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

After the nationalised bank Hypo Real Estate (HRE) failed last summer's stress tests you can't blame its compatriots for being cautious, particularly when HRE transferred €173 billion in non-strategic assets and risk positions to its bad bank in October 2010. So banks, understandably, prepared for July's assessment vigorously, bolstering reserves with large capital increases....

After the nationalised bank Hypo Real Estate (HRE) failed last summer's stress tests you can't blame its compatriots for being cautious, particularly when HRE transferred €173 billion in non-strategic assets and risk positions to its bad bank in October 2010. So banks, understandably, prepared for July's assessment vigorously, bolstering reserves with large capital increases.

Improved stability within the majority of the German institutions is being reflected in the market and things are gradually picking up. "I think the development was a positive one in the market. I think a year ago liquidity was much tighter, there was less finance around and the insecurity was very high over how things would develop," says one lawyer. Another banking partner agrees: "There is a lot of positive feeling amongst the banks about the market in general,"

In the latter half of 2010 it was a different story, refinancing was the predominate form of work and bonds had emerged as the only means of affordable financing. "The bank bond market that has developed in Germany over the last few years, it doesn't only do the refinancing, you have got it doing financing," explains one partner.

But this trend has not fully materialised. The exception being when companies need to service a large amount of debt: "When corporates have a massive amount of debt, especially on the leveraged side, that was refinanced by a various mix of bonds and loans and these bonds were typically high-yields."

All the conventional modes of financing are, however, available and transactions utilising them are becoming more prevalent: "Deal volumes are comparatively modest to what we saw in the heyday but they are going up. Leverage which banks permit is going up," says another lawyer.

Some banks are offering deals with relatively little credit protection as an incentive for hesitant borrowers: "We see aggressive structures. It's amazing. The financial crisis sometimes resulted in a grinding halt. This has changed," explains another partner.

Several lawyers confirmed that they had even heard whispers of covenant-lite loans in Germany. "I'm not sure how quick it's going to be, but I'm noticing murmurs in the market of covenant-lites, it's sort of said in the quarters here by the banks with a bit of a smirk on their face saying: 'It's never going to happen here.' We don't know. The banks are keen to make their money work for them like anyone else so they are going to have to be robust and push internally for the credit approval ratings the private equity firms are getting from other banks," explains one partner.

Another interesting development is the renaissance of the classic syndicated loan as a back-up or general purpose facility. While the economy is thriving and margins are low, lenders are taking their chances to lock in funds for longer periods: "They are looking at five year maturities rather than three to two as it has been previously because 50% of the margin has evaporated," says one partner.

"We've never been so busy," says one debt capital markets lawyer. The volatility that has pervaded the market has subsided and firms report a reliably stable deal-flow....

"We've never been so busy," says one debt capital markets lawyer. The volatility that has pervaded the market has subsided and firms report a reliably stable deal-flow. "We have seen the deals and business is coming back in all areas across the board," says another partner.

Debt markets and firms' practices continued to benefit from the absence of affordable bank lending and the increased attractiveness of bonds. "One trend has been for corporates to fund themselves directly via the capital markets [and] I'm not talking about seasoned issuers; we had a series of debt Eurobonds and we had high-yield bonds from first-time issuers," notes one partner. Despite the banking market re-emerging, lawyers feel this will continue to be a reliable source of work. "The debt Eurobond issuer topic will be ongoing. There is a real tendency to dis-intermediate, cut out the middle-man, the bank, and refinance in the capital markets and take no risk," says one partner.

July 2010 saw the first high-yield bond issued under German law since the changes to the country's bond legislation in 2009, which allowed for amendments to be made to the covenants after bonds had been issued. Previously sold under US law, German high-yield bonds are being utilised to finance acquisitions and to refinance, particularly when issuers need to service a large amount of debt. "One of the features last year was where a corporate had massive debt, especially on the leveraged side, that was financed by a combination of loans and bonds and that was typically high-yield." Some lawyers are quick to point out that as yet no true German high-yield market exists but there is an expectation across the continent that it could develop into more than just a niche market in Europe.

