Trade Alert - March 2017, Issue 39


At the end of 2007, according to PWC, German non-performing (“NPLs”) totalled EUR 135.5bn as a result of local banks preferring not to sell at the distressed prices being offered. Now, after a reduction in activity during the crisis years, investors’ appetite for German loan portfolios is back.

Loan sale activity in Germany nearly doubled from 2015 (EUR 5.3bn) to 2016 (EUR 10bn). The expectation is that the sale and purchase of loan portfolios will continue to increase in 2017, with Deloitte reporting that NPLs on German balance sheets currently exceed EUR 240bn, and other outside influences (including IFRS 9) pushing banks to hasten disposals.

At the forefront of the current crop of portfolios coming to the German market are shipping loans. As the depression in the shipping industry continues, banks heavily involved in the industry prepare to take losses.

HSH Nordbank sold a EUR 5bn portfolio of shipping NPLs in 2016. The bank announced in January this year that it has agreed to sell another EUR 1.64bn mixed portfolio of loans in the next few months with a further EUR 1.6bn still to be disposed of. Not to be left out, the Financial Times has reported that Commerzbank, NordLB and KfW have also significantly reduced their shipping portfolios.

In addition to a struggling market, Reuters reported that the recent activity is being driven by increased regulatory scrutiny (in particular from the ECB) which is expected to result in portfolio adjustments and the marking down of substantial portions of banks’ loan books over the next few years.

When contemplating the acquisition of a loan portfolio that originated in Germany, it is important for any potential buyer to be aware of the specific requirements for purchasing and holding German loans.


Banking Licence - The supervisory body responsible for granting bank licenses in Germany is the Federal Financial Supervisory Authority (“BaFin”). In general, the acquiring and holding of loans within Germany does not require a banking license.

Previously, under Section 32 of the German Banking Act (Gesetz über das Kreditwesen, “KWG”), the granting of loans in Germany required a banking license. Now, according to BaFin’s interpretive decision dated 12 May 2015, certain investment funds no longer need a banking licence to grant, restructure and extend the period of loans.

Market participants should be aware that breach of the relevant provisions under KWG may constitute a criminal offence and is punishable on indictment by a term of up to five years of imprisonment and/or a fine.

Passive freedom to provide services. Possible exemption - It may also be possible for a secondary loan purchase and sale transaction which involves the granting of a loan (e.g. in case of an undrawn revolver tranche or a refinancing) to fall outside of the scope of the German banking licence requirements, where the German borrower initiates the contact with a non-German lender within the European Union, thereby benefitting from the EU passive freedom to provide services.

Shareholder Loans - Under German law, financial support provided by a shareholder to its corporation will be subordinated in insolvency proceedings. The rights of the shareholder will rank behind the claims of other creditors in the event of insolvency. This doctrine applies to all German corporations and could even apply to foreign corporations, such as an English limited liability company, if German insolvency proceedings are initiated in relation to such English company. Therefore, we recommend seeking additional representations from the Seller to ensure that a shareholder loan has not been granted. Furthermore, the security package provided for a loan should also be reviewed by local counsel in order to avoid that loans are regarded as subordinated due to extensive security rights for the creditors, e.g. in case of share pledges.

Possible exemptions to subordination include (1) the restructuring privilege, which exempts a shareholder loan if shares are acquired in an attempt to restructure the company during an insolvency or imminent insolvency; (2) for a minor non-managing shareholder of a GmbH, the loan is not regarded as subordinated if it has been provided by a shareholder who holds a maximum of 10% of the share capital and is not a managing director of such company; and (3) for a German AG, the minimum shareholding must also be more than 10% for the loan to be subordinated.

Possible tax implications – In Germany, corporate income tax (Körperschaftssteuer) is chargeable to a limited extent (beschränkte Steuerpflicht), on certain categories of German-source income paid to non-German resident companies. Non-German resident companies are those that do not have their seat and place of management and control in Germany.

Put in a lending context, non-German lenders receiving interest payments from a German borrower whilst enjoying security over German real estate may incur an income tax liability. Depending on the legal entity of the lender, the rate of tax triggered could be between 15.825% and 26.375% (incl. solidarity surcharge). However, such rate may be reduced under an applicable Double Taxation Treaty (“DTT”) between Germany and the jurisdiction where the lender is resident for tax purposes, and in some cases the DTT may altogether exclude Germany's right to levy taxes on interest paid to foreign lenders.

If it transpires that a non-resident lender has incurred a tax liability on German source interest payments, payments would not be deducted at source but instead the non-resident lender would itself be responsible for paying any amounts due to the relevant German tax authority.

It should also be noted that where the relevant debt is only secured in part against German real estate, it may nevertheless affect all of the interest payments made by a German borrower to a non-resident lender. In other words, the German situs security will taint the non-German situs security interest.


