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Albania

Regulatory Impact Analysis on the draft law of

Corporate and Municipal Bonds

Avv. Mauro Baldissoni

Partner - Tonucci & Partners, Rome

Avv. Neritan Kallfa

Senior Associate - Tonucci & Partners, Tirana

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TABLE OF CONTENTS

1. SCOPE OF WORK ____________________________________________________3

2. METHODOLOGY _____________________________________________________5

3. RELEVANT LEGAL FRAMEWORK _______________________________________7

4. COMPARATIVE FRAMEWORK__________________________________________8

5. RELEVANT STEPS FOR THE ISSUANCE OF CBs __________________________23

6. ISTITUTIONAL FRAMEWORK _________________________________________29

7. CASE STUDY _______________________________________________________37

8. THE COSTS OF THE CBs ISSUANCE ____________________________________41

9. ALBANIAN TERMINOLOGY ___________________________________________47

10. CONCLUSIONS ____________________________________________________50

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1. SCOPE OF WORK

The developments of the Albanian financial systems have been accompanied by a

thorough legal reform aiming at creating a legal system in conformity with the best

international practices and local commercial legal framework. The Albanian legal reform

in the financial system has required not only a complete revision of the existing

legislation but also the introduction of whole series of new legal institutes, such as

securities, derivative financial instruments, future and option contracts, and agencies,

such as the Albanian Financial Supervisory Authority .

In 2007, at the request of the Albanian Financial Supervisory Authority (the “AFSA”),

the European Bank for Reconstruction and Development (the “EBRD”) started a new

project in order to enhance the Albanian securities markets legislation and provide

corporations and municipalities with alternative means of raising debt capital for the

financing of their development. Within this context, the EBRD has undertaken an

initiative in order to improve the quality of legislation through the preparation and

adoption of corporate and municipality bond new legislation.

Mauro Baldissoni and Neritan Kallfa, lawyers at Tonucci and Partners (“T&P”) are

acting for the EBRD in connection with the implementation of Regulatory Impact

Analysis (“RIA”) on the draft law on Corporate and Municipal Bonds (“DLCB”).

The project aims at assessing the impact of the provisions to be introduced by DLCB and

at identifying the issues arising out of DLCB on the Albanian securities market and, in

particular, on the Albanian legal framework actually in force.

In particular, T&P have been instructed to perform said assessment by simulating the

issuance of corporate bonds by a joint stock company to be selected by AFSA.

We understand that AFSA encountered some difficulties in identifying a suitable issuer,

due to the reluctance of Albanian companies to be available for the simulation. That

being said, we selected Stefani & Co Sh.A., an Albanian joint stock company, which

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accepted to co-operate with us and was interviewed for understanding problems raised by

DLCB. Raiffeisen Bank Sh.A. was also interviewed in order to test the feasibility of the

DLCB, as a potential arranger and underwriter of the CBs issued by Stefani & Co Sh.A.

This report of T&P (the “Report”) has been structured to describe:

(i) the methodology used in performing the analysis;

(ii) the problems related to the letter of law so as to flag provisions which are not

compliant with the existing Albanian laws or can introduce a problem of conflicts

among different laws;

(iii) suggestions on how such issues should be handled, if any;

(iv) the potential impact that the DLCB may have in the Albanian market;

(v) the costs that issuers are likely to face; and

(vi) the ability of Albanian institutions to implement the new legal framework.

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2. METHODOLOGY

Two methods of analysis are used: (A) RIA and (B) the case study analysis.

(A) As far as RIA is concerned, T&P compared the existing legal framework with DLCB.

Such approach is applied from three perspectives which are not necessarily independent

form each other. These perspectives are as follows:

(i) Simulative application of the draft law. We have applied the procedures set out in

the DLCB in order to simulate the issuance of the corporate bonds (“CBs”). From this

perspective, we also tried to follow and simulate the application of the rules on the

organization of the bondholders’ group. Further, the above simulation was closely

integrated with the joint application of the laws which, according to our opinion,

complete the full picture of this matter. This comparative methodology is used in order to

highlight the inconsistencies and potential conflicts of the DLCB with related laws.

(ii) Simulative instruments for the issuance of CBs. We have identified and examined

the documents deemed necessary for the issuance of the CBs. This perspective is relying

on the overall requirements applicable for the securities under the Law on Securities.

Through the above methodology we intended (a) to highlight the inconsistencies and

potential conflicts of the DLCB with related laws, similarly to the perspective under item

(i) above but from a different angle, and in addition (b) to discern potential disparities

regarding the products (i.e. the documents to be produced) as well as the competent

bodies of the issuer involved in the CBs issuance process (i.e. competence).

(iii) Simulative institutional framework. From this perspective, we have identified and

considered the overall picture of the service providers for the issuance of the CBs. This

methodology highlights the overlapping of the competences of different service

providers. This method is also used also to identify different stages of the CBs issuance

and the effective operation of the service providers (i.e. licensed entities) in the Albanian

market.

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(B) The case study research has been based on participant observations and interviews

with Stefani &Co Sh.A. and interviews with Raiffeisen Bank Sh.A.

Stefani &CO Sh.A. is a joint stock company very dynamic in the Albanian market, active

in the foods and beverages industry. We have interviewed certain shareholders, members

of the board of directors and the CEO of Stefani &CO Sh.A. The interviews took place in

November 2008 and were conducted in order to assess the willingness and capabilities of

the company to undertake the process and produce all the documentation required for the

CBs issuance.

In November 2008 we have also interviewed a member of the Investment Banking Board

of Raiffeisen Bank Sh.A. in order to test the feasibility of the DLCB and to assess the

willingness of Raiffeisen Bank Sh.A. to participate in the CBs issuance process.

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3. RELEVANT LEGAL FRAMEWORK

The relevant legal framework examined by us is the following:

- Law no. 9572, dated 3.7. 2006 “On the Financial Supervisory Authority”

(“LoFSA”);

- Law no. 9879, dated 21.1.2008 “On Securities” (“LoS”);

- Law no. 9665, dated 21.2.2006 “On the state borrowing, state debt and loan state

guarantee of the Republic of Albania”;

- Law no 7850 dated 29.7.1994 “On the Civil Code of the Republic of Albania”, as

amended;

- Law no 8116 dated 29.3.1996 “On the Civil Procedure Code of the Republic of

Albania”, as amended;

- Law no. 8537, dated 10.10. 1999 “On the securing charge”;

- Law no. 9901, dated 14.4.2008 “On Entrepreneurs and Companies” (“LoC”);

- Law no. 9723, dated 3.5.2007 “On the National Registration Centre” (“LNRC”);

- Law no 8901 dated 23.5.2002 “On Bankruptcy”;

- Law no. 8269, dated 23.12.1997 “On the Bank of Albania”, as amended;

- Law no. 9662, dated 18.12.2006 “On Banks in the Republic of Albania”;

- Law no. 9880 dated 25.2.2008 “On the Electronic Signature”;

- Stabilization and Association Agreement (“SAA”) and the Interim Agreement on

Trade and the trade related issues between the Republic of Albania and the

European Communities entered into force on 1 December 2006;

- National Plan for the implementation of SAA VKM no. 463 dated 5.7.2008;

- Directive 2003/ 71/ EC of 4 November 2003 on the prospectus to be published

when securities are offered to the public or admitted to trading and amending

Directive 2001/34/EC;

- Directive 2004/ 109/ EC of 15 December 2004 on the harmonization of

transparency requirements in relation to information about issuers whose

securities are admitted to trading on a regulated market and amending Directive

2001/34/EC.

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4. COMPARATIVE FRAMEWORK

Table no. 1 of this Report shows the results of a comparative analysis of the DLCB

provisions and the LoS currently in force in order to flag issues raised by the application

of the DLCB, together with suggestions about how such issues should be handled. This

table is structured as follows:

- the first column identifies the relevant issue;

- the second column reports the relevant provisions of the LoS, LoC or other

relevant law;

- the third column reports the relevant DLCB provisions;

- the fourth column includes T&P comments on the relevant issue.

This comparative analysis highlights the following issues:

1. There is a discrepancy between the definition of “registrar of securities” and

“custodian of securities” included in LoS and the definition of “Account provider”

included in the DLCB;

2. There is a discrepancy between the term “bond owner” included in the LoS and

the term “bondholder” included in the DLCB;

3. There is an interpretive uncertainty between the provisions dealing with

registration of dematerialized bonds in the LoS and the DLCB;

4. There is a discrepancy between the definition of bonds in the LoS and the DLCB;

5. The DLCB includes a provision on conditions for the issuance of dematerialized

secuities that duplicates another provisions already included in the LoS;

6. There is a discrepancy between the types of bonds listed in the LoS and those

permitted under the DLCB and conflicting provisions on the authority to

determine further types of bonds;

7. The definition of Bearer Bonds is missing from the DLCB;

8. There are discrepancies between the elements of electronic bonds under the LoS

and the elements of paper bonds under the DLCB;

9. The “Account Provider” is required to perform activities in addition to those of a

custodian under the LoS and the securities registrar is required to perform

payment services in addition to those under the LoS;

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10. The content of the Bond loan program under the DLCB is not specified;

11. The minimum number of people required to form a Bondholders group under the

DLCB is not specified and it is not clear how the provisions relating to the

Bondholders group apply when the number of Bondholders changes above or

below the minimum during the life of the bonds;

12. There are overlaps and interpretive issues with respect to LoC provisions referred

to in the DLCB;

13. The DLCB does not expressly authorize securing charges to be taken over bonds;

14. There is an interpretive issue as to the definition of “terms of Bond loan” under

the DLCB:

15. There are incomplete cross references in DLCB provisions dealing with bond

distribution;

16. The corporate body competent for the issuance of the CBs and the DLCB

provisions on quorum for bonds issuance are inconsistent with the LoC;

17. The DLCB quorum for bond issuance is inconsistent with LoC provisions referred

to in the DLCB;

18. The reference to Board of Directors only in DLCB provisions dealing with bonds

conversion is inconsistent with the two-tier corporate governance system provided

for by the LoC.

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Table no. 1: Comparative Analysis between relevant laws currently in force and the Draft Law on Corporate and Municipal

Bonds

Issues to be considered Provisions of relevant laws currently in force

Provisions of the Draft Law on Corporate and Municipal Bonds Comments :

1. Discrepancy between the definition of “registrar of securities” and “custodian of securities” in the LoS and the definition of “Account provider” in the DLCB

Art. 123 LoS The securities registrar (“the registrar”) is a joint stock company licensed by the Authority, whose scope includes the securities data organization and management. Art. .72-77 LoS Operations related to the custody of securities shall be: 1. Securities storing and safekeeping. 2. Reporting on payment of

dividends, interests or other receivable instruments.

