Debt Finance 2025 Comparisons

Despite weak GDP growth and volatile political conditions, the debt market in Germany performed better than expected and made strong gains in 2024. Syndicated leveraged loan issuance rose by more than 50% year-on-year, a development mostly driven by the ECB’s unprecedented series of interest rate cuts. Such liquidity increasing turned Germany back into a borrowers’ market with decreased pricing reaching better margins than pre-2022 levels, and documentation becoming more borrower friendly. In the leveraged finance space, refinancings, add-on financings and portfolio work have still dominated the market. But, in particular in Q4 of 2024, there was an increasing number of new financings, which has continued in Q1 2025. The non-sponsor corporate lending market was stable throughout the year 2024, despite a growing number of restructurings and insolvencies in the market. 

The German debt market is a dynamic, diverse and interconnected ecosystem, with various market players contributing to its structure and functionality and supporting its further growth. The main players are as follows.

• Local banks: local banks, such as Sparkassen and Volksbanken, still play a crucial role in the German debt market. They are deeply rooted in their communities and have a strong understanding of local businesses and economies, and maintain close relationships with small and medium-sized enterprises (SMEs).
• International banks: they bring a global perspective to the German debt market by offering sophisticated financial products and services, leveraging their international experience and underwriting larger financings.
• Direct lenders: direct lenders have become increasingly important in the German debt market. They offer flexible financing solutions that may not be available through traditional banks at a (much) higher speed, and even cater to niche markets and sectors that may be underserved by traditional banks. Germany is now firmly established as the third largest private debt market in Europe, behind only the UK and France. However, private credit managers’ ability to be competitive with banks has recently become more limited as rates have fallen significantly in 2024 and banks are gaining market share again.

The real economy and the financial economy in Germany are highly interconnected internationally, making them particularly vulnerable to the effects of geopolitical tensions. In particular, the following geopolitical events and developments have affected the German economy and, as a consequence, the German debt market heavily in 2024.

• Ukraine war: first and foremost, the ongoing war in Ukraine has continued to disrupt energy supplies to German corporates, particularly natural gas, which has contributed to the ongoing high level of energy prices in Germany. This has heavily affected the profitability and creditworthiness of German corporates, in particular in the energy-intensive industries (like the chemical industry, automotive industry, etc). On a separate note, the ongoing war in Ukraine has led to increased caution among investors and higher risk premiums for debt issued by entities with exposure to the region (including neighbouring countries like Poland).
• Conflict in the Middle East: the escalating tensions in the Middle East have contributed to volatility in oil prices, which has had a similar effect to increased prices of natural gas.
• Global interest rates: the massive interest rate cuts pushed through by the ECB in 2024 had a major impact on the German debt market, albeit a positive one. Lower financing costs led to an increased level of activity in the German debt market.
• German/US elections: the announcement of a snap election in Germany in February 2025 had a very limited impact on the German debt market. The period of policy uncertainty, as investors awaited the formation of a new government and its policy priorities, has not affected market stability or activities to a large extent. The zero-growth agony of the German economy did not change much in early 2015 until the German elections. The election of Donald Trump as the next US president in 2024 has also had a little effect on the German debt market.

All of these factors will have a persistent influence on the German economy and the German debt market in 2025, with some small changes.

• Ukraine war: the question of when and how the war in the Ukraine will possibly end in 2025, either by way of a peace agreement or (more realistically) by way of a prolonged armistice, will have an enormous influence on the German economy.
• Conflict in the Middle East: any further escalation in the Middle East would have a significant impact on the price of raw oil and natural gas and therefore also on the German economy.
• Global interest rates: a further cut of interest rates by the ECB would continue to have a positive impact on the level of activity in the German debt market.
• German/US elections: any policy of a new German government would have a huge impact on the German economy and the German debt market, in particular if the new government increases spending on infrastructure and defence, as announced in early March 2025. The introduction of tariffs on European goods, as planned by President Trump, could also impact the German economy.

In Germany, borrowers and lenders enter into all types of debt finance transactions. Among the most widely used are the following.

