Banking & Finance 2023

Last Updated October 12, 2023


Law and Practice


Freshfields Bruckhaus Deringer is a leading international globally integrated law firm offering clients dedicated legal advice across all legal fields and industry sectors in all important economic regions. With over 2,800 lawyers in 28 offices in 17 countries across Europe, Asia and the USA, it is among the largest law firms in the world. The firm specialises in complex, cross-legal and cross-border matters and combines in-depth industry knowledge with innovative solutions to help its clients grow, strengthen and defend their businesses. In the finance sector, the firm’s advice covers corporate finance, acquisition finance, leveraged finance, real estate finance, financial restructuring, finance regulatory, equity and debt capital markets, securitisation and structured, project and asset finance. The firm would like to thank Adrian Strahm, trainee and Karl Kuhn, trainee, for their contribution to this chapter.

Regulatory Environment

In recent years, developments in the German loan market have mainly been shaped by the Capital Requirements Regulation (CRR) and the UCITS V Implementation Act. The CRR (which is based on the Basel III framework) imposes strict capital adequacy requirements on banks and requires them to maintain certain leverage ratios. This heavy regulation has caused regulated lenders to withdraw from certain areas of the lending business, thereby creating a gap. Since the introduction of the UCITS V Implementation Act in March 2016, which amends the German Capital Investment Code (Kapitalanlagegesetzbuch) and the German Banking Act (Kreditwesengesetz) to allow certain alternative investment funds to originate loans to German borrowers, this gap has gradually been filled by alternative credit providers.

Impact of Recent Economic Cycles

The recent volatility of the German loan market resulting from economic uncertainty, high inflation and rising interest rates has lowered the demand for loans in Q1 and Q2 of 2023 and caused lenders to adopt more risk-averse lending practices. Lenders have placed particular focus on strengthening financial covenant protections and ensuring the financials and business models of potential borrowers are solid.

Russia’s war on Ukraine triggered a wave of dealmaking with investors seeking to offload Russian assets and investments. While the direct claims of German financial intermediaries against debtors in Russia were small, the war in Ukraine had far-reaching effects on German markets. In particular, the war on Ukraine has caused unprecedented energy cost rises, affecting German companies disproportionately given their high reliance on Russian oil and gas. At the same time, this caused a substantial increase of investments and financial demand in the energy transition area.

On the borrower side, those with solid businesses are seeking to refinance existing loans to secure lower rates and better financial terms, where possible. Borrowers with highly impacted businesses, however, often find themselves in lengthy negotiations with lenders to obtain waivers of financial covenants, extensions of existing loans or adjustments of existing terms.

Economic developments have caused a significant drop in the high-yield bond issuance rate. In 2022, only 13 high yield bond financings were recorded in Europe, marking a 50% decline to the previous year.

Over the years the German high-yield and leveraged loan markets have gradually assimilated their covenant packages and overall documentation terms. Whilst a growing number of high yield bond issuances are secured, there is a noticeable number of typical “covenant lite” provisions in large cap leveraged term loans.

Despite this trend to assimilate loan and high-yield documentation terms, certain differences are worth mentioning. In light of the interest rate volatility, some companies consider issuing fixed rate notes. Loans generally continue to have more extensive undertakings and events of default allowing lenders to demand economic or legal adjustments in case borrowers are seeking amendments or waivers.

As mentioned under 1.1 The Regulatory Environment and Economic Background, there has been a significant increase in alternative credit providers in the German loan market. Debt funds have traditionally focused on small and mid-cap leveraged buy-outs but are gradually also financing corporate borrowers and offering unitranche solutions for large-cap leveraged acquisitions, thereby taking market share from the syndicated market.

Direct lending by alternative credit providers typically offers certain benefits over traditional bank lending including:

  • no syndication risk since the debt is held to maturity;
  • flexible and borrower friendly covenants;
  • financing at higher leverage multiples; and
  • greater execution speed.

The unitranche offerings have resulted in a high number of super senior bank products, typically revolving credit facilities and related hedging, but more recently also in form of additional term debt. This trend has led to new intercreditor arrangements.

The recent trend to reduced leverage via senior debt and the need for additional leverage in competitive auctions or distressed situations has resulted in PIK HoldCo or preferred equity structures. These products, which are provided by the growing number of very flexible so called “capital solution providers”, do not require intercreditor agreements as they are structurally subordinated to the senior loans, but the higher risk triggers a substantial increase in pricing.

ESG and other sustainability linked lending has become a popular component of most lending transactions. Companies and lenders typically agree on bespoke ESG performance indicators that are assessed annually through the delivery of company-produced or objective third-party reports. ESG-ratings have however become less visible over the last years. Depending on whether the targets have been met, the interest rate of the borrower is adjusted. Although such margin adjustments often only range from 1-5 basis points, borrowers and lenders also benefit from the positive image resulting from publicly visible ESG commitments.

In Germany granting loans is subject to a banking license. Banking licenses are granted by the Bundesanstalt für Finanzdienstleistungsaufsicht, and in case they are combined with a deposit-taking license, the European Central Bank. The license application is a lengthy and burdensome procedure.

The regulatory environment generally does not allow non-banks (institutions that do not hold a banking license) to act as lenders. However, some narrow exemptions apply. As such, non-banks may cooperate with credit institutions in order to be involved in the loan business (so called “fronting-bank model” or “white label model”) or may rely in certain circumstances on the reverse-solicitation exemption (see 3.1 Restrictions on Foreign Lenders Providing Loans). Furthermore, no licence is required for the mere acquisition and holding of loan claims but there is a very fine line distinguishing between the mere “holding” and other actions in respect of those claims (eg, extensions) which again lead to a license requirement.

