Lending and Acquisition Finance

Lending and acquisition finance in Germany

Lending and acquisition finance in Germany combine general loan law in the Civil Code (BGB) with a highly developed contractual practice. Corporate borrowers raise money through bilateral and syndicated facilities, Schuldschein loans, bonds and, increasingly, private credit. Acquisition finance funds the purchase of a company by a strategic buyer or a financial sponsor and is secured on the target group's assets once the acquisition has closed. Throughout, German law imposes three constraints that international lenders must understand: security is created asset by asset without a floating charge, German companies may support their shareholders' debts only within the limits of capital maintenance, and insolvency law can unwind payments and security granted in a crisis.

This page explains the main instruments, the German security package, limitation language for upstream and cross-stream support, intercreditor arrangements and the issues that arise when a borrower comes under pressure. It is aimed at borrowers, sponsors, banks, debt funds and in-house counsel who negotiate or manage German loan documentation. The tax treatment of interest is mentioned where it affects structure; transaction tax is covered on our page on corporate and transaction tax.

Facility agreements for German borrowers are often based on Loan Market Association (LMA) templates, adapted for German law where German law governs, or kept under English law with German-law security documents. Both approaches are common in the market. Where German law governs, drafters must keep in mind that the rules on standard business terms in §§ 305 ff. BGB can apply to pre-formulated clauses even in negotiated commercial agreements, which can make one-sided provisions vulnerable to review for fairness. Careful documentation of genuine negotiation reduces that risk.

Corporate loans, syndicated facilities and Schuldschein loans

A loan under German law is a contract under § 488 BGB: the lender makes money available, and the borrower pays interest and repays the loan when due. Termination rights are a defining feature. In addition to contractual events of default, § 490(1) BGB gives lenders an extraordinary right to terminate where the borrower's financial circumstances or the value of security deteriorate materially and repayment is endangered, and the general right to terminate long-term contracts for good cause applies. Facility agreements typically regulate these rights in detail, and lenders are expected to exercise them in good faith, particularly in a crisis.

Syndicated facilities are arranged by one or more banks and shared among a group of lenders through an agent. German syndicated loans for investment-grade and mid-cap borrowers usually contain a term loan and a revolving credit facility with financial covenants (for example a leverage ratio), information undertakings, negative pledge and restrictions on disposals and financial indebtedness. Sustainability-linked margins tied to key performance indicators have become common.

The Schuldschein loan (Schuldscheindarlehen) is a German specialty. It is a loan under § 488 BGB, documented by a certificate of indebtedness and usually divided into tranches with different maturities and fixed or floating rates. Arranging banks place it with banks, savings banks, insurers, pension funds and other institutional investors; transfers take place by assignment or contract transfer. Because it is a loan and not a security, no prospectus is needed and the documentation is short and standardised. International companies increasingly use Schuldschein loans to diversify their investor base. Our insight on Schuldschein loans explains the market in more detail.

Real estate and asset finance

Real estate finance in Germany is secured mainly by land charges entered in the land register, usually combined with a notarised submission of the owner to immediate enforcement, so that the lender can enforce without first obtaining a court judgment. The lender also takes an assignment of rental income, insurance claims and, in share-deal structures, a pledge of the shares in the property company. Loan-to-value and debt-service covenants are standard. Asset finance for machinery, vehicles and equipment relies on security transfers and leasing structures, where the insolvency treatment of the lessor's ownership is the key question.

Acquisition finance structures

In a typical leveraged buyout, the sponsor sets up a German acquisition company (BidCo), which borrows the acquisition finance and buys the target. The lenders' credit risk is initially limited to the BidCo, which has no operating business; the target's cash flows and assets only become available after closing, through guarantees and security from target group companies and through debt pushdown measures. Acquisition finance in Germany therefore distinguishes between the certain-funds period up to closing and the post-closing period in which the security package is completed.

Certain funds are a central requirement in competitive sale processes and in public takeovers, where an independent investment firm must confirm that the bidder has the necessary funds. During the certain-funds period, lenders can refuse to fund only in narrowly defined circumstances, such as major defaults by the borrower or illegality. Interim facilities agreements, signed together with the purchase agreement, give sellers confidence that the money will be available even before the full documentation is agreed.

Debt pushdown brings the acquisition debt closer to the operating cash flows. The usual tools are a domination and profit transfer agreement between BidCo and the target, which creates a fiscal unity (Organschaft) for tax purposes and allows profits to be transferred to BidCo, or a merger of BidCo and the target after closing. Each route has corporate, tax and creditor-protection consequences. Interest deductibility is restricted by the interest barrier in § 4h EStG, which limits net interest expense to 30% of tax EBITDA, subject to an exemption for net interest expense below EUR 3 million.

Financial covenants in acquisition finance are typically tested quarterly on a leverage basis (senior or total net debt to EBITDA), sometimes combined with interest cover or a cash-flow test. Sponsor-backed deals often include equity cure rights, allowing the sponsor to remedy a covenant breach by injecting equity, and generous definitions of EBITDA adjustments. Information undertakings require regular financial statements, compliance certificates and budgets, and they become the lenders' primary early warning system.

