Vol 7 (2010) - Issue 6

Article preview

Financial Restructuring in Germany: Issues, Options, and Innovations

1. Introduction
During the early 2000s the German market, compared to other major European markets such as the UK and France, lagged behind in terms of LBO deal volumes. By the mid 2000s, however, the German market saw a marked increase in LBO volumes driven by two key factors, firstly, increased investor liquidity, and secondly, the increasing entry into the German market of international banks and institutions.
In terms of investor liquidity, the German LBO market was supported by the unprecedented availability and demand for syndicated loans. In 2006, for example, USD 296bn of syndicated loans were signed in Germany, second only in Europe to the UK (USD 307bn).
These high levels of loan issuance were complemented by the increased focus given to the German market by international investors; with many banks establishing new offices in Germany, whilst others that had exited the market a few years ago re-entered. Whilst German institutions still represented a large proportion of lenders, overseas lenders were becoming increasingly prevalent: in 2004 German institutions represented 36% of the German LBO loan market, with US institutions at 33% and UK institutions accounting for 8%. As we set out later in this article the entry of international investors into the German LBO market resulted in the introduction of different and new restructuring methods and the subsequent emergence of new and innovative restructuring solutions.
The combined impact of high loan issuance and increased liquidity meant that the deal flow during 2006 included some of the largest ever buy-outs in Germany including pharmaceutical group Altana, Linde’s forklift subsidiary KION, TV broadcaster ProSiebenSat1 Media and Blackstone's investment in Deutsche Telekom.
The legacy of this buyout activity, in the context of the recent evaporation of liquidity and economic downturn, has meant that many international investors and banks have been left with investments in German LBOs which are now in need of financial restructuring. The remainder of this article examines how the unique legal and jurisdictional issues in Germany, combined with new restructuring perspectives, have resulted in innovative restructuring solutions.

2. Legal and jurisdictional issues
Recent experience shows that lenders to a corporate where the COMI (centre of main interest) is in Germany are likely to face a number of jurisdictional specific issues under German law being:
a) The risk of equitable subordination,
b) Tax risks associated with a debt for equity swap,
c) Lender liability issues related to the provision of new money; and
d) The importance to lenders and Group management of obtaining a positive Sanierungsgutachten (or German Restructuring Opinion / 'GRO').
A clear understanding of each of these issues is critical to achieving a successful restructuring outcome and we consider each of these in further detail below.
Equitable subordination
A key issue for lenders to a German corporate is the risk of equitable subordination whereby should the lender group take control of more than 10% of the Group’s equity there is a risk that, upon insolvency, their remaining loans would be treated as subordinated debt.