The slight recovery of the equity markets and buoyant debt markets has reduced the popularity of convertibles bonds. "The convertible market is very subdued. The increase in straight equity and debt work has seen a reduction in this type of asset class," explains a lawyer. Hybrids have, however, become a popular choice among banks as they support core Tier I capital requirements under CRD II. Ensuring financial institutions are in line with European capital requirements has created a good deal of work for firms: "We are advising our bank clients and some owners of credit institutions on how to go about their capital base, their own funds base," says one lawyer. CRD IV was announced in July 2011 and will be begin implementation into law in January 2013. "It's not long for banks to prepare," says one lawyer, "We expect a flurry deals."

"There is no stopping in the development of the legal framework and everybody has to prepare for, and adapt to, the legal changes and requirements plus the market forces."

The optimism engendered by a flurry of IPO activity in early 2010 has fallen away in the turmoil of the European sovereign debt crisis and investors are unwilling to gamble in what are uncertain times. "We had a good first half of the year in 2010 then the second half was, from an IPO perspective, disappointing for all of us," says a lawyer....

The optimism engendered by a flurry of IPO activity in early 2010 has fallen away in the turmoil of the European sovereign debt crisis and investors are unwilling to gamble in what are uncertain times. "We had a good first half of the year in 2010 then the second half was, from an IPO perspective, disappointing for all of us," says a lawyer. "The German economy is very strong, so the IPO market would be a strong market but it all depends on whether the market stabilises and whether Greece and the respective problems will be solved or not."

Lawyers point to a pipeline of deals but admit only the large reliable companies succeed. "The market is active in that I would say there are 10 to 12 IPOs that people are working on, but given the uncertainty around the market, deals especially private equity exits, have been postponed or put on hold. You can work on the large IPOs like Ratiopharm or Evonik, which are publically announced as multibillion for the second half of 2011, but those under €500 million are difficult."

Capital increases drove the equity markets in the first half of 2011 and filled lawyers' boots in the absence of other activity. The most significant of these were completed by Porsche for €5 billion, Commerzbank for €11 billion and Deutsche Bank for €10 billion, its largest issue ever. "The current market is very, very nervous. It's easier to place a capital increase because the company is already known to investors and maybe has a long standing, [rather] than to go public and do an IPO which investors look very diligently into," says one lawyer.

A continuing trend among issuers is the preference to take dual-track option in regards to preparing the prospectus: "Given the volatile market there is increasing interest to have it as a dual-track structure so that very late in the transaction they can decide whether it goes the M&A or IPO route," notes a lawyer.

Another development was Deutsche Börse's $9.7 billion merger with the NYSE to form the world's largest exchange operator in July 2011. The deal still faces anti-trust hurdles on both sides of the Atlantic, but if it is a success, it is anticipated that it will cut over heads by €300 million annually and significantly boost revenues.

The reputation of securitisation took a battering in the aftermath of the financial crisis but the market is now adapting to the new regulated climate. "Through the new rules we basically have to find a new standard in the market....

The reputation of securitisation took a battering in the aftermath of the financial crisis but the market is now adapting to the new regulated climate. "Through the new rules we basically have to find a new standard in the market. We were educating the market. It's simply on the plate so you have to deal with it. There's no single standard but I think the market is coping quite well," says a partner.

Regulatory advice is filling a void left by transactional work for some firms as they try to ensure deals adhere to the new parameters. "We have diversified into the regulatory area. On the Risk Potential Rules, the EU directive legislation for securitisations, at the moment it is very work intensive because we feel more and more transactions being structured again," says one lawyer.

Certain asset classes such as CDOs and CLOs have become rare and this, combined with a general lack of conventional work, has pushed some firms to shift focus: "Because the market last year was quite slow [and] there were few transactions, we have started diversifying, still in structured finance, but with a slightly different angle, like derivatives [and] asset-based lending transactions, where there's a structured element."

The evolution of the market aside, lawyers do note an increase in general activity. "We certainly see a pickup in the securitisation market since about half a year ago [Q4 2010]," says one partner. The most resilient asset class has, unsurprisingly, been auto-loan receivables. "Car loan and car lease sector the transactions have really picked up in that market," says one lawyer. Real-estate securitisations are still, however, non-existent.

Restructuring existing CMBS and RMBS transactions is providing the bulk of work for law firms: "It's an ongoing trend, the restructuring of CMBS and RNBS transactions. Quite dramatic and martial restructurings," explains a securitisation specialist.