In response to critics, the Act for Further Facilitating the Restructuring of Companies (Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen) came into force in Germany on 1 March 2012 and amended the German Insolvency Code with a view to making Germany a more ‘creditor friendly’ jurisdiction in which to effect financial restructurings. Amongst other things, the reforms give creditors influence on the insolvency court’s decision on who is appointed as insolvency administrator, and prevent existing shareholders from vetoing debt-for-equity swaps.

Following the changes to the German Insolvency Code, companies such as IVG (real estate), Kettler (sports equipment), Suhrkamp (publishing house) and Leiser (shoe retail chain) have been restructured whilst utilising the updated legislation. However, critics have argued that the reform did not introduce preventive restructuring procedures, i.e., pre-insolvency proceedings that may in particular be limited to a certain group of creditors (e.g., financial creditors). As a consequence, major German restructuring cases such as Apcoa Parking were resolved by an English scheme of arrangement.

Preventive restructuring procedures will now be introduced as a result of the proposed European directive on preventive restructuring frameworks. The details of these procedures are currently the subject of major discussions amongst German restructuring experts.


In German insolvency proceedings, the claims of insolvency creditors are filed with the insolvency administrator. The insolvency administrator enters the claims into an insolvency table and all claims are then examined at the examination hearing with respect to amount and rank. A claim is deemed acknowledged and receives distributions from the insolvency estate if no objections are raised.

The insolvency table has the same effect as a final judgment. Therefore a third party who purchases an insolvency claim will participate in distributions, but only if the insolvency table has been updated to reflect that the claim has been assigned to such third party.

However, if a claim is disputed by the insolvency administrator or another insolvency creditor, it is up to the insolvency creditor who filed the claim to pursue the claim before an ordinary court outside of insolvency proceedings.

Therefore, a distinction must be made between claims that have been acknowledged (festgestellt) and claims that have been disputed (bestritten). Where purchasing, we would recommend seeking additional representations from the Seller to ensure that the claim being acquired has been acknowledged in the insolvency proceedings.


The insolvency administrator has the right to set aside (Insolvenzanfechtung) certain transactions that have taken place within specific hardening periods prior to the onset of insolvency proceedings. For a transaction to be set-aside, the transaction in question must have been shown as detrimental to the insolvency estate.

With regard to the trading of insolvency claims, a set-aside may in particular become relevant for security interests that were granted following insolvency, e.g. for a loan that was originally unsecured.

The rules regarding a set aside are currently being reformed. The new provisions will likely come into force as early as spring 2017. The new law is set to improve legal certainty with regard to a set-aside, but will probably mitigate clawback risks only slightly.


The three month period prior to the application for the opening of insolvency proceedings is the key time frame. However, there are longer hardening periods for certain interests, including four years for gratuitous benefits and ten years for “wilful disadvantage” (Vorsatzanfechtung) to the detriment of the company’s creditors.

With regard to certain security interests, German insolvency law grants the insolvency administrator the right to realise the secured asset. The secured creditor will receive proceeds only after deduction of costs (usually 9 per cent of the realisation proceeds plus VAT, if applicable).

Special Note

With special thanks to Michael Neises and Dr. Christoph Gringel from Heuking Kühn Lüer Wojtek in Germany, who assisted us with this Trade Alert.


Adam Colman

+44 (0) 20 7170 8633

Adam Colman is an associate in the Financial Restructuring Group and the Debt & Claims Trading practice in Cadwalader's London office.

Adam specialises in advising bank and fund clients on UK and cross-border loan and claims trading transactions, and also has a wide range of experience working on other finance and corporate matters, including, private acquisitions, primary lending, credit reviews, bespoke options and ‘cashless rolls’.




This month, the finance ministry in Reykjavik announced that capital controls on the krona ended on 14 March 2017.

Finance Minister Benedikt Johannesson stated that the elimination of capital controls is “a critical first step in the new Government’s strategy for the country’s financial future”. According to the NY Times, the move signals that the financial landscape in Iceland has recovered from the crippling debt liabilities it held at the point of the crash.

The full dismantling of capital controls comes after increased tourism enhanced Iceland’s economy in recent years; preliminary data reported by Al Jazeera shows Iceland will enjoy 7.2 percent growth in 2016.

However, in an interview with Bloomberg, the Finance Minister warned of short-term krona volatility as IKR rises against USD and EUR, threatening the impressive recovery.

The NY Times reported that while the Icelandic government remains in a legal dispute over funds that still have frozen Krona assets, the Icelandic Central Bank announced that it bought ISK 90bn at 137.5 Krona/Euro from foreign currency holders to safeguard the economy from instability, said Bloomberg.


On 29 March 2017, the Republic of Iceland announced an invitation to buy back its 5.875% notes issued in dollars due May 2022. The offer to noteholders, posted on the London Stock Exchange, sets out an invitation to buy any or all outstanding bonds at a fixed spread of 75bp over the reference Treasury bond. The tender offer expires on 4 April 2017.

For more information, see the LSE reports here.


