SECTION 1: MARKET OVERVIEW
1.1 Please provide an overview of the market and
environment for cross-border financing in your
In the German market, market participants use cross-border
financing for a variety of different purposes, including
acquisitions, refinancings and leveraged buyouts (LBOs). LBOs
are usually financed by way of senior debt provided by banks or
institutional investors, and/or by way of (high yield) bonds.
In particular, with respect to the mid-cap market, the market
share of debt funds providing unitranche financings has
increased significantly. Unitranches and high yield (HY) bonds
are usually supported by revolving credit facilities provided
by banks for general corporate purposes. Corporate financing is
regularly structured as bank loans and, depending on the size,
combined with bonds.
As in many other European jurisdictions the total deal flow
as well as the total deal volume in Germany was significantly
higher in 2017 than in the preceding years, with Germany
amongst the three most active European countries in terms of
number of deals and volume of LBO transactions and senior loans
in general. Covenant-lite terms have become widely accepted at
least with respect to large-cap deals; however, they are less
common in the mid-cap sector (although the market has
successfully tried to structure covenant-lite transactions with
debt volumes down to €200 million, or $233.3 million
approximately). The majority of transactions in 2017 (and so
far in 2018) were refinancings and LBOs/acquisitions. However,
we have also seen more HY bonds issued by German corporates
including several first-time issuers. The availability of HY
bonds as a financing instrument depends on the volume raised
and the issuer's rating. Due to the flexibility provided, bonds
have been valued by an increasing number of corporates. In
addition, the issue of bonds pursuant to German law (SchVG) has
become more common, which makes it easier for German midcap
corporates to get access to the market.
In recent years, the market has moved in favour of
borrowers/issuers, resulting in a decrease in yield and an
erosion of documentary terms. However, this development may
have slowed down, as lender pushback and negotiations during
syndication have led to an increased use of flex rights in the
lenders' favour. In 2018, there have been some transactions
with significant difficulties with syndication, resulting not
only in changes to the pricing but also in changes to the
structure (eg conversion of an all-senior structure into a
senior/second lien structure).
1.2 Have there been interesting changes in the structure of
the banking sector in your jurisdiction?
Although they have been in the market for a while, debt
funds providing unitranche financings are currently gaining a
bigger share of the market with respect to mid-cap financings,
whilst also increasing the size of the tickets they are able to
hold. Their competition with banks also leads to pressure on
pricing and documentation. Due to the acceptance of debt funds
as market participants, an increasing number of banks have
started to focus on super senior financing by way of revolving
credit facilities, as well as participating in term loans with
a first-out/second-out structure.
SECTION 2: FINANCING STRUCTURES
2.1 What have been the key trends or developments in your
jurisdiction over the past 12 months in terms of financing
structures, deal drivers and the way borrowers and creditors
are participating in the market?
An increasing number of transactions are being structured
and organised by external debt advisors.
The erosion of documentary terms seen in the European market
in general can also be seen in the German market. Covenant-lite
terms, EBITDA adjustments and more flexibility with respect to
the incurrence of additional debt are examples of such
sponsor-friendly terms. Further to large-cap transactions,
these are now also seen in mid-cap documents. Unitranche /super
senior structures have been chosen in various leveraged finance
transactions where sponsors balance higher leverage multiples
in direct lending deals against lower pricing in bank
2.2 Briefly outline some recent notable transactions
involving your jurisdiction, highlighting any interesting
aspects in their structures and what they might mean for the
We have seen various new debt funds pushing into the German
market. The competition among debt funds and also among banks
and debt funds, has significantly increased. Sponsors use the
competition for very competitive selection processes, which
increases the pressure on terms and documentation.
In 2017, one of the biggest ever German private equity
transactions, the public takeover of Stada Arzneimittel by Bain
Capital and Cinven was financed by €2.35 billion of bank
loans and €1.1 billion of dual tranche bonds. The Stada
acquisition was the first public takeover in Germany to use a
financing package which included bonds.
In 2018, the first covenant-lite transaction with a volume
below €250 million in the European market was arranged out
SECTION 3: LEGISLATION AND POLICY
3.1 Describe the key legislation and regulatory bodies that
govern cross-border financing in your jurisdiction.
Financing activities such as lending or providing guarantees
generally require a licence by the German Financial Supervisory
Authority (Bundesanstalt für
Finanzdienstleistungsaufsicht, BaFin) pursuant to the
German Banking Act (Kreditwesengesetz). The licence
requirement not only applies to entities located in Germany,
but also to entities located outside of Germany, providing they
actively target the German market with the intention of
offering their services/products to German customers on a
repeated basis. However, under certain circumstances,
exemptions from the licence requirement apply, including for
example in the following cases:
- The services/products are not actively
offered by the foreign provider but requested by the client
- The services/products are offered by an
EEA-institution holding a corresponding licence in its home
member state (passporting).
