagreb stock exchanges, as well as the EXAA Energy Exchange Austria, collecting and distributing data from these sources to market data clients. The VSE composition is 42% financials, 30% basic industries, 12% industrial goods and service, 11% utilities, 3% technology and telecom, and 1% consumer products.

And business – despite the pandemic – is good. Austria’s capital market capitalization of 2020 was higher than it was in 2018, and equity turnover in Austria grew by 11% in comparison to 2019. “The decline in valuations that followed March of 2020 was balanced by a very strong catch-up in third and fourth quarters,” says Vienna Stock Exchange CEO Christoph Boschan. “We can’t complain a whole lot. Year-on-year, the Austrian Traded Index doubled since hitting a low in March last year, when global stock markets plummeted. According to analysts, cyclical stocks saw a strong comeback with the rollout of the vaccine.”

Stocks and Bonds

Schoenherr Partner Christoph Moser avoids grandiose language, describing the Vienna Stock Exchange as “a niche, small market,” and reporting that, “it has not, unfortunately, mirrored the strong developments of the IPO markets in the US, UK, or Germany.” Moser says that the market was somewhat silent from 2011 to 2018/2019, with just a few “IPOs and other equity issuances, with some de-listings and demergers leading the pack.” Still, he says, “in 2019, we saw some IPOs in Vienna, like Marinomed Biotech and Frequentis, that indicated an upwards trend in equity capital markets.” Moser says that this was set to be the case for 2020, with some equity projects in the pipeline, but the market ebbed in early spring with the onset of the pandemic.

“Traditionally, Austria never really had strong activity in equity capital markets, due to a lack of eligible issuers,” agrees Wolf Theiss Partner Claus Schneider, and he notes that “there were no notable new issuances and very few capital increases last year.” Still, he points to another source of activity at the VSE. “During the pandemic, we saw a nice number of bond issuances taking place, but no new debt issues, rather roll-overs and re-financings due to low interest rates, particularly by real estate companies, and banks that needed to build up certain forms of capital and eligible liabilities in large sizes.”

Indeed, the VSE claims to be the fastest-growing stock exchange in Europe in terms of listed bonds, and a strong competitor to the exchanges in Luxembourg and Dublin. “We have invested in promoting debt activities and have launched a bond listing initiative as part of our overall strategy,” says Christoph Boschan, referring to a program that started in 2018. “I believe we are more and more becoming an EU center for debt listing of any kind, not just for those with instruments that are intended to be traded internationally, but also for those seeking a listing for regulatory or compliance reasons.”

Moser agrees that debt capital markets have played a large role in Austria in recent years. “Last May, June, and July saw corporate bonds still playing an important role – with a higher risk premium for sure, but working smoothly.” He says that investor demand for corporate bonds remained strong, even as uncertainty on the equity side saw share prices plunging. “After the initial shock, it was like the debt market kept speeding up back to its pre-pandemic pace,” he says. “Some companies raised huge amounts of money.” OMV’s raising of a combined EUR 4.5 billion via three senior unsecured and hybrid bond issuances in 2020 is an example. “The debt market is still robust and solid,” he says, “and I see no reason for it to slow down, especially on the corporate side.”

The situation is a bit different for financial institutions, Moser says. “Several banks usually refinance parts of their business with mortgage covered bonds,” he says, “but there is so much cheap money that banks can access via the central bank that some banks have no need to access capital markets.” He cites this ease of access as the reason for less mortgage-covered bond activity in the second to fourth quarter of 2020, but he says that this could change, if “the central banks decide to turn off the tap, should they deem it prudent, in an effort to conserve funds.”

Preparing for Post-Covid

“In the history of world economies … it is a given that those economies with developed financial markets have recovered faster, have shown higher growth rates, and have developed more sustainably,” says Christoph Boschan. “We at the exchange firmly believe that Austrian capital markets will remain strong. A year and a half ago, the government confirmed its desire to foster capital market growth via the introduction of tax relief for investors that hold their investments for a certain period of time.” Once it becomes law, he says, the incentive will make stock investments more attractive.

In the meantime, listed companies in some industries have been hit harder by the pandemic than others. “For example,” Claus Schneider says, “the European Central Bank – and in its wake the Austrian Financial Markets Authority – has issued a ‘recommendation’ that credit institutions be restricted from making dividend distributions as a response to the pandemic, which has made their shares less attractive – especially as banks reported nice profits, which they could not pay out to their shareholders for the time being.” In some other industries as well, Schneider reports, there were dividend restrictions or governmental efforts to discourage companies from paying large dividends. Still, he says, “I firmly believe that there very well might be a ‘catch-up’ effect once the pandemic is over,” with profit reserves quickly distributed to shareholders. In addition, he says, “one thing I could imagine happening after the pandemic is capital increases by companies that are in trouble as a consequence of the crisis, due to a need to fill up equity cushions and restart their business.”

Moser agrees that, heading into 2022, there should be more equity transactions in the field. “We expect to see a trend for equity financing for corporates,” he says, “especially those that suffered due to the pandemic, in order to reduce their gearing and to finance future growth projects.” Moser believes that Austria has several hidden champions – successful companies operating out of the spotlight – that investors would be interested in. According to him, many successful Austrian companies are family-owned or with concentrated private shareholders, who see no value, at the moment, in going public. “There is no reason to go to the market if you can strike a deal with just a few people – it’s faster and more cost-effective,” he says. Still, he notes, “if there were a tax incentive for public equity investments in place, or another sort of a regulatory nudge to stimulate an IPO – this might change the landscape.” According to him, “to have a more mature equity market, you have to start with the companies themselves and give them an attractive incentive to go public.”

One way or another, he says, “we may expect to see some IPO activity in the near future – a solid two or three this year or in early 2022.” According to him, “if capital markets remain solid, and current trends are not disrupted, I think that private equity exits will play a role in IPOs this year and in 2022.”

Boschan notes that more capital flowing in from individual investors would spur the economy. “Activating private capital is possible, which would definitely help the public budget,” he says. “The capital is there, it’s just a matter of tapping into it, and the current government agrees – which is why they are endeavoring to increase financial literacy and incentivize private entrepreneurship even more.” In the meantime, he says, it is up to the VSE to make sure that all and any investors, including those from outside the country, “feel no hurdles when doing business in Austria – there must be no local obstructions that would slow capital down.” And he seconds the call for governmental action. “What is lagging now is that specific measures need to be implemented. COVID-19 has slowed legislative efforts down – but this is the case everywhere in Europe,” he says. “The government ought to implement bold and broad measures and to follow up on its stance that capital markets should be developed. And the current coalition included strong measures in their government program, like fostering financial literacy and lifting the capital gains tax for investment holding periods of over one year.” According to him, “swift implementation would promote the local capital market.”

Ultimately, Schneider says, the Vienna Stock Exchange has developed remarkably in recent years, and both its equity and debt markets will continue to grow. “It may never be the size of, or compete with, Frankfurt or Paris,” he says, “but it is for sure to remain a key player in its extended home markets.”

If past is prologue, after 250 years, you can put your money on that.

This Article was originally published in Issue 8.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.