Category: Hungary

In recent years, and for multiple reasons, cyber-attacks against healthcare providers have increased significantly on a global level. First, IT platforms and devices used by healthcare providers have a technical diversity, while sources devoted to an integrated cybersecurity system for these IT platforms are often limited, making the IT systems vulnerable and ideal targets of potential cyber-attacks. Second, health data qualifies as “highly sensitive data,” which is considered very valuable on the black market compared to other types of personal data.

Cyber-attacks against healthcare providers can cause significant damage, not only to the individuals and institutions concerned, but also on a social level, particularly because cyber-attacks against healthcare institutions can often result in a partial or complete disruption of patient care. Furthermore, cyber incidents can also cause substantial reputational damage to the institutions involved. 

Such problems have been observed in numerous cyber-attacks, such as the WannaCry ransomware attack against the UK’s National Health System in 2017, which affected numerous hospitals and other NHS bodies. Nor has Hungary been immune from cyber incidents affecting the healthcare sector. According to the National Cyber Defense Institute in Hungary (NKI), the number of cyberattacks against Hungarian healthcare institutions and hospitals increased significantly in 2019. The NKI points to phishing and ransomware attacks as the main threats in this sector. 

In the European Union, healthcare providers, such as hospitals and private clinics, are obliged to comply with both: (i) the local cybersecurity-related legal framework implementing the NIS Directive (Directive (EU) 2016/1148 concerning measures for a high common level of security of network and information systems across the Union); and (ii) the GDPR (Regulation (EU) 2016/679 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC).

In addition, in Hungary, under the country’s cybersecurity regime, certain healthcare providers must, among other requirements: (i) maintain an adequate level of protection of their electronic information systems; (ii) establish an operator security plan; (iii) appoint a liaison officer; and (iv) report cyber incidents to the NKI.

Under Hungarian law, cyber incidents include any loss of or damage to the confidentiality, integrity, authenticity, functionality, or availability of information recorded and stored in an electronic information system. In the event of a cyber incident, the affected healthcare providers are obliged to notify the NKI without delay. Following notification, the NKI contacts and cooperates with the relevant organizations, service providers, and authorities to address the cyber incident. Failure to comply with specific cybersecurity-related obligations could lead to a fine of up to HUF 5 million (approximately USD 16,700).

In addition to these cyber security requirements, the GDPR requires healthcare providers to notify the National Authority for Data Protection and Freedom of Information (the NAIH) of any privacy incident without undue delay, if possible within 72 hours after identifying the privacy incident, in addition to other related obligations.

Should the healthcare provider fail to comply with the requirements set out by the GDPR in relation to the management of data breaches, e.g., by failing to notify the NAIH of a cyber incident concerning personal data, the NAIH can impose an administrative fine of up to 4% of the annual global turnover of the company group or EUR 20 million, whichever is higher. In addition, the competent authority may prohibit the breaching healthcare provider from continuing the non-compliant data processing activity, which could pose a significant risk to business continuity if the healthcare provider heavily relies on processing personal data as part of its business model.

In addition, a number of criminal offenses have been introduced into Act C of 2012 of the Criminal Code (including information systems fraud, information system or data violation, circumvention of technical information system pr–otection, misuse of personal data, etc.) in order to protect personal data and sensitive health-related data by threatening perpetrators with criminal prosecution.

In practice, cyber incidents raise numerous complex issues involving cybersecurity, data protection, and criminal law. We are of the view that although cyber-attacks cannot be fully prevented, preparation for such cyber-attacks is critical, especially in light of the NHS’ Lessons learned review of the WannaCry Ransomware Cyber Attack (February 2018), according to which “[…] in the judgement of most industry experts, it is not a question of ‘if’ but ‘when’ the next cyber-attack strikes the health and social care system.”

By Akos Nagy, Partner, Eszter Takacsi-Nagy, Special Counsel, Zsombor Orban, Managing Associate, and Bianka Pandur, Junior Associate, Kinstellar

This Article was originally published in Issue 7.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Market Spotlight – Hungary

Greenfield Investments: Extended Liability of General Contractors and Interim Subcontractors

In the construction industry, it sometimes happens that the blue-collar employees working on a project do not receive their wages because the employer, acting as the subcontractor, is insolvent. For this reason, the Hungarian legislator has argued that it is necessary to increase liability on the construction market and thus to force general contractors and subcontractors to choose reliable subcontractors and agents.

Due to an amendment, as of February 1, 2020 Hungary’s labor supervision authority will require the general contractor of a construction project or any interim subcontractor to pay the wages of employees hired by another company acting as the subcontractor or other agent if they do not get paid by the employer.

The new rules are only applicable to third-country nationals hired for seasonal work and only if the employer does not pay the wages of such employees in full by the end of the employment relationship.

Real Estate Transactions: Changing the Transfer Tax Rules

Generally, real estate classified as “urban area” is designated for construction activities, whereas real estate classified as “non-urban area” serves primarily for agricultural and other purposes. According to the legislator, the acquisition of non-urban real estate may be speculative. There have been several cases in the past where non-urban real estate was acquired, then reclassified to urban and sold at a considerable profit.

