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JULY 2013
Legal Focus
65
Reports show that the corporate default rate is increasing as companies in many regions continue to experience financial difficulties in the aftermath of the financial crisis. Is this something you would agree with? Please explain.
As compared to its European peers, the German economy has proven relatively strong and resilient during the financial crisis and the Eurozone crisis. Nevertheless, we have also seen increasing corporate default rates in Germany and a number of high profile insolvencies in the aftermath of the global financial crisis. Whilst recent refinancing has reduced the “wall of maturity”, there are still many corporates that need to refinance and we expect that involuntary refinancings will increase and further debt restructurings are on the horizon.
In order to overcome “hold-out” or “free rider” issues, the new German Bond Act (SchVG) was introduced in August 2009.
What do you think are the advantages and disadvantages of a restructuring programme as opposed to insolvency?
In Germany, an out-of-court restructuring has still clear advantages for the debtor since insolvency is widely seen as a stigma and hence the public announcement of insolvency proceedings may lead to difficulties for the borrowers to continue their business and preserve the business as a going concern (which is typically also in the interest of the creditors). Insolvency may in particular affect the relationships with customers and suppliers. It therefore remains the preferred approach to restructure outside insolvency, where possible.
What issues commonly arise in
restructuring situations and how can they be overcome?
A particular issue has been the restructuring of capital markets debt as part of large corporate debt restructurings. Many large corporates have issued bonds that need to form part of an overall restructuring package. This not only adds a layer of additional legal complexity but may also give rise to further potential for individual bondholders to block the entire restructuring exercise. In order to overcome “hold-out” or “free rider” issues, the new German Bond Act (SchVG) was introduced in August 2009. It has introduced flexible and predictable tools that shall allow effective corporate bond restructurings, including haircuts and debt-to-equity swaps, by 75% majority decision of bondholders. A very important feature of the new German Bond Act is that holders of old bonds issued prior to 5 August 2009 can generally opt into the application of the new regime by 75% majority vote. Unfortunately, a series of recent court cases dealing with the restructuring of subordinated bonds has created uncertainty regarding the use of the opt-in mechanism for old bonds. Risks associated with the use of the opt-in mechanism must therefore be carefully analysed by experienced legal advisers. LM
Contact:
dr. Stefan Henkelmann Counsel
Allen & overy LLP tel +49 69 2648 5997
Email: stefan.henkelmann@allenovery.com Website: www.allenovery.com