IFLR 1000
The Guide to the World's Leading Financial Law Firms

CONTEXT AND TRENDS
Unlike the German economy, which has been on a steady upward trajectory for the past 18 months, the banking market has been far less predictable. "It's been mixed, I would say....

CONTEXT AND TRENDS

Unlike the German economy, which has been on a steady upward trajectory for the past 18 months, the banking market has been far less predictable. "It's been mixed, I would say. 2011 was still quite a good year but in 2012 I see a slowdown in activity," is one practice head's summary of the past 12 months.

After a positive start to 2011, lawyers report a change in the mood of the market around summer. With bankers concerned about meeting impending capital requirements to be implemented under Basel III and CRD IV in June 2012, their focus turned to their balance sheets. Greece's default coupled with several failed, high profile attempts to secure large syndicated loans, such as Blackstone's initial difficulties in financing the acquisition of Jack Wolfskin, further fuelled market uncertainty.

Lawyers report a "quite noticeable" reduction in the level of acquisition or leverage finance enquires, attributing the lack of activity to hesitant investors and companies. "We know that many German corporates have been considering acquisitions in the last year, but were sidestepping because of market uncertainties," says one finance partner. Very recently, some say the situation has improved. "We have a flow of acquisition related queries," remarks one partner, while admitting all deals are at a preliminary stage.

Presently, although liquidity concerns felt throughout the European banking community are less pronounced in Germany, the Eurozone crisis "still creates uncertainty". The implementation of strict capital requirements has also had an impact. "Banks' books are contracting, liquidity is contracting. That is a result of the new and anticipated regulatory framework we are working under," explains one lawyer. There is still, however, a good appetite for good corporate credit. "At a time when sovereign doesn't pay and credit among sovereigns is not good credit, the banks are very keen to get good names into their banking books. If there is a good case and the terms are reasonable there should not be a problem to refinance." For borrowers, who don't fall into the blue chip category, however, the cost of borrowing has inflated. Securing any type of financing is a far slower process as "banks have become conservative about the quality of documentation". Terms are stricter than they were a few years ago; facilities often include extensive security packages and unsecured deals may now need to be secured. Transactions have also become more complex. "If you look back a couple of years corporate loans were quite simple without security, now we see different financing products are all tied in to packages," says one lawyer.

A trend observed first in 2011, which continues, is financing transactions often combining debt and capital markets instruments. For major corporations, which need to refinance multibillion Euro facilities, or smaller operations which find bank financing too expensive, the bond market is becoming an increasingly important source of funding. Principally, this is due to two factors: restrictive lending practices on the part of European banks, forcing borrowers to explore other funding options and an increase in demand from investors. High-yield bonds have become especially popular when refinancing is necessary. "A full refinancing via the syndicate is not possible because the amounts are too large so a bond financing is set up. These are international bonds cross over or high-yield offerings," explains one partner. Additionally, Mittelstand companies, which can't secure affordable bank credit, have been successfully selling bonds on the Frankfurt exchange. Not technically high-yield as they don't contain the same security packages, they are attractive for both seller and buyer, offering relaxed listing rules for the issuer and far higher yield for retail investors. However, lawyers expect the "flurry of activity" to decline rapidly after the first default was reported in 2012.

With banks scaling back their exposure, looking to meet capital requirements, there have been a significant number of portfolios changing hands as banks look to get non-performing loans off their books. Unsurprisingly, real estate is the country's most active sector in regard to this. "There has been a reopening of the real estate M&A market," explains one partner. "The German real estate market is probably the only one which is doing well. In terms of commercial real estate, German funds are buying in and outside of Germany and are financing this with banks in the German market place, that's a very active market," says another. The number of alternative investors or funds with a stake in the market has been growing steadily. Looking of take advantage of the cut price distressed loan portfolios and unencumbered by the same regulations as banks, funds are apparently not only giving equity, but in some circumstances granting or acquiring loans and even replacing banks. "Depending on their strategy, these funds may buy loans from banks in an opportunistic or hedge fund approach. They are trying to get into the equity or they are trying to put larger loans into pieces and sell them so really loan trading again." One recent example of this saw Blackstone buy books from both RBS and Soc Gen.

