Infrastructure development is, and will continue to be, a leading sector of the economy in Bulgaria and Eastern Europe over the next few years. As sponsors and banks conduct much greater due diligence, this article considers which remedies in the security package are effective in practice. This is of course a ‘hot’ issue in the context of non-recourse project financing.
Step-in rights: limitations
A standard collateral structure for project financing requires the creation of a security interest over the main project agreement, thus allowing the lender to step in the rights of the company in the event of a default.
The common law mechanism of a step-in right is not recognised under Bulgarian law. Rather, any stipulation in a security agreement to the effect that, in the event of the borrower’s default, the lender will become an owner of the security assets is unenforceable.
The case law, with regard to the scope and applicability of this provision, refers solely to the nullity of ownership transfer arrangements between the mortgagor and the mortgagee. There is no court practice whether the prohibition covers the replacement of the borrower in the revenue producing project agreements. Some Bulgarian academics found that such replacement is exempted. Furthermore, these academics propose that the limitation should be explicitly repealed in relations between merchants as being commercially not justified. It is specified that the businesses need less regulation in comparison with relationships between non-commercial operators and that the limitation aims to protect the non-commercial operators.
Additional limitations for the step-in rights exist in the Public Procurement Act 2004, where the parties to a public procurement agreement are generally prohibited from amending it once it has been concluded. This prohibition also refers to the replacement of the awarded bidder by the lender because of the various requirements towards the candidate for a contractor of a public procurement.
An acquisition is possible; however, it is indirect, on the basis of enforcement of the permitted securities, having the form of a mortgage or pledge. Certain options for direct acquisition exist, but they can be agreed subsequently, not in advance and could be in various forms of liabilities termination, such as datio in solutum (giving in payment).
Fixtures or movables
In terms of security interests over infrastructure and utilities, Bulgarian law differs between collateral over immovable and collateral over movable objects.
Mortgage/business enterprise pledge
Infrastructure elements and fittings that can be defined as fixtures on the land and inseparable attachments to the buildings are subject to mortgage or a ‘going-concern’ pledge. The prevailing practice is to use a going-concern pledge rather than a mortgage. Unlike enforcement of a mortgage, which goes through a formal tender process, the lender to a pledge may sell or restructure the debt in the most efficient manner. The pledge is also advantageous to the borrower, due to the significantly lower registration fees than those applicable for the mortgage. Provided that the ‘going-concern’ pledge is properly registered with the relevant registry for the asset concerned (in the case of immovables, with the Land Registry), it attaches to the specific asset and ‘follows’ its transfer to a third party. Otherwise, both liens substantially create the same security rights and priority ranking and are considered alternatives to each other.
Where infrastructure project elements are deemed to be a movable asset, they can be encumbered by a ‘registered’ pledge, whereby the pledger retains possession, use or management of the pledged property until commencement of the enforcement.
OBJECT CHARGED: SPECIFICS
Power generation and transmission
Power plants are defined by the law as an aggregate of technologically connected facilities, installations and auxiliary elements for generation of electricity, heat, and/or for combined generation of heat and electricity. In their complexity they represent fixtures to the land, and by applying the legal definition for immovable property they can be regarded as real property and can subsequently be charged by immovable collateral. It is currently unclear how wind turbines and photovoltaic panels are treated. Though the prevailing opinion of legal practitioners is that they should be legally considered as immovable property, the Bulgarian courts have not yet set a clear precedent.
The transmission network includes water, gas, electricity, and heating pipelines, as well as cable lines and cable equipment. Similar to the question on the capacity of the green energy production facilities, so far the legal doctrine has not established a consistent interpretation of the status of pipelines. To the extent that these lines are permanently fixed to the land, they could be regarded as immovable, and can thus be subject to a mortgage. Arguably, if the networks are built on a module design, they should be treated as movables. The question has recently been raised with regard to the pan-European transmission projects that pass through the territory of Bulgaria, such as the Nabucco gas pipeline project. The criterion used by the legal scholars for classifying gas pipelines as immovable properties is the permanence in the fixing of these pipelines to the land (Alexander Georgiev in Property and Law magazine, issue 4/2003). It should be further pointed out that, as an additional test, it should be examined whether, upon separation from the ground of the pipeline, the existing function and usage of the land could be damaged and its value decreased.