- BaFin granted an exemption from the
licence requirement (requiring, inter alia, a respective
application and effective home country supervision).
- The lender does not extend the loan but
only acquires loan receivables.
- The lender is an alternative investment
Financing activities involving financial instruments, eg
(debt) securities and certain other forms of (debt) instruments
(Vermögensanlagen), may also fall in scope of
German financial regulatory law. The public offering of
securities for example generally requires a prospectus under
the Securities Prospectus Act
(Wertpapierprospektgesetz) unless an exemption applies
(eg offering to qualified investors, limited number of offers,
limited amounts). Certain intermediary services relating to
financial instruments such as brokerage, placement, and
underwriting also generally require a licence by BaFin, and may
be subject to the conduct rules set forth in the Securities
Trading Act (Wertpapierhandelsgesetz).
3.2 Have there been any recent changes to legislation or
regulations that may impact the cross-border financing market
or availability of funding in your jurisdiction?
There have been no recent changes having significant impact
specifically on cross-border lending activities.
3.3 Are there any rules, legislation or policy frameworks
under discussion that may impact lenders or borrowers involved
in cross-border financing in your jurisdiction? How can market
Upon the occurrence of Brexit, UK entities would be treated
as non-EEA entities and thus would no longer be able to provide
their services in Germany under a UK licence based on the EU
passport privilege (unless agreed otherwise in the pending
SECTION 4: LOCAL MARKET NORMS
4.1 Are there frequently asked questions from new market
entrants or often overlooked areas from parties involved in
cross-border financings in your jurisdiction?
Under German law, in insolvency proceedings, shareholder
loans become automatically subordinated to other creditors'
claims. Repayments of any shareholder loans are subject to a
one year claw-back period immediately preceding the filing for
the opening of insolvency proceedings, regardless of whether
the respective repayment occurred in a financial crisis or
In a German court ruling, third parties were treated as
quasi-shareholders (and therefore subordinated creditors in its
debtor's insolvency) if they had a 'shareholder-like influence'
on the borrower. Following this decision, it has become
controversial whether financial institutions, which, for
example, through tight undertakings and a comprehensive
security package take certain control over the business of the
borrower, could be treated as such quasi-shareholders. It is,
however, common market practice to use standard covenant and
A recent German court ruling declared fee arrangements as
being general terms and conditions to the detriment of the
borrower void, requiring the pricing of a loan to be fully
included in the interest. The ruling has particularly raised
uncertainty as to what extent arrangement fees in syndicated
loans are still valid. Market participants should be prepared
for discussions on alternative fee concepts.
4.2 Please describe any common mistakes or misconceptions
that exist about the financing market in your
German law provides for a number of security rights that are
accessory to the existence of the secured claim. In particular,
pledges can only be granted directly in favour of the creditor
of the secured claim and are limited to the respective amount
of such claim. In case of a transfer of a participation in a
syndicated loan, the new lender needs to benefit from the
existing security. A problem arises where the secured claim
temporarily ceases to legally exist (eg by way of novation), as
the pledges fall away in such situation. One way of addressing
this is the pledges securing parallel debt (equal to
outstanding debt amount) in favour of the security agent. The
'future pledgee' concept is another option by which the
security agent acts as an attorney without the power of
representation for future lenders who will then declare their
consent by signing the respective transfer certificate. Both of
these concepts are common practice, but have never been tested
4.3 Are there any classes of assets over which security
cannot be taken or regulations specific to your jurisdiction
governing the taking of security over certain classes of assets
that lenders should be aware of?
Essentially all classes of assets can be taken as security
under German law with very few limitations (eg certain IP
rights). However, there is no global instrument granting
security over all assets (such as a floating charge).
Furthermore, no lender may receive or hold security excessive
in value in comparison to the amount of the secured
Pledges over shares in a German company with limited
liability (GmbH) need to be created by way of a notarial deed.
This creates further significant costs that need to be taken
into account. The former approach, namely to have the
notarisation take place in Switzerland has been abandoned by
most market participants after a German court ruling put the
validity of such pledges under doubt.
4.4 What measures should be taken to best prepare for your
local market norms?
Parties should seek advice from a local law firm and involve
them in the process at an early stage to ensure that any issues
with respect to timing or costs are addressed or avoided.
SECTION 5: PRACTICAL LEGAL CONSIDERATIONS
5.1 Briefly explain (i) the typical security package
available at closing and (ii) any downstream, upstream and
cross-stream guarantees available in your jurisdiction, in each
case, with reference to any specific restrictions or
Typically, for LBOs only security over shares in the initial
borrower (BidCo), as well as security over HoldCo's and BidCo's
assets, are available at closing. A security package from the
operating companies (e.g. land charges (real estate), security
transfer (movable assets), pledges (shares, bank accounts,
global assignment (receivabkes) can only be obtained following
closing, ie after the target company has been acquired.