RISING STARS

Baker & McKenzie
Oliver Socher

CONTEXT AND TRENDS
With bank financing expensive and the equity markets closed, debt has become a vital source of funding for established German companies. "For good names, the margins are still pretty low so it's a good time to borrow on the market," says one partner....

CONTEXT AND TRENDS

With bank financing expensive and the equity markets closed, debt has become a vital source of funding for established German companies. "For good names, the margins are still pretty low so it's a good time to borrow on the market," says one partner. Lawyers report that clients seem to see this as a temporary fix. "We have a number clients who are issuing bonds so they can refinance next year when they hope the market will have improved," explains one partner. Amongst the German legal profession, however, the consensus is that rather than a trend it is likely to become the standard form of financing. "Banks having to shrink their banking books will result, in the long term, in more companies getting to the capital markets at earlier stages because money there is cheaper than getting it from banks," says one lawyer.

The ongoing evolution within banks, which has seen interest rates drop for investors and all but the most reliable lenders shunned, has created an interesting segment of the German bond market. German Mittlestand (German small and medium enterprises) companies have been selling unsecured bonds to retail investors. "The so called SME market has been tapping the retail bond market directly without intermediaries such as banks or investment banks," explains one partner. These bonds are high-yield in return but without the covenant package or investor protection included in bonds of this type and with investors looking for better returns than low interest rates banks are currently offering, they are "ready to take risk again". "Your typical retail investor is giving money to banks in the form of DAX certificate or a structured basket, warrant or whatever, without any sort of collateral. It is a market that was almost completely destroyed with Lehman but now the speculators are back again," remarks one lawyer. Although in the latter half of 2011 and early 2012 the "Mittlestand bond market" was thriving with over €2 billion worth sold, recently it has trailed off after the first defaults. "The number of these issues has had a good start but it's getting a bit slower since you had the first issuers going a bit belly up and that cautioned investors a little bit," observes one lawyer.

Reputedly, institutional investors are behaving more cautiously, favouring secured debt. "Banks have had problems convincing investors to buy unsecured debt. Increasingly it is becoming more important for banks to issue any kind of covered or secured note issues," remarks one peer. This has left banks looking for financing to refinance with little choice but to oblige and, as a consequence, the German N Bond, structured and covered bonds have become extremely popular instruments.

On the regulatory side, Insolvency II and Basel III are expected to force banks and insurance companies to issue more debt. "All those notes outstanding which have been issued as tier 1 hybrid notes will need to be changed because these notes will no longer be accepted as tier 1 capital so we will see issues which are taking these structural requirements on board," says one lawyer. Additionally, upcoming revisions to the prospectus directive has generated work for firms. "We are frantically assisting clients who are trying to revise their bond programmes before the changes kick in," notes one lawyer.

MAJOR LATERAL HIRES

Berthold Kusserow
From: Linklaters
To: Allen & Overy

Jochen Seitz
From: Simmons & Simmons
To: Mayer Brown

RISING STARS

Gleiss Lutz
Kai Birke

CONTEXT AND TRENDS
Following a familiar pattern to the two previous years, the German equity market began strongly in 2011 and promptly closed midsummer. "If we start at the beginning of 2011, the markets were extremely hot....

CONTEXT AND TRENDS

Following a familiar pattern to the two previous years, the German equity market began strongly in 2011 and promptly closed midsummer. "If we start at the beginning of 2011, the markets were extremely hot. There were a number of high profile deals – the three largest being the IPOs of Hapag, Osram and Evonik. All three were subsequently pulled along with a number of smaller IPOs," laments one lawyer. After a succession of postponements marked a "horrible" end to the year, instructions began increasing again early in 2012. "It picked up right after Christmas with block trades and secondary deals," says one lawyer noting "the general mood in the equity market was much better." Months on, this did not translate into successful transactions. "It's been mostly convertible bonds and equity linked products and mostly in the planning stages. Overall the number of deals that have come to the market has been low," says one partner.