3. Informing about meetings of security issuers and rights related to shares and other securities in custody, and the execution of customers’ orders related to the realization of these rights.

4. Informing about legal changes that directly or indirectly influence the reporting to the customer on the custodian account balance.

5. The service of organizing general meetings.

6. Other services related to securities such as the realization of rights and fulfilment of obligations deriving from securities, as agreed between

Art.2(2)(a) “Account Provider”: a custodian who has opened with the Dematerialized Securities Registry an account of dematerialized securities, in which the custodian can handle securities by the bondholder’s order. Art. 5(2) The Account Provider shall be responsible for conducting the entries, registrations of granting, operations and payment of the bond loan on behalf of the issuer.

It should be clarified in the DLCB whether the “Account Provider” is a “registrar” and/or “custodian”. The definition of “Account Provider” in the DLCB is similar to the definition of “custodian” in the LoS with some elements of the definition of “registrar” in the LoS. This is somehow confusing also with reference to the definition of “Dematerialised Securities Registry” (see Art.2(2)(j) of the DLCB), which is obviously a “registrar” under the LoS. This certainly creates ambiguities in the Albanian version of the DLCB. Therefore, we suggest that reference is included in the DLCB definition of “Account Provider” to clarify that it is a “custodian” in accordance with LoS. See also comments under item 9 below. The same problem occurs in the Albanian version. In addition, we suggest to amend the definition of the “Account Provider” set out in Art 2(2) in order to include the functions of the account provider set out in Art 5(2).

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the customer and the custodian and which are not contrary to the law.

2. Discrepancy between the term “bond owner” in the LoS and the term “bondholder” in the DLCB

Art.16 LoS A bond is a long-term debt security binding the issuer to pay the bond owner, on a determined date, the nominal value and the interest of the bond, in one or more instalments.

Art. 2(2)(b) “Bond”: a long term debt security binding the issuer to pay the holder, on a determined date, the nominal value and the interest, in one or more instalments. Art. 2(2)(f) “Bondholder”: the holder of the Bond. In case of Dematerialised Bonds, the person in whose name a dematerialized securities account is opened with the Dematerialized Securities Registry, in which account the dematerialized Bond is recorded.

The DLCB uses the equivalent terms “holder of the Bond” and “Bondholder”. On the contrary, the LoS refers only to the “bond owner”. Strictly from the Albanian legal point of view, a “holder” is substantially different from a “owner”. We recommend to amend the definitions in the DLCB to refer to bond “owner” or alternatively to indicate specifically in the relevant definitions all the ownership rights of the “holder of the Bond” and the “Bondholder”. The same problem occurs in the Albanian version.

3. Interpretive uncertainty between the provisions dealing with registration of dematerialized bonds in the LoS and the DLCB

Art. 115 LoS A dematerialized security shall be an electronic record of a security account in the computer system of the securities registrar with which its issuer shall undertake to fulfil the obligations toward the owner contained in the security.

Art. 2(2)(ë) “Dematerialised Bond”: an electronic record of an account in the computer system of the Dematerialised Securities Registry. Art. 2(2)(j) “Dematerialised Securities Registry”: a legal entity licensed by the Albanian Financial Services Authority, whose scope includes the securities data organisation and management.

We have noticed that LoS has clearly indicated that a dematerialised CB is recorded in the registrar. As discussed under issue 1 above, we recommend that in order to avoid discrepancies between the LoS and the DLCB, the Account Provider is clearly defined as a custodian pursuant to the LoS. As a consequence, the registration should be maintained by the Account Provider with a separate legal entity defined as the Dematerialised Securities Registry, consistent with article 2(2)(a) of the DLCB. The discrepancy arises from the Albanian version of the DLCB, where the term Account

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Provider is translated as “regjistrues”. This creates confusion between the role of the Account Provider as custodian and the role of the registrar. Therefore, consistent with our comment under issue 1 above, we recommend that both the English and the Albanian versions of the DLCB are amended to clearly indicate that the Account Provider is a custodian. Additionally, we suggest that the definition of Dematerialised Securities Registry is amended as to include reference to such entity being a “registrar” pursuant to the LoS.

4. Discrepancy between the definition of bonds in the LoS and the DLCB

Art.16 LoS A bond is a long-term debt security binding the issuer to pay the bond owner, on a determined date, the nominal value and the interest of the bond, in one or more instalments.

Art.2(2) (gj) “Long – Term Bonds: A Bond with a maturity of longer than twelve months

Art. 2(2)(gj) of the DLCB implies that there can be bonds with a maturity of less than 12 months. This is inconsistent with the LoS, which clearly state that a bond is long term debt security. While we do not find any reference and/or definition of long term debt in the LoS, we recommend that the DLCB may simply reaffirm that a company should not issue bonds with a maturity shorter than twelve months.

5. Duplicative provisions on conditions for the issuance of dematerialized securities

Art.115 LoS Dematerialized securities may be issued only by a public offer.

Art. 3(1) Bonds shall be issued in dematerialised form where offered through a public offer.

The first part of Art. 3(1) of the DLCB duplicates Art. 115 of the LoS. Unless otherwise argued by the drafter, we suggest not duplicating provisions included in the LoS.

6. Discrepancy between the types of bonds listed in

Art. 18 LoS Bonds may be classified:

Art.3(2) In addition to the types of Bonds defined in Article

Art. 18 of the LoS includes a closed list of the types of bonds permitted while the DLCB

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the LoS and those permitted under the DLCB and conflicting provisions on the authority to determine further types of bonds

1. By the method of securing the rights: (a) secured; (b) unsecured 2. By the method of exercising the right on interests: (a) zero coupon bonds, which are bonds that pay interest immediately; (b) bonds with coupons, which are bonds that pay interest in instalments. 3. By interest: (a) discountable bonds; (b) fixed-interested bonds; (c) bonds with floating interest rates. 4. By the method of exercising the right to redeeming the nominal value: (a) bonds redeemable in one instalment; (b) bonds redeemable in several instalments. 5. By the method of exercising the right to redeeming the nominal value: (a) bonds redeemable before maturity date; (b) bonds irredeemable before maturity date. 6. By special rights: (a) participating bonds, which are bonds conferring their holders the right to also receive dividends; (b) bonds that are convertible to shares; (c) convertible bonds conferring their holders pre-emption rights to purchasing shares.

18 of the Law on Securities, the Albanian Financial Services Authority can determine by regulation further types of Bonds which may be issued and traded in the Republic of Albania.

includes an open list. Moreover, the DLCB gives AFSA the authority to determine further types of bonds while Art. 1 of the LoS seems to leave to the law to “determine types of securities”. Additionally, Art. 12-14 of the LFSA do not include AFSA’s powers and/or authority to determine other types of instruments provided for in the LoS. We suggest that the DLCB includes an express provision addressing the conflict of authorities (e.g. expressly indicating that the DLCB supersedes Art. 1 of the LoS above) and indicating that AFSA has the authority to determine other types of bonds if such instruments have the elements provided by Art. 18 of the LoS.

7. Definition of Bearer Bonds

(Not applicable.) Art. 9(1) Bearer Bonds which are payable upon delivery shall not be issued for an indefinite term. Art. 60(1) The exercise of the conversion rights shall be conducted by the following manner: (a) Concerning paper bearer Bonds, by the legal holder of the title.

The term bearer bond, which is used in the DLCB, is not defined in either the DLCB or the LoS. We suggest that a definition of Bearer Bonds is added to Art.2 of the DLCB

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8. Discrepancies between the elements of electronic bonds under the LoS and the elements of paper bonds under the DLCB

Art.19 LoS When bonds are entered as electronic records, they shall contain the following elements: 1. The type of bond. 2. Series of the bonds (in cases where

the issuer has issued more than one series of the same type).

3. Date of issuance of bonds. 4. Name, seat and registration number

of the issuer with the National Registration Center.

5 Holder of the bonds: a) for individuals: name, address

and birth certificate or passport number;

b) for legal entities: name, seat and company registration number.

6. Nominal value of bonds. 7 Interest rate. 8. Schedule and manner of payment

of interest. 9. Date of entry of the bonds in the

register.

Art.4 The content of the certificate of Bonds in paper form must contain the following elements: a. the name of the issuer; b. the place and time of the Bonds’ issuance; c. the nominal value of each Bond; ç. the total nominal value of the Bond loan; d. the name of the bondholder if the Bond is

registered; dh. the place, time and manner of redemption; e. the signature of the legal representatives of

the issuer; ë. the data which is required for the

determination of the rights of the bondholders-creditors and in particular the securities of the loan, the conversion right or the right to participate in the gains of the issuer;

f. the series number of the Bond; g. any interest units, if the Bond is interest-

baring; gj. any rights of the issuer for early termination

(redemption) of the Bond;

If paper bonds include all elements of electronic bonds plus additional ones specific to paper bonds, it would be appropriate to indicate in Art.4 of the DLCB that paper bonds have all elements of Art.19 of the LoS plus the additional ones to be listed in Art.4 of the DLCB.

9. Additional activities to be performed by the “Account Provider” and payment services to be performed by the securities registrar

Art. 123 LoS The securities registry (“the registry”) is a legal entity licensed by the Authority, whose scope includes the securities data organization and management. Art. 126 LoS Subject to the securities it has received a license for, the Registry shall provide the

Art.5(3) The assets which are to be used for the fulfilment of the obligations arising from the Bond loans shall be transferred by the Account Provider to the bondholders, immediately after their collection from the issuer. Art.6(2) All payments from the issuer to the bondholders

Art.5(3) and Art.43 of the DLCB list certain payment and asset transfer services to be performed by the Account Provider. These activities are in addition to the custodian tasks to be performed by the Account Provider as indicated under items 1 and 3 above. Therefore we recommend that the definition of

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service of registering securities, by organizing the method of keeping the register in such a way that it shall ensure at any time full data on the security ownership and limitations to ownership rights over them.

deriving from the Dematerialised Bond shall be fulfilled through the Dematerialized Securities Registry. Art.43 1) At maturity date, a Bondholder can claim redemption of the Bond to the Account Provider. The Account Provider cannot proceed with the payment of the principal and interest, as long as the issuer has not satisfied any obligations towards the Account Provider arising from the Bond loan program. 2) The issuer is released from its obligations towards the Bondholders to pay any amount connected to Bond loan program, as long as it pays to the Account Provider the relevant amount in due time. The Account Provider is responsible for the payment of such amounts to the Bondholders or other beneficiaries.