Private credit and unitranche

Debt funds are now significant providers of acquisition finance in German mid-market buyouts. A unitranche facility combines senior and junior debt into one tranche at a blended price, usually alongside a super senior revolving facility from a bank. The relationship between the fund and the bank is governed by an intercreditor agreement or an agreement among lenders, which sets the payment waterfall on enforcement and the voting rights of each group. Funds that originate loans are subject to fund regulation and must ensure that their lending activity is structured in compliance with German licensing rules; see our page on investment funds.

The German security package

German law has no floating charge or all-assets security. A full security package therefore consists of separate agreements, each governed by the rules applicable to the asset concerned. Most security is non-accessory: it exists independently of the secured claim and is linked to it by a security purpose agreement, which gives flexibility in syndicated structures with a security trustee and parallel debt. Accessory security, such as pledges, can be held only by the creditor of the secured claim, which is why parallel debt undertakings are used.

The choice between pledge and security assignment for receivables reflects practice: a pledge of a receivable is effective only if the creditor of the receivable notifies its debtor (§ 1280 BGB), which is impractical for trade receivables, whereas a security assignment can remain undisclosed until enforcement. Movable assets are transferred by way of security because a pledge would require the lender to take possession (§ 1205 BGB). The land charge has become the standard real estate security because it is not linked to a specific debt; where it secures a claim, certain defences arising from the security agreement can be raised against any acquirer (§ 1192(1a) BGB).

Limitation language and capital maintenance

Upstream guarantees and security, given by a subsidiary for the debts of its parent, and cross-stream support for sister companies are where acquisition finance in Germany is most distinctive. The capital maintenance rule in § 30(1) GmbHG prohibits payments to shareholders from the assets required to preserve the share capital. Granting and, in particular, enforcing upstream security can amount to such a payment. Managing directors who allow prohibited payments are personally liable to the company under § 43(3) GmbHG, and in a crisis payments can also trigger liability under § 15b InsO.

Facility agreements therefore contain limitation language. It typically provides that the lenders may not enforce an upstream or cross-stream guarantee or security to the extent that enforcement would cause the company's net assets to fall below its registered share capital, or increase an existing shortfall, calculated on the basis of adjusted balance sheet figures.

Lenders negotiate the adjustments, the timing of the calculation, and the obligations of the company to realise assets that are not needed for its business. Section 30(1) GmbHG contains an exception for payments covered by a full-value claim for consideration or repayment against the shareholder and for payments under a domination or profit transfer agreement, which affects how much limitation is needed in a given structure.

Similar issues arise for a GmbH & Co. KG, where the capital maintenance rules of the general partner GmbH apply indirectly, and for stock corporations, where the prohibition of the return of contributions is stricter than in the GmbH. Beyond capital maintenance, case law on liability for destroying a company's existence restrains shareholders from withdrawing assets needed to pay creditors. Our insight on upstream guarantees and limitation language discusses the market standard.

Intercreditor arrangements and crisis issues

Where several layers of debt exist (senior, second lien, mezzanine, shareholder loans, hedging), an intercreditor agreement regulates ranking, payment blocks, standstill periods for junior creditors, the release of security in a distressed disposal, and voting. German insolvency law respects contractual subordination, and shareholder loans are subordinated by law (§ 39(1) no. 5 InsO), with repayments in the year before a filing being subject to avoidance under § 135 InsO. Intercreditor agreements must take this into account, particularly where the sponsor provides shareholder loans alongside the bank debt.

When a borrower's performance deteriorates, lenders and borrowers usually negotiate covenant waivers, amendments and standstills. Lenders should be aware that new security or payments obtained in a crisis can be challenged by an insolvency administrator, and that lenders who exercise excessive influence over management risk being treated like shareholders or face liability for delaying insolvency. Restructuring tools under the StaRUG allow the borrower to implement a restructuring plan with majority votes in creditor groups; see our page on StaRUG restructuring. Lenders considering selling their exposure should note the Secondary Credit Market Act, which regulates the purchase and servicing of non-performing loans.

Enforcement of German security follows statutory procedures unless the security agreement validly provides otherwise. Pledged shares are generally realised by public auction, although pledge agreements often provide for alternative methods permitted by law. Land charges are enforced through forced sale or receivership by the court. Security assignments of receivables are enforced by notifying the debtors and collecting payments. In insolvency, secured creditors generally have a right to separate satisfaction, but the administrator often realises the collateral and deducts statutory fees.

• Monitor covenant headroom and information undertakings as early warning indicators.
• Check new security and payments in a crisis for avoidance risk under §§ 129 ff. InsO.
• Align intercreditor terms with the German enforcement and insolvency framework.
• Prepare an enforcement plan: share pledge enforcement by public auction or agreed sale.

How TRW & Co helps

We advise borrowers, sponsors, banks and debt funds on lending and acquisition finance in Germany. We negotiate facility agreements, interim facilities and commitment papers, Schuldschein documentation and intercreditor agreements, and we draft and execute German security packages, coordinating the notarial and register steps. For borrowers and managing directors we negotiate limitation language that protects them against personal liability. When financings come under pressure, we advise on waivers, standstills, enforcement and restructuring, working with our restructuring team. To discuss a financing, please contact us.