Introduction and other relevant changes – Financial Legal Update – Portugal

Numerous legal changes have been approved in recent months or enter into force during the course of 2019, having already been published last year, which will have an impact on the Portuguese capital markets and, more broadly, on financial activities developed in Portugal.
At an EU level, we firstly highlight the full entry into force, on 21 July 2019, of Regulation 2017/1129 (the “New Prospectus Regulation”), which will inter alia entail relevant changes in the drafting of prospectuses, including their summary and risk factors sections.


We have, however, selected another legal change, with both an EU and a Portuguese driven component, to discuss in greater detail here, not disregarding the importance of the changes outlined above, but rather focusing on a matter that we believe will have  relevant and long-lasting effects, shaping the Portuguese capital markets and, from a wider perspective, the banking and financial activity in our jurisdiction.


Senior Non-Preferred Notes

Law 23/2019 was published on 13 March 2019, implementing Directive (EU) 2017/2399 and thereby acknowledging in the Portuguese legal system “senior non-preferred notes”, a new class of instruments foreseen in this Directive. It was implemented by amending Decree-Law 199/2006, of 25 October 2006 (on the liquidation of credit institutions and financial companies).

These instruments are now available to be issued by Portuguese credit institutions (and certain investment firms), for the purposes of building their minimum requirement for own funds and eligible liabilities (“MREL”), as foreseen in Directive 2014/59/EU (the “Resolution Directive”). MREL serves as a buffer in case of resolution, to ensure that those liabilities are bailed-in (by write-off or conversion into capital instruments) before other available senior liabilities. The required MREL levels are individually set by the regulator and the final levels started to be notified this year to the relevant credit institutions, who will benefit from a gradual adjustment period over the next years.

Ordinary claims under certain debt instruments shall be paid in insolvency, after all other ordinary claims have been paid in full and before the subordinated claims are paid. The maturity of the instruments shall be of at least one year, they should not be derivatives (or have them embedded), and their terms & conditions/prospectus should expressly disclose the above ranking of claims.

Our expectation is that banking issuers will generally adjust their EMTN Programmes to foresee this type of instruments, in the context of their standard annual programme updates this year, and that the market will witness first issuances during the second half of 2019. Note that in earlier updates, the language used in all or most of the EMTN terms & conditions was already adjusted to avoid a conflict between the ranking of this new class of instruments and tier 2 instruments (at least the new tier 2 instruments, compliant with Regulation (EU) 575/2013 – the “CRR”).

The implementation of this Directive and legal acknowledgement of senior non-preferred notes was long-awaited, and it is clearly positive that the legislator did not deviate from the Directive requirements.


Important remark

The law goes beyond the Directive, creating so-called “credit privileges” (“privilégios creditórios”) – a type of security interest under Portuguese law – to the benefit of those deposit-holders who did not benefit from such entitlements thus far. Accordingly, all claims for deposits will generally rank ahead (for such security) of other senior unsecured bank liabilities, notably senior unsecured bank EMTN or other notes.

This legal amendment seems to have long been at the back of the minds of the legislative bodies, who now took this opportunity to introduce it alongside the Directive. It is not a unique type of route in Europe; Germany and Italy had already followed the depositor preference approach. This is intended to reinforce confidence in the Portuguese deposit base and financial system, but may, on the other hand, put ordinary senior unsecured bank liabilities under some rating and pricing pressure.

Banking issuers should, in any case, update their risk factors disclosure in prospectuses, noting that all deposits benefit from creditors’ privileges and will be ranking ahead for privileges vis-à-vis senior unsecured bank liabilities.

By Pedro Cassiano Santos, Head of Practice Partner Banking & Finance