Account Provider is amended accordingly. Additionally, we note that Art.6(2) of the DLCB mentions payment services to be performed by the securities registrar. Art.126 of the LoS does not expressly set out that the securities registrar performs payment services, although we would expect that the dividends paid on shares go through the registrar similarly to what the DLCB states for bonds. Although DLCB is to be considered as lex specialis, in order to avoid interpretive issues we recommend to expressly amend Art.126 of the LoS in order to include the payment services among the services performed by the securities registrar.

10. The content of the Bond loan program under the DLCB is not specified

Art.17 LoS The bond issuance act shall be approved by the issuer’s authorized body. The bond issuance act shall contain the following elements: 1. Name and seat of the issuer. 2. Total amount of the issue. 3. Nominal value of the bond. 4. Data about the guarantor. 5. Manner of bonds issuance and subscription. 6. Purpose for which the bond issuance proceeds are used. 7. Type of bonds and rights conferred by them.

Art.14(2)(3) and (4) The Bond loan program shall contain in detail the terms of the Bond loan. It shall be binding vis-à-vis the issuer, the Bondholders and successors, as well as any third party beneficiaries thereof. The Bond loan program is approved by the body of the issuer which is responsible to decide on the issuance of the Bond loan. The Bond loan program must be drafted in language that is clear and comprehensible and must include all information necessary, on which basis investors can make an objective assessment of the investments prospects and risks.

The DLCB does not provide specific indications about the content of the bond loan program but indicates that the Bond loan program is approved from the issuer’s authorized body. The elements of a bond issuance resolution are provided for by the LoS article 17. We therefore suggest that Art.142 of the DLCB includes a reference to LoS Art.17.

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8. Maturity for payment of the nominal value of the bond and the interest. 9. Interest rate and manner of calculation and payment of interest. 10. Amount of the issuer’s authorized capital and the percentage of the issue of bonds in the equity. 11. Sources of funds for the repayment of the bonds. 12. Structure and number of bonds. 13. Convertibility into other types of securities. 14. Repayment priority in case of issuer’s bankruptcy. The bond issuance act may include special privileges or benefits for the buyers.

11. Interpretive issues relating to provisions about the Bondholders group

(Not applicable.)

Art. 16(1) In each case of a Bond loan issue it is mandatory to organise the Bondholders into a group. The group of the Bondholders does not have legal personality.

Art.16(1) of the DLCB requires the bondholders to be organized into a group without legal personality. The use of the word ‘bondholders’ in the plural and the use of the term ‘group’ seem to require a number of no less than two persons. We recommend that the DLCB clarifies the minimum number of the bondholders required to form a group under DLCB. The DLCB should also clarify that when there are less than the minimum number of bondholders no group is formed and the rules relating to groups are not applicable. The DLCB should also clarify how the provisions relating to groups apply when the

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number of bondholders increases or decreases above or below the minimum threshold during the life of the bond.

12. Overlaps and interpretive issues with respect to LoC provisions referred to in the DLCB

Article 144 LoC (Quorum) (1) In case of matters requiring ordinary majorities, the General Meeting may only make valid decisions if attended by shareholders holding more than 30% of the subscribed voting shares. In case of matters requiring qualified majority as of Art. 145, the General Meeting may only make valid decisions if the shareholders having more than half of the total number of votes are participating in the voting in person, by letter, or by electronic means in accordance with Article 142. (2) If the General Meeting could not be held due to lack of the quorum referred to in Paragraph 1, the meeting shall be reconvened with the same proposed agenda within 30 days. Article 145 LoC (Decision-Making) (1) The General Meeting shall decide by three-quarter majority of votes of shareholders participating in the voting as set out in Art. 144, paragraph 1 on the amendment of the Statute, the increase or reduction of basic capital, profit distribution, company restructuring and dissolution, unless the Statute requires a higher majority for these decisions. (2) On other matters listed in Article 135, the General Meeting shall decide by majority of votes of participating

Art. 17(4) The relevant provisions of the Law on Entrepreneurs regarding the decisions of the General Meeting of the shareholders of a joint stock company are applicable. Art. 22

The group of Bondholders is validly convened when Bondholders representing at least ¼ of the total value of the Bond loan are present (or lawfully represented) at the meeting. Decisions are validly taken at an absolute majority of the votes represented in the meeting. If the ¼ quorum is not achieved, the meeting of the group of Bondholders is adjourned within 20 working days from the date of the first meeting and convenes validly, irrespective of the size of the Bond loan represented. Decisions on the issues listed in Article 18, can be validly taken when Bondholders representing at least 2/3 of the total value of the Bond loan are present or lawfully represented at the meeting. If the 2/3 quorum is not achieved, the meeting is adjourned within 20 working days from the date of the first meeting and validly convenes with a quorum of ½ of the total value of the Bond loan. If such quorum is again not achieved, then the meeting of the group of Bondholders is adjourned within 20 working days from the date of the second meeting and validly convenes at a

Given that Art. 22 of the DLCB regulates specifically the quorum and the majority vote of the meeting of the group of the bondholders, it is superfluous to insert a further generic provision in the DLCB which provides that the provisions of LoC regarding the decisions of the General Meeting of the shareholders of a joint stock company are applicable to the decision of the group of the bondholders. Therefore we recommend to add before the last phrase of 17(4) “Subject to Article 22 of this Law”. Further we note that the LoC has different rules on calling, quorum and majority vote for ordinary and extraordinary general meeting. Therefore we recommend to clarify in the relevant articles of the DLCB the type of general meeting involved.

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members, unless otherwise provided by this Law or the Statute. (3) The validity of any decision assigning additional duties to or reducing the rights of the shareholders as provided by this law, the Statute or an issuing decision, is subject to the consent of the shareholders concerned, unless otherwise provided by this law.

quorum of ¼ of the total value of the Bond loan. In all the above mentioned cases, decisions are validly taken with a majority of 2/3 of the votes represented in the meeting. The Bond loan program may provide for higher quorum and majorities. Art. 24 If it is not otherwise provided for in law or in the terms of the Bond loan program, concerning the decision making of the group of Bondholders, the provisions of the Law on Entrepreneurs on the General Meeting of the shareholders apply, adjusted respectively to the nature and scope of the Bond loan. Art. 49 If it is not otherwise provided for in the present law, matters in relation to the decision of the general meeting of shareholders on the issuance of Bond loans are governed by the provisions of the Law on Entrepreneurs on the general meeting of shareholders in a joint stock company.

13. Authorization to take securing charges over bonds

Art. 2 LoSC A securing agreement is any transaction, whatever its form and however it is denominated, that creates, whether by transfer of ownership, by possession such as in the case of a pledge or otherwise, a securing charge in movable things, intangible property, or rights of their owner”.

Art. 21(2) In case of a pledge over Bonds, the voting right is exercised by the pledgor of the Bonds, unless otherwise provided for in the pledge agreement or in the terms of the Bond loan program. As to the civil fruits of the Bonds, the provisions of the Civil Code on pledge over rights apply.

Bonds might be subject of pledge and/or securing charge. As the securing charge is specifically designed for intangible assets, we anticipate that securing charges may be frequently taken over bonds. Therefore we recommend to include provisions as to the exercise of voting rights over the bonds and civil fruits in case securing charges are taken over bonds, similarly to what done in

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Art. 21(2) of the DLCB with respect to pledges.

14. Interpretive issue as to the definition of “terms of Bond loan” under the DLCB

(Not applicable.) Art. 26(1) The terms of Bond loan being sold through public offer must provide for the appointment of a Bondholders’ agent and his deputy. Art. 29(1) The Bondholders’ agent responsibilities are defined exclusively in the provisions of the present law, the terms of the bond loan and the decisions of the group of Bondholders. Art. 30(1) The Bondholders’ agent shall execute with due professional skill and care the acts which are necessary for the exercise of its duties, in accordance with the provisions of the present law, the terms of the Bond loan program and the decisions of the group of Bondholders. Art. 32(1) The Bondholders’ agent is liable towards the Bondholders in accordance with the terms of the Bond loan for any misfeasance.

The expression “terms of the Bond loan” is not defined in the DLCB. Given that other provisions of the DLCB deal with the Bond loan program, we suggest that the relevant articles expressly refer to the “terms of the Bond loan program” as done in Art. 30(1).

15. Incomplete cross references in DLCB provisions dealing with bond distribution

(Not applicable.) Art. 28(2) Should a Bond loan be distributed through public offer, the Bondholders’ agent, as well as his deputy, can be removed at any time by decision of the group of Bondholders. A meeting of the group of Bondholders may be called, in accordance with the provisions of Article by the issuer upon request of Bondholders representing at least 1/20 of the value of the Bond loan or of the relevant series.

The relevant reference of the article is missing in the English and in the Albanian versions. We recommend to add Article “20”.

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16. The corporate body competent for the issuance of CBs and the provisions on quorum for bonds issuance are inconsistent with the LoC

Art. 154 (gj) and 167 (2) LoC Art. 154 (gj) The Board of Directors has the following rights and duties: (gj) Causing the company to incur debt - through loans or the issuance of bonds or convertible debt instruments - for an amount higher than 5% of the assets of the company which emerge in company’s annual turnover of the last business year. Art. 167 (2) The administrators have the rights set out in the sections (a), (gj), (h) and (i) of the first paragraph of the section 154.

Art. 47(1) The decision to issue a Bond loan is taken by the general shareholders meeting representing at least ¼ of the paid up share capital. If the ¼ quorum is not achieved, the general meeting is adjourned within 20 working days from the date of the first meeting and no quorum is required. The decision of the general meeting of shareholders is taken at majority of votes being represented at the meeting.

First we should note that general meeting resolutions provided in the DLCB are not fully in harmony with the powers and competences provided in the LoC. Indeed, according to Art. 154 (gj) and 167(2) of the LoC, the decision to issue a bond is taken by the administrative body while according to Art 47(1) DLCB, the decision to issue a bond is taken by the general shareholders meeting. Art 47(1) DLCB is partially in compliance with the LoC as regards convertible bonds because the decision to issue convertible bond is taken by the general shareholders meeting. As regards issuing of non-convertible bonds, although we consider the DLCB to be lex specialis, in order to avoid interpretive issues we recommend to expressly state that Art.47(1) of the DLCB supersedes Art.154 (gj) of the LoC Similarly to what indicated under item 12 above, Art.47(1) of the DLCB should also clearly indicate whether an ordinary or extraordinary meeting is required.