As of February 1, 2020, the transferring party (i.e.,  the seller) in a transfer of urban real estate via an asset deal must pay transfer tax if the real estate was reclassified from non-urban to urban within the ten years leading up to the transfer, except if the reclassification occurred in the sixth year or later from the original acquisition by the seller. For example, if the original acquisition was in 2010 and the subsequent sale occurs in 2020, then a transfer tax is payable if the reclassification from non-urban to urban occurred by December 31, 2015, whereas no payment obligation exists if the reclassification occurred later. No amount will be payable if the real estate is sold more than ten years following the reclassification.

The tax base of the real estate transfer tax is the difference between the market value of the non-urban real estate at the time of the original acquisition and the market value of the urban real estate at the time of the subsequent transfer. Transactions will be taxable on 90% of the tax base. The transferor (the seller) will need to notify the tax authority of the market value and the tax will be paid not by the acquirer (i.e.,  the purchaser) but by the transferor on a self-assessment basis. Except for corporate tax exemptions (e.g., a  beneficiary asset transfer), no tax exemption will apply. The new law also applies to share deals, i.e.,  if the transaction concerns the transfer of shareholding in a company holding reclassified real estate. In a share deal, however, the purchaser will pay real estate transfer tax only if it acquires (together with its related parties) more than a 75% stake in such a company, whereas in a transfer of reclassified real estate, the seller’s payment obligation exists irrespective of the transferred stake.

Building Authority Procedures: Governmental Offices to Act as General First-Instance Building Authorities

As of March 1, 2020, local notaries in Hungary have lost their competency to act as general, first-instance building authorities. Such competence has been be passed to governmental offices, previously acting as second-instance building authorities Thus, building authority procedures have become single-tier and it is no longer possible to file an appeal against their decisions. It will still be possible to challenge such a decision before competent courts. According to the legislator, the aim is to streamline decision-making.

Ongoing procedures that were not closed by February 29, 2020 will be decided by the governmental office. In practice, the transfer process may lead to a delay in terms of decision-making. In any case, the inability to file an appeal within the public administration system may alter the actions of developers and other parties in construction processes. As litigation is expensive and time-consuming, this may discourage those clients from seeking legal remedies.

By Laszlo Krupl, Head of Real Estate, and Adrian Menczelesz, Associate, Schoenherr Budapest

This Article was originally published in Issue 7.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

 

The Hungarian banking sector enjoyed a banner year in 2019, but still faces challenges. Legislative changes are creating more aggressive competition between banks, which in turn are cutting fees and demanding flexible financing structures in order to survive. Although some banks are unwilling to take part in these practices, one thing is certain: All banks must adapt to the new regulatory environment. I’ve outlined some of the major challenges that Hungarian banks face in the near future.

New Insolvency Regime

Banks will have to forget everything they know about bankruptcy and insolvency since new legislation is now being drafted to replace the current law, which has been repealed to comply with a 2019 EU Directive on preventive restructuring. These two pieces of legislation – the EU Directive and the new Hungarian law – will provide regulatory cover for much of the life of a Hungarian company, starting from the date a firm experiences financial difficulties and initiates preventative restructuring to avoid insolvency (the period covered by the Directive) to when the company becomes bankrupt and must either be reorganized (according to the bankruptcy process) or terminated.

Digitalization

Under EU Directive 2015/2366, also known as the Payment Services Directive (PSD 2), and its Hungarian implementation law, banks are required to open their systems to “payment service providers” and “payment information service providers,” which gives small businesses the opportunity to connect to a customer’s bank account to provide services or initiate payments. Another EU regulation facilitates electronic transactions. The Electronic Identification, Authentication and Trust Services directive (eIDAS) requires banks to identify customers electronically. To that end, eIDAS has created standards for electronic signatures, qualified digital certificates, electronic seals, and other authentication mechanisms.

To prevent fraud, the European Banking Authority has published guidelines on customer authentication and secure communication, which should have far-reaching implications on the competitive position of banks in the digital era. Because legal obstacles in Hungary prevent banks from digitalizing their operations, the Hungarian Banking Association has drafted 22 recommendations to help bring Hungarian banks into the digital era.

Reinvigorating the Bond Market

In a bid to reinvigorate the bond market, the Hungarian National Bank has launched a national bond program, involving the purchase by the National Bank of a maximum 50% of primary-market issues. The issued bonds must be listed on the Xbond platform of the Budapest Stock Exchange and must be issued in Hungarian forints. Issuers must have a minimum B+ rating and the offering must be public with a three-to-ten-year term. The coupon type can be fixed floating or zero coupon. Since September, MOL, Cordia, and Pannonia Bio have participated. Financing banks were also asked to purchase bonds, which some declined to do, given their lack of experience with transactions of this type and the risks entailed in having to repay bond yields quickly. But more progressive banks have been eager to participate.

Energy Financing

Energy financing was dormant until 2019 when a solar financing boom began in Hungary. This boom, which should continue throughout 2020, was possible after the Hungarian Energy Office began issuing KAT (Kotelezo Atveteli Tarifa) and METAR licences for solar projects. Banks have been waiting for energy financing possibilities for years and are now competing to participate in these projects. But legal challenges have arisen because some of the land on which these projects are based qualify as farmland or industrial properties not owned by the solar project company. Also, lawyers are undecided whether a solar-panel unit is real estate or a fixed asset. This ambiguity complicates matters when a bank tries to create a security interest for solar panels. For this reason, some banks are reluctant to finance solar projects while other banks are able to live with these risks.

