GERMANY Law and Practice Contributed by: Michael Josenhans, Lucas Lengersdorf and Karl Kuhn, Freshfields
Aforementioned Competition with Public Debt Markets The resurgence of syndicated loans and high- yield bonds has increased competition for pri - vate credit lenders, with public debt markets offering significant margin savings in certain instances. Furthermore, Germany’s SME sec - tor (its famous Mittelstand ) remains largely con - servative, favouring the strong domestic banking sector for financing. Longstanding relationships and trust in traditional banks often outweigh the appeal of private credit or public debt, posing challenges for private credit providers in a mar - ket dominated by established banking partner - ships. High Cost of Capital and Interest Rates Rising interest rates, particularly the elevated EURIBOR, have resulted in higher financing costs, causing borrowers and lenders to adopt a more conservative approach regarding lever - age multiples. Selectivity and Lengthy Deal Timelines Private credit lenders have become increasingly selective when originating new transactions, focussing on selected attractive sectors, solid underlying assets and strong outlooks and credit stories. This selectivity, coupled with valuation mismatches and macroeconomic uncertainty, has limited or at least extended deal comple - tion times. Challenges in Fundraising Fundraising has proven to be uneven, with larger, established funds capturing the lion’s share of capital, while smaller or newer funds face headwinds. For every USD2.40 of targeted capital, only USD1 was successfully closed. The more liquid secondary market has – in contrast – experienced a surge in activity.
Regulatory Uncertainty and Market Risk Transmission Increasing regulatory scrutiny of private credit, particularly regarding its interconnectedness with the banking sector and institution investors, could pose additional challenges. This scrutiny stems from concerns about risk transmission and early signals of stress, such as negative outlooks for private credit-backed instruments. Performance Fragility and Default Risks Signs of underlying fragility in the performance of portfolio assets have emerged, particularly in sectors that traditionally attract higher leverage. This fragility is further reflected in the increas - ing use of payment-in-kind (PIK) structures and credit facilities based on net asset value to address short-term pressures. 1.5 Junior and Hybrid Capital Private credit providers in Germany actively offer junior and hybrid capital products such as mez - zanine financing, subordinated debt, and PIK structures. These products play a key role in the private credit ecosystem, particularly for acquisi - tion financing, growth capital, and recapitalisa - tion strategies where flexible financing solutions are required. Trends in Junior and Hybrid Capital Products Strategic role of mezzanine and subordinated debt Subordinated debt and mezzanine loans have been increasingly utilised as private credit pro - viders aim to bridge gaps where senior financing alone is insufficient. These products are particu - larly prominent in: • LBOs – junior capital allows sponsors to opti - mise the capital structure with an equity-light approach, enhancing returns;
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