GERMANY Trends and Developments Contributed by: Michael Josenhans, Lucas Lengersdorf and Beatrice Zobel, Freshfields
Different formulations for these rights exist: some - times participation is prioritised according to original investments, sometimes a simple 50/50 allocation applies. The presence, nature and scope of participa - tion rights are ultimately subject to negotiation lever -
dealing with German law governed documents in this area. • Interest capitalisation/PIK must follow mandatory law, pursuant to which the choice to capitalise may only be made on or after the last day of each inter - est period. Prior to that, only the intention to capi - talise may be communicated. However, no day-1 PIK election or automatic capitalisation mechanics are feasible. • Call-protection/prepayment fee arrangements need to be documented separately in the case of floating interest arrangements (usually under a designated fee letter) which is to be governed by foreign law (usually English or Luxembourg law). • When combining debt features with equity ones, or certain upside-instruments such as profit participa - tion rights, mandatory laws on equitable subordi - nation need to be taken into account when drawing up the financing documentation. Preferred equity: handling non-debt structures A frequent alternative to holdco debt is preferred equity, which is often chosen for its beneficial impact on the accounting or ratings treatment for the group. Investors seek terms that deliver similar safeguards to debt, but key differences remain: • preferred equity does not have a set maturity, nor does it provide a direct claim for repayment in insolvency; • redemption is typically contingent on the issuer’s distributable reserves or satisfaction of other legal criteria; • dividend rates may increase over time – mirroring debt term structures – to incentivise a timely liquid - ity event or repayment; and • liquidation or recovery may be linked to contrac - tual mechanisms, such as mandatory sales, put options, or liquidity events, but remains subject to the issuer’s financial capacity. Negotiations over preferred equity often centre on maintaining enough “equity-like” features to secure beneficial accounting treatment while also deliver - ing the substantive protections desired by investors. Breaches will usually trigger heightened dividend rates or mandatory redemption obligations, as opposed to
age and commercial context. Anti-short circuit undertakings
To reinforce their priority, lenders often require anti- short circuit arrangements. These are designed to: • ensure that new shareholder investments flow into the holdco, either as equity or deeply subordinated shareholder loans; and • guarantee that distributions and payments from opco upwards pass via the holdco, where they are subject to the same contractual restrictions that protect lenders. By channelling economic flows through the holdco, credit investors build a cushion behind their claims and realign shareholder incentives towards support - ing recovery of the instrument in distress scenarios. Specific permissions or carve-outs – such as allow - ing shareholders to purchase discounted opco debt directly – are sometimes negotiated to balance flex - ibility and economic alignment, but care is taken to ensure these exceptions do not undermine the broad - er intent of the protections. Contractual limitations It must be recognised that good behaviour rights derive their force from contractual undertakings. Their utility depends on the continuing performance and financial substance of the issuer or its affiliates. When a business enters deep distress and assets migrate elsewhere, such rights may serve more as negotiat - ing tools or levers for applying moral and reputational pressure to sponsors, rather than enforceable claims in insolvency. Creditors therefore assess the risk that their remedies may ultimately be limited to influence rather than binding legal force. German law specifics While documentation trends for holdco/PIK financings are oftentimes driven by US/UK markets and devel - opments, certain specifics are to be observed when
75 CHAMBERS.COM
Powered by FlippingBook