2020 will not be an easy year for Hungarian banks due to these legislative changes. Banks have tasked their legal departments and outside counsels to bring clarity to these issues, but the environment will remain uncertain so long as gaps in regulation remain.

By Erika Papp, Managing Partner, CMS Hungary

This Article was originally published in Issue 7.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

 

On December 27, 2019, several amendments made to the Hungarian capital markets act by the Hungarian Parliament to adhere to the relevant rules of the European Union be-came effective, also making it easier for Hungarian companies to issue bonds under the Bond Funding for Growth Scheme (BGS) by introducing more lenient information and publication rules for issuances.

The Hungarian National Bank launched the BGS on July 1, 2019, to provide liquidity in the Hungarian bond market. Under the BGS, the Hungarian National Bank purchases 50% of bonds with an eligible rating issued by non-financial corporations – initially – up to the aggregate amount of HUF 450 million (approximately EUR 140 million). The Hun-garian National Bank purchases the bonds at market value and may purchase a further 20% on the secondary market at market value (i.e., the aggregate stake of the Hungar-ian National Bank may reach 70%).

The amendment of the Hungarian Capital Markets Act was only the first step towards a more relaxed regulatory environment. The bonds issued under the BGS must be intro-duced to a trading platform within 180 days from the issuance, even if the issuance was not meant to be a public placement. The Hungarian Stock Exchange launched the XBond trading platform on July 1, 2019, that is open only to eligible issuers and investors, and bonds may be issued and introduced to the XBond trading platform without the need for a prospectus. After half a year, the Hungarian Stock Exchange adjusted the terms and conditions of the XBond trading platform by further simplifying the pricing and offer pro-cess, in order to make its use is even more comfortable for the market players.

In addition, the Hungarian Capital Markets Act was amended in four primary ways:

The first point circles around the BGS. Pursuant to the new rules, registering the securi-ties to a multilateral trading platform (e.g., the XBond trading platform) does not auto-matically result in a public placement. This also means that no prospectus will be re-quired for securities introduced to the XBond trading platform; a simple information memorandum is sufficient.

The definition and rules of public placement have been harmonized with the relevant EU regulation (Regulation No. 1129/2017), and although this expands that definition and those rules, the exemption from the requirement of submitting a prospectus has become wider as well. For example, under the former rules the offering of securities only to qualified investors was deemed a private placement. Under the new rule it will be con-sidered a public placement, yet it will be exempted from the prospectus requirement.

For securitizations, the amendment establishes a special regime for the transfer of the exposures from the originator (the party from whom the exposures originate) to the SPV (the party securitizing them). According to the new rules, ex-ante approval is required for the transfer of the exposures from the originator to the SPV if the exposures stem from at least 20 contracts or their value is higher than HUF 10 billion (approximately EUR 30 million). Furthermore, the originator must notify the debtors about the transfer 30 days prior to the transfer and the debtors may terminate their contracts within 15 days from such notification.

Regulation No 596/2014 on market abuse (the “Market Abuse Regulation”) induced nu-merous amendments to the Hungarian Capital Markets Act. The Market Abuse Regulation also led to the amendment of the Hungarian National Bank Act to resolve certain juris-dictional and scope conflicts.

Although the amendments are numerous, it is not expected that the market will be dis-rupted by them. The establishment of the XBond trading platform and the recent fine-tuning of its operation is welcomed by the market. The harmonization of the public placement rules was a long-standing obligation of the Hungarian legislator. Although the securitization regulation is yet to be tested, the approval requirement and the termina-tion right of the debtor may make market players skeptical.

By Gergely Szaloki, Partner, Schoenherr Budapest

This Article was originally published in Issue 7.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

 

In the few months since Hungary’s Private Foundation Act came into force on March 29, 2019, it has already significantly grown in terms of financial importance.

Highlights of the Private Foundation in Hungary

A private foundation is an atypical form of a foundation that is mainly established in order to prevent the fragmentation of the private property and to ensure proper asset management. Private foundations are generally considered to be outstanding legal structures and asset management instruments for companies and high-net-worth individuals. Especially in the case of high-net-worth individuals, private foundations are created by founders who grant certain assets to realize the purpose of the foundations and determine how the assets shall be managed both while they are alive and after their deaths. Private foundations may have named beneficiaries and as such may prove to be a great tool against fragmentation of family estates through inheritance. A founder’s intention to provide for the integrity of his or her private wealth may, however, also prove to be legitimate during the founder’s lifetime, should the founder not want to be engaged in the operation of the assets to the extent he or she was before, but, for instance, allocate more time to other life time activities.

In essence, a private foundation is a legal entity, separate from its founder and from its administrating officers, of which the founder may be a dominant member. It is also separate from the beneficiaries, who may receive various types of financial benefits from the private foundation in a regulated way as provided for by the founder. The right to revoke a foundation and to transfer the assets back to the founder as well as the founder’s capability to become a beneficiary are also ensured. Without reference to certain tax provisions with attractive benefits for founders and beneficiaries, the concept of the private foundation provides considerable incentives for funds to be transferred into the domestic economy.

