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While regulatory changes, in particular the implementation of Basel III, and the financial and sovereign crisis have led to a reduction in the overall capacity and willingness of banks to lend, the loan market in Germany has been favorable for borrowers, with banks and non-bank lenders competing for mandates.
In the leveraged finance segment, small-cap and mid-cap transactions are usually being financed by domestic banks and international banks with a strong presence in Germany. However, alternative debt providers have established themselves as a viable alternative to traditional bank lending, offering so-called unitranches (a type of debt which combines senior and subordinated debt into a single debt instrument) which enable the borrower to take on more senior debt compared to traditional bank loans due to the lack of amortization, in return for higher margins. Underwriting is offered by most banks for the right deal although club deals are still relatively common in the small cap market and lower end of the mid cap market. Large cap leveraged finance transactions are usually financed with either support from institutional investors in the international loan market or the high yield bond market (or both), depending on the liquidity in the relevant markets. Seeking loan financing for buyouts or refinancings in the US – which was popular in 2013/2014 – is now relatively rare due to the liquidity in the European loan market.
Activity in the investment grade lending market has been quite stable over the last few years. Refinancings are the most common source of transactions, but there have also been some larger acquisition financings. However, corporates continue to diversify their debt capital structure, either by way of bond issues, US private placements or so-called Schuldscheindarlehen, when refinancing existing debt or funding acquisitions and other investments.
Please provide a brief overview of forthcoming changes to the law or other matters that may affect the loan markets or the responses to the questions below.
The recent implementation of the Alternative Investment Fund Managers Directive (Directive 2011/61/EU), in particular the prohibition on 'asset stripping', may also have an effect on the structuring of leveraged buyouts but it is too early to properly assess the impact it will have.
Does your jurisdiction recognize the concept of a trust or a security agent holding security for the benefit of all lenders? If not, is there an accepted method of ensuring all lenders get the benefit of security? Are there any limits on action a security agent could take on behalf of the secured parties?
Under German law the concept of a trust–in the sense that a trustee holds security on trust for all the lenders– or otherwise the holding of security for the benefit of other persons may be employed in relation to non-accessory security, i.e. security assignments, security transfers and land charges. It may not be used for pledges however. Due to the accessory nature of pledges (see above on the principle of accessoriness) the pledgee must be the creditor of the debt which is secured by the pledge. In order to enable the security agent to become a pledgee the concept of 'parallel debt' is normally used, whereby the debtors create an independent obligation towards the security agent to pay the amounts owed by them towards the lenders (and other finance parties). Often, however, the lenders (and other finance parties) are granted individual pledges in addition to the pledge granted to the security agent in order to mitigate the risk that the parallel debt concept is not recognized by the German courts.
Would there be any concerns in terms of validity or enforceability for an entity in your jurisdiction to grant a New York law guarantee as typically required in syndicated loan agreements governed by New York law?
A typical New York law guarantee given by a German company would generally be valid and enforceable, subject to the restrictions on the giving of guarantees on first demand referred to above.
Will a choice of New York law as the governing law of the documents and the courts of the State of New York as the jurisdiction for disputes be upheld in your jurisdiction? Would a judgment given by the courts of the State of New York be enforceable in your jurisdiction without a retrial of the merits of the case?
The choice of New York law will be recognized and given effect to by the German courts, subject to applicable rules of German international private law. In particular, a German court may apply overriding mandatory provisions of German law irrespective of the choice of New York law and may refuse to apply New York law if such application is manifestly incompatible with the public policy of Germany.
A judgment given by the courts of New York would be enforceable in Germany only subject to the limitations imposed by the German Code of Civil Procedure (Zivilprozessordnung). In particular, a judgment by a New York court will not be recognized if, applying the principles of German law, the courts of New York did not have jurisdiction, if the recognition of the foreign judgment conflicts with German public policy or if a German judgment would not be recognized in New York under similar circumstances (principle of reciprocity).
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