Distressed Debt Investors

1
Distressed Debt Investors Deals and Deal
Structure That Work

• Peter H. Hoegen
• Allen Overy LLP
• Frankfurt, 5th October 2005

2
What is Distressed Debt ?

• No statutory definition for distressed debt
• Defaulted loans for more than 90 days on a
  material credit obligation (see Basel II)
• Distressed Debt
• Large single and mostly corporate loan (Groß- und
  Mittel-standskredite)
• Focus on restructuring or individual exit
  strategies
• Increasing secondary trading market
• Non-performing Loans (NPLs)
• Portfolio of consumer or commercial (mortgage)
  loans
• Individual loan of less importance - focus on
  servicing
• Nearly established market

3
What are the different Loan Baskets ?

• NPLs
• Loans which are in default for a lengthy period
  (90 days) of time and either have been terminated
  or will be terminated (Non-Performing Loans)
• Restructuring Loans
• Loans which are subject to restructuring measures
• Sub-performing (watch list) Loans
• Loans with first indications of financial
  difficulties or deterioration of assets
• Mixed portfolios contain often a bulk of NPLs,
  Watch-list Loans and Restructuring Loans

4
Transaction Structures for Distressed Debt

• True Sale Transaction - Asset Deal
• Non-recourse transfer of credit risk to the buyer
  
• Sale and purchase of loan receivables and
  security
• Transfer by way of assignment or transfer of
  contract
• Sub-participation / Risk-participation
• No transfer of assets
• (funded) sub-participation
• (unfunded) risk participation
• Asset deal combined with sub-participation or as
  fall-back-structure
• Joint Ventures / Platform structures

5
Distressed Debt - How is an Asset Deal structured
?
Loan / Security
Existing Lender / Seller
Borrower
SPA
Transfer
Assignment of claim (in case of fully drawn
loans) No consent required
Transfer of contract (in case of undrawn
loans) Consent required
New Lender / Buyer
6
Distressed Debt - How is a Sub-participation
structured ?
Loan / Security
Lender
Borrower
Sub-parti- cipation
No Transfer
Sub-participation funded
Risk-participation non-funded
Participant
7
What are the Contractual Issues?

• Nature of the Relevant Loans
• Term loan (fully drawn secured unsecured
  amortising)
• Revolving credit facility (drawn - secured
  unsecured)
• Syndicated loan
• Terminated or non-terminated loans
• Transferability of Loans and related Security
• Transfer clause (not market standard in domestic
  styled transaction)
• Accessory and non-accessory security
• Other Limitations stemming from
• Pooling arrangement (Sicherheiten-Poolvertrag)
• Standstill / deferral agreements
• KfW (DtA) refinanced loans

8
What are the Key Legal Issues ?

• Banking Secrecy
• Terminated loan or transfer clause agreed ?
• According to a highly disputed decision of the
  Court of Appeal (Frankfurt) a breach of banking
  secrecy could invalidate the assignment
• Data Protection Law
• Application typically limited to individual
  persons and partnerships with individual persons
  being personally liable
• Banking licence
• No banking licence for purchase and enforcement
  of receivables
• Banking licence required for banking business
  activities

9
What are the Key Legal Issues ? (Cont.)

• Servicing
• Licence required pursuant to the Legal Services
  Act
• VAT
• Buyer may under certain conditions be subject to
  VAT
• Equitable Subordination
• If loan has to be qualified as capital replacing
  loan
• Voidability by Reason of Insolvency
• Taking of additional security when debtor was in
  a financial crisis

10
Documentation Standard

• International standard (LMA / LSTA) versus German
  style (the latter at least for transfer of
  assets)
• Transaction Documents
• Confidentiality Agreement
• Trade Confirmation (reference to LMA standard
  reps)
• Transfer Agreement / Assignment Agreement
• Participation Agreement
• Pricing Letter

11
What are the Exit Strategies?

• Restructuring
• Selling-off Receivables
• Securitisation
• Enforcement
• Compulsory administration compulsory sale
  private sale
• Insolvency of the Borrower
• Secured lender as preferred creditor
• Takeover of Assets
• Purchase of properties
• Debt Equity Swap
• Consent of shareholders required

12
Distressed Debt Investors Deals and Deal
Structure That Work

• Peter H. Hoegen
• Allen Overy LLP
• Frankfurt, 5th October 2005