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Legal Focus
JULY 2013
Debt Refinancing and Restructuring
Looking further into the issues surrounding debt refinancing and restructuring, we speak to Dr. Stefan Henkelmann from Allen & Overy in Frankfurt, Germany.
Please introduce yourself, your role and your firm.
Allen & Overy is a leading international law firm with 42 offices in 29 countries. We are at the heart of the world's banking and financial markets. With over 1,000 banking and finance lawyers worldwide, we have one of the largest and most international teams of any global law firm. In Germany, Allen & Overy fields the market's pre-eminent banking and finance practice with some 70 lawyers.
As a Counsel in the International Capital Markets department of Allen & Overy in Frankfurt, I have extensive experience in German and international capital markets transactions. I specialise in securitisations, structured finance and restructurings in the capital markets sector. I regularly advise on a wide variety of securitisations – with a particular focus on Commercial Mortgage Backed Securities (CMBS) – other structured finance transactions, and restructurings such as CMBS restructurings, corporate bond restructurings, and NPL transactions.
the refinancing and restructuring market has evolved radically over the last few years. How have you seen the market change recently in your jurisdiction?
One major development, in my view, is the evolving role of capital markets lending and refinancing. While the German debt market had traditionally been dominated by bank lending, a shift from loan to bond financing and
refinancing will be one of the key features of the corporate debt market of the future. The tightening of regulation is likely to further shrink the size and scope of traditional bank lending activity and will increase the cost of bank credit which will in turn increase the demand for bond financing provided by alternative lenders. At the start of this year, many borrowers have taken advantage of benign credit market conditions to raise long-term financing at relatively low costs and refinancing activity has driven the markets. In particular, in the real estate market we have seen a shift from bank to non-bank lending. We have recently been involved in the successful refinancing of large German legacy CMBS deals by means of bonds or new CMBS transactions.
Yet there is still a significant level of leveraged loans outstanding which either need refinancing or restructuring as the “wall of debt” approaches with the peak period of maturity in 2015/16. While for investment grade corporates the refinancing of existing debt by unsecured bank loans or bonds, or a combination thereof, is still a viable option, non- investment grade corporates may try to issue secured bonds or high yield bonds but some of them may struggle to obtain refinancing and may need to extend maturities, which may increase involuntary refinancing accompanied by covenant resets. Where such “amend & extend” strategies cannot be implemented, this could result in an increase in defaults or insolvencies.
Another key trend on the debt restructuring side is that deals have become more international and restructuring across borders has become more important over the last few years. On the one hand, this adds legal complexity and can make a successful restructuring more challenging. On the other hand, this has offered opportunities to use a more “rescue friendly” foreign insolvency law regime. There have been prominent cases where German distressed companies restructured their debt by means of shifting their centre of main interest to England or using English schemes of arrangement or company voluntary arrangements in order to implement a debt restructuring. In response, the German legislator has adopted a reform of the German Insolvency Code (ESUG) in March 2012 in order to make the German restructuring regime more competitive. The ESUG has significantly increased creditors’ influence, enables debt-to- equity swaps as part of insolvency plan proceedings and has introduced a protective shield (Schutzschirm) to support self-administration. The ESUG does, however, not generally allow an out-of-court debt restructuring by means of majority vote. It remains to be seen whether the new German restructuring regime will provide an efficient rescue statute which, in combination with a developing “rescue culture” in Germany, can prove to be a competitive and effective restructuring tool.