• Corporate loans: Germany is the leading economy in the EU and has thousands of Mittelstand companies and leading international corporates. This is why a large majority of German debt finance transactions consist of corporate loans, ie, loans provided to companies for general corporate purposes, including working capital, capital expenditures and refinancing existing debt.
• Acquisition finance: the number and total volume of acquisition financings, mostly sponsor-driven (leveraged finance transactions), have grown steadily over the last few decades and now provide for a substantial share of debt finance transactions in Germany.
• Asset-based finance: this type of financing has gained popularity in recent years for several reasons, mainly because for companies that do not qualify for traditional bank loans due to credit issues or lack of collateral, asset finance has provided an alternative way to access capital (in particular for small and medium-sized enterprises). In addition, in times of economic uncertainty, German businesses have learned that asset-based finance allows them to maintain liquidity and avoid over-leveraging.
• Project finance: driven by the political pressure for an energy turnaround (Energiewende) and lower interest rates, the project finance market has experienced significant growth in Germany recently.
• Real estate finance: the real estate finance market has barely recovered from the current real estate sector crisis and is still underperforming.

Financings in Germany are provided through various debt instruments. While unitranche financings have been on the rise over the past couple of years, traditional bank financings seem to have been making a small comeback in the past 18 months, being provided either by a club of lenders or via a (to be) syndicated loan facility. German law also offers a unique debt instrument: promissory note (loans) (Schuldscheine), which are loans initially offered and arranged by a small group of lenders and then further sold in rather small portions to commercial lenders (often smaller regional banks), subsequently increasing the number of participating creditors. These are only available to investment grade or at least very highly ranked borrowers, are unsecured and can have floating or fixed interest rates. The documentation is covenant light and offers great flexibility for the ongoing business of the borrower.

Debt securities, such as bonds (Anleihen), are an option for large, creditworthy borrowers. Issuing debt securities allows borrowers to tap into a broader investor base, potentially raising larger amounts of capital compared to a syndicated bank loan solution. Depending on market conditions, issuing debt securities can be more cost-effective than bank loans. Interest rates on bonds can be lower than bank loan rates, especially for companies with strong credit ratings. These instruments typically have fewer restrictive covenants, providing greater flexibility for borrowers but also making it more difficult to change existing documentation as the investors in debt securities are more difficult to present required amendments to. Sometimes, these instruments even require unanimous decisions where you would usually expect a majority decision in a bank financing. The same applies to the German law promissory notes (Schuldscheine).

Bank loans are provided either by banks or private credit funds. Smaller regional banks (Sparkassen) often provide locally prevalent borrowers with financings and do not participate in larger bank deals which can be provided by an international syndicate. Debt securities are mostly offered to institutional investors, ie, entities like pension funds, insurance companies and mutual funds, who seek stable returns in the long term.

Depending on the size and (intended) internationality of the financing transaction, Loan Market Association (LMA) documentation is often used, with German law precedents available for investment grade financings as well as real estate financings (for the latter, even in the German language). German banks sometimes prefer to use their own house style of documentation, which varies in complexity and similarity to the LMA standard. Generally speaking, German law does not require the parties to agree on highly detailed documentation as most fallback positions are specifically set out in German law itself or applicable case law.

Financings provided by (a club of) banks tend to have less flexibility, often staying more closely to the LMA or to an equivalent level of restricting covenants, whereas private credit funds are generally more flexible. Unitranche financings provided by private credit funds also require fewer mandatory prepayments (eg, usually no excess cashflow) and rely on other factors for their return of investment. Debt securities, as stated at 3.1 Debt Finance Transaction Structure, have fewer covenants and provide the most flexibility.

The most relevant jurisdiction-specific term that needs to be included is the parallel debt concept. German law is very strict when it comes to creating and maintaining security. Certain types of German law security (“accessory security” like pledges) can only be created in favour of a person who has a claim against the borrower, and will automatically fall away if that is either not the case or the underlying claim is satisfied. Therefore, it is essential that such a concept is included to enable the security agent (which itself usually does not have a claim for payment, apart from fees in some cases) to hold and administer German law security for other (secured) parties.