The German government's pledge to phase out nuclear energy completely by 2022 means renewable projects will create a great deal of instructions for lawyers in numerous practice areas, and it is hoped, in structured finance. "We see a lot of interest in renewable energy financings and the potential of that being securitised or refinanced by a restructured covered bond," says one partner.

While not as resilient as the country's economy, the M&A market is showing signs of recovery. Firms note that buyers are stimulating the market, German companies are cash rich and banks have built up a capital base and can afford to back them again so, says one partner, "generally there is financing available"....

While not as resilient as the country's economy, the M&A market is showing signs of recovery. Firms note that buyers are stimulating the market, German companies are cash rich and banks have built up a capital base and can afford to back them again so, says one partner, "generally there is financing available".

"I think a confidence has returned to the players. Everyone was shocked after the financial crisis and looking to sort their portfolios out, definitely on the German side of the market, now people are very confident about their ability to service debt," says one partner.

A lack of targets is the main hindrance. "In Germany the real economy recovered pretty well last year [2010]. That somehow took away the pressure from sellers to put assets on the block. In particular, and as long as, they feel that the valuation levels are not back at a level they consider to be something appropriate," says a lawyer.

While the level of distressed work has subsided, firms expect more to come from the financial sector, citing the heavily subsidised Hypo Real Estate, which was bailed out in July 2010 on condition the bank would divest of 85% of its business, as one example, as well as two of the savings banks, Bayern LB and West LB, which are likely to sell assets.

The hostile takeover bid for Hochief by Spanish construction company ACS, and the more amicable merger between Deutsche Börse with the New York Stock Exchange, illustrate a new interest from foreign investors in acquiring German assets. "I think we saw more interest from corporates outside Germany buying in to Germany," says one lawyer. Another agrees: "The firm sees quite a lot of inbound M&A from the US and, interestingly China, and India."

On the legislative side, the German takeover directive is due for review at the end of this year, an issue which has become a highly politicised since the acrimonious hostile takeover of Hochtief that was dragged out for nine months and culminated in the resignation of the German construction group's supervisory board.

Currently under German law a prospective buyer is required to make a tender offer once it holds 30% of a company's shares, but if it fails it does not have to make any additional bid and can continue to increase its stake, without seeking shareholder approval. According to one corporate partner "the takeover directive is due to be reviewed by the commission by the end of this year. It may be also that the German legislator will look more closely at the German take-over code. No one would be surprised if there were changes."

A mood of cautious optimism prevails among private equity lawyers after a series of successful exits, but it may be ill-founded. There is financing available and there has been renewed activity in terms of secondary exits but the primary market is still virtually non-existent....

A mood of cautious optimism prevails among private equity lawyers after a series of successful exits, but it may be ill-founded. There is financing available and there has been renewed activity in terms of secondary exits but the primary market is still virtually non-existent. "It's mainly secondary buyouts not primary; we are still lacking that in the market. We are waiting for it and holding our breath but the fact still remains that the large German corporates they are loaded with money and there is no direct need for them to off-load non-core business," explains a private equity lawyer.

A clear indication that normal service is resuming, at least on the sponsor side, is that the acquisition of targets that do arise are fiercely contested by private equity houses and investment banks. "Sellers have been very successful in stimulating a competitive process for exits. More and more, strategic investors find themselves in competition with financial investors," observes one partner.

An interesting development on the financing side of equity transactions has been the rise of the bond: "We're seeing an increased element of bond financing put in to the structuring. It's largely pricing and availability. It's something you can tap at extremely short notice," says one partner.

Lawyers point out that high-yield is definitely on the rise, having been making segues into the German market since the first were issued under the German law in July 2010 and are expected to be utilised more frequently in future. One partner heralds "the renaissance of high-yield bonds which had been practically non-existent in acquisition finance at least in Germany. There's been quite a significant appetite for them recently".

With $73 billion in acquisition financing due in Germany in the next few years there is expected to be a wave of restructuring and this trend towards bond financing is expected to continue. "Our finance, high-yield and restructuring experts expect an increased need for advising among private equity sponsors and portfolio companies with a view towards restructuring, renegotiating credit lines and conditions for converting debt to other financial instruments such as high-yield bonds," explains one private equity lawyer.

