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"No-one knows what kind of impact it’s going to have because we have literally nothing with which we can compare it"
Volker Beissenhirtz, Schultze & Braun |
Germany’s distressed debt market could be slashed in size by surprise provisions contained in a new bill, published by the country’s ministry of justice on January 23. The Risikobegrenzungsgesetz – risk limitation law – is the first bill to come out of Germany’s heated public debate about the merits of private equity and hedge funds, which has involved these investors being characterized as "locusts".
Volker Beissenhirtz, head of the Berlin office of insolvency law specialists Schultze & Braun, says that the bill was originally intended to constrain hedge funds that band together to sway shareholder votes. However, late in the drafting process, extra provisions were inserted that seek to give borrowers more power and protection in the market for non-performing and sub-performing loans, in which foreign funds and banks have been the principal investors. There were an estimated €15 billion in trades in that market last year, he says.
Horse trading
The bill’s progress is being held up by a round of political horse-trading but there appear to be no objections in principle and it could be passed into law as early as April, says Beissenhirtz.
If adopted, it would require banks to ask borrowers whether they are willing to allow their loans to be sold to a third party at a later date – if borrowers decline to give this permission, banks will be obliged to hold the loan to maturity, restricting the amount of debt available for trading. "No-one knows what kind of impact it’s going to have because we have literally nothing with which we can compare it," he says. "There’s no precedent for this kind of change and it came as a definite surprise."
Brave face
Debt investors are putting a brave face on the new rule, buoyed up by indications that lenders are unwilling to let themselves be dictated to by their borrowers.
"The impact shouldn’t be too dramatic," says a London-based trader who specializes in German distressed debt. "I think it’s more a case that after all the talk, politicians felt they had to act."
He says that lenders are planning to penalize borrowers that refuse to allow their loans to be traded – as much as a double-digit basis point increase could be tacked onto the cost of the loan. "The feedback I’ve been getting is that lenders want to keep their options open – and that means being able to sell distressed loans rather than working them out. So what they’re planning to do is price the loans in such a way that borrowers are strongly incentivized to allow them to be traded."