Public-Benefit Private Foundations vs. Private Interest Foundations

The Hungarian Private Foundation Act distinguishes between private foundations based on their objective. Public-benefit private foundations are made for public interest such as education, healthcare, research, or sporting activities; thus, the scope of the beneficiaries is open. The foundation shall support and/or cover the funding for the purposes of the public interest, or support institutions which carry out such activities. The Corvinus University for Economic Studies in Budapest is a well-recognised example for a public-benefit private foundation. By contrast, as a private foundation’s objective is private, the scope of the beneficiaries can be closed. In this case, beneficiaries shall be named or otherwise described in the statutes.

Capital Requirements and Capital Control

Although the procedure to establishment a private foundation is similar to that for the establishment of a non-private foundation, there are some differences. In Hungary, there is a minimum capital requirement of HUF 600 million (approximately EUR 1,775,000). These assets – which can be provided either in cash or in kind – have to be defined in the statutes in sufficient detail to enable their individual identification.

In order to provide the greatest safety for the founder’s assets, there are several control and monitoring mechanisms required by law, and further protective functions and procedures can be detailed in the statues. For example, a Hungarian Private Foundation must safeguard the assets provided by the founder. This provision ensures that the funds are preserved and managed to that their value does not fall under the level of the minimum capital; thus, providing appropriate protection by requiring the board of foundation to exercise due diligence during the administration of funds.

If the minimum capital requirement cannot be met, payments to the beneficiaries shall be lowered or withheld. Furthermore, if this situation continues for three consecutive years, the foundation shall dissolve, as it is deemed to not have reached the goal set out in the statues. In addition, dissolution can be initiated at the request of the body or person who exercises the rights of the founder at any time.

Monitoring the Management of Assets

Founders may transfer their rights to the foundation’s board or other organs. If they do so, a property administrator shall be appointed, whose most important tasks are to oversee whether the management of assets is in accordance with the statues and to monitor the exercise of the founder’s rights. If the property administrator finds that the latter violates the provisions of law or the statues, judicial oversight proceedings can be initiated. 

An important aspect of the establishment of a private foundation is the obligation to draft an investment policy, describing the portfolio and its risk-management and decision-making mechanisms regarding envisaged investments in detail. This way, the founder can specify the way he or she wishes the assets to be managed and shape their future management. All in all, the investment policy ensures that the assets are guarded and used by the private foundation according to the will of the founder.

Management and Controlling Bodies in a Hungarian Private Foundation

The main decision-making and managing body of the Hungarian Private Foundation is the board of directors, which must consist of at least five natural persons. These members are the executive officers of the private foundation, and – in order to ensure that the assets are safeguarded with the highest competence – educational or other requirements can be defined in the statues as a requirement for these roles. The supervisory board must be both set up and operated with an auditor.

Hungarian Private Foundation Act – Future Prospects

Since the entry into force of the Hungarian Private Foundation Act, the private sector has shown considerable interest in this legal construct. The possibility of establishing a private foundation enables the safe and successful transfer of private wealth by lowering or eliminating the risk of fragmentation or the effects of mismanagement. The concept of private foundations is appropriate to fulfil their designated role by providing various safeguards. Even though the minimum capital requirement is considered slightly high, there is a strong intention on the legislator’s side to significantly reduce this amount, which would give an even greater boost to the success of this legal instrument.

By Eszter Kamocsay-Berta, Managing Partner, and Bálint Éberhardt, Junior Associate, KCG Partners

This Article was originally published in Issue 7.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

 

Dentons Partner Anita Horvath has been appointed Co-Head of the firm’s Corporate and M&A Practice in Hungary, where she will work alongside Partner Rob Irving.

Dentons describes Horvath as a “premier Hungarian qualified lawyer in the market who advises on complex domestic and cross-border M&A, joint ventures, and private equity transactions as well as general corporate matters.” According to the firm, “her international excellence is leading clients to increasingly use her to lead multi-jurisdictional transactions that are not related to her base region of Hungary/CEE.”

Earlier this year, Horvath was also appointed Head of the firm’s Energy Practice.

Horvath is a graduate of the Eotvos Lorand University. Prior to joining Dentons in 2015, she spent two years with Freshfields Bruckhaus Deringer and almost nine years with White & Case.

The Banking sector in Hungary has been doing well in recent years. Schoenherr Budapest Local Partner Gergely Szaloki walks us through that progress.

CEELM: We spoke at length about the current state of affairs in the Banking sector in our recent CEELM Round Table. Could we start now by offering our readers a bit of context for that conversation? Where was the sector, and the economy as a whole, five years ago, and how has it evolved since?

Gergely: If we are to use a time machine and go back five years, I’d highlight two main challenges for the Banking sector at the time: the growing ratio of non-performing loans and the start of digitalization stress.

As to the first, I’d say the Banking sector has made good progress. NPLs are at a healthy level, in no small part due to the fact that the economy in general has picked up, allowing debtors to start making money and financing their debts. This was also supported by the Hungarian housing market picking up. Really, apartment prices have skyrocketed in the last five years in both Budapest – the capital – and outside of it, with prices per square meter having doubled in certain regions. This raise in flat prices helped a lot in terms of raising capital. There were also a few regulatory changes that helped banks along the way in terms of getting rid of these NPLs.

On the second subject, I’d say that the stress of digitalization was only starting to show its head back then. Back then, Fintech companies were only just starting to enter the market. The difference between then and now is massive – five years ago I couldn’t pay with my phone, or handle my finances with it. We’d read back then about developments in the field – but it still seemed to be science fiction. Today it’s mainstream.

