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Published in the BondGuide - Special "Anleihen 2019" (convenience translation)
by Frank Günther, André v. Holtzapfel and Carl-Gustav Beckmann
 

 

Schuldscheindarlehen in focus: the role of the "joint representative"

The German Schuldschein market is growing steadily. This financing instrument is continuing to increase in popularity, despite increasing insolvencies and restructurings. The volume of new issues reached almost EUR 25 billion in 2018, making it the third largest new issue year following the record years 2016 and 2017 and also the third-highest since 2004. After a slight decline in the issue volume in 2018, the market is expected to rise again in 2019.

Schuldschein dethroned syndicated loans

The Schuldscheindarlehen is very attractive due to the relatively low interest rates as well as the easy placement for debt raising companies and has therefore become increasingly important in the German economy. With a total volume of more than EUR 200 billion, the Schuldscheinmarket - in contrast to the crisis-ravaged mid cap bonds - has in the meantime overtaken the syndicated loan as the financing instrument of choice.

In addition, companies appreciate the instrument with regards to the comparatively lean and largely standardised documentation. Furthermore, the obligation to publish a prospectus does not apply, as Schuldscheindarlehen are within the meaning of § 488 BGB simple bilateral loans.

Traditionally, Schuldschein issuers were distinguished by an investment grade credit rating and a business model with low cyclical fluctuations. As a rule of thumb, ticket sizes of these issues were EUR 200 million and above. However, the number of new Schuldschein issuances with a rating of BBB- or worse and loan sizes below the EUR 200-million-mark are increasing in today’s market environment.

Restructuring made difficult

The disadvantages of the instrument come to light as soon as companies get into financial difficulty and have to start negotiations with its financing partners, including banks, bondholders, leasing companies, credit insurers, amongst others. A toolbox for reaching a consensual agreement as such as the German Bond Act (SchVG) for bonds does not apply.

Schuldscheindarlehen do not allow for majority decisions in the course of out-of-court financial restructurings to have a binding effect in respect of all Schuldschein lenders. An application of the German Bond Act, in particular the provisions on Collective Action Clauses according to § 5 Sec. 3 SchVG, do not apply because, as already described, Schuldscheindarlehen are structured according to § 488 BGB.

Therefore, for the implementation of a restructuring the approval of all Schuldschein lenders is required.

Don’t care attitude

In these situations, often investors, without a real "house bank relationship" to the issuer are selling their Schuldscheindarlehen at a discount to distressed debt investors and hedge funds, which commonly follow their own agenda, which is not necessarily in the interest of the issuer and the shareholders.

The issuer and the majority of the creditors also frequently see themselves with "blackmail attempts" in the form of an individual termination notice and the resulting insolvency risk.

Workaround through joint representative

In these situations, the communication with Schuldschein lenders is imperative and can be vital to keep them aligned.

What contribution can a "joint representatives" of the Schuldschein lenders bring in this context? The responsibilities are as varied as they are useful:

  • Financial advice for Schuldschein lenders on the planned restructuring transactions of the company, e.g. restructuring measures and financial reorganisation out-of-court or in insolvency;
  • Support and representation in negotiation with the company and other creditor representatives;
  • Assessment of the economic impact of the various options, including any M&A or disposal processes;
  • Provision of a centralised information platform to ensure an even and adequate information base in order that Schuldschein lenders can be informed about the situation in the best possible way and derive their own decisions.

The value of this role becomes even greater, the earlier the joint representative takes over the management and communication with Schuldschein lenders.

In parallel to the role as joint representative of bondholders according to SchVG the duty of care is exclusively to the benefit of Schuldschein lenders. The costs are to be borne by the debtor within the framework of a mandate agreement.

Conclusion

A solution regarding the unanimity requirement in restructurings of Schuldscheindarlehen is close in form of the pre-insolvency restructuring framework. The implementation of the EU directive into German law and the possibility to cramp down individual creditors will make restructurings considerably easier. However, even under the new regime the necessity to name a joint representative remains.

 
 

 

Erschienen bei Mergermarket 05/2018 by E


 

The ESUG insolvency law , introduced two years ago, gave Germany a truly
effective alternative to liquidation. But it is still an insolvency law. Local
practitioners and legislators bitterly regret the absenceof an equivalent to the
increasingy popular English Scheme of Arrangement as a restructuring tool.

On the other hand, practitioners are coming to realise that another piece of
leislation may have provided them with similar tools; Germany's 2009 Bond Act.

Asmus Ohle und Wolf Waschkuhn explain how it works.

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