Kaupskil ehf., a wholly-owned subsidiary of Kaupthing ehf., has sold 582,922,113 shares of Arion Bank for approximately ISK 48.8bn via a private placement. Notably, foreign investors Attestor Capital and Taconic Capital Advisors UK purchased nearly 10 per cent each, with total overseas investment reaching 42.1 per cent. The proceeds of sale will be used to prepay the ISK 84bn secured note held by the Icelandic Treasury.

Separately, an English Court of Appeal has upheld the decision in the English Commercial Court to dismiss a claim initiated by Vincent Tchenguiz and related parties against Kaupthing and others. The Court ruled that the pursuit of the claim in the English courts contravened Icelandic insolvency law, and therefore the claimants were not permitted to pursue Kaupthing in England.


Optional Redemption Second Notification Date – 9 March 2017 (increased amount) and remaining balance after 9 March payment

Glitnir has announced it will increase payments to registered Noteholders of Amortising Zero-Coupon Convertible Notes of Glitnir HoldCo ehf. on the Optional Redemption Date (9 March 2017) by EUR 2,012,222. The additional amount originated from realizations of other assets. Further information from Glitnir regarding the increased amount can be found here.

As a result of the optional redemption of the Notes in part on 9 March 2017, there was a reduction of the aggregate principal amount of each Noteholder’s interest in the Notes. Noteholders looking for additional figures regarding their holding of Notes may do so at their secured website.

LBI ehf.

On 14 March 2017, Landsbankinn fully prepaid USD 170m comprising of the entire outstanding balance under Bond Series 2020 and partially prepaid Bond Series 2024 with a payment of USD 111m.

LBI ehf. gave notice of its intention to make an unscheduled payment on Convertible Notes on 5 April 2017 in an estimated amount of EUR 301,992,221.

Earlier this month, LBI ehf announced that their case against PricewaterhouseCoopers reached settlement and the continuing litigation, intended to be held in front of the Reykjavik District Court, has been cancelled as a result.


Mailbox (Birmingham) Limited v Galliford Try Construction Limited [2017] EWHC 67 (TCC)

On 1 February 2017, the High Court handed down its decision on the impact of security assignments on the right to bring a claim.

The decision is noteworthy because while the equitable assignee has the right to remedy, it is not unusual for a court to mandate that the assignor (in this case, the Security Trustee) be joined to proceedings to enforce its assigned rights concurrently with the equitable assignee. Here, the court said that was unnecessary as there was no dispute between the assignor and assignee.

The full decision is available on Baillii here.


Brexit – With the European Union (Notification of Withdrawal) Bill 2016-2017 passing the lower and upper houses of the UK Parliament on 13 March 2017 and receiving Royal Assent on 16 March 2017, most observers predicted that Prime Minister Theresa May would trigger Article 50 the next day. However, Number 10 waited until 29 March 2017 before initiating proceedings, which may have partly been a response to Nicola Sturgeon’s announcement regarding a second Scottish referendum.

Scotland – On 13 March 2017, Scottish First Minster Nicola Sturgeon announced her intention to ask the Scottish Parliament to vote on a second Scottish Independence referendum and proposed that the vote would take place between Autumn 2018 and Spring 2019. The Scottish Parliament voted to invoke Section 30 of the Scotland act 1998 on 28 March 2017 which allows Holyrood to legislate on matters where Westminster has competence.


1. Volkswagen AG (“VW”)

Ramifications from last year’s emissions scandal are not the only problem facing VW. This year, Fiat Chrysler made an initial play contract with VW, which was immediately rejected by the German car manufacturer. However, Reuters stated that as Peugeot maker PSA made a deal to buy GM’s Opel earlier this month and profit continues to slide, VW has indicated it may be open to partnership.

2. Stada

The Financial Times reported that two private equity groups submitted takeover offers for the German drug manufacturer (and generic maker of Viagra) this month. The bids to buyout the company for EUR 3.7bn includes taking over Stada’s dividend payments and a commitment to create an investment agreement. The battle will be fought between Bain and Cinven partnering up against Permira and Advent.


Westinghouse Electric Company, a U.S. nuclear energy company that was purchased by Japan-based Toshiba in 2006, has filed for Chapter 11 bankruptcy protection in New York.

The New York Times reported that Westinghouse has been afflicted with the combination of a ruinous construction deal along with slowing demand for energy, falling prices in natural gas and increased access to clean energy sources. Toshiba estimates it will take a loss of approximately USD 9bn on Westinghouse, largely due to the construction of four nuclear reactors in the southern United States which are over-budget and years behind schedule for completion.

Westinghouse is one of many nuclear energy companies that has run into trouble in recent years; Siemens AG left the industry, Areva, in France, is in a restructuring and China’s General Nuclear Power Group and Russia’s Atomenergoprom continue to fall in market value, according to the Wall Street Journal.

Awaiting court approval is a financing offer from Apollo Investment Corp who would provide USD 800m in financing to Westinghouse in a restructuring, with Toshiba guaranteeing up to USD 200 million of that figure. However, it will not be an easy road for Westinghouse; as Reuters pointed out, the U.S. and Japanese government loan guarantees create political implications and the forthcoming sale of the nuclear services business is expected to be complex.

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