In addition, as described in 1.1 The Regulatory Environment and Economic Background, German investment laws were amended to allow certain EU regulated credit funds to grant loans under very specific circumstances, even if they do not hold a banking license.

The banking license requirement applies to both domestic and foreign lenders equally. Certain exemptions may apply for EU-institutions which hold a banking license in their home jurisdiction and are supervised by competent authorities in their home jurisdiction within the EU. These institutions may passport their banking license to Germany if they fulfil the relevant requirements.

Generally, the license requirement applies if foreign lenders wish to provide services to customers who are considered as German residents. One exemption to this rule (so called “reverse solicitation”) applies in case the customer seeks out the foreign lender explicitly, while the foreign lender does not market or advertise their services to German customers as such.

Generally, foreign lenders may receive security or guarantees in the same way as domestic lenders. The receipt of real estate security might have certain tax implications for foreign lenders.

Germany has not implemented foreign currency controls except reporting obligations in case of incoming or outbound payments regardless of currency. However, banks and payment institutions are required to freeze assets of persons subject to EU sanctions lists. This affects all assets, including funds, regardless of currency. Funds subject to an asset freeze are required to be reported to the competent authorities, which is Deutsche Bundesbank in Germany.

By law, no restrictions on the use of proceeds arise, other than in case of non-compliance with sanctions or other applicable public laws and the financial assistance/capital maintenance requirements described under 5.3 Downstream, Upstream and Cross-Stream Guarantees and 5.4 Restrictions on the Target.

In syndicated financings, it is market standard to implement an agency and security agency concept. The trust concept is not recognised in Germany. To allow the security agent to hold certain types of security, a parallel debt concept will be included in the financing documentation.

Loan claims can be transferred to a new lender by way of a transfer of rights and claims (Vertragsübernahme) or by way of an assignment of claims (Abtretung).

Transfer of Rights and Claims

The usual way to trade out of and into a syndicated loan is by transferring all rights and claims of an existing lender to a new lender. The new lender does not only assume the right to demand principal and interest from the borrower but also assumes funding commitments and other obligations of a lender.

Assignment of Claims

In situations in which no more obligations remain on the part of the lender (eg, in the case of non-performing loans) loan claims are usually assigned from the existing lender to the new creditor.

Transfer of Security

In both scenarios, certain security (so called "accessory” security, in particular pledges and mortgages) will by law transfer together with the secured claim. A novation of loan claims should therefore be avoided. In respect of other security (the “non-accessory” security, in particular security transfers, security assignments and land charges), the existing and the new lender would need to expressly transfer the security to the new lender and, in some cases, certain actions from the security grantor could be required. To avoid this, such security is granted only to the security agent in order to secure the parallel obligations of the debtor towards the security agent, and therefore does not need to be transferred.

A debt buyback by the borrower or the sponsor is often contractually permitted but accompanied by a disenfranchisement of the borrower or sponsor in such case, meaning that, amongst others, they cannot participate (and are not counted) in any decision-making by the lenders. Sponsors need to consider a potential equitable subordination based on statutory law. Borrowers also need to keep in mind potential tax consequences.

The acquisition of a German public company requires the inclusion of a certain funds concept in the financing documentation because by law the purchaser is required to prove that it will have the required funds available at the time the public offer is made. The financing is not published but only reviewed by an intermediary (a recognised financial institution) which confirms the certain availability of the funds as required by law. For that purpose, strategic buyers will usually already agree long-form documentation while sponsors will in most cases agree on a term sheet and a precedent for the long-form documentation from a previous transaction (sometimes accompanied by an interim loan agreement as a fundable document).

Pre-insolvency Restructurings

Since 1 January 2021, German legislation has established a comprehensive legal framework for voluntary out-of-court restructurings (for details, see 7.4 Rescue or Reorganisation Procedures Other Than Insolvency). As a result, certain provisions of financing agreements have become subject to increased negotiations but such renegotiations need to be closely observed in line with the law. Certain lenders, for example, intended to include StaRUG proceedings as an event of default even though such an event of default provision would by void by law.


The Ukraine war and sanctions imposed in connection therewith have recently drawn close attention to the sanctions clauses in new financing agreements. In most cases it turned out, however, that the previous market standard of broad and flexible sanctions provisions was sufficient to cater for this increased awareness and did not require (many) changes.


Credit agreements often include contractual recognition clauses that acknowledge the potential application of bail-in powers by resolution authorities. These clauses are intended to facilitate the smooth implementation of bail-in measures and are required in certain circumstances by regulations like the Bank Recovery and Resolution Directive.

In respect of a loan governed by German law, the parties may not agree upfront to compound interest (ie, interest may not be charged on interest) (section 248(1) BGB) but can do so once the interest is accrued (ie, PIK toggle arrangements are possible). In case of unpaid interest, default interest may therefore not be applied. However, the same result is reached by agreeing on the obligation to pay lump sum damages (pauschalierter Schadensersatz) in the same amount. 

In general, financing agreements do not need to be publicly disclosed. In IPOs and bond offerings, summaries of the underlying financial arrangements may need to be published.

Separately, certain disclosure requirements exist due to German banking regulations. Amongst others, financial institutions need to notify the German Central Bank of loans with a volume of EUR 1 million or more (large exposures) together with certain key information on the borrower.

Whether payments of principal, interest or other payments made to lenders are subject to withholding tax depends on the structure and financing in question. The “typical” financing agreement usually triggers no withholding tax. But there are a number of important exceptions, like eg, relating to profit-related payments and certain hybrid arrangements. Also, interest secured by German real estate may trigger a domestic limited tax liability.