CEELM: You mention both the economy overall and real estate prices picking up as a driving factor for banks. What role did the banks themselves play in the recovery?

Gergely: It might be a bit strong to call them zombies at the time, but before they got rid of their NPLs, banks were rather inactive. Once those portfolios were cleared, they could restart their lending business, which naturally helped the real estate market. And it was not just the residential real estate sector that saw a boom – a lot of commercial development kicked off as well, and most of it was financed by local banks. On top of it, the Hungarian Government employed various mechanisms to encourage Hungarian families to have children, which also incentivized a lot of development in residential spaces, again financed by local banks. I’d say it was a two-way street in terms of which helped the other recover.

CEELM: What about the practice of law in the Banking sector? How is it different in Hungary today from five years ago?

Gergely: I’d say that lawyers’ jobs basically remained the same over that time. There is really nothing new in my everyday work – I am pretty much doing the same things I was five years ago. How I am doing it might have changed a bit in the interim.

Firms faced the same digitalization push the banks did. Many see this as a hurdle to overcome but, of course, once that’s done, it helps our work as lawyers rather than impeding it.

Of course, as a law firm, considerable investments are required, especially if, like us, you aim to be at the cutting edge of both software and processes. Once those investments are carried out though, you reap the benefits. The Schoenherr office is operating under a home office setting at the moment, in light of current events. Everyone, from assistants to associates to partners, was initially encouraged, and then required, to work from home to stay safe. The transition to this set-up was extremely smooth – but five years ago this would have been much harder to implement. This is where we felt first-hand that our efforts in digitalization had paid off.

And I suspect every major law firm in Budapest has worked hard, and continues to do so, to gain a competitive edge on the digitalization end of things.

CEELM: How does this evolution translate in terms of fees for the clients?

Gergely: Of course, it will ultimately translate into the pricing strategies, but really, that revolution started ten years ago with the crisis kicking in. We were used to working mostly on an hourly basis but that’s not something our clients are interested in paying for anymore. Now, as a result of digitalization, it no longer makes sense for us either, as certain tasks no longer pay off under that old model. If certain kinds of client requests took up a large amount of time in the past to perform, with the deployment of the right technological solutions, they can now be done in a far more efficient manner. Applying traditional hourly fees would actually not reflect our investments as well as other aspects, such as our professional liability coverage.

CEELM: You’ve told us about the sector overall. What about your firm specifically? How has it evolved over the last few years?

Gergely: I think this was an interesting time for the firm. As you probably know, Schoenherr’s network is based in Vienna, where the first office was opened in 1950. Between the fall of the Iron Curtain and around ten years ago, the firm managed to open up offices pretty much everywhere in the CEE and SEE regions, except Greece.

Since the last five years is the main point of reference we’ve been looking at, I’d say the firm underwent a different type of expansion in that time. Granted, as seen from the outside, not much has happened in terms of our network, with fewer eye-catching headlines of the kind that accompany the opening of a new office. Seen from within, the story looks quite different, however, as our main drive over the recent years has been to grow stronger in those markets where we already planted our flag.

For example, the Budapest office grew by 30-40% in terms of headcount in the last four or five years, and revenue has almost doubled in that same time span. It is a good problem to have, but we need to move to a new and bigger office as we have outgrown our current place. Yes, it’s less spectacular news to report but I would argue it’s a more significant development than geographical expansion.

CEELM: What about the future. How do you see the next five years?

Gergely: I obviously have no crystal ball in front of me, and things are very volatile today. The Covid-19 virus is here and it sometimes feels like it came out of nowhere. I’d like to believe that things will pick up soon but there is always the chance we’ll fall into another recession, as many economists project. Then again, we’ve been listening to the same people telling us that the next big crisis is just around the corner for the last two or three years, so am I not sure if the virus will be the thing to finally trigger it or if it will turn out to be just another hiccup along the way.

If I had to place a bet, I do expect some level of economic downturn – but I am hopeful it won’t be as big as a decade ago. I expect it will require a lot of restructurings, and looking at CEE, I foresee plenty of companies having liquidity problems or other forms of shortages that will require bridge financing or some form of organizational restructuring. We, at Schoenherr, are expecting these – as I assume most of the market is – and are building up our capabilities further to meet the expected demand down the line.

CEELM: You mentioned you are preparing for restructurings. Are banks?

Gergely: I am talking to clients regularly but, at this point, the feedback is mixed. Some say they are already feeling it, while others are not yet reporting anything just yet, but they say that they are still preparing for the inevitable moment when it will.

CEELM: How are they preparing?

Gergely: That I have limited info on, as I assume they protect that strategy as a business secret. Generally speaking, Hungarian banks have a robust capital structure so, if some of their clients will face difficulties, I think they should be able to weather the storm.

Beyond that, there’s a great deal of know-how that has been built up over the last ten years, which I’d split into two chapters. The first five years after the recession were all about sweating it out and hanging on. The subsequent five were all about selling off what was perceived as helpless. Should banks be faced with a new wave of challenges, I think they are far better equipped now to distinguish between what’s salvageable and what’s not and act quickly based on it.

CEELM: What about legislation? Is there anything in the works that may help down the line, should it be needed?