According to the standard parallel debt wording, each obligor irrevocably and unconditionally undertakes to pay to the security agent amounts equal to any amounts owing by it to any secured party under any finance document as and when those amounts are due. Each party acknowledges that such obligations of the debtors are several and are separate and independent from, and shall not in any way limit or affect, the corresponding obligations of the debtors to any secured party.

The typical security package in Germany consists of security over shares, bank accounts and receivables. Depending on the assets available, security over real estate, intellectual property or movables assets can also be provided, as decided by the finance parties on a case-by-case basis. German law requires separate security agreements for each asset class, as there is no “all asset” security like a “fixed and floating charge” or debenture. The decision over which asset type security is taken is mostly cost-driven as each additional type of security will increase legal fees.

With the exception of security over shares and real estate, German law does not require a specific form for security documents. Security over shares and real estate needs to be notarised (beurkundet) and invokes additional notarial fees, which can be quite substantial. Additionally, security over real estate needs to be registered with the land registry, which incurs further fees. Apart from the land register, there is no general register for German law security, which remains “invisible” to any third party.

The key considerations with respect to security and guarantees are as follows.

• The Treuhand concept instead of trust: although in the German market participants frequently refer to the security agent as security trustee, German law – strictly speaking – does not know any equivalent of the common law “trust” concept. The German concept regularly used is a German law Treuhand (usually translated as “trust”). The Treuhand concept works very differently from a common law trust in the case of an insolvency of the security agent, but outside this scenario, the German Treuhand can work similarly to a common law trust in the context of a secured financing. The standard LMA provisions found in the intercreditor agreement precedent, only need some tweaking, and most of the provisions can be mirrored.
• Parallel debt: as stated at 4.3 Jurisdiction-Specific Terms, a parallel debt concept is necessary as far as German law security is concerned. There is no need for a German law-governed parallel debt if the concept is comparable, ie, the claims of the secured parties are mirrored with the entity actually holding the security and, vice versa, the payments towards the secured obligations reduce the parallel obligations.
• Restrictions on upstream security: a German limited liability company (GmbH) can generally secure debt of a shareholder or of subsidiaries of that shareholder. Under the German capital maintenance rules stipulated by statutory law, an up-stream security is, however, customarily limited to distributable reserves available at the time of enforcement and may not reduce the relevant company’s registered share capital. Any violation of capital maintenance rules will not affect the validity of the (security) agreements to which the GmbH is a party but might expose the managing directors of the GmbH to personal liability. To avoid the risk of personal liability, it is market practice to include “limitation language” in upstream security/guarantees given by a German GmbH.

• Corporate benefit: for the financing documentation, demonstrating corporate benefit is not required to legally enter into the documentation or grant security, although the directors of the company cannot, as a general rule, act detrimentally to its interests and could be personally liable if they do. This is, however, not exclusive to entering into financing agreements which do not inflict additional or more restrictive duties than daily business.
• Financial assistance: apart from restrictions on upstream security (see above), there are no restrictions on financial assistance for German limited liability companies (GmbHs). Stock corporations and their subsidiaries, however, cannot secure any financings which are used to finance the acquisitions of their shares. These restrictions do not apply if a domination and/or profit and loss pooling agreement (DPLTA) is entered into with its shareholder. Comparable to other jurisdictions’ fiscal unities, these DPLTAs give the shareholder(s) of the stock corporation more control and but also share losses and gains. Whether or not a DPLTA can be entered into is subject to a detailed tax analysis.
• Requirement for guarantee fees: appropriate fees for granting security or providing guarantees do not affect the validity or enforceability of those instruments, but lacking an appropriate consideration can have adverse tax implications.

Intercreditor agreements are required if different classes of creditors either directly participate in a financing or are foreseen to participate at a later stage. Intercreditor agreements usually also contain the necessary administrative provisions for the security agent to act on behalf of the other secured creditors as well as the parallel debt required for certain German types of collateral agreements. The latter may also be set out in the facilities agreement for smaller, less complex financings.

Absolutely necessary are intercreditor agreements if different classes of debt are to be administered – eg, in a senior/mezz or, more prevalent these days, senior/super senior set-up right from the beginning.

