Vol 7 (2010) - Issue 1

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Revision of German Bond Act: New Restructuring Options for German Bonds

On 5 August 2009 a major reform relating to German bond restructurings took place in Germany: the new German Bond Act (Gesetz über Schuldverschreibungen aus Gesamtemissionen) came into force. This new act replaces a legal regime, the German Act Concerning the Joint Rights of Bondholders (Gesetz betreffend die gemeinsamen Rechte der Besitzer von Schuldverschreibungen), which has broadly remained unchanged since its introduction on 4 December 1899.

1. The old German Bond Act

The old act was designed for bond restructurings, but never acquired practical relevance and has long been considered as highly inflexible. This was mainly due to the following reasons:

(1) Firstly, the scope of the old act was regarded as too narrow; it covered only bonds where the issuer and the place of the issuance were located in Germany. However, nowadays it is common practice that a non-German vehicle acts as the issuer of the bond.

(2) Secondly, amendments regarding the bond were possible only to prevent an illiquidity of the issuer or insolvency proceedings over the estate of the issuer. The aforementioned triggering events were too late for a successful restructuring of the issuer.

(3) Thirdly, the restructuring options which were provided for in the old act were very limited; in particular the old act provided only for the possibility to reduce interest claims and to defer principal claims for a limited period of three years. Haircuts regarding the principal claims of the bondholders, debt-for-equity swaps or other standard restructuring tools were not provided for. Furthermore, it was unclear if – on an international level – the widespread 'Collective Action Clauses', i.e. clauses granting a majority of bondholders usually the opportunity to amend the terms and conditions by mere majority vote, could be validly agreed on.

(4) Finally, the procedural rules were regarded as technically flawed, in particular with respect to the convening of bondholders’ meetings.

2. The new German Bond Act

The new act is designed to correct the aforementioned downsides and to align the German bond law with common practice in international financial markets.

2.1. Scope of application

In contrast to the old act, the new act now applies to all issuers of bonds which are governed by German law, regardless of the place of business of the issuer. Moreover, the new German Bond Act does not apply only to conventional bonds with fixed interest payments but also to other forms of debt securities such as derivatives. The only exceptions to the scope of application concern Pfandbriefe (German covered securities regulated by the German Pfandbrief Act), and, broadly speaking, government bonds.

Time-wise, the new act applies to all bonds issued after the coming into force of the new act on 5 August 2009. Bonds issued prior to that date remain subject to the old act. However, creditors who hold bonds which have been issued prior to the effective date may – together with the issuer – opt for the application of the new act.