17. DLCB quorum for bond issuance is inconsistent with LoC provisions referred to in the DLCB

Art. 144 and 145 LoC (Please see row 13 above.)

Art. 56(1) Subject to the Law on Entrepreneurs, the issuer’s general meeting of shareholders has the exclusive right to decide the issuance of Convertible Bonds. The decision of the general meeting of shareholders is to be taken with a presence quorum of 2/3 of the paid up share capital and by a majority vote of 2/3

Please be aware that Art 56(1) is not fully in adherence with the LoC. The words “subject to the LoC” at the beginning of the article could create an interpretative issue for the following reasons:

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of shareholders present or represented in the general meeting. If the 2/3 presence quorum is not achieved, the general meeting is adjourned within 20 working days from the date of the first call and validly convenes with a presence quorum of ½ of the paid up share capital. If such quorum is again not achieved, then the general meeting of shareholders is adjourned within 20 working days from the date of the second call and it validly convenes with a presence quorum of ¼ of the paid up share capital. In all cases the decision is taken by a majority vote of 2/3 of the shareholders present or represented at the general meeting of the shareholders.

- the LoC includes general provisions about quorum and majorities of general meetings; - DLCB art.56(1) may include special provisions for quorum and majority of general meetings deciding on the issuance of bonds,

- on the one hand, it is not desirable to have special provisions on general meetings as these always create interpretive issues: for instance, should the company convene a separate meeting or can they split one meeting in two parts and apply different quorum and majorities to different decisions; - on the other hand, even if not desirable, it is not a legal issue and there would not be conflicts as it is always possible for a lex specialis to derogate a lex generalis; - in this case, however, the problem is that the words “subject to…” mean that art.56(1) apply only after the provisions of the LoC have applied. This creates a conflict: the provisions of the LoC are different and if applied together (instead of being derogated) they will conflict with the provisions of the DLCB; - in order to eliminate the conflict, the DLCB should clarify that art.56(1) of the DLCB derogates the relevant LoC article. In order to do so, the first paragraph of the English and Albanian versions should be rephrased as follows: “Notwithstanding the provisions of the Law on Entrepreneurs, the issuer’s general meeting of shareholders has the exclusive right

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to decide the issuance of Convertible Bonds according to this article.”

18. In DLCB provisions dealing with bonds conversion, reference to Board of Directors only is inconsistent with the two-tier corporate governance system provided for by the LoC

Art. 180 LoC (2) The General Meeting may authorise the Board of Directors, in the one-tier system, or the Managing Directors, in the two-tier system, to issue shares referred to in Paragraph 1 for a period not exceeding five years. The relevant organ shall report the decision referred to in Paragraph 1 to the National Registration Centre for registration and publication.

Art. 58 In order to complete the share capital increase of the issuer as a consequence of the conversion of the Bonds into shares, the Board of Directors of the issuer must have certified the payment of the value of the Bonds and any conversion price. Accordingly, the provisions of the Law on Entrepreneurs are appropriately applied as to the share capital increase, in analogy to the nature and the scope of the Bond loan.

Please note that according to Art. 180 (2) of the LoC, it would be the Board of Director if there is a one tier corporate governance system and the Managing Directors if there is a two tier corporate governance system. Therefore, this article should include a reference to Managing Directors as well.

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5. RELEVANT STEPS FOR THE ISSUANCE OF CBS

Table no. 2 lists the relevant steps necessary for the issuance of CBs, together with

related conflicting provisions, if any, of other laws currently in force as well as

suggestions as to improvements of the DLCB provisions that we deemed appropriate.

This table is structured as follows:

- the first column identifies the relevant steps and related issues, if any;

- the second column indicates the relevant DLCB provisions;

- the third column indicates the relevant provisions of the LoS, LoC or other

relevant law;

- the fourth column includes T&P comments on the relevant issue.


a. It is unclear which is the corporate body approving the CB loan program

(corporate bond issuance);

b. It is unclear whether the issuer is required to prepare and publish a CB prospectus;

c. It is unclear which corporate body of the issuer is responsible for preparing and

publishing the prospectus;

d. There are no provisions expressly dealing with the subscription of bonds.

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Table no. 2: Comparative Analysis of the corporate actions to be taken by the issuer for the issuance of corporate bonds pursuant to the Draft Law on Corporate and Municipal Bonds

Relevant steps and documents to be considered

for the issuing

DLCB provisions

Provisions of relevant laws currently in

force

Comment(s):

1. Approval of the Corporate Bond Loan Program

- It is unclear which is the corporate body approving the CB loan program (corporate bond issuance)

Art.14(3) The Bond loan program is approved by the body of the issuer which is responsible to decide on the issuance of the Bond loan. Art.47(1) The decision to issue a Bond loan is taken by the general shareholders meeting representing at least ¼ of the paid up share capital. If the ¼ quorum is not achieved, the general meeting is adjourned within 20 working days from the date of the first meeting and no quorum is required. The decision of the general meeting of shareholders is taken at majority of votes being represented at the meeting.

1) LoC, Art. 180/1, 136, 137, 144, 145, 154, 162 and 167 The issuing of convertible corporate bonds requires the approval of the extraordinary shareholder meeting. The issuing of non-convertible corporate bonds in a one tier Corporate Governance system requires the approval of the Board of Directors (Art. 154 and Art. 162) and in a two tier Corporate Governance system requires the approval of the Administrator(s). In the Albanian joint stock company with a two tier system the Administrators would be either a Management Board, if the administrators act in concert or a manager, if the Management Board would derogate such powers to a single manager or it may be that in the absence of the Management Board in case the company would opt as such, directly to a manager. 2) LoS, Art. 17(1) The bond issuance act shall be approved by the issuer’s authorized body.

1) We should note the terminology first. In the DLCB it is defined as a “corporate bond loan program”, while in the LoS it is simply mentioned as a “bond issuance”. Although this disparity in the terminology deserves attention, we have assumed that both means the same action i.e. resolution of the company to issue bonds. Consequently, we would suggest that article 14(2) of the DLCB may refer specifically to the requirements provided in Art. 17 of LoS. 2) According to LoC the approval of the issuance of non-convertible corporate bonds does not require the involvement of the General Meeting. According to LoC, the competence for the issuance of non-convertible bonds belongs to the management body. It is provided that for convertible bonds only the issuance of bonds requires the approval of the general meeting of shareholders (which obviously falls within the ambit of the Extraordinary General Meeting) As regards issuing of non-convertible bonds, although we consider the DLCB to be lex specialis, in order to avoid interpretive issues we recommend to expressly state that Art.47(1) of the DLCB supersedes Art.124 (gj) of the LoC (please see Table 1 point 16).

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Relevant steps and

documents to be considered for the issuing

DLCB provisions


force

Comment(s):

2. CB prospectus: - It is unclear whether the issuer is required to prepare and publish a CB prospectus; - It is unclear which corporate body of the issuer is responsible for preparing and publishing the prospectus.

(Not applicable.) a) Prospectus - LoS Art.28-29 b) AMF approval - LoS Art.30 c) Prospectus publication - LoS Art.32

LoS requires a prospectus to be prepared and published? for the issuance of bonds in accordance with its provisions. However, DLCB does not clarify whether the issuer, besides the CB loan program, is required to prepare the CB prospectus as well. Although we have assumed that the issuer is obliged to do so, it may be useful to clearly indicate this in the DLCB, possibly by way of reference to the relevant provisions of the LoS. Also we note that neither LoS nor DLCB indicate which corporate body is responsible for the preparation and publication of the prospectus. Therefore, we recommend specifying in the DLCB which corporate body of the issuer is responsible for preparing and publishing the prospectus.

3. CB subscription & settlement: - There are no provisions expressly dealing with the subscription of bonds.

Art.10 Pursuant to the Law on Securities, the Account Provider shall be responsible for clearing and settlement of transactions of securities held in its accounts.

LoS Art.35 Subscription and payment of securities under a public offering shall not exceed three months from the day on which the issuer has been informed about the Authority decision. In the case of a private offering this period shall not exceed thirty days. During the settlement of securities, the issuer shall deposit the paid-in amounts in a special account opened at the bank in which the investor has an account for this kind of transactions. If within the periods set forth in paragraph one of this Article at least 75% of the securities remain unsubscribed and unsettled, and in the case of private offering 90% of the securities remain unsubscribed and unsettled, the issuer shall not be allowed to issue the securities and shall refund paid-in amounts to the investors

The LoS clearly designates two processes: subscription and settlement. While settlement is regulated in Art. 10 of the DLCB, the DLCB is silent on the subscription. We recommend that provisions are added to the DLCB dealing with the subscription of CBs.

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Relevant steps and


DLCB provisions


force

Comment(s):

within seven days upon the expiry of the period for the settlement of the securities. Within seven days upon the expiry of the period for settlement, the issuer shall notify the Authority of the number and percentage of the securities that have been subscribed and paid for and of the persons who have subscribed and paid for them. The Authority is also authorized to require from the issuer other data concerning the subscription and payments pertaining to that particular issue of securities. The subscription and payment of securities after the expiration of periods referred to in paragraph 1 of this Article shall be void.

4. Information: - There are no provisions expressly dealing with the information to be provided.

LoS Art 90 Issuers of listed securities shall produce and publish annual, semi-annual and quarterly financial reports on their activity regularly. The Authority shall adopt regulations on the conditions for the publication and content of the reports referred to in paragraph 1 of this Article. The issuers referred to in paragraph 1 of this Article, whose shares are listed in quotations on stock exchanges in European Union member states, can produce reports on their activity as per either this Law or the European Union member state acts. LoS 106 When a person acquires or releases shares of a public company, and as a consequence of that fact the proportion of votes in the

Information rights for holders of financial instruments are generally provided by law for holders of listed instruments given their wider circulation among the public. In Albania, LoS regulates this matter. It is not clear whether the general obligation of the issuer to inform the Bondholders (in the even the bonds are listed) will be regulated only in the LoS. If this is the intention it would be better to add in the DLCB a reference to the LoS. Otherwise the DLCB may include specific provisions which address the obligation of the issuer to provide certain information to the Bondholders (in the event the bonds are listed) directly or via the Account Provider. With respect to unlisted bonds, obviously the Bondholders will have the information rights provided under the terms and conditions of the bonds (i.e. the Bond loan program).