Up- and cross-stream guarantees/security are subject to
capital maintenance rules applicable to stock corporations
(Aktiengesellschaft), limited liability companies
(Gesellschaft mit beschränkter Haftung) and
limited partnerships (Kommanditgesellschaft) with a
limited liability company as general partner. A violation of
such capital maintenance provisions may lead to a personal
liability of its directors. The common approach addressing this
is a so-called limitation language, which ensures (subject to
certain exceptions and adjustments) the preservation of the
stated capital (Stammkapital). This may lead to a
substantial decrease in value of the guarantee/security but is
widely accepted by market participants. Following recent court
rulings leading to uncertainty as to whether the test for the
preservation of the stated capital should apply at the time of
granting or of enforcing the security, the leverage market has
reverted to applying the test on enforcement.
For stock corporations the rules applicable to up- and
cross-stream payments are even stricter and prohibit (subject
to certain exceptions) the making of payments to stockholders
except for distributions of balance sheet profit. This applies
to upstream guarantees or security accordingly. In addition, a
stock corporation is prohibited from giving financial
assistance by supporting a third party on the acquisition of
shares in the stock corporation, including by way of
(up-stream) guarantees/security for any acquisition debt.
5.2 Are there any specific issues or challenges creditors
should be mindful of regarding an insolvency or restructuring
situation? Have there been any major judicial changes to the
insolvency system (or related judicial decisions) in your
jurisdiction recently? How long does an enforcement process
In insolvency proceedings, in certain circumstances the
insolvency administrator may challenge the creation of security
interest granted over the assets if the creation was to the
disadvantage of other creditors. The risk of such claw-back
rights can be significantly reduced if the relevant security is
structured in the form of a cash transaction (i.e., the debtor
receives an arm's-length benefit in connection with and within
a short period of time following the creation of the security).
In such case, the security can only be challenged based on the
criteria of an intended damage claw-back right, which means
that (a) the debtor had the intention to disadvantage its
creditors and (b) the beneficiary was aware of such intention.
This will prove difficult because cash transactions are
indications against these criteria. Claw-back rights can no
longer be exercised once the applicable hardening periods (from
three months up to 10 years) have expired.
Further recent changes in law provide for insolvency
proceedings for a group of companies, eg by insolvency
proceedings of all group companies being dealt with by one
court, and of a restructuring procedure before an actual
insolvency takes place. The overall intention is to strengthen
the position of both debtors and creditors in order to prevent
a loss of value.
The duration of an enforcement process depends on the
individual security right. Different rules apply to accessory
security rights, non-accessory security rights and security
interests over real estate. While a share pledge enforcement,
for example, can be realised within a few months, the
enforcement of security over real estate can take significantly
longer depending on the circumstances. Enforcement may
generally be achieved by way of a sale or, in the case of
monetary rights, by way of collection. In case of pledges, the
relevant assets need to be sold (with certain limited
exceptions) by way of a public auction.
SECTION 6: OUTLOOK
What are your market outlook predictions for the next 12
months in cross-border financing in your jurisdiction?
We expect a further increase of unitranche/super senior
financings provided by debt funds and banks. Banks seek larger
commitments in such transactions subject to limitations set by
debt funds which are keen to maintain control over the main
terms of the financing documentation.
We further expect that underwritten transactions will be
structured more carefully in order to avoid further failures in
syndication and sponsors ending up with less favourable terms
than initially achievable. The trends in the US and the UK
markets will continue to have a significant influence on the
The bond market is difficult to predict. On LBO transactions
we believe that sponsors will try to use the loan market for
more certainty of funding. Issuers will try to find the right
window for the offering of the bonds.
Overall, the enormous liquidity pressure in the market will,
in our view, see a very busy year-end in 2018, in which sellers
will use relatively low pricing for acquisition debt to compete
in auctions involving high purchase prices.
Partner, Latham & Watkins
T: +49 89 2080 3 8069
F: +49 89 2080 3 8080
Thomas Weitkamp is a partner in the Munich office of
Latham & Watkins. He practices in the firm's
finance department, advising clients on a variety of
complex domestic and cross-border finance and financial
restructuring transactions. Thomas advises financial
institutions, debt funds, companies and private equity
funds on a wide range of matters, including acquisition
finance, public-to-private transactions, leveraged
buy-outs, senior/super senior structures, direct
lending, infrastructure financing, restructurings and
corporate financing. He is qualified as a German
Rechtsanwalt and as a solicitor (England and
Max von Cube
Associate, Latham & Watkins
T: +49 69 6062 6646
F: +49 69 6062 6700
Max von Cube is a financial regulatory lawyer in the
Frankfurt office of Latham & Watkins, and a member
of the firm's financial institutions group. He
regularly advises domestic and international clients on
regulatory, compliance and transactional issues
relating to German and European banking, financial
services and capital markets regulation. Max is
qualified as a German Rechtsanwalt and also holds a
degree (diploma) in economics.