Before Facebook's disappointing debut, some German lawyers held a glimmer of hope that a disappointing 12 months for the equity markets might end positively. Unfortunately, the sceptics were right and in the month following Facebook's flop, Evonik's major shareholders pulled the plug on plans to float around 30% of the chemical company for the second time in ten months. If deemed a success, that deal was expected to encourage a number of issuers to launch protracted IPOs, the biggest among them Osram and Hapag Lloyd.

While Germany's economy seems immune to the problems engulfing Europe, its equity markets are clearly not. Lawyers apportion the blame firmly with the Euro crisis, which has diminished investor's confidence and which in hand has discouraged issuers. "The biggest issue was the European debt crisis. The equity markets came down although they were not a volatile as the debt markets. If you look at private equity investors who want to sell, you're not going to sell in a volatile market when you can't have best execution," reasons one equity partner.

The uncertain market has made issuers cautious, particularly those in private equity funds. A preference for preparing a more expensive prospectus with either dual or triple track, with a third option of a high-yield bond is noted among clients. Whereas a dual track prepares for the outcome of an IPO or an M&A transaction and triple includes an additional option for a bond to be used as "a dividend recap." One lawyer explains: "If you can't IPO the company or sell it you take out a dividend recap and you achieve that by raising debt in the high-yield market then paying yourself a dividend."

MAJOR LATERAL HIRES

Mark Devlin
From: Linklaters
To: Baker & McKenzie

Stephen Hutter
From: Shearman & Sterling
To: Skadden Arps Slate Meagher & Flom

Katja Kaulamo
From: Shearman & Sterling
To: Skadden Arps Slate Meagher & Flom

Christoph Vaupel
From: Linklaters
To: Taylor Wessing

CONTEXT AND TRENDS
Until 2009, it was almost impossible to issue high-yield bonds under German law as the legislation was inflexible prohibiting a number of features needed for this bond classification, such as allowing amendments to covenants post closing and for majority bond holder consent. That year, however, the new Bond Act was introduced and in 2010 the market saw the first German law governed high-yield bonds....

CONTEXT AND TRENDS

Until 2009, it was almost impossible to issue high-yield bonds under German law as the legislation was inflexible prohibiting a number of features needed for this bond classification, such as allowing amendments to covenants post closing and for majority bond holder consent. That year, however, the new Bond Act was introduced and in 2010 the market saw the first German law governed high-yield bonds. Although these early offerings are dismissed by some as more hybrid rather than high-yield because they lacked "the true covenant structure," they were the first sub-investment grade bonds issued under German law and paved the way for the recent issues such as Schmoltz & Bikenbauch, which include a "New York style covenant package".

Initially, with lawyers able to draft the binding documents in German, hesitant companies were encouraged to issue under German law, but there has not been the landslide of interest in these bonds that was expected. Primarily, the market has trailed off due to investor demand. "We had anticipated there would be more high-yield bonds issued under German law but there has been a backward trend to US law, which is to do with the fact that this is where they are sold and where the investments are," explains one lawyer. Schaeffller's recent €2 billion high-yield bond in 2012 is a prime example of this. "It was a dual tranche, Euro-Dollar deal but really the momentum and the marketing came out of New York," says one partner. "Unless the European market matures we're only going to see more pure New York governed deals."

Overall, lawyers categorise the current high-yield market as "bumpy". After a fairly strong 2011, which saw "quite some activity until mid December" on the US side, lawyers report it "downed" before opening up again in the states and Europe at the very end of the year. The majority of 2012 has been categorised by inconsistency "with quite some activity" in the first two months of the year followed by a slower March and April as the spreads widened and issuers hesitated. "There were very few priced in Europe in April," noted one lawyer. The States however is still a robust market. "We saw people go to the states to try and place US dollar denominated bonds there to benefit from the stronger market," says one lawyer.

