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05 March 2010
The financial crisis led credit institutions to review their procedures for the issue of secured bonds, leading to a greater emphasis on liquidity. As a result, it soon became clear that the law on the issue of secured bonds failed to regulate the administrator's authority where a credit institution enters bankruptcy. During bankruptcy an issuer can no longer issue secured bonds. Under normal market conditions the administrator, in order to create liquidity, would simply sell or transfer parts of the securities into bank paper. However, during the financial crisis this was deemed to be unsatisfactory when market operators did not behave in the usual manner. Therefore, the government has drafted a proposal to clarify the administrator's authority in such cases.
Under normal market and political conditions, bonds issued by Swedish banks and institutions that operate on the credit markets are given the highest possible rating by other international institutions that operate on the global credit market. This high rating implies that Swedish issuers of secured bonds need not burden themselves with high borrowing fees. According to the government, this fact is one reason behind the low interest charges that Swedish consumers pay for loans.
Another explanation for this is the law on the issue of secured bonds, which came into force in 2004. At present, the largest banks and credit institutions in Sweden are licensed by the Swedish Financial Supervisory Authority to issue secured bonds, which account for a large part of all borrowing transactions. At the end of 2008 the total sum of outstanding secured bonds amounted to €96 billion. Under the Rights of Priority Act, the bearer of the bonds enjoys a specific priority right in the mass of securities on registration.
As well as stipulating the procedure for and the limits of issue of secured bonds by banks and credit institutions, the law also contains rules in case of the issuer's bankruptcy. The rules are intended to ensure that the bearer of the bonds shall not be affected by the bankruptcy. For this reason, and to assure the bondholder that payments will be maintained, the secured bonds and the mass of securities are placed in a special winding-up pool separate to the other assets in the bankruptcy estate.
From an international perspective, this type of legislation is common in the majority of European judicial systems. The proposed changes seek to clarify the kind of action that the administrator can take in order to obtain the amount of liquidity that is desired for the development and sustainment of a winding-up pool. Prior to the proposed changes, it was generally believed that the administrator, with the help of the Bankruptcy Act, could create liquidity by selling the assets in the mass of securities. However, it is questionable whether the act could be used by the administrator in order to take out a loan or to make derivatives agreements to obtain liquidity.
The proposal is under consideration by the Council on Legislation and is expected to come into force in July 2010.
For further information on this topic please contact Margareta Andersson or Jörgen Wistrand at Wistrand Advokatbyrå by telephone (+46 31 771 21 00), fax (+46 31 771 21 50) or email (firstname.lastname@example.org or email@example.com).
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