Gergely: There are some talks about a new insolvency law, but nothing has been published yet, so what it will bring is still a big question mark for us. I really hope that, whatever they are cooking in their kitchen, they will allow us to at least get a sniff soon so that we can brace ourselves and wrap our heads around it.

And it’s not just a matter of preparing as under normal circumstances when it comes to new legislation. We need to face the reality that this is what we may end up going to war with. If a crisis is to hit us, it would be rather unfortunate to have a fresh insolvency regime in place that has not yet been fully vetted out. 

This Article was originally published in Issue 7.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

 

The Hungarian financial market finished 2019 in a strong position. Intrigued by what many have described as a “special” year, CEE Legal Matters sat down with several of the nation’s leading Banking/Finance lawyers at Lakatos, Koves & Partners’ offices in Budapest to learn more.

Round Table Participants:

• Peter Lakatos, Managing Partner, Lakatos, Koves and Partners (host)
• Mestyan Szabolcs, Partner, Head of Banking & Finance and Capital Markets, Lakatos, Koves and Parters (host)
• Gabor Borbely, Partner, Head of Finance, DLA Piper Budapest
• Balazs Jozsef Ferenczy, Senior Attorney at Law, Head of Banking & Finance, Kapoly Law Firm
• Gergely Szaloki, Local Partner, Schoenherr Budapest
• Gyorgy Szilagyi-Schreindorfer, Head of Corporate Finance Legal Department, OTP Bank

CEELM: Let’s start by reviewing the current situation. How do you see the Banking sector as a whole, and where do you think it’s going?

Gyorgy: Last year was great, and most market participants are optimistic for 2020. However, there are also various expectations that it might start getting slightly worse in the upcoming period. I think that last year was “special” mostly due to housing loans and the retail market, but the corporate market also hit the 15% extension of the credit volume. We still need a careful approach at the beginning of 2020, and we need to take our time to see how the situation develops.

Gabor: Everyone agrees that last year was successful. Currently, we have about five key players on the market that are most active in various projects, but we have also witnessed international players coming in and out. My experience tells me that banks are under pressure, considering the number of deals on their tables.

Mestyan: Agreed. I am pessimistic about repeating the same success, however. It seems like some of the players are so satisfied that they haven’t woken up yet.

CEELM: What exactly led to last year’s success?

Balazs: It looks as though this is a continuous course. The National Bank made efforts to restore the market in the past year. In 2013, they put a program in place to prevent a credit crunch, and it seemed to work. This led to market players being able to get loans and funds that weren’t as costly. The interest rate was 2.5 percent, which led to a very favorable increase in the market. In the last two quarters of 2019 alone, HUF 435 billion was introduced.

Gergely: I think that success came from the fact that banks started to gain momentum, and in the last three years have unloaded their NPLs, which made them free to act. Of course, a significant demand on the market helped with the situation.

CEELM: Many commentators, especially from outside of Hungary, have pointed at the fact that the level of nationalization rose from 30% to over 50%. Did this trend facilitate growth?

Gergely: I don’t think that last year’s success was in any way connected to that fact, or that nationalization had any significant effect.

Balazs: It is very uncertain how that will play out in the future as well. Right now, we can only rely on opinions we hear. The top five or six banks are strongly embedded in the market, therefore I don’t think that their position has changed in any way.

CEELM: The Deputy Governor of the National Bank of Hungary and the Deputy CEO of Erste Bank both called for consolidation in the banking sector. Do you think that is needed, and to what extent do you see it happening?

Gergely: Even though it might not be necessary, consolidation is already happening, and we had examples of it last year. Whether the outcome will be positive remains to be seen. What we may predict is that Hungary will face a slow but certain consolidation.

Mestyan: I agree. I also don’t think that this has affected the big banks, and the overall picture is carved in stone.

Gyorgy: Yes. It might not be as rapid as some commentators expect, but it already exists on the market. The emerging IT costs on the side of banks, which appear mostly due to digitalization, are something smaller banks can’t afford. Considering they all have to deal with international competition, they are struggling to keep up on their own, therefore consolidation is a positive, even a necessary thing.

CEELM: What are these costs, exactly?

Gyorgy: Developing IT systems in banks is costly, as are different financial services, etc. From a larger perspective, it could be advantageous to digitalize. If we look at the agenda of the Hungarian Banking Association, they are trying to make the regulatory environment better and more competitive, and one of their proposals involves more digitalization.

Gergely: I think that banks now feel dual pressure, first from the regulators who are pushing them to move on and digitalize, and second from the market – the consumers – who like to do their banking from their phones and don’t like to queue.

Peter: I recently went to a branch of a bank I have used since the 90’s, and I noticed that there is no cash desk, which is a direct product of digitalization. I think it’s nonsense not to have it. Now you have to withdraw everything from the ATM, and the branch employs only two people.

Balazs: Digitalization is a positive thing. Mobile payments are booming, and in those terms, this could be a great marketing strategy for the firms. Adding one more thought to the consolidation question: Consolidation in generally a good thing, and we have seen examples of great consolidation in the past couple of years. The larger the bank, the cheaper the services.