Lawyers are generally optimistic about the prospects for the next 12 months. "I'm on market update calls with six or seven large banks who are in this business almost every other day listening to those guys it seems the market strengthened a little bit over the last one to two weeks." One driver for high-yield issuances has been the banks. Looking to alleviate their balance sheets, banks have encouraged borrowers to consider high-yield. "The high-yield market is driven by banks that are not keen to refinance the full volume. They want to deleverage and spread risk and are imposing on the creditor to use the high-yield market to refinance at least part of the outstanding credit," says one partner. Going forward, the trend to refinance via the high-yield market is expected to generate a great deal of activity. "If you look at the underlying data there needs to be quite a bit of high-yield activity just for the refinancing of existing deals. I guess the number that people use there needs to be €55 billion of high-yield to refinance existing transactions," explains one partner. The popularity of high-yield has also extended to investors seeking dividend recaps and companies needing to finance acquisitions.

CONTEXT AND TRENDS
Generally, the German structured finance market has been relatively subdued with only the less risky, "very traditional" products being considered by issuers. "The ABCB Conduit market is reasonably active," says one lawyer....

CONTEXT AND TRENDS

Generally, the German structured finance market has been relatively subdued with only the less risky, "very traditional" products being considered by issuers. "The ABCB Conduit market is reasonably active," says one lawyer. Others note their work has predominantly been limited to the securitisation of trade or auto loan receivables. With the restructuring of outstanding transactions still a "booming segment," however, lawyers are not overly concerned about revenues. "Restructuring CMBS and RMBS deals keeps us busy while we wait to see if it will pick up here like in the US," says one partner.

One developing trend has been the growth in private deals where the investors are predefined at the outset. Rather than the typical route of a transaction, beginning with an issuer seeking to securitise an asset and then offering it to the capital markets, lawyers are increasingly seeing deals designed specifically to meet investor demand. "You have two or three designated investors who want to invest in a certain portfolio and then there is a transaction which is tailor made to the needs of investors," explains one partner.

An interesting development in the last 12 months has been the reappearance of credit risk transfers or synthetic securitisations, which had all but disappeared in the wake of the crisis. Whereas, historically, these deals were used to improve liquidity they are now being utilised for capital relief purposes. "Banks need to reduce their risk rated assets and given that sales of whole portfolios are not straightforward, if the underlying assets are sound there is the investor interest in synthetic deals," explains one partner. With banks unwilling to drop the price of their loan portfolios but required to reduce risks, these synthetic deals provide an interim solution, which have highly beneficial structures for banks. "You may have one of €1 billion or slightly above €1 billion portfolio and 50% of the mezzanine piece could be €50 million. If you have an investor who is ready to put down €50 million to invest in this bond or security you get a capital relief, which is in the same size because the whole portfolio for regulatory purposes will be considered to be off balance sheet, although the banks will still own the portfolio," remarks one partner. Another option for banks seeking liquidity is to hand bonds over to the ECB (European Central Bank) and "get the cash through the door". Lawyers note a number of deals of this type are ongoing and that "the ECB has consistently relaxed the standards of what type of collateral it will expect."

CONTEXT AND TRENDS
Severely hampered by the European macroeconomic situation outside its borders, the German M&A market is stagnating. "What we see is a sideways market," laments one lawyer....

CONTEXT AND TRENDS

Severely hampered by the European macroeconomic situation outside its borders, the German M&A market is stagnating. "What we see is a sideways market," laments one lawyer. There should be activity, finance is available, particularly for investment grade clients and most German companies are performing well, meaning that as buyers they are in a strong position to expand while for investors they represent good targets. Firms report a strong pipeline of deals but say there are a number of factors hindering transactions. One is that the equity markets are firmly shut. "If it were not for the Eurocrisis, we would see a number of substantial IPOs, which is always important for M&A to show that the exit route is open," observes one partner. The other problem is pricing. "Whenever you have volatility then the buyers are not prepared to pay attractive prices and then those who are not forced to sell withhold and that is the situation we are in," says one lawyer.

On the buy side, another challenge has been getting deals approved. "Clients are less willing to take risk. Internally they have to justify why we are doing this transaction rather than not doing one, or doing another one," observes one partner.

A good proportion of the activity there has been has centred around the energy sector with a number of deals seeing stakes in grid operators change hands. One such transaction saw Hamburg buy a 25% stake in the network that feeds the city in what was essentially a de- privatisation. Lawyers say this transaction has encouraged other municipalities to consider the same strategy. "Some years ago all the big cities sold their energy grids, they privatised everything to raise money. Now they start buying their stuff back. Recently I hear that others are seeing Hamburg as an example of how to do this and there big cities are looking at opportunities," says one lawyer. On the renewable side, with extensive subsidy cuts leading to insolvencies there have been some distressed transactions.

