Dr
Annerose Tashiro from Schultze & Braun, with offices across Germany
and in London, discusses how proposed German legislation will affect
distressed debt investment in Germany.
Last year the German Ministry of Justice proposed a draft bill to protect against trading in distressed debt in Germany. The bill, known as the Risk Limitation Bill, is being discussed in specialised committees in the German Parliament (Bundestag) at present. Once politicians and experts have discussed the bill it will then be passed to parliament to be approved in the second legislative stage.
We see this bill as adopting the stance of the previous Vice Chancellor, Franz Müntefering, who famously called hedge funds and other financial institutions “locusts”. The German Ministry of Justice that proposed this protectionist measure is following through this rhetoric, with legislation that would limit the freedom and flexibility of the financial debt market.
If the bill were to be implemented as it currently stands, it would result in there being less debt available to trade in Germany, with hedge funds, private equity companies and other financial institutions finding it a lot harder to invest in distressed debt.
An important element of the bill is the proposal to make many sorts of commercial and private loans non-assignable, giving borrowers the ability to immediately block loans on being transferred to other lenders, such as hedge funds.
Another result of the proposals, is that it will make it a lot easier for borrowers to seek compensation for damages now – for instance if their house is repossessed unlawfully – a lender may no longer excuse itself for the lack of any negligence or other fault on their executing side.
Of course, with legislation there are always unintended consequences. Presumably banks will, as a consequence charge higher interest on non-tradable loans – putting up the cost for such loans, and perhaps causing more people and businesses to default because of the extra costs of borrowing.
Further amendments to the bill which is planned to come into force in summer 2008 propose that property loans may only be terminated if the borrower is more than 6 months in default.
The German Minister of Finance recently approached other equivalent G8 ministers to start to initiate international response, as an answer to the changing finance market in terms of risk and protection. According to press reports, he would even try to implement changes domestically if there is no consensus on the International or European basis.
Germany had one of the highest amounts of distressed debt investments in 2007, with an estimated 15 billion euros traded last year. Whether this law will reduce this, by successfully prohibiting some aspects of trading or by increasing the costs of compliance, remains to be seen.
However, my colleagues and I expect that whatever the final Act contains, there will be ways to limit the impact of the proposed legislation. On behalf of our bank and investment clients, we will be monitoring its development. At the moment it looks as if there will be no further big changes to it, however financial institutions as well as trading teams should start to get prepared.
Dr Annerose Tashiro
Rechtsanwältin / German Attorney-at-Law
Dr Annerose Tashiro, head of Cross-Border Restructuring & Insolvencies at Schultze & Braun. Schultze & Braun is Germany’s leading business recovery and insolvency law practice covering over one third of all of Germany’s 183 Insolvency Courts (unmatched by any other law firm). Founded over 50 years ago in Achern, Germany, Schultze & Braun now employs over 500 employees: attorneys, tax advisors and auditors provide a range of legal and financial advisory services to clients throughout Europe and also in America.
In the UK it particularly advises financial institutions and their UK legal teams on all matters related to business recovery, distressed debt and corporate insolvency matters in Germany.
Last year the German Ministry of Justice proposed a draft bill to protect against trading in distressed debt in Germany. The bill, known as the Risk Limitation Bill, is being discussed in specialised committees in the German Parliament (Bundestag) at present. Once politicians and experts have discussed the bill it will then be passed to parliament to be approved in the second legislative stage.
We see this bill as adopting the stance of the previous Vice Chancellor, Franz Müntefering, who famously called hedge funds and other financial institutions “locusts”. The German Ministry of Justice that proposed this protectionist measure is following through this rhetoric, with legislation that would limit the freedom and flexibility of the financial debt market.
If the bill were to be implemented as it currently stands, it would result in there being less debt available to trade in Germany, with hedge funds, private equity companies and other financial institutions finding it a lot harder to invest in distressed debt.
An important element of the bill is the proposal to make many sorts of commercial and private loans non-assignable, giving borrowers the ability to immediately block loans on being transferred to other lenders, such as hedge funds.
Another result of the proposals, is that it will make it a lot easier for borrowers to seek compensation for damages now – for instance if their house is repossessed unlawfully – a lender may no longer excuse itself for the lack of any negligence or other fault on their executing side.
Of course, with legislation there are always unintended consequences. Presumably banks will, as a consequence charge higher interest on non-tradable loans – putting up the cost for such loans, and perhaps causing more people and businesses to default because of the extra costs of borrowing.
Further amendments to the bill which is planned to come into force in summer 2008 propose that property loans may only be terminated if the borrower is more than 6 months in default.
The German Minister of Finance recently approached other equivalent G8 ministers to start to initiate international response, as an answer to the changing finance market in terms of risk and protection. According to press reports, he would even try to implement changes domestically if there is no consensus on the International or European basis.
Germany had one of the highest amounts of distressed debt investments in 2007, with an estimated 15 billion euros traded last year. Whether this law will reduce this, by successfully prohibiting some aspects of trading or by increasing the costs of compliance, remains to be seen.
However, my colleagues and I expect that whatever the final Act contains, there will be ways to limit the impact of the proposed legislation. On behalf of our bank and investment clients, we will be monitoring its development. At the moment it looks as if there will be no further big changes to it, however financial institutions as well as trading teams should start to get prepared.
Dr Annerose Tashiro
Rechtsanwältin / German Attorney-at-Law
Dr Annerose Tashiro, head of Cross-Border Restructuring & Insolvencies at Schultze & Braun. Schultze & Braun is Germany’s leading business recovery and insolvency law practice covering over one third of all of Germany’s 183 Insolvency Courts (unmatched by any other law firm). Founded over 50 years ago in Achern, Germany, Schultze & Braun now employs over 500 employees: attorneys, tax advisors and auditors provide a range of legal and financial advisory services to clients throughout Europe and also in America.
In the UK it particularly advises financial institutions and their UK legal teams on all matters related to business recovery, distressed debt and corporate insolvency matters in Germany.