It only looks simple
The practice with recent renewable energy projects shows that it is often the case that, rather than acquiring full title to the underlying land, developers acquire only a construction right. This specific right, which belongs to the category of ‘limited ownership’ rights under Bulgarian law, can be a separate object charged by a mortgage or a going concern pledge. But what is advantageous to the borrower could be disadvantageous to the lenders, since there are certain limitations to construction rights that expose a secured creditor to a risk that needs to be considered upon the title due diligence and structuring of the events of default under the financing.
Other specifics exist for the easements. They service the power plant for routing the cables, for instance, but are not separate property rights and cannot be mortgaged separately from the real estate. There are practical issues related to these ‘energy’ easements, and they need to be consulted with appropriate counsel.
Telecommunications networks pass through properties with different ownership status, public and private. The company that delivers and provides social telecommunication networks and services retains an ownership over them by virtue of law. However, the law introduces a special form for their disposal that excludes the notary deed, which is why they cannot be charged by mortgage. Thus only a going concern pledge is permitted.
These infrastructure elements are divided into:
- equipment for waste disposal, treatment and utilisation, which can either be fixed or movable and respectively charged by alternative collateral; and
- what are known as ‘open objects’, such as waste treatment sites. By characterising them as ‘open’ property, these sites do not lose their identification, and their disposal and mortgaging as immovables is permitted to the extent that they are not located over public state property.
Water and water treatment
The legal regime of water objects defines them predominantly as public state or public municipal property, and their charging by security interest is not permitted, unless the water objects (lakes, storage dams) are located on a property which is private. Waterways in their majority are also public ownership and taking of security over them is not allowed. An exception exists for waste waterways, which service a private property. They are hence also treated as private and could be charged by security interest – again, not separately, but only together with the real estate they are crossing through.
The first consideration for the lender to understand before entering a transportation infrastructure financing is, again, the property regime of the objects, and whether they are prohibited for private ownership. Most of these properties have a special regime of operation or maintenance that is assigned to entities controlled by the government. It provides for a sovereign immunity over the assets, thus precluding a foreclosure. This limitation cannot be contractually waived.
The national road network is under the protection of the constitution, being explicitly classified as a ‘public state property’. Thus it cannot be subject to security interest.
The law defines an airport as a part of the land or water (including all buildings and equipment), designed in whole or in part for the arrival, departure and movement, on the surface, of the aircraft and for serving their passengers, cargo and mail. Consequently, it can be classified as real property. The civil airports for public use may be administered or exploited by private persons through (limited term) concession arrangements, as set out in the Concessions Act , which does not repeal their public status. The currently granted concessions are very broad and they typically cover all main infrastructure elements, including the cargo facilities and the terminal buildings. They cannot be subject to security interest. It is expected that this will be changed by the adoption of the Public Private Partnership Act, a draft of which was proposed by the Council of Ministers. Alternatively, the land and terminals of the private airports, which are limited in number so far, can be charged by mortgage or going concern pledge.
The objects of railway infrastructure and the land on which they are constructed or which is designated for their construction are public state property. They are operated and managed by the National Company Railway Infrastructure or by merchants, to whom a concession is granted, pursuant to the Concessions Act . Consequently, they cannot be encumbered by securities. The elements that are excluded from the concession, such as the rolling stock, can be subject to pledge.
The public ports in Bulgaria are regulated as branches (territorial divisions) of the governmental entity Port Infrastructure. These ports are protected by sovereign immunity and cannot be subject to securities and, subsequently, to enforcement. The law further differentiates, under a separate regulation, the commercial vessel equipment, which is treated in the same way as the commercial vessel and can be encumbered by a mortgage of the type of a maritime mortgage.
Energy production facilities (power plants) or other property subject to licensing are transferred following the permission by the State Energy and Water Regulation Commission. Security interest over property used for performing an activity subject to licensing can be established with the prior permission of the Commission. Non-compliance with this limitation can invalidate the collateral. Similar requirements exist for other facilities as well.
No particularities of precedence apply to infrastructure financing. Rather, the general priority regime applies. There are certain ‘hidden’, unregistered claims that have priority over the claim of a first-ranking secured creditor. Such prior ranking statutory claims, in general, are the claims of the state for unpaid taxes, social insurances and custom duties. Additional risks are associated with the insolvency rules of challenging collateral. These cover the so-called suspicious period transactions, where the insolvency administrator is entitled to challenge certain transactions, including the granting of security effected by the borrower within a certain period before the opening of insolvency proceedings and the disadvantageous for creditors transactions that can be voided.
In conclusion, although there will be a focus on infrastructure lending, lenders will have to properly assess the practical liquidation value of the secured assets and the practicalities of security.