Besides withholding tax and limited tax liability aspects (as noted in 4.1 Withholding Tax), lenders are usually not suffering taxes from lending into Germany. In particular, Germany levies no stamp duty, and net wealth tax is not levied either. VAT may become a relevant aspect in Germany and the EU, but mostly, a VAT exemption applies.

From a tax perspective, it is important that the lender is not associated with a country in a tax haven jurisdiction. Rather, it is advisable for a lender and beneficial owner of the loan to be tax resident in a tax treaty jurisdiction having a favourable double tax treaty with Germany. This would give the lender the typical tax protection of a Qualifying Lender.

A comprehensive collateral package will typically comprise collateral over all of the borrower’s and/or guarantors’ assets to the extent the cost benefit ratio justifies it.

Most security agreements have standard terms, leaving little room for negotiation. With few exceptions (mentioned below), security agreements can be executed by simple exchange of signatures (electronic, if agreed between the parties).


Pledge agreements over shares in German limited liability companies (contrary to pledge agreements over interests in partnerships and over stock in corporations) need to be notarised which incurs high costs. The notarisation is usually attended by the legal advisors of each party based on a power of attorney, possibly requiring certification and legalisation depending on the jurisdiction of the represented party.

The perfection of a pledge requires that the relevant pledged entity is notified of such pledge (implemented either by the relevant pledged entity becoming a party to the agreement for the purpose of such notification or by requiring notification to be sent and evidenced within a certain time period (eg, five business days)). In the case of certified stocks, the stock certificates need to be handed over or a substitute of such handover needs to occur. Sometimes, stock certificates need to be endorsed.

Bank Accounts

In correct legal terms, it is not the account as such that is pledged but the rights and claims which the account holder from time to time has towards the account bank in connection with the bank account.

The perfection of account pledges requires that the account bank is notified of the pledge (implemented by requiring such notification to be sent and evidenced within a certain time period (eg, five business days)).

Moveable Assets

Security transfer agreements require the inclusion of certain details on the location or the identity of the assets and potential rights of third parties (eg, landlords, suppliers or factoring providers). Obtaining the required information on those details from the security provider is a key timing item in this respect.

No perfection requirements exist. However, the transferred assets need to be clearly determinable (bestimmbar) by an independent third party. Therefore, close attention needs to be paid to a sufficiently detailed description of the location of the transferred assets or, if necessary, other features which set the transferred assets apart from others (eg, by way of labelling the transferred assets).


IP rights can be assigned or pledged for security, depending on the exact type of IP and its registration. Security rights over IP do not need to but should be registered with the competent registry to protect the lenders’ interests.

Note that electronic signatures are not sufficient in the event that the IP includes trademarks registered with the European Union Intellectual Property Office (EUIPO) but in such case actual wet-ink signatures need to be exchanged.


Security assignment agreements need special attention in case of other/previous assignments of receivables by the assignor, eg, to a factoring provider. Obtaining the required information from the assignor is a key timing item.

A notification of the debtor of the assigned receivable is not required to perfect the security. However, prior to receipt of a notification the debtor can effectively settle the receivable by way of payment to the assignor. Notifications are therefore common in respect of intra-group receivables and receivables towards professional parties (eg, insurances or report providers) but not in respect of customers.

Real Estate

Security over immoveable assets is provided by way of land charges or mortgages. The land charge or mortgage itself is a standard document only containing a formal description of the security right to be established. Therefore, a related security purpose agreement needs to be concluded which includes all other provisions, such as the security purpose and enforcement triggers.

The land charge or mortgage itself needs to be notarised, resulting in additional costs depending on the amount of the land charge or mortgage. Further costs arise for the registration with the land registry.

Land charges and mortgages can be certified or uncertified. In the case of an uncertified land charge or mortgage, the security only becomes valid upon its entry into the land registry.

A floating charge typically describes an instrument which creates security over non-constant assets changing in quantity and quality. German law however requires that a security interest must relate to determinable assets such that these assets are identifiable by a third person familiar with the agreement between the security provider and the security taker. A floating charge would not be compatible with these requirements.

In a similar way, however, German security interests usually cover all existing and future assets of a certain type (which is possible for all of the security types mentioned under 5.1 Assets and Forms of Security except for land charges/mortgages).

It is generally possible under German law for any entity to provide downstream, upstream and cross-stream guarantees or security.

However, if the guarantee/security provider is a German limited liability company or a limited partnership with a limited liability company as its general partner, by law upstream and cross-stream guarantees/security cannot be provided, or may result in personal and criminal liability for the management directors, to the extent the granting or enforcement of such guarantee/security would lead to a breach of capital maintenance rules (Kapitalerhaltungsregeln). The capital maintenance rules prohibit the direct and indirect repayment (such term to include payments pursuant to guarantees or security in favour of obligations of a direct or indirect shareholder) of registered share capital of a German limited liability company to its shareholders. Accordingly, by way of so-called “limitation language” in the respective guarantee/security document, enforcement of up- and cross-stream security will be limited, subject to certain exceptions, if and to the extent that payments under the guarantee or enforcement of the security would directly or indirectly cause the net assets (Reinvermögen) of the guarantee/security provider (or, in case of a partnership, the net assets of the respective general partner) to fall below the amount of its respective registered share capital and, hence, create a personal or criminal liabilities for the management directors.

The granting of guarantees, securities or financial assistance is not generally prohibited under German law but is subject to certain restrictions, depending on the legal form of the target, to the extent it qualifies as a payment to the shareholders of the target.