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Relevant steps and


DLCB provisions


force

Comment(s):

general meeting that person possesses exceeds or falls below the following thresholds: 10%, 25%, 30%, 50% or 75% of the overall number of shares, that person shall notify in writing the Authority or the issuer of that acquisition or release within 15 days. The period referred to in paragraph 1 of this Article shall begin from the moment of the conclusion of transaction of concern or from the emergence of the fact on which the transfer of shares is based, regardless of the entry into the share book or the depository of the registry. The legally conducted transaction shall be deemed concluded in spite of an agreed condition for deferral. The notice referred to in Paragraph 1 of this Article shall contain: 1. First name and last name, civil registry number and residence of the person that has acquired or alienated the shares, or the name, head office and the registration number of the legal entity, and the name and surname, personal registration number in the civil registry and residence of the responsible person in the legal person entity that has acquired or alienated the shares. 2. The agreement on the transfer of the shares. 3. The number of acquired or alienated shares, the share in the initial capital of the issuer on the basis of acquired or alienated shares, the number of voting rights that the total of acquired or alienated shares ensures in the general meeting of the issuer. 4. The total number of shares, i.e. the

28

Relevant steps and


DLCB provisions


force

Comment(s):

proportion of the initial capital of the issuer after the acquisition or release.

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6. ISTITUTIONAL FRAMEWORK

In Table no. 3 we have identified the institutional players in the framework of DLCB and

indicated whether they currently operate in Albania. The table shows that certain

institutional players required for the functioning of DLCB have not yet been licensed in

Albania. Our suggestions also include reference to appropriate secondary legislation to be

implemented.

Additionally, the table compares the DLCB and LoS provisions about the relevant

institutional players and discussed any inconsistency where present.

This table is structured as follows:

- the first column identifies the type of offering (public or private);

- the second column lists the relevant institutional players pursuant to the LoS;

- the third column lists the relevant institutional players pursuant to the DLCB;

- the fourth column includes T&P comments, if any, on the current status of

licensing of the relevant institutional players in Albania, the appropriate

secondary legislation to be implemented and possible inconsistencies between the

DLCB and LoS where noted.


1. There are no bondholders’ agents currently licensed by AFSA.

2. There is no dematerialised securities registrar currently licensed by ASFA.

3. There are no account providers currently licensed by ASFA.

4. There are no brokerage companies currently licensed by ASFA.

5. Even though the Tirana Stock Exchange Sh.A. has been licensed by AFSA, it has

not started operations yet.

6. DLCB is silent on the potential subscribers.

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Table no. 3: List of the institutional players involved in the DLCB framework

Type of offering

LoS DLCB

Comments:

Public Offering

Issuer:

- Council of Ministers (exempted from rules governing bond issuance set out in chapter 1 of the Law);

- Bank of Albania (exempted from rules governing bond issuance set out in chapter 1 of the Law);

- Local governments; - Corporations; - Other legal entities; - Foreign issuer (Art. 5 and 38)

Issuer:

- Joint stock companies having their registered seat in the Republic of Albania; and

- Local Government (Art. 1)

Potential subscribers: No restrictions (the law is silent on this point)


Bondholder’s agent Appointed by the Group of Bondholders amongst a list drafted by the Issuer and approved by the AFSA. (Art. 26)

Currently there are no such entities licensed by the AFSA. AFSA should provide a list of the licensed Bondholder’s agent and publish it in their website.. We recommend that AFSA adopts regulations relating to agents, which should include, among other things, requirements for the agents to be licensed (including minimum financial and operational requirements as well as personal and professional requirements for owners and management), time and conditions of the licensing process, conditions for

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Type of offering

LoS DLCB

Comments:

maintaining the license (including fees payable and information and inspection rights of AFSA), sanctions for failure to meet the licensing conditions and appeal against negative decisions.

Account of dematerialized security: Dematerialized securities shall be recorded in a security account in the computer system of the securities registry. (Art. 115 - 122) Securities Registry: It is a legal entity licensed by the AFSA whose scope includes the securities data organisation and management. (Art. 123 to 140).

Account of dematerialized security: Dematerialized securities shall be recorded in a Dematerialized Securities Registry. (Art. 5) Dematerialized Security Registry: A legal entity licensed by the AFSA, whose scope includes the securities data organisation and management. (Art. 2 (2) (j))

Currently there are no such entities licensed by the AFSA. We recommend that AFSA adopts regulations relating to dematerialized securities registrars, which should include, among other things, requirements for the registrars to be licensed (including minimum financial and operational requirements as well as personal and professional requirements for owners and management), time and conditions of the licensing process, conditions for maintaining the license (including fees payable and information and inspection rights of AFSA), sanctions for failure to meet the licensing conditions and appeal against negative decisions.

Custodian: The custodian and the registry shall open a custodian account of dematerialized securities. (Art 73) The security custody services shall be performed, against a fee, by a bank authorised from the Albanian Financial Supervisory Authority.

Account Provider: It is the custodian who has opened with the Dematerialized Securities Registry an account of dematerialized securities. (Art. 2.2 (a)) The Account Provider shall be responsible for conducting the entries, registrations of granting, operations and payment of the Bond loan on

Currently there are no custodians or account providers licensed by the AFSA. We recommend that AFSA adopts regulations relating to account providers, which should include, among other things, requirements for the account providers to be licensed (including minimum financial and operational requirements as well as personal

32

Type of offering

LoS DLCB

Comments:

(Art. 72) The security custody services shall be regulated by a contract entered into between the custodian and the customer. (Art. 72.6)

behalf of the issuer. (Art. 43) The Account Provider must be licensed by the Albanian Financial Supervisory Authority. (Art. 12 (2))

and professional requirements for owners and management), time and conditions of the licensing process, conditions for maintaining the license (including fees payable and information and inspection rights of AFSA), sanctions for failure to meet the licensing conditions and appeal against negative decisions.

Brokerage Company Joint-stock companies with seat in the Republic of Albania, licensed by the AFSA in order to carry out transactions with securities.(Art. 44)

Brokerage Company The DLCB refers to Art. 44 of the LoS. (Art. 2,1 (i)

Currently there are no such entities licensed by the AFSA. We recommend that AFSA adopts regulations relating to brokerage companies, which should include, among other things, requirements for the brokerage companies to be licensed (including minimum financial and operational requirements as well as personal and professional requirements for owners and management), time and conditions of the licensing process, conditions for maintaining the license (including fees payable and information and inspection rights of AFSA), sanctions for failure to meet the licensing conditions and appeal against negative decisions.

Stock exchange Stock exchanges operating in Albania shall be licensed by the AFSA. (Art. 78) The listing shall be the entry in the stock exchange official list and shall not cover security quotation. Securities listed

Securities market The issuer who issues bonds through a public offer shall within six months from the finalisation of the distribution, deposit an application for listing the Bonds with a securities market in Albania. (Art. 35)

As far as we are aware, even though the TSE has been licensed, it has not started operations yet and, therefore, it does not offer any kind of listing services. We recommend that AFSA adopts regulations relating to the operation of the

33

Type of offering

LoS DLCB

Comments:

on a stock exchange shall be fully negotiable and entirely paid for.(Art. 86)

TSE, which should include, among other things, listing requirements for issuers and instruments, time and conditions of the listing process, conditions for maintaining the listing (including financial and operational requirements of the issuer, price and volume thresholds for the instruments, fees payable and information and inspection rights of AFSA), sanctions for failure to meet the listing conditions, appeal against negative decisions and operations of the stock exchange (including days and times of trading, price determination and publicity, trading reporting).

Guarantor The bond issuance act shall contain data about the guarantor. (Art. 17). The prospectus on the public offer for the sale of securities shall contain the name, seat and business address of the guarantor, if any. (Art. 19).

Guarantor The principal, interests and expenses of the Bond can be secured by any kind of security or guarantee, provided by the issuer or a third party as detailed in the Bond loan program. (Art. 38)

Private Offering

Issuer:

- Council of Ministers (exempted from rules governing bond issuance set out in chapter 1 of the Law);

- Bank of Albania (exempted from rules governing bond issuance set out in chapter 1 of the Law);

- Local governments; - Corporations; - Other legal entities; - Foreign issuer

Issuer:

- Joint stock companies having their registered seat in the Republic of Albania; and

- Local Government (art. 1)

34

Type of offering

LoS DLCB

Comments:

- (Art. 5 and 38)

Potential subscribers: - Institutional Investors (investment funds, pension funds,

insurance companies and foreign or domestic legal entities who invest securities in the context of their investment portfolios. The status as institutional investor shall be certified by a decision of the Albanian Financial Supervisory Authority);

- Issuer’s shareholders; - Issuer’s employees; - Up to 100 external investors (external investors shall be

any foreign or domestic individuals or legal entities that are not issuer’s shareholders, issuer’s employees

or institutional investors) (Art. 27)


Given that the DLCB is lex specialis it may be deemed as to supersede the LoS provision on restricting the number and type of potential subscribers. In order to avoid this outcome and the related interpretative issue, we recommend that DLCB include a reference to art. 27 of LoS.

Bondholder’s agent Appointed by the Issuer. The responsibilities of the Bondholder’s agent are defined exclusively in the provisions of the DLCB, the terms of the bond and decisions of the Bondholder’s group.(Art. 26 ss)

Currently there are no such entities licensed by the AFSA. AFSA should provide a list of the licensed Bondholder’s agent and publish it in their website.. We would recommend that AFSA adopt regulations relating to the agents which may rule, among others, the criteria for the appointment of the agents, the time framework of their licence, conditions and terms for their operation, penalties etc.

Securities Registry: It is a legal entity licensed by the AFSA whose scope includes the securities data organisation and management. (Art. 123 to 140).

Dematerialized Security Registry:A legal entity licensed by the AFSA, whose scope includes the securities data organisation and management.

Currently there are no such entities licensed by the AFSA. We recommend that AFSA adopts regulations relating to the dematerialized

35

Type of offering

LoS DLCB

Comments:

(Art. 2 (2) (j))

securities registrars, which should include, among other things, requirements for the registrars to be licensed (including minimum financial and operational requirements as well as personal and professional requirements for owners and management), time and conditions of the licensing process, conditions for maintaining the license (including fees payable and information and inspection rights of AFSA), sanctions for failure to meet the licensing conditions and appeal against negative decisions.