Where there have been deals some interesting trends have emerged. Inbound investment into Germany from China is one area, which is said to be on the increase. Although not a entirely new trend, there is a different element to the deals. Whereas in 2011 lawyers noted Chinese companies acquiring German businesses for the technology, recently these transactions have a wider significance. "The Chinese are buying into engineering companies mainly. Not only for the IP, but the brand, the production and the network. It's not only taking something back to China and improving your own production," says one M&A partner.

A second development noted is that a culture of public takeovers appears to be developing. "There are much more than last year," remarks one lawyer. "These are not plain vanilla takeovers, a lot are contested, something fairly unfamiliar to the German market. These are all strategic transactions having thought about it for some while and the price is just right." What is also interesting is that Anglo American tactics are being adopted. "From a German perspective its quite interesting to see you now have inter looping entities – so competitors buying significant stakes in the targets trying to hinder the acceptance ratio being met and once the takeover falls through they approach the former bidder to start the transaction again together," says one partner.

CONTEXT AND TRENDS
Over the last 12 months, activity in the private equity market has fluctuated. With financing available again, 2011 started positively and the deals on the market were in the "upper mid cap, lower big ticket" end of a value which had become scarce in Germany....

CONTEXT AND TRENDS

Over the last 12 months, activity in the private equity market has fluctuated. With financing available again, 2011 started positively and the deals on the market were in the "upper mid cap, lower big ticket" end of a value which had become scarce in Germany. The most prominent examples were the sale of HRE for €600million, which was the largest transaction in the last 12 months, and the sale Jack Wolfskin. One lawyer notes: "The leverage on both transactions was pretty high, almost back to old days, like around six times. People thought that's all good news the market is back." This, however, proved a false dawn. When the banks financing the Jack Wolfskin deal couldn't syndicate it, "the market soured".

Reluctant to be left over-exposed, the banks would not finance any of the larger transactions. However, activity was not completely abated. Where viable, private equity houses looked at alternative financing models for transactions. "Most clients made themselves less dependent on financing opportunities, be it by going all equity or using vendor notes. Sometimes they even will go into pipe (PPE -private investment into private equity) transactions where they will buy smaller stakes." Additionally, on some larger deals, funds have looked at using bonds to replace bank finance. Although this activity ensured the most prominent firms' revenues were not too severely dented, the Euro crisis meant it was generally a quiet second half of the year for private equity lawyers. "There was a whole standstill for leveraged buyouts," observes one partner.

After an inconsistent 2011, the private equity market appeared to have stabilised as the summer of 2012 approached, with banks willing to finance deals and private equity houses looking at secondaries to raise funds for the next round of investments. "Leverage is available, everyone is bullish again," says one partner. While optimistic, lawyers are hesitant about forecasting "a bumper year". "We are really confident in light of the pipeline but it is completely uncertain when the window will close. It can happen very soon whenever there is insecurity on the capital markets with the Eurozone," notes one lawyer.

One area private equity funds have been active is in buying loan portfolios from banks looking to reduce their exposure. Going forward, it will be interesting to see what strategy these funds adopt. "We will see a very versatile lender structure and that will increase and create new dynamics in the market. How to structure, what is the exit corridor? Is it one or two years? Is it a more middle investment structure?" contemplates one lawyer.

CONTEXT AND TRENDS
Within Germany, project finance mandates are currently limited to transactions within the energy sector and, on the infrastructure side, the ongoing expansion of the road network. Outside of the country, lawyers have been active for German institutions backing international deals....

CONTEXT AND TRENDS

Within Germany, project finance mandates are currently limited to transactions within the energy sector and, on the infrastructure side, the ongoing expansion of the road network.

Outside of the country, lawyers have been active for German institutions backing international deals. "It's fair to say there has been more cross border work, involving German sponsors or German financial institutions," notes one partner.