Restrictions for Limited Liability Companies and Limited Partnerships

If the target is a limited liability company or a limited partnership with a general partner that is a limited liability company the granting of security or guarantees is subject to the capital maintenance rules set out in 5.3 Downstream, Upstream and Cross-Stream Guarantees.

Restrictions for Stock Corporations

If the target is a stock corporation (Aktiengesellschaft), capital maintenance rules provided in the German stock corporation act (Aktiengesetz) generally strictly prohibit payments to shareholders which qualify as a return of capital, unless a fully recoverable repayment claim against the shareholder exists.


There is no white-wash procedure in Germany but the following procedures are usually implemented to avoid the legal consequences that may be caused by a breach of capital maintenance rules:

  • inclusion of a so-called “limitation language” in the financing documentation (see 5.3 Downstream, Upstream and Cross-Stream Guarantees);
  • a so called “debt push-down”, ie, an assumption of the debt by the target company;
  • a merger (Verschmelzung) of the target with the acquisition vehicle; or
  • the conclusion of a domination and/or profit and loss transfer agreement (Beherrschungs- und/oder Ergebnisabführungsvertrag) between the target and its shareholder(s).

The articles of association of entities to be pledged can often include provisions requiring the approval of all shareholders for pledges and/or a sale of any shares (Vinkulierungsklausel). In such case, shareholder consent for the pledge and for a potential future enforcement of such pledge should be obtained. Ideally the deletion of such provision is requested and implemented prior to, or at least shortly after, the execution of the pledge agreement. Other restrictions are uncommon but could be included in the articles of association which therefore need to be reviewed.

All types of security mentioned under 5.1 Assets and Forms of Security can be released by way of a release agreement which can be executed by simple signature (ie, no notarisation is required in respect of the notarised security rights).

The release of a land charge/mortgage needs to be entered into the land registry in order to become effective. All other security rights cease to exist at the time agreed in the release agreement. The release of the pledges and assignments are usually (but do not need to be) notified to the relevant debtors (if they have also been notified of the pledge or assignment).

Certain security interests (in particular security transfers of moveable assets and assignments of receivables) can only be established once and can therefore only exist in one rank. It can, however, be ensured that the proceeds of such security are applied in a different order to groups of creditors by providing the security to a security agent and contractually agreeing on the order of application, for example in an intercreditor agreement.

Security interests over shares/interests/stocks, bank accounts and land can be provided multiple times in different ranks. Such security interests will rank in the order of their valid establishment (priority rule). Nonetheless, in non-distressed financings, usually only one rank of security is established and the order of application is agreed in an intercreditor agreement, as described above. In deviation thereof, in scenarios in which different secured claims face different insolvency clawback rights, it is common to provide individual, different ranking security rights to different creditor groups.

There are two types of security existing by law which usually rank prior to the contractual security rights of lenders:

Pledge by the Account Bank

Account banks usually have a right of pledge over the accounts opened with them based on their general terms and conditions for any claims arising against the pledgor in connection with the account. Account pledge agreements therefore usually request the pledgor to undertake reasonable efforts that the account bank waives or subordinates such pledge. A strict requirement for such waiver or subordination is usually not included given the limited scope of the secured obligations under such pledge pursuant to the general terms and conditions.

Landlords’ Right to Moveable Assets on Leased Premises

A landlord of leased premises has a statutory right of pledge over the lessee’s assets brought onto the premises for any claims arising in connection with the lease. Given the limited scope of the secured obligations under such pledge it is unusual for a requirement to be included that such pledge needs to be waived. However, in recent transactions we have sometimes seen the requirement for the lessee to regularly provide proof of rent payments in order for lenders to be able to assess the risk associated with the prior ranking pledge of the landlord on a regular basis.

By law or pursuant to the relevant security agreement, the enforcement of German collateral is only possible if and once the secured claims have become due and payable. In many cases, security agreements contain (additional) conditions, requiring an event of default to have occurred and be continuing and/or the loan having been accelerated. However, certain pre-enforcement securing steps are sometimes permitted without a due and payable claim as long as an event of default is continuing.

The enforcement by law generally requires the enforcing creditor to obtain an enforcement title in court. This requirement is often either waived (eg, in share pledges) or avoided by immediate submission to foreclosure (eg, in land charge deeds).

The further enforcement procedure depends on the type of security:

  • A security assignment over claims is enforced by the secured party collecting any claims from the debtors.
  • A surety or guarantee is enforced by seeking a court title for payment against the debtor.
  • A share pledge is enforced by way of a public sale (ie, an auction). This is subject to a prior notice period typically limited to five business days. After the secured debt has become enforceable pledgor and pledgee may also agree on a private sale; a forced private sale or appropriation is not permitted.
  • An account pledge is enforced by instructing the account bank to pay any amounts standing to the credit of the account to the pledgee.
  • Land charges/mortgages are primarily enforced by way of public auction. This process can be expected to take at least 12 months. Where the charged real property generates income, it is also possible to place the property into forced administration and to use the generated income to pay down the secured debt. This is often quicker. In any event, the enforcement of a land charge requires six months’ prior notice being given to the debtor.

In general, parties may contractually agree on the governing law of their agreements. Under the Rome I Regulation (Regulation (EC) No. 593/2008) the parties have in general the right to choose any governing law, even without a specific connection to the case.

Similarly, the parties may contractually agree to submit to a foreign jurisdiction. Depending on which foreign jurisdiction is chosen, this submission will be legally binding in accordance with different applicable regulations, conventions or laws.