Under German law, before the commencement of insolvency proceedings, all creditors have equal rights of payment by virtue of law, ie, they are ranked pari passu. It is, however, possible to agree on the ranking of debt contractually among creditors, but even this does not prevent paymentsnot made according to the pre-agreed order from being valid in rem. Breaching contractual subordination agreements could, however, trigger contractual implications or penalties/damage claims.

Once insolvency proceedings have been opened, the following classes of creditors must be distinguished.

• Secured creditors: these creditors have been granted in rem security interests (eg, mortgages, pledges) over specific assets of a debtor. They have the highest priority in insolvency proceedings and are entitled to be paid from the proceeds of the sale of the secured assets.
• Unsecured creditors: these creditors do not have any in rem security interests. They are paid from the remaining assets of the debtor after secured creditors have been satisfied. Within this category, there can be further distinctions, such as preferential creditors (eg, employees’ wage claims) who have priority over other unsecured creditors.
• Subordinated creditors: these creditors have claims that are subordinated either contractually or by law. They are paid only after all other creditors have been satisfied.
• Shareholders: shareholders are the last to be paid. Their claims are subordinated to those of all creditors. Shareholders are most likely to lose their investment.

When it comes to an enforcement of security in Germany, in most (if not all) situations the relevant security grantor is already insolvent. In insolvency, the German insolvency administrator takes control of the assets of the relevant entity with a view to liquidating them to the benefit of the creditors. In the case of secured assets, a conflict may arise between the collateral holder and the administrator as to who controls the enforcement and realisation of the collateral. German law distinguishes between different asset types: movables that are subject to a security transfer remain with the administrator, while receivables that have been assigned for security purposes may be enforced by the security agent.

As regards shares, it was widely accepted that the administrator was allowed to enforce certain types of security. They usually negotiated and entered into with the security agent a so-called realisation agreement, which sets out the agreed enforcement process. The Federal Supreme Court has recently confirmed that non-movable rights, such as shareholdings, trade marks or patents, cannot be enforced by the administrator, but by the security agent directly. This will make enforcement of collateral over non-moveable rights easier, cheaper and quicker in the future.

The enforcement of foreign judgments in Germany depends on whether they originate from an EU or non-EU country. EU judgments are generally recognised and enforceable without an exequatur procedure under the Brussels I Regulation (recast) (Regulation (EU) No 1215/2012), requiring only a certified copy and a standard certificate. Non-EU judgments must go through a formal recognition procedure under Sections 328 and 722 of the Code of Civil Procedure (ZPO), where German courts assess jurisdiction, reciprocity, fair trial standards, and public policy compliance. Additional treaties or bilateral agreements may simplify enforcement for certain non-EU countries.

In Germany, StaRUG (Corporate Stabilisation and Restructuring Act) was implemented in 2021 and provides a restructuring process outside of formal insolvency proceedings. It allows debtors facing imminent illiquidity to implement restructuring plans with a majority vote of 75% in each creditor class. Even if a creditor class does not vote for the plan, it can still be crammed down under certain conditions. The debtor can also prevent individual enforcement actions through a court-approved stay and can further limit lenders’ rights to enforce loans, guarantees or security during the process, especially if enforcement would undermine the restructuring plan and the security is of considerable importance for the going concern of the business.

In Germany, insolvency law significantly impacts lenders’ rights in debt financings. The key considerations are as follows.

• Lenders’ rights to enforce a loan, guarantee or security in insolvency: once (preliminary) insolvency proceedings are opened, a court ordered or automatic stay generally prevents individual enforcement actions. Secured creditors retain preferential rights over the proceeds or their collateral but must work within the insolvency framework. Guarantees granted by third parties remain valid. Guarantees granted by the debtor are subject to the (court ordered or automatic) stay and can be subject to claw-back by the insolvency administrator.