Custodian: The security custody services shall be performed, against a fee, by a bank authorised from the AFSA to do so. The security custody services shall be regulated by a contract entered into between the custodian and the customer.(Art.72)

Account Provider: It is the custodian who has opened with the Dematerialized Securities Registry an account of dematerialized securities. (Art. 2.2 (a)) The Account Provider shall be responsible for conducting the entries, registrations of granting, operations and payment of the Bond loan on behalf of the issuer. (Art. 43) The Account Provider must be licensed by the Albanian Financial Supervisory Authority. (Art. 12 (2))

Currently there are no custodians or account providers licensed by the AFSA. We recommend that AFSA adopts regulations relating to account providers, which should include, among other things, requirements for the account providers to be licensed (including minimum financial and operational requirements as well as personal and professional requirements for owners and management), time and conditions of the licensing process, conditions for maintaining the license (including fees payable and information and inspection rights of AFSA), sanctions for failure to meet the licensing conditions and appeal against negative decisions.

Brokerage Company

Brokerage Company

36

Type of offering

LoS DLCB

Comments:

Joint-stock companies with seat in the Republic of Albania, licensed by the AFSA in order to carry out transactions with securities.(Art. 44)

The DLCB refers to Art. 44 of the Securities Law. (Art. 2 (i)

Currently there are no such entities licensed by the AFSA. We recommend that AFSA adopts regulations relating to brokerage companies, which should include, among other things, requirements for the brokerage companies to be licensed (including minimum financial and operational requirements as well as personal and professional requirements for owners and management), time and conditions of the licensing process, conditions for maintaining the license (including fees payable and information and inspection rights of AFSA), sanctions for failure to meet the licensing conditions and appeal against negative decisions.

Guarantor The bond issuance act shall contain data about the guarantor. (Art. 17) The prospectus on the public offer for the sale of bonds shall contain the name, seat and business address of the guarantor, if any. (Art. 19)

Guarantor The principal, interests and expenses of the Bond can be secured by any kind of security or guarantee, provided by the issuer or a third party as detailed in the Bond loan program. (Art. 38)

37

7. CASE STUDY

At the beginning, it would be worth mentioning that several Albanian companies

contacted by us have not accepted to test the feasibility of the procedures envisaged by

the DLCB.

The above reluctance of Albanian companies mainly derives from the following reasons:

(1) the most common corporate vehicle in Albania is the limited liability company, while

joint stock companies have a very limited use. According to the Albanian legislation, the

corporate governance structure of a limited liability company (“Sh.p.k.”) is more flexible

than the corporate governance structure of a joint stock company (“Sh.A.”) and,

therefore, most of the companies acting in the Albanian market are Sh.p.k. and they are

unlikely to transform into Sh.A. in order to become suitable CBs issuers;

(2) according to the ordinary Albanian banking practice, when a bank grants a loan to a

company, it normally requests such company to provide its financial statements, main

corporate documents (such as the deed of incorporation and the by-laws),main core

business agreements, and documents which evidence material liabilities of the company

(such as documents related to material litigation). It rarely happens in practice that the

banks conduct a more detailed due diligence on the borrower. The same documents may

be eventually requested by banks acting as underwriters of CBs but when underwriting

bank also offer CBs to their clients, they run reputational risks in connection with the

solvency of the issuer. As a result they are likely to require more information from the

issuer and run a more detailed analysis of its condition in order to minimize any negative

impact on their reputation that may derive from a possible default of the CBs issuer. At

least at this stage, many Albanian companies seem to be reluctant to apply higher

transparency standards and provide more detailed information which may be requested in

the event of a CBs issuance and, in particular, in case of a CBs issuance through a public

offering;

38

(3) the main shareholders of these companies (who are quite often also their managing

directors) have shown a conservative approach and hesitance towards new debt

instruments and, in general, they do not have familiarity with debt leverage.

Regardless of the evident reluctance of the Albanian companies to participate in the

simulation of a CBs issuance, several Albanian companies, including some Sh.p.k.,

showed a serious interest in the debt instruments proposed through DLCB. The majority

of the above Albanian Sh.p.k. has the minimum elements required by the LoC for a “joint

stock” company and tends to understand that CBs are debt instruments which may help

them to raise funds in alternative to bank loans and do not necessarily need to be secured

or guaranteed.

Among joint stock companies, Stefani & Co Sh.A. (the “Target”) accepted to discuss

with us the feasibility of the simulation.

The Target is very dynamic in the Albanian market, especially in the production and

distribution of food and beverages. We interviewed its shareholders and directors, who

showed a relevant interest in raising funds using alternative instruments in respect to the

traditional bank loans. In the case at hand, the Target would be interested in raising funds

for the purchase and the development of a new area for industrial purposes.

However, at the date of this Report, it is not possible to verify with certainty whether the

issuance of CBs by the Target could be competitive versus bank loans. This is because

the competitiveness of CBs can be assessed only on a case by case basis based primarily

on the creditworthiness of the issuer and its financial condition at the time of issuance,

the specific terms of the bonds including maturity and interest rate as well as any security

interest, and market conditions. These elements cannot be determied a priori.

In principle, with respect to the borrower, CBs will be appealing debt instruments for the

Target in the event the sum of the interest to be paid plus the issuance costs to be born by

39

the Target1 will be lower than the sum of the interest to be paid on a bank loan having

similar terms and conditions plus related structuring and arrangement fees and execution

and contingent costs.

With respect to investors, CBs will be attractive in the Albanian market if their returns

will be higher than the returns offered by treasury bonds issued by the Albanian

government when adjusted for the creditworthiness of the issuer. The spread needs to

consider the higher risk posed by CBs compared to treasury bonds and by definition

interests on CBs will be (or at least tend to be) higher than those on treasury bonds.

However, issuers with strong balance sheets may represent a useful opportunity for

domestic and foreign investors to diversify their Albanian portfolio and gain exposure to

the private sector of the economy.

At the date of this Report, the average annual interest rate applied to bank loans by

Albanian banks is approximately 11% (ALL) and the average annual returns on Albanian

treasury bonds is 7.95% (ALL)2.

Therefore, net of issuance costs, we expect CBs to be successful if issued at interest rates

ranging between 8 and 10 %3.

In addition, we have also interviewed Mr. Christian Canacaris, member of the Investment

Banking Board of Raiffeisen Bank Sh.A. (the “Bank”), a leading Albanian international

bank, in order to test the feasibility of the DLCB.

1 Please see Chapter 8 of this Report for an analysis of the costs of the issuance of the CBs. 2 www.bankofalbania.org 3 As at the date of this Report, we are unable to estimate the CB issuance costs to be borne by the Target. Based on the analysis of the costs described in Chapter 8 of this Report, we expect such costs to be higher than the transaction costs involved in the execution of a bank loan. In particular, we expect the cost of issuing a privately offered CB to be slightly higher than the transaction costs of a bank loan while we expect the cost of a publicly offered CB to be approximately 20% higher. The difference would be represented by the additional transaction cost involved in a public offering (e.g. prospectus preparation and distribution). This estimate is net of costs relating to related activities (such as marketing costs) that may apply to a CB issuance but are neither expressly nor implicitly required by the applicable legal framework.

40

According to Mr. Canacaris, CBs are not only an interesting debt instrument through

which the Bank may diversify its portfolio but also represent a business opportunity for

the Bank, which could act as the institutional vehicle selling CBs to its clients, including

in particular its private, individual, resident or non resident customers.

According to Mr. Canacaris, the Bank would undertake to underwrite and distribute

Albanian CBs only if the issuers offer serious guarantees about the correctness and

accuracy of its financial statements. In particular Mr. Canacaris indicated that the

financial statements of the issuer should be audited by one of the Big Four auditing

companies, all of which have offices in Albania.

Finally, according to Mr. Canacaris, the growth of the primary market for CBs (i.e. CBs

issuances) will grow if a secondary market (i.e. resales of CBs among investors)

develops. This requires the presence in Albania of a working and efficient regulated

market. It is therefore necessary for CBs to be successful that the TSE begins its

operations.

41

8. THE COSTS OF THE CBS ISSUANCE

Based on the elements discussed in Chapter 8, the simulation performed on the Target

highlights the following:

(i) the Target should not experience particular technical difficulties in performing the

undertakings necessary for the issuance of CBs;

(ii) the costs to be borne by the Target for the issuance of CBs will mainly depend on:

(a) internal costs for complying with the requirements necessary for the

issuance of the bonds (e.g., all costs and expenses related to management

bodies and personnel involved);

(b) fees and expenses of legal, accounting and tax advisers;

(c) fees and expenses of guarantors involved, if any;

(d) structuring and/or arranging fees and expenses of sponsors involved, if

any;

(e) printing and distribution costs of the prospectus, if any;

(f) fees and expenses of institutional players, if any (e.g. custodians, security

registrars, paying agents);

(g) fees and expenses relating to the listing process, if applicable; and

(d) marketing costs, if any.

As far as the internal costs for the issuance of the CBs are concerned, we point out that

the Target must engage its management and employees in:

1. taking required corporate actions and ancillary activities in connection thereof

(e.g. board of shareholders resolutions, organization of related meetings,

preparation of related minutes);

2. assisting in the due diligence process (e.g. searching, collecting and listing

documents; organizing meetings with appropriate managers and employees;

managing the data room). Even though this activity is not explicitly required by

the law it is nevertheless a necessary component of the issuance process as it is

the pre-condition of both business (evaluation of the creditworthiness of the issuer

42

and pricing of the CBs) and legal (gathering information to be used for preparing

the relevant documents) analyses;

3. assisting in preparing any relevant documents (drafting, negotiating, reviewing

and revising, as the case may be, among others: terms and conditions of the CBs,

underwriting and distribution agreement or subscription agreement, CBs

prospectus, related guarantees or security instruments, management certificates,

interim financial statements or management accounts, agreements with relevant

institutional investors providing services to the CBs, market presentations,

documents to be required for listing); and

4. participating in road shows. This activity is not explicitly required by the law and

it will be necessary only for marketing CBs issuances to foreign investors abroad.

At the date of this Report, it is not possible to quantify the internal costs for the issuance

of the CBs to be borne by the Target. According to an analysis done with the Target,

these could range from 2,000 Euro to 8,000 Euro (excluding item 4 above). This estimate

has been arrived at by considering the personnel wages and directors compensation for

the number of people likely to be involved in the above activities for a period of four

weeks.

In case of a bank loan, item 2 above does not apply and a smaller set of documents is

required. According to Art. 56 of the Banking Law, the bank is required to obtain certain

documents such as: a formal request from the borrower; a financial declaration of the

borrower; a loan agreement; and documents relating to security interests. According to

Albanian practice, the aggregate internal cost for these documents ranges from 500 to

2,500 Euro.

