The President signed an amendment to the Law on Investment Funds and Management of Alternative Investment Funds, the Law on Bonds, the Law on the Bank Guarantee Fund (BFG), which concerns the possibility of banks, brokerage houses and reinsurance companies issuing securities with a loss absorption mechanism, the President’s Office said.
Provisions are added to the Bond Law for a new category of bonds in the form of capital bonds, qualified for the regulatory capital of banks and brokerage houses or the own funds of insurance and reinsurance companies, in accordance with the relevant provisions of European Union law. […] Capital bonds will be able to be issued for the purpose of qualifying for own funds, either as additional instruments in Tier I or Tier II, according to its announcement.
Issuers of capital bonds will be allowed to be a national bank, a brokerage house, a national insurance company and a national reinsurance company. The ability to invest in capital bonds will be limited to professional clients only. The minimum face value of a capital bond has been set at 400 thousand zlotys.
The bondholder will have the right to receive interest on capital bonds.
The law specifies in detail the scope of data and information contained in the terms of issue of capital bonds, stipulating, among other things, that the terms of issue will specify in detail the risk factors associated with a specific mechanism for covering losses in the event of the occurrence of an event stipulated in the terms of issue – in particular, they will specify the issuer’s entitlement to write off the bonds in the form of a permanent write-off or a temporary write-off reducing the nominal value of the capital bond, or the entitlement to convert the capital bonds into shares in such an event.
If an event specified in the terms and conditions of issue occurs, the bank or brokerage house will redeem the capital bonds in the form of a permanent write-down or a temporary write-down reducing the nominal value of the capital bonds in whole or in part, or convert the capital bonds into shares (applicable to banks, brokerage houses or insurance and reinsurance companies in the form of joint stock companies).
Capital bonds will become due if the issuer of capital bonds goes bankrupt or opens liquidation.
The possibility of issuing capital bonds by banks, brokerage houses and insurance and reinsurance companies results in the introduction of provisions in the Commercial Companies Code for increasing share capital by converting capital bonds into shares.
A share capital increase through conversion of capital bonds into shares will be possible only in the event of the occurrence of events, specified in the terms and conditions of issuance of such bonds, entitling to such conversion. Shares granted in exchange for paid-up capital bonds will not require their subscription. The granting of shares will be automatic, pursuant to a resolution of the company’s board of directors.
The board of directors will report the increase in share capital through the conversion of capital bonds into shares to the registry court, together with the resolution of the general shareholders’ meeting on the increase and the resolution on the issuance of capital bonds, as well as a statement by the board of directors that the shares have been granted in exchange for capital bonds that have been fully paid up.
The law introduces a framework for recovery and resolution for entities with central counterparty (CCP) status in the European Union, i.e., an entity that clears certain derivatives transactions.
It designates the Bank Guarantee Fund (BFG) as the competent authority.
The BFG’s decision to place a CCP under resolution, the management board or a member of the management board of a CCP in restructuring, or the supervisory board or a member of the supervisory board of a CCP in restructuring, will be subject to appeal to an administrative court.
The law also regulates the bail-in, conversion and issuance of ownership instruments and debt instruments or other unsecured obligations in connection with the CCP’s entry into resolution. The bail-in will take place as of the end of the day on which the BFG’s decision on the application of the instrument is posted on its website; this day will also be the day on which the persons entitled to the bailed-in or converted financial instruments are determined. The decision will replace the actions set forth in the Commercial Companies Code related to reducing or increasing share capital, joining a company, taking up shares, and making contributions. The decision will be constitutive – the redemption of capital instruments will take place as soon as it enters into legal circulation, i.e. as soon as it is delivered.
The difference between the loss that a shareholder, clearing member or other creditor suffered as a result of the resolution of the CCP and that they could have suffered (hypothetically) if the BFG had not taken resolution action with respect to the CCP in question (i.e., if the CCP had been liquidated under insolvency proceedings) will be required to cover the BFG from the statutory fund.
A consequence of the introduction of a new institution in the Commercial Companies Code – an increase in the company’s share capital through the conversion of capital bonds into shares – is the need to ensure that appropriate information about an increase in share capital made in such a manner is entered in Section I of the Register of Entrepreneurs.
The law introduces solutions for a subordinated loan agreement, taken out to qualify as an additional Tier 1 instrument. The subject of the subordinated loan will be allowed to be cash in an amount not lower than PLN 400 thousand. The subordinated loan agreement will be allowed to be offered only to professional clients, in writing under pain of nullity. The loan agreement will indicate the risks associated with its conclusion.
The grantor of the subordinated loan will not be entitled to terminate or withdraw from the agreement. The subordinated loan agreement will entitle the lender to receive interest for an indefinite period. The provisions of the Civil Code on maximum interest will not apply to interest. The bank’s board of directors will be able to write off the loan by making either a permanent write-off or a temporary write-off reducing the amount of the subordinated loan in whole or in part upon the occurrence of an event specified in the agreement. The claim for repayment of the subordinated loan will become due upon the bank’s bankruptcy or liquidation.
Analogous regulations on subordinated loans are also to be extended to brokerage houses and insurance and reinsurance companies.
Regulations have been added to the Bankruptcy Law, according to which when determining whether a debtor’s monetary liabilities exceed the value of its assets, liabilities arising from the issuance of capital bonds and subordinated loans are not taken into account.
The law also clarifies the order in which receivables are satisfied in the event of bankruptcy of a bank or brokerage house – in particular, by including in the fifth category receivables from liabilities incurred in order to be counted as part of the brokerage house’s own funds, in respect of which the Financial Supervision Commission (FSC) has not granted permission for such counting.
The law introduces a new recapitalization instrument, which will be the Treasury’s coverage of institutions’ capital shortfalls. It will consist of the Treasury’s subscription or purchase of Common Equity Tier 1 instruments, or Additional Tier 1 instruments, or Tier 2 instruments, on terms that do not deviate from average market conditions.
Such support will be able to be provided at the institution’s request if it meets certain conditions and submits a plan to cover capital shortfalls, which it will be required to follow. The law further specifies that recapitalization instruments will only be allowed to be applied to prevent a serious disturbance in the economy, as long as it is proportional to the scale of the threat, is preventive and temporary, and does not serve to cover losses that the entity has suffered or may suffer in the near future. Recapitalization instruments will be used only if the FSC orders an institution to comply with the additional own funds requirement and the measures taken by the institution do not prove sufficient.
The law is to enter into force on October 1, 2023, with the exception of the indicated regulations entering into force on other dates (on the day following the date of promulgation, on May 22, 2023, and 14 days after the date of promulgation).
Source: ISBnews