A waiver of immunity will generally be upheld by German courts. However, assets that serve a specific public purpose generally benefit from sovereign immunity under German law (section 882a of the German Code of Civil Procedure).

Under the Brussels I Regulation recast (Regulation (EU) No. 1215/2012), judgments in civil and commercial matters delivered within an EU member state are (with very limited reasons for rejection) automatically acknowledged in all EU member states, regardless of whether the judgment is final and binding.

When the fundamental criteria for recognition (or rejection) are governed by an international treaty, German courts will apply those criteria.

In all other cases, the foreign judgment must be both final and binding. According to Section 328 of the Code of Civil Procedure (ZPO), a foreign judgment will be acknowledged in Germany if no grounds for rejection (delineated in Section 328 (1) of the ZPO) are applicable. The party seeking recognition bears the responsibility of proving that the elements required for recognition are present.

A foreign lender can generally enforce its rights in the same way as a domestic lender.

The court order opening insolvency proceedings imposes an automatic stay on any enforcement actions by unsecured creditors against the company. Unsecured creditors can only enforce their rights within the legal framework of insolvency proceedings, ie, substantially file their claims to the insolvency table with the insolvency officeholder to receive the insolvency dividend (pro rata payment). In practice, the court often imposes such stay even prior to the formal commencement of insolvency proceedings in so-called preliminary insolvency proceedings.

The Insolvency Act does not impose an automatic stay on the enforcement by certain (secured) creditors. Generally speaking, the following rules apply:

  • Creditors who can demonstrate that they have ownership (title) in an asset or similar rights in rem or other absolute rights which, therefore, are not part of the insolvency estate (segregation right, Aussonderungsrecht) have a claim for restitution of the relevant asset, eg, suppliers with (simple) reservation of title rights (einfacher Eigentumsvorbehalt).
  • Creditors with security interests in assets forming part of the insolvency estate have a right to separate satisfaction (Absonderungsrecht), ie, they may seek preferential satisfaction of their claims from the proceeds of the liquidation of the relevant asset. However, the Insolvency Act provides for specific rules regarding the responsibility and process in relation to the enforcement of such security interests.

The proceeds realised by the insolvency officeholder (note the exceptions under 7.1 Impact of Insolvency Processes) will generally be distributed to the creditors pursuant to the following waterfall:

  • Costs of insolvency proceedings and so-called administrative claims (Masseverbindlichkeiten), ie, including specifically claims arising from transactions executed by the insolvency officeholder after the commencement of insolvency proceedings;
  • Unsecured claims (Insolvenzforderungen) pari-passu;
  • Subordinated claims (nachrangige Insolvenzforderungen), eg, interest accruing after the commencement of insolvency proceedings or certain shareholder loans (eg, by shareholders holding more than 10% of the registered share capital provided they are not part of the management board).

The sale of a company on a going concern basis out of insolvency (asset deal) is typically consummated within three to six months. The completion of the proceedings regarding corporate insolvencies including any litigation, admission of claims, distribution of the insolvency estate, etc, can take several years depending on the size of the company and/or the complexity of the matter. If the insolvent company implements an insolvency plan, the time frame also varies from a few months to several years.

The range of the insolvency dividends distributed in German insolvency proceedings varies widely. The rights of segregation and rights to separate satisfaction are usually not included in insolvency statistics in Germany. These depend on the value of the collateral in each individual case. For insolvency proceedings commenced in 2011 and concluded by 31 December 2018 the average dividend of unsecured creditors amounted to 6.1% (see German Federal Statistical Office (Destatis), 2020, Reference (Fachserie) 2, series 4.1.1, p. 4).


Since 1 January 2021, the Stabilisation and Restructuring Act (StaRUG) (implementing the EU Restructuring Directive of 20 June 2019 (Directive (EU) 2019/1023)) provides for a comprehensive legal framework for voluntary out-of-court restructurings.

In principle, a debtor with its centre of main interest in Germany has access to StaRUG proceedings if it faces imminent illiquidity (drohende Zahlungsunfähigkeit) but not yet illiquidity (cash-flow insolvency, Zahlungsunfähigkeit) or over-indebtedness (balance sheet insolvency, Überschuldung) (each as defined in the German Insolvency Act).

StaRUG then allows the debtor to implement a financial restructuring and bind all creditors, including classes that do not approve the plan, through a cross-class cram-down. Operational restructuring measures, however, continue to require a consensual agreement of all affected parties (for example, the termination of long-term contracts such as lease agreements is not feasible under StaRUG).

If a new financing is required to implement the restructuring, such financing in principle will be excluded from claw back and lender liability in subsequent insolvency proceedings. However, as these privileges only apply for a limited timeframe until the debtor is sustainably restructured, in practice lenders will continue to rely on a restructuring opinion (S6-Sanierungsgutachten) to reduce risks (see 7.5 Risk Areas for Lenders).


The German Bond Act 2009 provides for an out-of-court restructuring procedure in relation to bonds governed by German law. Provided that and to the extent the terms and conditions of the bond provide for the possibility to amend these by way of a bondholders’ resolution, the SchVG allows for a wide range of restructuring measures. These include, eg, a waiver of principal and/or interest, deferrals, a debt-for-equity-swap and modifications of the terms and conditions of German bonds. The resolution of bondholders generally requires for major decisions such as waivers or debt-for-equity-swaps a quorum of 50% by value of the bonds in the first bondholders’ meeting, and, if the quorum is not met, 25% by value in a second bondholders’ meeting. No quorum is required for other decisions. The majorities that must be obtained to approve the resolution for major decisions are 75& of bondholders by value present and voting in the bondholders’ meeting and more than 50% for any other decisions (such as the appointment of a joint representative). The bondholders’ resolution is subject to appeal within one month. A successful appeal will nullify the resolution.

