GERMANY Trends and Developments Contributed by: Anselm Lenhard and Philipp Büchler, LARK
is relevant from a banking regulatory perspec- tive. • Also exempted from banking licence require- ments are loans that are more equity-like and subject to qualified subordination provisions. Such subordination provisions do not only provide for a subordination of the loan in the insolvency or liquidation of the borrower but also prohibit the lender from requesting pay- ment if and to the extent payment would give cause to the commencement of insolvency proceedings over the assets of the borrower. Often, vendor loan agreements contain quali- fied subordination provisions, given that they are usually structured as subordinated financ- ing. Customary terms of vendor finance, and structural considerations While there are no standardised terms for vendor loan agreements, the requirements of a senior acquisition financing of the buyer have certain customary implications for the structure and the terms of vendor loan arrangements in situations where vendor finance is not provided as a bridge to third-party acquisition financing. Subordination As acquisition financing obtained in the bank or private credit markets is structured as senior financing, vendor finance will always be subor- dinated in these circumstances. Subordination is usually achieved through an intercreditor agree- ment or subordination agreement with the lend- ers under the senior financing. If the amount of the vendor loan is relatively small, the lenders under the senior financing may also agree to rely only on qualified subordination provisions or on subordination provisions in the form of a contract for the benefit of third parties, pursuant to Section 328 paragraph 1 of the German Civil
Code ( Bürgerliches Gesetzbuch ) in the vendor loan agreement itself. However, in more complex financing structures where robust enforcement mechanisms are pri- oritised, senior lenders will also strive for a struc- tural subordination of vendor finance through “debt push-up” of the vendor loan to a holding entity in the buyer’s acquisition structure. This is usually achieved by the holding entity assum- ing the payment obligation of the buyer, and by the seller consenting to such assumption of debt and the corresponding release of the buyer from its payment obligation. No security In contrast to circumstances where vendor finance is used as bridge financing, a vendor loan is usually unsecured, because substan- tially all of the assets of the buyer and the target group are being used to secure the senior rank- ing acquisition financing. Second lien security for the benefit of the seller is usually not accept- ed, as this would prevent the granting of further prior-ranking security required for further add-on financings or in the event of a restructuring of the senior financing. Only in acquisition structures where the vendor loan is pushed up to a holding entity in the buyer’s acquisition structure may first-ranking security over shares be granted at a level not interfering with the senior financing, and subject to certain restrictions on enforce- ment and standstill periods in the intercreditor agreement with the senior lenders. Limited covenants Vendor loan arrangements usually contain no or only limited covenants, even for more size- able vendor loans, and in particular where they are part of a more complex financing structure with senior acquisition financing obtained by the buyer in the bank or private credit markets. Here,
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