Direct lending coming to Norway

Direct lending is the provision of bilateral loans directly from lenders other than banks to corporate borrowers. In the Norwegian market, debt financing is typically a choice between the traditional bank market or the issuance of bonds. Over the last decade however, bank lending has become more difficult to obtain for many companies within industries such as shipping and offshore due to, e.g., capital requirements within the banks, ESG considerations, and limited risk ­appetite within the banks for certain shipping and offshore asset classes. Moreover, bond issuances are not always the right solution for issuers, depending on all aspects of investor demand and sophisti­cation of the issuer. As a consequence – and as an alternative – direct lending from specialised funds has grown rapidly as a source of ­lending, and according to Preqin and Fidelity, assets under management have increased from approximately EUR 40 billion in 2014 to EUR 250 billion in 2022 in the EU alone.

The Norwegian banking monopoly

Whilst alternative investment funds are able to offer credit to borrowers in most European jurisdictions, Norway stands out as having one of the most restrictive credit regimes in Europe. Pursuant to the Norwegian Financial Institutions Act of 2015, so-called “financing activities” are subject to the lender having a licence as either a bank, a credit mortgage institution, or a financing company. To obtain such a licence, substantial regulatory requirements apply (mostly in relation to capital requirements and banking resolution rules). These requirements create high entrance barriers for providing credit in Norway, and are in effect barring direct lending funds from operating in Norway, unless they can rely on the exemptions the Act provides. In this respect, Norway stands out also compared to our Scandinavian neighbours; in Denmark, offering credit to non-retail borrowers based on own balance sheet does not require a licence, and in Sweden, a simple registration procedure is sufficient. 

Current exemptions ­allowing for direct lending

There are certain exemptions from the Norwegian banking monopoly, which allows for direct/non-bank lending. The most practical exemptions are as follows:

• Investments in bonds are not considered as financing activity
• Financing within a group of companies 
• “One-off” financings 
• Seller’s credit 
• Financings as a result of ­“reverse solicitation” to corporate ­borrowers
• Pension schemes and life insurance companies may provide financing under certain conditions
• ELTIF, EuVECA and EuSEF funds may provide financing under specific regulations

Several of these exemptions are relatively frequently used in the Norwegian market, however, any potential lender considering ­entering the Norwegian market should carefully analyse if an exemption is applicable and also take into consideration that these exemptions can be complex to rely on as a long term business strategy. That being said, foreign direct lending funds do have a presence in Norway (including direct lending funds established outside of Norway, and managed from Norway), and they all have to rely on these exemptions. 

ELTIF is currently the only regime that allows for direct ­lending in an organised and larger scale. However, Norway has only implemented the first version of ELTIF (commonly referred to as “ELTIF 1.0”), which is widely regarded as an unsuitable framework for most managers and investors and as such, a relative failure in the EU with only about 50 ELTIF 1.0 funds established in the whole of the EU. To date, there is only one ELTIF established in Norway.

Coming exemptions ­allowing for direct ­lending

Whilst the regulatory framework has so far held back direct ­lending in Norway compared to other European jurisdictions, certain legislative changes are on their way which could pave the way for more direct lending in the Norwegian market. 

• AIFMD 2: AIFMD 2 includes a regulatory framework governing credit funds (“loan-originating AIFs”), which would allow for financing from alternative investment funds (“AIFs”) in Norway. This will be a significant ­development in terms of allowing direct lending funds full access to the Norwegian market. AIFMD 2 entered into force in the EU on 15 April 2024 with a transposition deadline two years later on 16 April 2026. It remains to be seen whether Norway is able to implement AIFMD 2 within the deadline.
• ELTIF 2.0: In order to address the shortcomings of ELTIF 1.0, “ELTIF 2.0” has been adopted in the EU, but has not yet been implemented in Norway. ELTIF 2.0 has been improved compared to ELTIF 1.0, and there is a lot more uptake of this fund type in the EU already. ELTIF 2.0 ­entered into force in the EU on 10 January 2024. It is unclear when the regulation enters into force in Norway.
• Shareholder financing: The exemption for financing within groups is proposed to be ­expanded to include financing of companies where the shareholder holds more than 1/3 of the shares or votes. The proposal has not yet been adopted, and during the hearing a lower threshold has been suggested by several Norwegian market participants. Once enacted, financing of portfolio companies may rely on this exemption, even if the ownership is less than 50 per cent.

All of the above will expand the possibilities for non-bank lending in Norway. As the conditions and demand for alternative ­financing in Norway should be attractive, especially within the fields of shipping and offshore, we expect a significant uptick in this asset class once the regulatory constraints are removed, and we see significant interest for direct lending mandates among our clients, both potential borrowers and lenders as well as from the financial intermediaries.