Insolvency Claw-Back

Certain pre-commencement transactions are subject to insolvency claw back actions by the insolvency officeholder provided certain conditions are met. Generally speaking, to be subject to claw back, the relevant transaction must have occurred prior to the commencement of insolvency proceedings and must have disadvantaged the debtor’s creditors (indirect effects being sufficient).

Finance documents therefore typically contain information obligations aimed at providing regular and, in the event of arising difficulties, early visibility of the borrower’s financial situation.

Lender Liability

Under German law, if a lender refuses to grant a (new) loan to the distressed company, accelerates its (existing) loans or refuses to waive (partially) its claims, thereby causing the company’s insolvency, the lender generally cannot be held liable, as it has no legal obligation to participate in the restructuring or remediation measures of the company. Nonetheless, lenders need to carefully consider the legal implications of their actions for the borrower’s directors given the relatively strict personal/criminal insolvency liability regime.

However, liability can, under certain circumstances, be construed on the fact that granting or extending a loan causes or assists the debtor’s delay in filing for insolvency. When granting new loans or extending maturities of existing loans to borrowers in distress lenders therefore typically request the issuance of a restructuring opinion pursuant to an industry standard (IDW S6) by independent experts essentially objectively confirming that the borrower can be restructured.

Project finance activity in Europe is spread across many sectors but continues to show a clear tendency towards infrastructure projects. In the near to mid-term, a particular focus will be on infrastructure required for energy transition and transportation.

Energy Transition

Germany’s energy transition targets include for renewable energies to make up 60% of the gross final consumption of energy and 80% of the gross electricity consumption by 2050. For this purpose it is estimated that around EUR600 billion of investments will be required amongst others in the areas of energy production, electricity grid expansion, energy storage and electrifying the transport sector.


In the 2030 Federal Transport Infrastructure Plan, the German government has identified a EUR270 billion need to renew and expand various federal motorways, railway infrastructure and waterways until 2030, and the current government is strategising substantial allocations for the enhancement and expansion of the rail network following the “Germany Pulse” (Deutschlandtakt) framework.

Legal Framework

In Germany, PPPs are usually based on a civil agreement between a public partner and a private entity. The public partner can be the Federal Republic, a federal state or one of its authorities or a local community while the private partner is a legal entity or a joint venture with several entities as shareholders. No specific laws on public-private partnerships have been enacted but general rules of corporate and financing laws and – because of the public aspect of the partnerships – EU and national public procurement rules apply. The PPP Acceleration Act of 2005 (ÖPP-Beschleunigungsgesetz) provided for a number of amendments to existing legislation to facilitate PPPs.

Identification of Possible Projects

At first, the public partner in respect of a project needs to assess the overall justification for a PPP. Federal and state budget laws require the economic efficiency to be substantiated through a detailed economic plan of the project and its comparison with an implementation of the project by way of a “conventional” procurement process. In addition, compliance with EU subsidies law must be ensured.

Preparation Phase

Thereafter, the public partner develops the main project contracts and specifications of the project and determines the project’s main aspects such as its term, the project's corporate set-up, equity and financing, a suitable contract model and the required level of public control. The administrative framework of the PPP can require a certain type of structure to retain certain levels of public control over the project.

Award and Negotiations

Once the main terms have been prepared, the public partner finds its private partner through a contract award procedure. According to section 2 of the Procurement Ordinance (Vergabeverordnung), the PPP project is subject to a formal award procedure if its volume exceeds a certain threshold whereas budget laws may require a tender even if the project remains below such thresholds. Procurement regulations frequently necessitate a Europe-wide tender and grant the applicant the right to pursue legal remedies before a public procurement tribunal.


Once the project has been awarded and the PPP has been finally negotiated and established the implementation of the project commences. During this phase, all laws applicable to the relevant project matter need to be observed.

Generally, parties are free to agree on the applicable law of the agreements (see 6.2 Foreign Law and Jurisdiction). However, if the project is or the relevant assets are located in Germany, parties usually prefer German law to govern (all or certain of) the agreements to ensure consistency and enforceability in Germany.

The parties can also agree to submit the contract to arbitration proceedings. Germany is a party to several dispute resolution agreements, including but not limited to the New York Convention, the Energy Charter Treaty of 1964, the Geneva Protocol on Arbitration Clauses of 1923 and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) of 1965.

Germany generally embraces foreign investments and maintains an open and accommodating stance, imposing minimal restrictions on such investments. In general, no restrictions exist on foreign entities owning real property or other resources in Germany. However, in certain exceptional cases, the government needs to be notified and may veto a transaction.

Project finance transactions are commonly structured as non-recourse financings in which the project company is set up as a special purpose vehicle. The financing is fully repaid through the free cashflow of the project company; sponsor guarantees are uncommon.

The project company will most commonly be a limited partnership (Kommanditgesellschaft) in which a limited liability company (Gesellschaft mit beschränkter Haftung) (GmbH) holds the position of the general partner (GmbH & Co KG). Equity contributions are typically made by the sponsors as limited partners. The shares in the general partner are typically held by the sponsors pro rata to their shares as limited partners. Alternatively, they can be held by the limited partnership itself (Einheitsgesellschaft), which facilitates transferability.

Further structuring will depend on the risk allocation between the parties and subject to all German and EU laws and regulations applicable to the sponsors, the lending entities, the project company and the sector.