One note of caution for lawyers and sponsors however, is that tax authorities are reputedly taking more of an interest in private equity structures in Germany which are being heavily scrutinised: "The tax authorities are keeping a closer eye on acquisition structures for private equity companies. There have been some articles by members of the tax authorities who have indicated that they would want to keep some targets under a closer watch," explains one lawyer.

Renewable energy continues to dominate the project finance sphere in Germany. The countries first off-shore wind farm delivered through a project financing closed in February 2011 and lawyers attest that they are working on others which are in formative stages, in addition to solar projects in more viable climates....

Renewable energy continues to dominate the project finance sphere in Germany. The countries first off-shore wind farm delivered through a project financing closed in February 2011 and lawyers attest that they are working on others which are in formative stages, in addition to solar projects in more viable climates. "What we've done in the last 12 months is many, many renewable deals. We are about to close two offshore wind financings and we've also been very busy on solar deals some of them in Germany but also a couple of them in other countries mainly France but also Italy has just started," explains one lawyer.

After the Japanese Fukishima nuclear disaster, the German government closed seven reactors temporarily and announced plans to eradicate the use nuclear power completely by 2022 rather than in 2036 as it had originally planned. As the country currently only has the one fully operational wind farm these revelations have only served to further invigorate the market and projects lawyers are eagerly anticipating a dependable deal flow for years to come that will be engendered by these plans. "Nuclear power accounts for 22% of our needs, which is quite huge" says one partner. "We have many industries which means for us there will be very large projects on the renewable side: offshore wind; onshore wind; waterpower; solar."

There is a perceived problem in the government's plans, the existing power grid does not extend from the north to the remainder of Germany. With wind energy the country's only viable option as the climate will not support solar and the north the only area with a coast to generate sufficient wind power, the grid will need to be expanded to transport this energy to the remainder of the landlocked country. This of course only means one thing: more projects. "There will be a huge spend in upgrading and expanding the national power grid and we're probably talking about the investment of several billion Euros into our power grid, which is an excellent trend and an excellent development for lawyers," explains an animated project finance lawyer.

Investors are aware of the potential and lawyers anticipate there will be attempts to acquire interests in projects which are already active. One lawyer remarked on this new trend: "What we also expect is that private equity houses, their infrastructure funds will invest into existing project financings and we also see secondary trade in projects."

Economic stability has dampened the German restructuring market to a certain extent and the number of insolvencies has plateaued rather than rising, as anticipated. "The overall restructuring market has been less active than people actually thought it would be and the situation is still that the upswing in the market has reduced," explains one lawyer....

Economic stability has dampened the German restructuring market to a certain extent and the number of insolvencies has plateaued rather than rising, as anticipated. "The overall restructuring market has been less active than people actually thought it would be and the situation is still that the upswing in the market has reduced," explains one lawyer.

However, there are sectors in which over-leveraged companies are struggling. "We are talking about mezzanine finance companies, we are talking about shipping, where the banks postpone, postpone, postpone, we are talking about the financial sector, which we think will all play a role in the future," says one insolvency lawyer. Another anticipated driver for work is the numerous mezzanine loans and leveraged finance transactions which are due to mature in the coming few years: "There are mezzanine programmes outstanding and this year or the next will be when a lot of leveraged transactions have to be refunded," says one partner.

Despite the countries revival, the market has not been quiet and one interesting development lawyers note is that creditors have shown a willingness to find solutions out of court. "There has been the trend in Germany to have a broad toolbox, either lender-lead restructuring, as in the case of Primacom, or trusteeships structures," observes a restructuring partner. "We are seeing more debt for equity swaps and, in particular, we expect to see this by way of German bond restructuring which we think will be a trend in next 24 months."

Germany's legal and business communities are eagerly awaiting ESUG, the reform of the current German insolvency code, which it is hoped, when implemented, will facilitate smoother, more restructuring-friendly insolvencies. "We are looking forward to our current insolvency reform which would bring us to, or at least enable us to, be a little more restructuring friendly. Some important flaws will be corrected so they can compete with the UK," says one partner.

Another notable legal development was the German restructuring act or Restrukturierungsgesetz to use its native language. Implemented in January 2011, the act is intended to allow all banks, but particularly those whose demise could affect the financial markets, to either restructure or wind-down through a smoother transitional period. The act also introduced an annual bank levy, which German financial institutions are now obliged to contribute to annually, for a restructuring fund that will be used by banks in crisis.