Debt finance

Lending

Under Portuguese law, home mortgage loans and consumer lending are regulated activities. Only credit institutions and financial companies can carry out such credit operations and therefore the lender (credit institution or financial company) will need to be authorized by the Bank of Portugal to conduct such business.

Home mortgage loans are subject to specific rules (eg early repayment rules). Credit institutions have the obligation to inform consumers about the calculation of the effective interest rate (TAE), any promotional conditions and early repayment conditions.

Regulated credit agreements are subject to specific requirements regarding the terms of the agreement. Prior to the execution of a regulated credit agreement, the lender must assess the solvency of the consumer borrower.

Borrowing

While borrowers are generally not regulated, it is advisable for borrowers to consider whether either the mortgage or consumer lending regimes apply to them, as they may benefit from the protections mentioned above.

Lending in Portugal can be structured in several different ways to include a variety of features depending on the commercial needs of the parties.

A loan can either be provided on a bilateral basis (a single lender providing the entire facility) or syndicated basis (multiple lenders each providing parts of the overall facility).

Syndicated facilities by their nature involve more parties (such as agents and trustees which fulfill certain roles for the finance parties), are more highly structured and involve more complex documentation. Larger financings will typically be done on a syndicated basis with one of the syndicates taking the lead in coordinating and arranging the financing.

Loans will be structured to achieve specific objectives, eg term loans, working capital loans, equity bridge facilities, project facilities and letter of credit facilities.

Loan durations

The duration of a loan also varies between:

• a short-term loan, with a maturity date not exceeding one year;
• a medium-term loan with a maturity date exceeding one year but not exceeding five years; or
• a long-term loan, with a maturity date exceeding five years.

Loan security

A loan can either be secured, unsecured or guaranteed. For more information, see Giving and taking guarantees and security. 

Loan commitment

A loan can also be:

• committed, meaning that the lender is obliged to provide the loan if certain conditions are fulfilled; or
• uncommitted, meaning that the lender has discretion whether or not to provide the loan.

A breach of a loan commitment will only create a contractual liability by the breaching party, which gives the innocent party the right to call for a contractual remedy or to be indemnified.

Loan repayment

A loan can also be repayable upon demand, on an amortizing basis (in installments during the life of the loan) or scheduled (usually meaning the loan is repayable in full at maturity).

Lending to institutional/professional borrowers is subject to less regulatory oversight and so less burdensome from a compliance perspective.

By contrast, lending in the context of mortgages and to consumers is a regulated activity. For more information, see Lending and borrowing – restrictions.

Portuguese law recognizes the principles under which one person or entity may act on behalf of another as attorney.

The Portuguese legal system does not recognize the concept of a trust.

Generally

Loan agreements and other finance documents are subject to general contractual principles. However, it is important to note that interest rates are capped by law and therefore, loans provided to institutional/professional entities are subject to the limit established for commercial interest rates which is updated every six months and is currently set at 7%.

The Legal Regime on Credit Agreements for Consumers establishes a number of requirements on lenders when dealing with consumers, including the need to:

• conduct affordability tests before lending; and
• provide standard information about a mortgage to enable borrowers to compare products.

Standard form documentation

Bilateral finance transactions are more likely to be documented on bank standard form documentation prepared in-house but which usually tend to follow the form of the Loan Market Association (LMA) adapted to Portuguese standards and legal requirements.

Borrowers should be aware of the potential implications of the Banking Act, which outlines certain measures for dealing with failing financial institutions.

The Banking Act gives the Bank of Portugal the power to ‘bail in’ obligations of failed Portuguese financial institutions. ‘Bail in’ describes a variety of write-down and conversion powers, such as the power to convert certain liabilities into shares or cancel debt instruments. In the case of Portuguese contracts, such powers override what the parties have agreed at a contractual level.