Financing is usually provided by way of a (senior) bank financing to the project company and subordinated shareholder loans. In certain structures, mezzanine or subordindated holdco (PIK) financing may be taken up by the project company’s holding company.

Alternative debt providers play an increasingly important role with debt funds funding into German project financings by way of subordinated or mezzanine financing, bridge loans refinanced upon the conclusion of senior financing, as a way of refinancing the equity made available upfront and, in select cases, even as senior lender.

The mix of available financing instruments is sometimes accompanied by project bonds or other sources of financings, such as export credit agency financings.

Ownership of land as such does not require a license and resources found on the property generally belong to the owner. Nonetheless, the extraction of metals, salt, and similar resources requires authorisation from the mining authority. Likewise, the establishment and operation of energy pipelines, electrical transmission lines and related infrastructure must receive approval from the relevant authority of the relevant federal state in which the assets are located. Usually, the granted permit will be time-limited and subject to a number of conditions such as compliance with environmental, health and safety laws. Royalties, taxes and other fees payable in connection with the extraction of natural resources vary depending on the type of natural resource. There are no general limitations, charges, or taxes associated with the exportation of natural resources. However, specific regulations may be applicable to particular exports contingent on the nature of the natural resource in question.

As a general rule, projects with the potential to cause adverse environmental impacts or pose hazards to the environment or individuals typically necessitate a permit, typically obtained from the relevant local authority. The execution of such projects is subject to various regulations, including occupational health and safety guidelines, which are overseen by multiple authorities.

The authority over specific projects varies based on the sector in question. For instance, regulatory oversight for projects in the oil and gas sector rests with regional authorities. The process for oil and gas exploitation in Germany follows a two-step approach, requiring an initial permit for exploration and a separate one for actual extraction. In the case of offshore wind farms, an operating permit issued by the Federal Maritime and Hydrographic Agency of Germany is mandatory, while the energy grid is managed by the Federal Network Agency (Bundesnetzagentur).

Freshfields Bruckhaus Deringer

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Trends and Developments


Milbank LLP is a leading international law firm handling complex high-profile cases and business transactions for clients around the world. Founded in New York over 150 years ago, Milbank has further offices in Beijing, Frankfurt, Hong Kong, London, Los Angeles, Munich, São Paulo, Seoul, Singapore, Tokyo and Washington, DC. Milbank’s international presence and experience are particular strengths for challenging, multi-jurisdictional transactions, including financings for cross-border acquisitions and global, multi-currency credit facilities for businesses operating in many countries. The German banking and finance practice represents underwriters, bank and debt fund lenders, private equity sponsors, strategic investors, issuers and borrowers in a broad array of financings, including general syndicated lending, infrastructure finance and acquisition financings, in particular complex cross-border LBO and Term Loan B-financings, bank/bond financings combining syndicated loan facilities and debt capital market products, including cross-over products such as hybrid bonds and German Schuldschein-loans. The team also specialises in non-bank lending structures, PIK facilities, preferred equity deals and other subordinated financing instruments.

Banking and Finance in Germany: an Introduction

Political and macroeconomic turmoil continues to affect market activity in 2023. The highest interest rates since the global financial crisis have led to a further decrease in debt raisings to fund leverage buyouts and amend and extend transactions dominate the market.

While equity capital markets activity in the US seems to recover, in Europe it has shrunk compared to the first three quarters of 2022.

Demand for liquidity is caused by exploding energy costs and increased interest rates as well as looming maturity walls. Still, this demand is yet to be reflected in the documentation.

Amend and Extend

The current market environment and looming debt maturity wall have encouraged several market participants to approach the lending market with amend and extend (A&E) proposals for existing loans in lieu of full refinancings. Most of them have approached their lenders with an A&E request accompanied by a term sheet including few other amendment requests. Lenders’ willingness to accept further improvements in the documentation in an A&E scenario is very limited. If the required majority within the lending consortium is reached, the maturity extension is documented in an amendment and restatement agreement.

If a lender fails to respond within a specified time, that lender’s commitment is discounted for the purpose of determining whether the necessary lender majority has been reached (“snooze-you-lose”).

Lenders rejecting their consent to an amendment request, which requires a consent level greater than majority lenders’ consent (including structural adjustments), “yank-a-bank” provisions can entitle a borrower to replace such non-consenting lender with an existing or a new lender if consent of the majority lenders has been obtained and the existing or incoming lender is willing to assume the non-consenting lender’s commitment.

Notably, in many European loan documents, an extension of a loan term is qualified as a so-called structural adjustment, requiring not just the consent of the majority of lenders but also of each lender participating in the affected facility. In that case, a non-responding lender cannot be forced into a term extension but can be forced to leave the consortium and be replaced by an existing or incoming lender as set out above.

Calculation of (Pro Forma) EBITDA

As in previous years, lenders remain focused on the calculation of financial ratios, in particular EBITDA adjustments effected through adding back certain EBITDA-reducing items to the pro forma adjusted EBITDA. Pro forma adjusted EBITDA is used in the loan documentation to test a borrower’s leverage ratio, which in turn is relevant for determining whether any financial covenants under the facility are breached and whether additional (incremental) debt can be incurred (as further discussed in the next paragraph). In deals including an EBITDA-based grower basket mechanism, the pro forma adjusted EBITDA may also be used to calculate the permitted baskets, determining, for example, the permission to incur further debt, dispose of assets or provide security for further financing.

