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Those arranging bond issuances in Latvia often have practical questions about the regulation of a collateral agent’s functions. Until 12 July 2024, this was a very complex question with several possible answers.

Theoretical uncertainty contributed unnecessary worries amongst bond issuers and investors, however, these legal risks never became an insurmountable obstacle during the issuance process, nor were they risks that were “priced” into the interest rate increases or otherwise adversely affected the bond sales process.

The amendments brought about on 4 July 2024 to the Financial Instruments Market Law (Finanšu instrumentu tirgus likums) are undoubtedly a positive development. Some of the known risks concerning the rights and obligations of a collateral agent have been resolved, however, not all of the risks have been fully covered by the recent amendments.

A number of ambiguities still remain, for example, concerning the text of the terms of the issue and prospectuses, as well as the wording and the collateral agreements entered into. The respective amendments do not cover, for example, the issuer’s contract with the collateral agent, as well as the insurance of pledged assets, which is also an important aspect of bank financing.

The most interesting text within the amendments to the Financial Instruments Market Law is contained under Article 91.2:

“(1) The collateral agent in relation to the debtor, the collateral provider, or any other person, shall have the rights and obligations arising from the information document, the terms of issue or the prospectus and the collateral agreement.

(2) In exercising the rights and obligations set out in the information document, the terms of issue or the prospectus and the collateral agreement, the collateral agent acts on its own behalf but in the interests of the holders of the debt securities.”

Overall, this is a small but all important step for the development of the capital market in Latvia.  Including, the avoidance of confusing and ambiguous terminology, such as “parallel liabilities” or “parallel debt” and other terms that do not comply with the Civil Law (Civillikums) within the terms of the bond issuance and prospectus.

The parties (the issuer and collateral agent) will have to agree on the terms of the collateral agent agreement, the pledge agreement and the insurance contract.  As the amendments now provide that the collateral agent acts “in the interests of the holders of the debt securities”, it is clear the role, rights and obligations of the collateral agent must be distinguished from the competence of the issuer’s advisors (who prepare the terms of issue or the prospectus) with the interests of the issuer as a primary consideration, in order to avoid a potential conflicts of interest.

One question to note is whether any deviations from the market practice (for instance, compared to bank financing), is the need for the collateral to be disclosed in the terms of issue or prospectus. If the issuer does not want to insure the pledged assets or does not want the insurance indemnity to be paid to the collateral agent, this should, in our view, be disclosed in the terms of issue or in the prospectus as this is part of the risk the debt holders should be aware of as it affects, inter alia, the risk of debt repayment.

The annotation to the amendments highlighting the lack of precedent before the Latvian courts is not entirely accurate, as there is although limited.  The Latvian courts are beginning to develop some experience in cases involving claims by the collateral agents. For example, in 2010 our law firm was authorised by an Estonian bank to enforce against Alta Capital Group, whereby the court of first instance fully recognised the claim of Swedbank” AS as a collateral agent under the applicable Latvian law. Civil proceedings were initiated and the claim was upheld.

Finally, it should be recalled the collateral agent is a person specifically authorised by the creditors, whose liability will be assessed, inter alia, under the provisions of the Civil Law , taking into account the liability of the trustee, who is liable to the principal for any negligence caused.

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VILGERTS law firm provides legal advice on bond issuances and collateral agent services. Since 2024, the firm has been providing collateral agent services in connection with a number of bond issues in Latvia, with total bond claims in excess of EUR 100 million. In connection with this article or the Firm’s services regarding bond issuances or collateral agent services, please contact Gints Vilgerts, Partner of the Firm ([email protected]), mobile. +371 29107768.