As far as the fees of legal, accounting and tax advisers are concerned, given the

complexity of the preparatory activity for the issuance of the CB (including, among other

things, conducting documentary and management due diligence and drafting, negotiating,

reviewing and revising the documents listed in items 1 and 3 above), we estimate that, at

the date of this Report, these would range from Euro 8,000 to Euro 16,000 in the

43

aggregate, provided that local advisers are retained. In addition to fees, costs will include

any expenses reimbursable to legal, accounting and tax advisers according to the terms of

their engagement letters. These may be significant if foreign advisers are retained.

By way of comparison, please note that, at the date of this Report, the assistance of legal,

accounting and tax is not normally requested required in the Albanian market for the

negotiation and the execution of a loan agreement. When legal assistance is requested, the

legal advisers’ fees are generally not higher than Euro 3.000.

The reason of such difference in the cost of external advisers derives from the fact that, in

case of the issuance of CBs, the work of the external advisers is more complex than in

case of bank loans. This is evidenced by a comparison of the documents required under

Art. 56 of the Banking Law and the documents listed in item 3 above.

The costs for structuring and/or arranging fees and expenses of sponsors involved (if

any), printing and distribution costs of the prospectus (if any) and marketing costs (if any)

are additional components of the costs for the issuance of the CBs. At the date of this

Report, these costs cannot be quantified as these activities have not been previously

performed in Albania with respect to CBs. We discussed this matter with Mr. Canacaris

and Ms. Ela Mulla, director of New Moment sh.p.k., an Albanian leading advertising and

publishing company and their feedback at the date of this report is as follows:

- structuring and/or arranging fees of sponsors involved: Mr. Canacaris is unable to

estimate how much an Albanian bank would charge for these fees. Based on the nature

of the work to be undertaken and the risks involved, we expect these costs not to differ

substantially from the arrangement fees currently applied to bank loans in the Albanian

market in the medium to long term. In particular, we expect the fees for the first few

issuances of CBs to be higher than the fees for bank loans due to the novelty of the

instruments and the uncertainty relating to the execution of the related transaction and we

expect such fess to gradually converge when the market develops;

- printing and distribution costs of the prospectus: these depend on the number of copies

to be printed, the number of pages per copy and the quality of paper and printing used.

44

Ms. Mulla estimates these cost to range approximately from Euro 2,000 to 8,000 for a

total of 1,000 copies. This estimate is based on the cost of printing and distributing

magazines of 60 pages each in Albania;

- marketing costs: these depend on the type and time of marketing activity conducted.

Ms. Mulla, estimates these cost to range approximately from 5,000 to 7,000 Euro. This

estimate is based on the cost of running one half page of advertisement per day on one

newspaper of national circulation and ten thirty-seconds advertisements per day on one

national broadcasting radio station for a period of two weeks. Although common in the

international bonds issuance practice, marketing activities are not expressly or implicity

required by Albanian law and in any event would only apply to the issuance of listed

instruments. Therefore their costs have been segregated from the others in the table

below.

Please note that the above costs are partly offset by the cost of the arrangement fees that a

borrower has to pay to the lender in connection with a bank loan. Such fee currently

averages 1% of the principal in the Albanian market and is normally added to the amount

of principal to be reimbursed by the borrower.

The cost of providing guarantees or taking security interests (such as pledges, mortgages

or securing charges on assets) would be the same for both a CB and a bank loan.

Therefore, these do not impact the differential cost analysis. In this respect we note the

following:

- on the one hand, while guarantees and/or security interests are a typical feature of

banking loans, they are not required for the issuance of CBs;

- on the other hand, the absence of guarantees and/or security interests increases the risk

of the instruments, which will be consequently priced at a higher interest.

Based on current market theories, we estimate that the incremental interest cost of

unsecured instruments compensates the net present value of taking and executing any

security interest on secured instrument when adjusted for the probability of default of the

issuer depending on its creditworthiness.

45

The costs for fees and expenses of institutional players such as custodians, security

registrars and paying agents as well as fees and expenses relating to the listing process, if

applicable, are additional components of the costs for the issuance of the CBs. At the date

of this Report, these costs cannot be quantified as there are no entities currently licensed

to perform these activities in Albania.

The following table compares the estimated or expected costs of a bank loan and a

corporate bond issuance of similar terms and conditions and value of 1 billion ALL

(approximately Euro 8,300.000). The estimated and expected figures used in the table

below are qualified by reference to the discussion in this Chapter, have only indicative

value and do not represent the actual costs likely to be incurred in connection with a CB

issuance in Albania.

46

Item Estimated costs for banking loans

Estimated costs for corporate bond issuance

Internal Costs Approx. 1.500 Approx. 5,000 Euro(1)

Fees and expenses of legal, accounting and tax advisers

Approx. 1,500 Euro Approx. 12,000 Euro(1)

Fees and expenses of guarantors =(2) =(2)

Arrangement Fee 1% = 83,000 Euro 1% = 83,000 Euro(3)

Printing and distribution costs of the prospectus

Not applicable 5,000 Euro

Fees and expenses of institutional players Not applicable Not available(4)

Fees and expenses relating to the listing process

Not applicable Not available(4)

Other fees Not applicable Not available(4)

TOTAL 86,000 Euro 105,000 Euro Difference excluding unavailable data and marketing costs

+22%

Marketing costs Not applicable Approx. 6,000 Euro(5) Difference excluding unavailable data and including marketing costs

+29%

____________________________________ (1) Figure represents the average of the estimated range discussed in this Chapter. (2) Fees and expenses of guarantors are not an express or implicit legal requirement of the instruments and have been

estimated to be the same for both instruments. Therefore they have been excluded from the table. (3) Based on the assumption that arrangement fees will converge in the medium to long term. In the short term we

expect these fees to be higher for CB issuances than for bank loans. Banks operating in the market have been unable to

determine the value of these fees at the date of this Report. (4) These data are not available at the date of this Report because the relevant services are not currently provided in

Albania and/or the relevant service providers have not been licensed. (5) Not legally required and only applicable to listed instruments.

47

9. ALBANIAN TERMINOLOGY

The legal terminology plays even more vital importance when it comes to a specific

legislation such as legislation on banking and financing matters. While, from one side,

there are enormous difficulties to adapt international banking and financial standards to

the Albanian language, from the other side there exist widely accepted Albanian terms as

a result of earlier attempts to accommodate these standards in the local legislation.

Therefore it is important that the Albanian terminology of the DLCB be as consistent as

possible with the terminology of existing laws. In particular, LoS and LoC have been the

primary sources for the examination of the terminology of the DLCB.

Following our thorough review of the legal terminology of the DLCB, we observed

several mismatching and inadequate translations. In most cases we deemed it appropriate

to replace common words used in the Albanian version of the DLCB’s text either with the

appropriate legal Albanian terms as used in laws currently in force (i.e. the term “debt”

translated in Albanian language as “borxh”) or with the related financial terms commonly

used in Albanian (i.e. the term “over the counter” translated in Albanian language as

“treg jashte burses”).

We enclose as Annex A to this Report a revised Albanian version of the DLCB including

our amendments and showing changes made against the current version. In our opinion,

the enclosed revised Albanian version is conforms more closely to the legal terminology

used in the Albanian legal framework currently in force. Below is a discussion of the

most significant inconsistencies of legal terminology highlighted in Annex A:

1. “Account provider” is translated in the DLCB as “regjistar”. The DLCB defines

also the term “Dematerialised Securities Register”, which is translated as

“Regjstri i Titujve të Dematerializuar”. Based on the definitions provided in the

DLCB as well as the functions ascribed to these entities under DLCB and LoS, it

is our opinion that the Albanian term “regjistrar” is a more appropriate translation

for the English term “Dematerialised Securities Register”. As regards the term

48

“Account Provider”, we think that it is rather closer to the term “Custodian”,

which has been translated in Albanian language as “Kujdestar”.

2. “Bearer bond” in one case is translated as “obligacionet e ripagueshme” and in

another case as “obligacion ne leter te paregjistruar/palistuar”. Both versions in

Albanian language may cause confusion and inconsistencies in the interpretation

of this term. The first Albanian version of the term literally means `repayable

bond`. The second Albanian version literally means either `materialised bond` or

`unlisted bond`. We do not think that these are proper translations of the term

“bearer bond”. We believe the proper translation of the term “bearer bond” to be

“obligacionet te mbajtesi”.

3. “Group of bondholders” in one case it is translated as “grupi i mbajtesve te

obligacioneve - kreditor” and in another case as “mbajtesit obligacioneve –

kreditor”. As it is translated, this term may cause confusion. First, the terms

“holder” and “Bondholder” are not properly translated, as discussed in item 4

below. Second, the term “kreditor should not be used as it is not used in the

English version. We believe the appropriate translation of the term to be “grupi i

zoteruesve te obligacioneve”. You may also want to consider including a

definition of this term in the DLCB and use an acronym (such as “G.Z.O.”) as the

defined term instead of using such a long expression.

4. “Bondholder” is translated as “mbajtes i obligacionit”. The word “mbajtes” in

Albanian language is equivalent to the word “those who possess” in English. In

civil law countries this is different from the word “owners”. We understand from

the context of many provisions in the DLCB that the Bondholder is the person

who owns the bond, not just the person who effectively has possession over it.

Possession is also inapplicable to dematerialized (i.e. intangible) instruments. We

therefore suggest to replace the term “mbajtes” with “zoterim”.

49

5. “Brokerage Company” is translated in the DLCB as “Shoqeri Broker”.

Although DLCB refers to article 44 of the LoS, the Albanian version of the DLCB

does not use the same term applied in the Albanian version of the LoS. The LoS

use the term “Shoqeri Komisionere”. Therefore we suggest to replace the term

“Shoqeri Broker” with “Shoqeri Komisionere”.

6. “Board of Directors” is translated in the DLCB as “Bord i Drejtoreve”. Although

this expression is widely used in the day to day business communication, the

proper Albanian translation according to LoC is “Këshilli Administrativ”.

Therefore we would suggest to replace the term “Bord i Drejtoreve” with

“Këshilli Administrativ”.

7. “Joint Stock Company” is translated in the DLCB as “shoqeri anonime”.

Although this term is widely used due to definition provided in the abrogated

LoC, the proper Albanian translation according to LoC is “Shoqëri Aksionare”.

Therefore we would suggest to replace the term “shoqëri anonime” with “Shoqëri

Aksionare”.

8. “Pledgor” - Art. 21(2) of the DLCB provides that “in case of a pledge over

Bonds, the voting right is exercised by the pledgor of the Bonds, unless otherwise

provided for in the pledge agreement or in the terms of the Bond loan program.”