Mestyan: Spending money on digitalization is not a new thing. When the Internet came in the 90’s, banks were spending a lot to develop online banking services. What is new to me as a lawyer are two things: First, it has become extraordinarily difficult to open a bank account for larger companies. If the parent company – or even the parent’s parent – is foreign, you need to go through a ton of paperwork before you can open an account. I understand this is not the bank’s fault, but the regulations that push this agenda. Second, in terms of digitalization, the banks are trying to simplify things by digitalizing all aspects of banking. Banks themselves sometimes tend to push for things that are not needed. We have tried to convince the banks that they don’t need all of it. We can blame it on EU regulations, but this is the wrong direction.

Gyorgy: There can be different opinions about what products and services are welcome on the market and the banks pay continuous attention to this. One thing is sure: the difficulties in opening a bank account result from the AML regulations.

Gabor: When it comes to digitalization, the biggest issue for the Hungarian banks, and the biggest change in the last five or six years, is that competition has mostly become cross-border. Technology is expensive, and we still have cash-dominated payment systems in Hungary. In conclusion, we are a small market and we can’t change everything, therefore we should try to be more and more efficient on all levels.

CEELM: Lets switch the discussion to the borrowers’ side. Who do you think are the biggest borrowers on the market?

Gyorgy: Generally, those are real estate developers, which in the last couple of years have mainly been funds, as well as the energy sector.

Gergely: We advised a lot of borrowers from the real estate sector last year as well, so from our experience that sector is a sponge that certainly attracts a lot of money, although real estate developers are probably not among the largest borrowers.

Mestyan: From 15 years of experience, I have noticed that Hungarian banks somehow always look past the enormous amount of manufacturing subsidiaries, which are still going to their parents’ bank or at least a bank in their parents’ jurisdiction, instead of developing a relationship with a local bank. I think there is a gap here. It’s hard to understand why Hungarian banks don’t shoot for manufacturing subsidiaries, and that is a shame, considering the fact that there exist some great manufacturers on the market. This is especially obvious now that it has become easier for them to reach out to the Hungarian banks.

Gabor: The problem is that these companies are getting financing through their balance sheets, so they don’t need financing at a subsidiary level per se, because they receive financing through their shareholders. What I think local banks are able to do is become a second layer of financing. This is a situation which is unlikely to change, because of the strong relationships that exist between those groups and their traditional financing partners in the headquarters.

Balazs: We have seen an increasing number of state-owned companies in the financial sector coming from the borrower’s side. They turn out to be unexpectedly large players – or are aiming to become so. They are professional and know the sector very well. We will see how this situation develops in the future.

CEELM: Aside from the traditional means of financing, we’ve seen a lot of bond issuances recently. Why is that?

Gergely: What we have seen in terms of bond issuance last year was mostly part of the scheme of the National Bank.

CEELM: Is this an attempt to trigger long-term investment?

Balazs: The National Bank’s Funding for Growth Scheme programs were previously so successful that they felt like it was time to boost fund raising through the capital markets too. The bank’s credit portfolio is positive and there is a minimal default percentage. The National Bank’s launch of the Bond Funding for Growth Scheme was thinking ahead that, in an event of an unexpected crisis, borrowers would have to rely on some other, more classical source of the economy, which would be capital markets. This way, they were segmented form the banking sector, so the effects of the crisis would not spill over. Companies now feel more and more comfortable in seeking bond issuance as a financing option. 

Gergely: I agree, even though I am not as optimistic that in the event of a crisis the two would be as segmented, because from the borrower’s side, most of the investors are banks. This is now an extremely popular method of financing. For most of the actors, this is their first time issuing bonds.

CEELM: What is in the pipeline in terms of legislation, or at least being discussed, that’s either exciting or potentially scary for you?

Gyorgy: The Hungarian Stock Exchange has established a program for securitization, and the expectation of the market is that there will be SME loan portfolios that will be securitized. Legislation has been proposed in this area in order to make it possible to establish SPV’s. We are quite curious about further development in this topic.

Gergely: We are also quite interested in how securitization will play out.

Gabor: Securitization is already happening in places like Poland. In Hungary, I think, there are multiple issues, mostly from the legal aspect, which adds to the caution of the potential participants. At the same time, the number of companies who would be able to go through securitization is very limited.

Balazs: Agreed. There were a lot of examples in the past where the originator companies were of Hungarian origin, and pooled into a larger European group. The question is whether there would be any Hungarian company large enough to be securitized at this point. At the same time, the banks are also larger, allowing them to neutralize some of the riskier assets.

Mestyan: I agree. There always have been securitizations in this country, but they are not necessarily seen by Hungarians, because they relate to global groups, even when the largest subsidiary is Hungarian. What amazes me is that some of these are done by the parent institution of the largest Hungarian banks, actually, so the Austrians are very active in our securitizations, while the local banks have no clue about it. I too think that the size and regulation have always been a question. I am very pessimistic about the future of legislation in this field. There were drafts back in 2007, but nothing serious happened since then.

CEELM: What needs to happen to stop you from being pessimistic?

Mestyan: To see it happen.

Gergely: It is true that the regulatory environment is a bit problematic. Having done the comparative analysis among the CEE and SEE jurisdictions, I can confirm that our regulatory environment is not as favorable to a securitization transaction right now as it is in other jurisdictions.

CEELM: Any last comments before we wrap up?