• Claw-back risks: the German Insolvency Code (InsO) allows the insolvency administrator to challenge transactions made before insolvency that disadvantaged other creditors. Risk periods vary depending on the nature of the transaction:
1. up to four/ten years for intentionally disadvantaging creditors;
2. up to four years for (partly) gratuitous performance; and
3. three months for payments made while the debtor was unable to pay debts when due.
• Equitable subordination: repayment claims regarding shareholder loans and equivalent claims are subordinated in insolvency under Section 39 (1) No 5 InsO. Any repayments of shareholder loans within one year before the company's insolvency, and security for shareholder loans granted within ten years before the insolvency petition, can be clawed back. Contractually, “deeply subordinated” debt may not be repaid if the debtor is immanently insolvent.
• Order of payment: the InsO foresees the following order of payments from the estate in insolvency proceedings:
1. court fees and administrator remuneration;
2. estate claims;
3. unsecured insolvency claims;
4. subordinated claims (eg, shareholder loans, penalties, interest on late payments); and
5. shareholder claims.

Secured creditors enjoy preferential satisfaction from the proceeds of the realisation of their collateral. Tax authorities and employees do not enjoy any preference, and wages incurred up to three months may be subsidised.

Whether payments of principal, interest or other payments made to lenders are subject to withholding tax in Germany depends on the financing structure in a certain case. However, the “standard/typical” financing agreement generally triggers no withholding tax, but there are some important exceptions, for instance:

• those relating to profit-related payments;
• specific hybrid arrangements; or
• any interest secured by German real estate that may trigger a limited domestic tax liability.

In addition to withholding tax and limited tax liability aspects, lenders are typically not subject to taxes from lending into Germany. No stamp duty or net wealth tax is levied in Germany. However, VAT  could potentially be relevant in Germany, but in most cases a VAT exemption applies.

From a German tax perspective, it is important that a lender is not associated with a tax haven jurisdiction. Instead, it is recommended for a lender and beneficial owner of the respective loan to be resident for tax purposes in a tax treaty jurisdiction with a favourable double taxation treaty in place with Germany. This would provide a lender the typical tax protection of a qualifying lender.

There are no thin capitalisation rules as such in Germany. Their substitute under German tax law is the net interest limitation of up to 30% of the EBITDA (there are certain exemptions applicable), whereby the members of a tax group are considered as one combined business for the German interest limitation rules. The 30% limitation applies to all interest, irrespective of whether the debt is granted by shareholder, related parties or a third party.

In Germany, credit activities such as providing loans and accepting credits are classified as regulated banking businesses. These activities are subject to authorisation by the German Federal Financial Supervisory Authority (BaFin) and can only be provided by authorised credit institutions. However, certain exemptions may apply to debt financing structures, including reverse solicitation, qualified subordination and an exemption for financings granted within the same group of companies, which prevent the applicability of the authorisation requirement. It is also noteworthy that, since March 2016, German law allows certain alternative investment funds (AIFs) to issue loans as well as restructure and extend the duration of unsecuritised loan receivables.

When dealing with debt financing instruments, it is important to assess whether they qualify as regulated financial instruments. While the mere issuance or purchase of individual financial instruments does not typically constitute a regulated service, other parties involved in debt financing transactions may be considered to be providing regulated investment services. In such cases, these parties would have to obtain authorisation for providing services in Germany. On a separate note, it should be checked if a debt finance instrument can be structured in a way that it does not meet the definition of a “loan” or “credit” under German regulations, which would provide further flexibility.

In connection with collateral, German law has some specific features that are very different from other jurisdictions, in particular those with a common law background. Here are three examples.

• Asset by asset: German security interests are granted strictly on an asset-by-asset basis, and a security interest only attaches to assets if they are adequately identified or identifiable and held by the party granting the security interest.
• Accessory security: the validity and enforceability of a pledge under German law is strictly linked (accessory) to the existence, the extent and the enforceability of the underlying secured claim. Therefore, only claims held by the pledgees themselves can be secured by a pledge (eg, account pledge or share pledge). For this reason, relevant documentation must contain a parallel debt covenant for the benefit of the security agent pursuant to which it holds a separate and independent claim against each obligor. Other types of security (eg, an assignment agreement, or a transfer of title agreement) are not accessory in nature.
• Difficult enforcement of share pledge: under German law, enforcing share pledges through a sale of pledged shares typically requires a public auction or enforcement of judgment (Zwangsvollstreckung) pursuant to the provisions of the ZPO unless the relevant pledgor agrees to a private sale after the secured claim is due. In practice, parties often agree to a private sale because it offers more flexibility and control over the sale process compared to a public auction or court enforcement.