Add-backs for projected cost savings and synergies are typically capped at 15 to 25% of the pro forma adjusted EBITDA. Confirmation by an auditor or other third-party financial expert of synergies exceeding 10 to 15% of the pro forma adjusted EBITDA is often prerequisite. Add-backs to revenues – even if capped – remain subject to strong lender push back. The forward- looking period in European deals is predominantly set at 18 months.

Another way of adjusting EBITDA is to add-back so-called exceptional items. These are unusual, non-recurring or extraordinary gains, expenses or losses that are added back to (the reported) EBITDA. Although in most deals such exceptional items are uncapped, we currently see lenders requesting that such adjustments are capped, or the scope of such extraordinary items is limited. A cap on exceptional items often takes the form of an aggregate cap together with synergy add-back so that the total amount of adjustments for exceptional items or synergies does not exceed a pre-agreed level, often set at the 15 to 25% cap for synergies.

Additional Debt Capacity

Additional debt capacity is a key consideration for borrowers to ensure sufficient liquidity in a market environment made volatile by inflation and high interest rates. Borrowers can raise additional debt by way of an incremental facility within the loan documentation, provided either by existing lenders or new incoming lenders who accede to the financing documentation (and consequently benefit from any transaction security securing the primary loan). Additional debt incurrence is mostly limited by way of a ratio cap instead of a hard cap. In European loan documents, a cap based on the net leverage ratio is predominant in limiting additional debt incurrence. The leverage ratio relevant for determining the cap must typically neither exceed the borrower’s (consolidated) opening leverage (at the time of closing) nor, moving forward, level of the currently applicable financial covenant profile.

Furthermore, borrowers can incur additional debt under permitted financial indebtedness baskets. These are not secured by the security provided for the primary loan but can be secured by other assets constituting permitted security.

One potential source of liquidity is factoring, whether on a recourse or non- recourse basis. Factoring on a recourse basis is capped under the loan agreement (contrary to non-recourse factoring which very often is permitted without a cap given that it is not considered to constitute debt). In recent deals in which trade receivables were not within the transaction security package, factoring has become an important instrument to raise liquidity.

Finally, a general basket for local facilities, accompanied by a general permitted security basket, can also improve a borrower’s liquidity position.

PIK Toggle

So-called “PIK toggles” allow a borrower to pay due or accrued interest in kind instead of in cash. They are a useful feature to enhance a borrower’s liquidity. Banks have not been seen to provide this option. By contrast, private debt funds often allow borrowers to elect that a portion of due or accrued interest is not payable in cash but instead capitalised and compounded with the loan to which it relates. The number of exercises of option to capitalise interest is limited and borrowers are still required to pay a certain minimum amount of interest in cash on each interest payment date. In return, lenders offering a PIK toggle benefit from a margin premium with regard to the capitalised portion of interest (which premium is typically also capitalised and not paid in cash). An alternative for banks or funds unable to allow interest to be capitalised due to their internal policy or guidelines is to expand the purpose of a (committed) acquisition or capex facility to encompass the financing of payments of interest.

Lenders offering a PIK toggle under German law should be aware of certain legal restrictions on the capitalization of interest. German law requires that interest is not capitalised prior to the last day of the applicable interest period. Thus, a PIK toggle must only be exercised once the interest has actually accrued and not in advance.

New Deal Activity and Outlook

The banking and finance environment in Germany remains difficult. In particular, no end to the political turmoil is in sight. Also, high energy costs still affect businesses. However, there are indications that better times are ahead.

The equity capital market is recovering, and a number of IPOs have or will come into the market, and a few others are in preparation. But the market is still fragile.

Inflation is still not where it should be, but interest rates might have peaked. There are some indicators that the focus might shift from further increasing interest rates toward keeping them at the current level. High interest rates will continue to impact the valuation of assets but allow market participants to assess their value better, which can in turn be reflected in the valuation of the relevant asset – on both the sell and the buy side.

Millbank LLP

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Law and Practice


Freshfields Bruckhaus Deringer is a leading international globally integrated law firm offering clients dedicated legal advice across all legal fields and industry sectors in all important economic regions. With over 2,800 lawyers in 28 offices in 17 countries across Europe, Asia and the USA, it is among the largest law firms in the world. The firm specialises in complex, cross-legal and cross-border matters and combines in-depth industry knowledge with innovative solutions to help its clients grow, strengthen and defend their businesses. In the finance sector, the firm’s advice covers corporate finance, acquisition finance, leveraged finance, real estate finance, financial restructuring, finance regulatory, equity and debt capital markets, securitisation and structured, project and asset finance. The firm would like to thank Adrian Strahm, trainee and Karl Kuhn, trainee, for their contribution to this chapter.

Trends and Development


Milbank LLP is a leading international law firm handling complex high-profile cases and business transactions for clients around the world. Founded in New York over 150 years ago, Milbank has further offices in Beijing, Frankfurt, Hong Kong, London, Los Angeles, Munich, São Paulo, Seoul, Singapore, Tokyo and Washington, DC. Milbank’s international presence and experience are particular strengths for challenging, multi-jurisdictional transactions, including financings for cross-border acquisitions and global, multi-currency credit facilities for businesses operating in many countries. The German banking and finance practice represents underwriters, bank and debt fund lenders, private equity sponsors, strategic investors, issuers and borrowers in a broad array of financings, including general syndicated lending, infrastructure finance and acquisition financings, in particular complex cross-border LBO and Term Loan B-financings, bank/bond financings combining syndicated loan facilities and debt capital market products, including cross-over products such as hybrid bonds and German Schuldschein-loans. The team also specialises in non-bank lending structures, PIK facilities, preferred equity deals and other subordinated financing instruments.

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