Recovering German corporates are set to drive the next stage of German law high yield due to their preference for local law and advisors.
Leïla Röder of White & Case in Munich said banks are confident that a number of the companies, known as fallen angels, are getting more comfortable with high yield and are looking to tap the capital markets for funding over the next two years.
According to Röder, the banks believe these companies will insist on German law for their documents because it’s what they’re used to. For companies that are selling high yield bonds for the first time, the comfort of a familiar legal regime, advisors and language can outweigh the marketing benefits of using New York law.
“I think there’s a lot of psychology in this one,” said Röder.
Marc Plepelits of Shearman & Sterling in Frankfurt agrees that the decision of whether to issue under German or New York law has been a comfort issue rather than a legal one.
Some companies just have a preference for German law, Plepelits said. Continental’s €750 million issue in July 2010 was under German law despite the company having extensive operations in the US. The company just felt more comfortable with German law so decided to stick with the legal environment they were familiar with.
Other companies are afraid of anything that has to do with the legal side of the US.
“A lot of that is just irrational as the US courts, especially when dealing with high yield bonds in Manhattan, are very sophisticated,” he said.
“They’ve litigated many of those deals and have a lot of experience, and there is no jury trial and no class action that people have to worry about.”
But if banks could choose and a company has no preference, he said they would probably still choose New York law as it may have an edge in marketing.
He said that if an issuer isn’t afraid of New York law, it has the advantage of more precedents, a clear legal situation and no novel issues that have never been litigated or tried in practice.
Some US investors may also be more hesitant to accept German law issues, so New York law can leave issuers with more flexibility to launch a US dollar financing in the future, he added.