Gabor: As a last thought, I’d like to add one point in terms of the challenges for future financing in Hungary. Apart from trying to catch up and digitalize, I also think that we need to go back to the fundamentals and make those processes more efficient.

Balazs: It looks like a number of companies are looking for payment service provider licenses under the PSD2 before the National Bank now, and the environment for regulation in that particular field doesn’t seem to be as problematic as it is, for example, for securitization. That’s something we’ll be expecting in the future. The other important issue is crowdfunding. It looks like it’s coming as a sort of competition for the banks. Equity-based crowd-sourcing from the users allows consumers to avoid the capital markets. European legislation is on its way, and it looks like in 2020 it will reach Hungary as well. This is very interesting.

Gyorgy: I agree. There is a big question for the market how the Hungarian regulator will handle the issue of big tech firms, because if it’s not done the right way it could potentially be harmful for the market. As the Bank for International Settlement and the Hungarian Banking Association have already underlined, it is essential to develop regulation under the “same activity, same regulation” principle.

Gergely: Coming back to crowdfunding, two years ago we also explored the possibility of its appearance in Hungary. As long as there is no legislation in this field – which is something we are really looking forward to – I don’t think that a good crowdfunding market can be established.

Mestyan: Thinking of Uber as an example of crowdfunding, if the taxis were successful in doing it, then the banks will certainly be too. I am very much in favor of it as well. I agree with Balazs, but I’d like to add that overregulation will slowly kill traditional banking, because providing EU-level legislation, which allows consumers to open an account with a picture of themselves is good, yet if you go to a local branch you have to bring three copies of recent bills, and that makes no sense. As a consumer, I don’t get it. To me that marks a slow killing of traditional banking as such, maybe not on the short-term, but surely in the next 20 or 30 years.

CEE Legal Matters would like to thank Lakatos, Koves & Partners for hosting the event, and all the attendees for their participation.

This Article was originally published in Issue 7.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

 

Sounds frightening, huh? When I first encountered this expression a couple of years ago, I thought it was one of those buzzwords that had been created by accountants or other financial wizards to tackle invasively curious tax administration people. “Bottomline” also sounded familiar: that is the very last figure in your financial statements; the one that interests you the most.

Triple bottomline (TBL or 3BL for those of you who like abbreviations), however, does not mean that your earnings skyrocketed in the previous year. To the contrary: this is about evaluating your firms’ performance from a broader perspective, taking into account the social and environmental (or ecological) points of view, in addition to the good old financial aspects. We, business lawyers, are often labeled by society as greedy, self-oriented people, who only care about our success at advising clients to the best of our knowledge. This indeed is often accurate, particularly in Hungary, where pro bono attitudes and actions are not yet very common. There are promising initiatives, however, largely driven by the pro bono departments of global law firms, and a fair number of lawyers are already engaged in such activities.

However, TBL requires more. It is about building our professional activities, conducting our professional lives, and living our days as lawyers driven by more than financial interests. It is about creating a paperless office, instead of printing out every redline version of a dull hundred-page agreement. It is about serving tap water in glass bottles instead of hundreds of PET-bottles at a neverending deal closing. It is about not undertaking an assignment involving clients or products we are not comfortable identifying ourselves with, for ethical or other reasons.

It is about taking into account the impact of our actions and acting as if people and places mattered.

Now, I understand that adopting this attitude has both easy and difficult aspects. It is relatively easy to switch to selective garbage collection. On the other hand, it may prove very difficult to say no to a client asking you to represent him or her in an investment which you believe is unsustainable or harmful to the environment. It may also be challenging to turn away mandates from governments or state-owned companies in captive states or hybrid regimes where the legal markets are largely driven by chunky state assignments and collaboration is a critical skill in the fight to compete.

At my firm, this change in attitude came naturally. I have been dealing with energy matters for the past 20 years and our focus has always been on changing together with the focus of markets and clients. 15-20 years ago everything was about oil, gas, coal, and maybe some biomass. Nowadays, everything is about renewables, which fits quite easily into the TBL universe. This shift towards renewables in my area of law helped me to recognize the importance of sustainability and social responsibility in other areas of life as well. It has slowly infected (trying to use this verb carefully though) our behavior at the office and it has now become one of the core organizing principles of our daily lives, without endangering growth and economic balance.

I also know how easily the omnipotent, magical word “growth” can blind us to the real values in our profession. In fact, however, a new breed of companies is evolving around the globe to create a whole new ethos in business, building on the values detailed above. We, lawyers in Hungary and CEE, have led revolutions in previous centuries, using our social engineering skills, our minds, and our courage. It is now time to join the green new deal around the globe and build our business further based on triple bottomlines. We might all just get richer with this at the end of the day.

By Csaba Polgar, Partner, Pontes Budapest

This Article was originally published in Issue 7.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

 

D’Ornano Partners has advised the Hungarian subsidiary of the Ruget group on the transfer of assets and the sale of real estate to the Hungarian Ferzol Group. RSM Legal Szucs & Partners advised Ferzol on the deal.

According to D’Ornano Partners, ”the Ruget group, a specialist in sheet metal, mechanical welding, and coating, has been present for 85 years in France and 17 years in Hungary.”

D’Ornano Partners’ team included Managing Partner Francois D’Ornano and Senior Associate Katalin Nogradi.

RSM Legal’s team included Partner Levente Almasi and Attorney Csaba Vakulya.