With liquidity tight in the banking sector, securing financing has become difficult for sponsors and they have had to diversify their funding sources. "There is greater dependence on multilaterals such as EIB (European Investment Bank), EBRD (European Bank for Reconstruction and Development), Korean Export Agencies, IFC (International Finance Corporation), to name a few. It really is a question of where, first and foremost, sponsors try to secure support from the multilaterals and the export credit agencies and then look what is left on the commercial markets," says one lawyer. Sovereign wealth or infrastructure funds are also becoming more important with many taking financial stakes in projects to fill liquidity gaps. "They bring a different dimension. They can be more conservative; they are driven by one thing and that's return," says one partner.

As a way of compensating for potential liquidity issues in the future, discussions have raised the prospect of a movement towards project bonds. "There's been a lot of interest in that and that technology is likely to become more prevalent in the west in the next 12 to 24 months," says one partner. "We have been invited by a number of the German institutions to go and present to them financing through project bonds. If there is a need to do that to tap that liquidity and other countries in Europe are doing it then I'm sure Germany won't be far behind."

CONTEXT AND TRENDS
With troubled companies migrating their holding companies to the UK or France to benefit from the more debtor friendly legislation, Germany overhauled its somewhat outdated insolvency laws in 2012. The new code, which was implemented in March, is designed to facilitate restructuring out of insolvency in a proceeding similar to the English scheme of arrangement....

CONTEXT AND TRENDS

With troubled companies migrating their holding companies to the UK or France to benefit from the more debtor friendly legislation, Germany overhauled its somewhat outdated insolvency laws in 2012. The new code, which was implemented in March, is designed to facilitate restructuring out of insolvency in a proceeding similar to the English scheme of arrangement. Key amendments to the law include: enabling debt for equity-swaps, allowing creditors the opportunity to elect their preferred administrator through a creditor's committee and incorporating what has become known as the "protective shield" into the law, where management can be put in place to reorganise a borrower's debt.

Most lawyers have welcomed the final legislation, but for a minority the new law fails to achieve its main goal of aligning itself with the UK and France where an out of court restructuring in insolvency is possible. "The devil is in the detail. All the new possibilities are only available if you enter into an insolvency proceedings, which means all stake holders, employees, suppliers, service providers, the pension funds, the clients, they are all dragged into insolvency proceedings and are all at the negotiation table. You don't want this, you want to work with the ones who can provide the success story, being the financial creditors and only the financial creditors," says one partner.

Another recent legislative development, which could have negative implications for a number of German companies, is the precedent set in the case of Pfleiderer, a German wood manufacturer which attempted an out of court restructuring of a bond. A minority of the bondholders objected to the restructuring and took the case to court where the restructuring was ruled to be invalid as the bond was issued prior to the implementation of the German Bond restructuring act. "From a market perspective it is a very bad signal. If I was asked tomorrow how to do a bond restructuring, I would carefully consider the options under the German act but also under other, more friendly jurisdictions," notes one practice head.

With the German economy prospering it would be easy to assume restructuring and insolvency work might dry up. But, with banks adapting to new capital requirements refinancing conditions are dire and even solid companies are looking to restructure. Companies particularly affected are those that took on relatively cheap mezzanine loans prior to the crisis, which simply no longer exist, not at the same price, at least. "A lot of German companies tried to navigate the crisis by going on saving mode, with the hope and the expectation that they could get a refinancing on board in 2012, 2013. Unfortunately, the developments inter alia in Greece cut across this strategy," explains one partner. This has meant, highly overleveraged companies faced with the prospect of cheap loans maturing this year and no affordable financing available, have had no alternative but to go into a restructuring.

Another catalyst for restructurings is related to the position of European banks. Under pressure to shrink down balance sheets, domestic and international lenders with exposure in Germany have been selling off "single loans from corporates" and "entire non performing loan portfolios" particularly in the real estate sector. The buyers have been investment funds, simply looking for "a good deal" or anticipating a "loan to own strategy". Either way, restructuring lawyers expect the transactions to create a good deal flow. "The funds will restructure the loans if they are looking to own the company or to sell it to either recover more than they purchased it for," explains one partner.