GERMANY Trends and Developments Contributed by: Michael Josenhans, Lucas Lengersdorf and Beatrice Zobel, Freshfields
jewel” assets or the pursuit of risky diversification/ investments into unrelated businesses. The necessity for such controls is evaluated case- by-case, and their inclusion is driven by the historic context, future strategy, and specific vulnerabilities perceived by creditors. Default triggers and rights of acceleration Lenders in holdco structures need mechanisms that allow them to accelerate their debt and pursue enforcement if the business hits trouble even though there is a recognition that there needs to be more flex - ibility as it relates to opco’s senior debt. Typical con - siderations include the following. • Cross-payment and cross-acceleration provisions – Granting holdco investors the right to call or enforce their debt if material opco debt becomes due and payable but remains unpaid or is acceler - ated or if a material subsidiary defaults or enters insolvency or similar proceedings. • Materiality thresholds – Ensuring these triggers are calibrated so that minor events do not provoke pre - mature enforcement; thereby maintaining enough headroom between opco and holdco covenants to allow for orderly processes. • Negotiated quantum and group scope – Defining how much debt must be accelerated, and which group entities’ insolvencies will be relevant. This careful calibration ensures that the holdco credi - tor’s position is preserved, while offering enough time and information to respond appropriately to distress. Such provisions provide a backstop, allowing inves - tors to react to emerging challenges and seek recov - ery before value is irreversibly depleted. Good behaviour rights: enhancing practical influence Because holdco creditors hold structurally junior posi - tions and have limited enforcement rights, commercial practice has evolved to bolster their practical influ - ence through “good behaviour rights”. These rights are designed to compensate for the limited practi - cal control lenders possess and provide pathways to preserve value and negotiate during times of distress.
Such contractual protections are usually provided by the holdco itself and/or certain affiliated entities or persons. Information and consultation Key elements of this protection include: • advance notification of any restructuring, refinanc - ing, or asset sale or other material transactions initiated due to opco-level financial pressures; • rights to be alerted as soon as any default or major adverse event occurs within opco debt; • access to documentation and participation in dis - cussions between borrowers, sponsors, and other creditors, including expert or strategy reports; • board observer and related information rights; and • active rights to consult and make reasonable requests regarding restructuring or recovery actions. Holdco creditors rely on these channels to stay engaged and make strategic decisions when senior debt holders drive the process. Such information and participation rights enable lenders to calibrate their responses – delaying, joining, or influencing workouts according to their risk appetite and recovery pros - pects. Equity cure/step-in rights Equity cure rights are relatively standard, enabling holdco creditors to inject further capital in order to cure defaults or breaches of financial covenants in the opco structure, should ordinary shareholders refuse. This flexibility allows the lender to prevent enforce - ment or preserve the value of its investment, espe - cially in situations where shareholders’ incentives diminish as their own equity position weakens. Participation rights In certain situations, holdco creditors may negotiate rights to participate on equivalent terms with share - holders in any restructured opco capital solution. This ensures creditors are not sidestepped if sponsors are invited to reinvest during a workout, and maintains the principle that recovery opportunities should reflect original priority positions in the capital stack.
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