The term “pledgor” in this article has been translated in the Albanian language as

“perfituesi i obligacioneve”. This term is confusing because it may be interpreted

as to mean the “pledgee”. Moreover, the term pledgor is widely used in the

Albanian language and it is therefore not necessary to introduce another term. We

therefore suggest to use the currently used term “penglenesi”.

50

10. CONCLUSIONS

The architecture of DLCB is comprehensive and generally fits with the framework of the

laws currently in force. Nevertheless, it presents several inconsistencies or discrepancies

with such laws.

As a first general remark, we would point out that certain provisions, which are common

in the Albanian drafting practice, are missing. These provisions relate to the description

of the “object” and “scope” of the law.

As a second general remark, we note that certain terms used in the Albanian version seem

ambiguous and imprecise. In Annex A enclosed to this Report we conducted a detailed

revision of the Albanian terminology and highlighted the most significant issues in

Chapter 9 above.

A. We found certain inconsistencies and discrepancies between the DLCB and other laws

currently in force. As a result of our comparative analysis, we recommend the following

amendments to the DLCB:

1. Article 2.2 (a) - We suggest that reference is included in the DLCB definition of

“Account Provider” to clarify that it is a “custodian” in accordance with LoS. In

addition, we suggest to amend the definition of the “Account Provider” set out in

Art 2(2) in order to include the functions of the account provider set out in Art

5(2).

2. Article 2.2 (b) and (f) - We recommend to amend the definitions in the DLCB to

refer to bond “owner” or alternatively to indicate specifically in the relevant

definitions all the ownership rights of the “holder of the Bond” and the

“Bondholder”.

3. Article 2(2)(ë) and (j) - We recommend that both the English and the Albanian

versions of the DLCB are amended to clearly indicate that the Account Provider is

a custodian. Additionally, we suggest that the definition of Dematerialised

51

Securities Registry is amended as to include reference to such entity being a

“registrar” pursuant to the LoS.

4. Article 2.2 (gj) – We recommend that the DLCB reaffirms that a company should

not issue bonds with a maturity shorter than twelve months.

5. Article 3 (1) - Unless otherwise argued by the drafter, we suggest not to duplicate

provisions included in the LoS.

6. Article 3 (2) - We suggest that the DLCB includes an express provision

addressing the conflict of authorities (e.g. expressly indicating that the DLCB

supersedes Art. 1 of the LoS above) and indicating that AFSA has the authority to

determine other types of bonds if such instruments have the elements provided by

Art. 18 of the LoS.

7. Article 6 (1) and 60 (1) – We suggest that a definition of Bearer Bonds is added

to Art.2 of the DLCB.

8. Article 4 – It would be appropriate to indicate in Art.4 of the DLCB that paper

bonds have all elements of Art.19 of the LoS plus the additional ones to be listed

in Art.4 of the DLCB.

9. Article 5 (3) and 6 (2) - In order to avoid interpretive issues, we recommend to

expressly amend Art.126 of the LoS in order to include the payment services

among the services performed by the securities registrar.

10 Article 14 (2) - We recommend that Art.14(2) of the DLCB includes a reference

to the requirements provided in LoS Art.17.

11 Article 16 (1) - We recommend that the DLCB clarifies the minimum number of

bondholders required to form a group under DLCB. The DLCB should also

clarify that when there are less than the minimum number of bondholders no

group is formed and the rules relating to groups are not applicable. The DLCB

should also clarify how the provisions relating to groups apply when the number

of bondholders increases or decreases above or below the minimum threshold

during the life of the bond.

12. Article 17(4), 22, 24 and 49 – Given that Art. 22 of the DLCB regulates

specifically the quorum and the majority vote of the meeting of the group of the

bondholders, it is superfluous to insert a further provision - such as Art 17(4) of

52

the DLCB - which provides that the provisions of LoC regarding the decisions of

the General Meeting of the shareholders of a joint stock company are applicable

to the decision of the group of the bondholders, we recommend to add before the

last phrase of article 17 (4) the words “Subject to article 22 of this Law”. Further

we note that the LoC has different rules on calling, quorum and majority vote for

ordinary and extraordinary general meeting. Therefore we recommend to clarify

in the relevant articles of the DLCB the type of general meeting involved.

13. Article 21(2) - We recommend to include provisions as to the exercise of voting

rights over the bonds and civil fruits in case securing charges are taken over

bonds, similarly to what done in Art. 21(2) of the DLCB with respect to pledges.

14. Article 26(1), 29(1), 30(1) and 32(1) - The expression “terms of the Bond loan”

is not defined in the DLCB. Given that other provisions of the DLCB deal with

the Bond loan program, we suggest that the relevant articles expressly refer to the

“terms of the Bond loan program” as done in Art. 30(1).

15. Article 28(2) – We recommend to add a reference to Art. 20.

16. Article 47 (1), 50 and 51 - In order to avoid interpretive issues, if we consider the

DLCB as lex specialis, we recommend to expressly state that Art.47(1) of the

DLCB supersedes Art.124 (gj) of the LoC.

17. Article 56(1) – We recommend to rephrase the first paragraph of the English and

Albanian version as follows: “Notwithstanding the provisions of the Law on

Entrepreneurs, the issuer’s general meeting of shareholders has the exclusive

right to decide the issuance of Convertible Bonds according to this article.”

18. Article 58 – We recommend that the article should include a reference not only to

the board of directors, but also to the administrators.

19. New Article - We recommend specifying in the DLCB which corporate body of

the issuer is responsible for preparing and publishing the prospectus.

20. New Article - The LoS clearly designates two processes: subscription and

settlement. While settlement is regulated in Art. 10 of the DLCB, the DLCB is

silent on the subscription. We recommend that the subscription is also regulated in

the DLCB.

53

21. New Article – We recommend that the DLCB includes specific provisions which

address the obligation of the issuer to provide information to the holders of listed

Bonds directly or via Account Provider.

22. New Article – We recommend that the DLCB includes a reference to Art. 27 of

LoS which describes the potential subscribers.

B. We also found that certain significant institutional players required for the

implementation of DLCB have not been licensed and the related regulations have not

been adopted yet. As a result of our analysis, we recommend that the following secondary

legislation is adopted in order for the DLCB provisions to be implemented:

1. We recommend that AFSA adopts regulations relating to (i) bondholders’ agents,

(ii) dematerialized securities registries, (iii) account providers and (iv) brokerage

companies which should include, among other things, requirements for such

entities to be licensed (including minimum financial and operational requirements

as well as personal and professional requirements for owners and management),

time and conditions of the licensing process, conditions for maintaining the

license (including fees payable and information and inspection rights of AFSA),

sanctions for failure to meet the licensing conditions and appeal against negative

decisions;

2. We recommend that AFSA adopts regulations relating to the operation of the

TSE, which should include, among other things, listing requirements for issuers

and instruments, time and conditions of the listing process, conditions for

maintaining the listing (including financial and operational requirements of the

issuer, price and volume thresholds for the instruments, fees payable and

information and inspection rights of AFSA), sanctions for failure to meet the

listing conditions, appeal against negative decisions and operations of the stock

exchange (including days and times of trading, price determination and publicity,

trading reporting).

54

C. In addition, we found that the English and Albanian versions of the DLCB need to be

amended in several parts:

1. with respect to the English version, to add missing definitions of the terms “over

the counter”, “account holder” and “bearer bond”;

2. with respect to the Albanian version, to adopt the proper translation of terms used

in the English version consistently with the terminology used in other laws

currently in effect, in particular LoS and LoC. We have reflected our comments in

a revised draft of the Albanian version of DLCB, which is enclosed hereto as

Annex A.

D. At the date of this Report, we are unable to estimate the CB issuance costs to be borne

by the Target. Based on the analysis of the costs described in Chapter 8 of this Report,

we expect such costs to be higher than the transaction costs involved in the execution of a

bank loan. In particular, we expect the cost of issuing a privately offered CB to be

slightly higher than the transaction cost of a bank loan, while we expect the cost of a

publicly offered CB to be approximately 20% higher. The difference would be

represented by the additional transaction cost involved in a public offering (e.g.

prospectus preparation and distribution). This estimate is net of costs relating to related

activities (such as marketing costs) that may apply to a CB issuance but are neither

expressly nor implicitly required by the applicable legal framework. Please also note that

costs related to the services to be provided by certain institutional players not yet licensed

in Albania have not been included in the above calculation.

E. The DLCB has sparked interest with local entrepreneurs and companies. However, at

the date of this e Report, such companies are not organized as entities suitable for raising

debt capital in alternative to banking loans. In particular:

1. The DLCB applies to joint stock companies but the most common corporate

vehicle in Albania is the limited liability company. Limited liability companies

are unlikely to transform into joint stock companies in order to become suitable

CBs issuers.

55

2. Additionally, because of reputational risks related to the distribution of CBs to

clients, underwriting banks are likely to require more information from an issuer

and run a more detailed analysis of its condition in order to minimize any negative

impact on their reputation that may derive from a possible default of the CBs

issuer. At least at this stage, many Albanian companies seem to be reluctant to

apply higher transparency standards and provide more detailed information,

which may be requested in the event of a CBs issuance.

3. Finally, the main shareholders of potential issuers companies (who are quite often

also their managing directors) have shown a conservative approach and hesitance

towards new debt instruments and, in general, they do not have familiarity with

the debt leverage.

On the other side, from the investors’ point of view, we have noticed that Albanians

investors still have very limited options to diversify their savings and investments.

Therefore CBs would represent another potential form of investment in addition to bank

deposits and treasury bonds.

As far as the banks are concerned, they are not only interested in subscribing the CBs as

principal investments in order to diversify their portfolio but also in selling CBs to their

customers. However, the development of a secondary market in Albania is closely linked

to the development of local regulated markets, such as the Tirana stock exchange.

The market response to the DLCB is also subject to the overall trend of the actual

lending policies from banks to corporate customers. At the date of this Report Albanian

banks have adopted more stringent policies for lending to large corporations. 4 However,

competition and liquidity in the banking market is still the primary source for financing

corporations.5 Depending on the relative difficulty in accessing the bank loan markets,

corporate issuers will be more or less willing to undertake CBs issuances.

4 Results from the observation of the Lending Activity, October 2008, Bank of Albania www.bankofalbani.org 5 ibid

56

In this respect we note that, when amended to reflect the changes highlighted in this

Report and when placed in a context of operating institutional players and related

secondary legislation, the DLCB is likely to be a valid instrument capable of enhancing

the Albanian securities legislation and providing Albanian companies with access to

financing alternative to bank loans.

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