Bank financing provided by Japanese lenders is playing an increasingly important role for European shipowners. With CRD VI, the European Union (EU) has now adopted a new regulatory framework intended to harmonise the regulation of lending to borrowers in the EU and other countries, such as Norway (European Economic Area (EEA)).

Dr Clemens Hillmer, Partner at the law firm NoordenJones, commented to Japan Maritime Daily on the implications of CRD VI and the measures Japanese lenders could take.

CRD VI provides that non-EEA banks granting loans to customers in an EEA country will generally be required to establish an authorised third-country branch in the relevant country in which the borrower is based. Depending on its risk class, such a branch must maintain at least EUR 5 million in a local account. It is important to note, however, that such a branch does not benefit from an EU passport and may therefore generally provide lending services only in the country in which it is authorised. Therefore, if a bank would like to lend to borrowers in more than one country, the bank would need to open a branch in each country, and it may also need to maintain at least EUR 5 million in each country. As Japanese ship financiers generally have customers in more than one EEA country, this structure will often not be suitable for a Japanese bank due to the costs involved.

Dr Hillmer further explains that an authorised EU subsidiary of a Japanese bank would not fall under the CRD VI third-country branch regime. Unlike a branch, such a subsidiary can benefit from an EU passport and may generally provide lending services throughout the EEA. However, such a subsidiary must be appropriately staffed and is subject to extensive regulatory supervision. While some Japanese banks already have subsidiaries in the EU, in such cases the subsidiary should generally also act as the lending office, rather than the parent company in Japan. However, it is also important to note that a London subsidiary of a Japanese bank would not be sufficient to conduct lending business with EEA borrowers, as such a London subsidiary does not have an EU passport.

Dr Hillmer suggests several other structuring alternatives besides establishing a branch or subsidiary. One is reverse solicitation: if the customer, such as a shipowner, approaches the bank exclusively on its own initiative and requests financing, it may be permissible for the loan to be granted directly from Japan rather than through a branch or subsidiary in Europe. However, this exemption must be interpreted narrowly. The bank must be able to demonstrate this to the regulatory authorities, for example through email correspondence with the customer, written confirmation from the customer and internal records. Dr Hillmer states: “If a lender intends to build a substantial portfolio of borrowers in Europe, it should not rely on this exemption as a long-term structuring solution.” For isolated lending transactions, however, reverse solicitation may be available if the bank has in fact been approached by the borrower in accordance with the reverse-solicitation requirements.

If a bank wishes to expand its business in Europe, but does not wish to establish a subsidiary or branch immediately, it may also establish a credit fund, for example in Luxembourg. Such a credit fund must be managed by an Alternative Investment Fund Manager (AIFM). The Japanese bank and, where relevant, other investors would then provide equity to the credit fund, and loans to EEA borrowers would be granted through the credit fund. The credit fund itself does not need to employ its own personnel. Representatives of the Japanese bank may, subject to applicable advisory, delegation and marketing rules, identify transactions and act as advisers or origination partners. However, the granting of loans must be approved by the AIFM, which will assess in particular whether the proposed loan is consistent with the fund’s investment criteria. Numerous service providers offer to act as external AIFM. Dr Hillmer states that “such a credit fund could provide a good first entry point into the European market for a Japanese bank seeking to build a larger portfolio.”

Dr Hillmer highlights further points. While local European entities, such as a KG in Germany, an A/S in Denmark or a CV/BV structure in the Netherlands, may act as borrowers, shipowners and borrowers in Greece are often structured through SPVs, for example in the Marshall Islands. There are good reasons to conclude that CRD VI may not apply in such cases because the borrower is not an EU entity. This must nevertheless be assessed on a case-by-case basis, particularly where the actual management decisions of the SPV are made in Greece.

Dr Hillmer further explains that “there are good reasons to conclude that Japanese leasing companies should not qualify as banks for the purposes of CRD VI and may therefore fall outside its scope”. However, this must again be assessed on a case-by-case basis. The decisive factor is not merely the description of the entity as a leasing company, but whether it takes deposits, as well as its actual activities and funding model. However, and this is important to note, even where CRD VI does not apply, national banking regulatory rules may still be relevant, including for leasing companies providing loans, and must be observed.

Dr Hillmer further clarifies that financial leasing (depending on the terms, including JOLCOs and sale-and-leaseback transactions) will not fall within the scope of the CRD VI branch regime, but national leasing regulations in the relevant jurisdictions must nevertheless be observed. For example, in Germany a financial lease generally requires authorisation by the German regulatory authorities. However, this authorisation requirement is also subject to an exemption where reverse solicitation applies.

Japanese banks and leasing companies should therefore carefully assess the regulatory treatment of the relevant financing structure before granting a loan or entering into a financial lease. As Dr Hillmer puts it, “CRD VI, national banking law and national leasing law must always be considered together.”