GERMANY Law and Practice Contributed by: Michael Josenhans, Lucas Lengersdorf and Beatrice Zobel, Freshfields
Risk-mitigating measures include borrower consent, proper documentation of the pro-competitive ration - ale for club lending in a given case, and implementa - tion of clear compliance protocols at all stages. 3. Structuring and Documentation 3.1 Common Structures Transactions are usually structured as a first lien struc - ture, whereby the unitranche is the dominant struc - ture. In most cases, the unitranche is accompanied by a super senior revolving credit facility for working capital needs, and in some cases, by a super sen - ior term facility (first-out structures). These facilities are usually provided by traditional banks. In certain situations, alternative or subordinated structures (eg, second lien/PIK/mezzanine) may be pursued by the relevant borrower. 3.2 Key Documentation Private credit transactions in Germany typically involve several key documents, including the facility agreement, the intercreditor agreement and the secu - rity agreements. These documents are often based on Loan Market Association (LMA) precedents, adapted to reflect the specifics of the transaction. In sponsor- backed transactions, documentation is often also substantially based on recent/agreed precedents. The facility agreement is usually drafted by borrower’s counsel and sets out the loan terms, covenants and repayment schedules, while the intercreditor agree - ment governs the rights and priorities of different creditor classes and the sharing of transaction security and enforcement proceeds. Agreements among lend - ers are not commonly negotiated separately; instead, lender co-ordination and priorities are addressed with - in the intercreditor agreement, to which the obligors are also usually a party. In distressed markets, the drafting dynamics may shift, with the lender’s counsel often holding the pen on the main finance documents. This reflects the increased leverage of creditors in such scenarios, where tighter covenants, enhanced security, and robust enforce - ment mechanisms are prioritised. Additionally, recent restructuring experience as well as macroeconomic factors like interest rate volatility have influenced
documentation trends, alongside ESG considerations, which are becoming more prominent in loan agree - ments. 3.3 Restrictions on Foreign Direct Lenders The banking licence requirement applies both to domestic lenders and to foreign lenders equally. Please refer to 2.1 Licensing and Regulatory Approval . Further restrictions could arise for foreign lenders if the loans are secured by land charges or mortgages in Germany. In this case, the lenders could be subject to tax liability in Germany in the event of income accruing from those loans. 3.4 Use of Proceeds and Acquisition Financings By law, no restrictions on the use of proceeds arise, other than for non-compliance with applicable sanc - tions or other public laws and the financial assistance/ capital maintenance requirements described in 5.3 Downstream, Upstream and Cross-Stream Guaran- tees and 5.4 Restrictions on the Target . 3.5 Debt Buyback A debt buyback is often contractually permitted but accompanied by a disenfranchisement of the bor - rower or sponsor in such a case – meaning that, among other things, they cannot participate (and are not counted) in any decision-making by the lenders. Sponsors need to consider the risk of equitable sub - ordination based on statutory German law as well as potential tax consequences. 3.6 Recent Legal and Commercial Developments Pre-Insolvency Restructurings German legislation has established a comprehensive legal framework for voluntary out-of-court restruc - turings. As a result, certain provisions of financ - ing agreements have become subject to increased negotiation, though such renegotiations need to be closely observed in line with the law. For example, certain lenders have intended to include Stabilisation and Restructuring Act (StaRUG) proceedings as an event of default, even though such provision would be void and potentially cross-contaminate the rest of the credit agreement. Please refer to 7.4 Rescue or
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