Structured lending and securitisation in Germany: overview

A Q&A guide to structured finance and securitisation law in Germany.

This Q&A provides an overview of, among others, the markets and legal regimes, issues relating to the SPV and the securities issued, transferring the receivables, dealing with security and risk, cash flow, ratings, tax issues, variations to the securitisation structure and reform proposals.

To compare answers across multiple jurisdictions, visit the Structured lending and securitisation Country Q&A tool.

This Q&A is part of the multi-jurisdictional guide to structured finance and securitisation. For a full list of contents visit www.practicallaw.com/securitisation-mjg.

Ingrid Kalisch, Kaye Scholer LLP
Contents

Market and legal regime

1. Please give a brief overview of the securitisation market in your jurisdiction. In particular:
  • How active and/or developed is the market and what notable transactions and new structures have taken place recently?

  • To what extent have central bank liquidity schemes assisted the securitisation market in your jurisdiction? Were retained securitisations common in the last 12 months?

  • Is securitisation particularly concentrated in certain industry sectors?

2010 saw a recovery of the German securitisation market, at least in comparison to the very low level of market activity in 2009. However, activity levels are not as high as before the financial crisis. In addition, the recovery applies only to certain asset classes, in particular, auto loans, whereas activity levels in relation to other asset classes such as collateralised loan obligations (CLOs) of small and medium-sized enterprise (SME) loan portfolios and residential mortgage-backed securities (RMBS) remained very much dormant.

In 2010, about 11 German auto asset-backed securities (ABS) deals with a value of EUR6.3 billion (as at 1 May 2011, US$1 was about EUR0.7) were structured and eight of them also placed (three of them by public syndication and five by private sale). It is understood that the retained deals were used for the European Central Bank (ECB) funding purposes. The 2010 trend largely continued in early 2011, with a number of auto loan securitisations coming to the market in the first five months.

The private placement of an unrated synthetic securitisation of German SME loans may be a signal of a changing market appetite. Market participants also seem to expect that commercial mortgage-backed securities (CMBS) will come back to the markets, although at this point it is rather a European, and not necessarily German, view. In Germany real estate loans have traditionally been refinanced to a large extent by covered bonds and contrary to the RMBS and CMBS markets the covered bond market has been active in 2010.

 
2. Is there a specific legislative regime within which securitisations in your jurisdiction are carried out? In particular:
  • What are the main laws governing securitisations?

  • Is there a regulatory authority?

Germany has not enacted a comprehensive securitisation law regime like a number of other European jurisdictions. Securitisations are generally subject to general civil and tax and regulatory laws with certain typical aspects of securitisations being addressed in special statutes. In particular, bank originators must observe a number of rules in regulatory legislation and relevant rules and guidelines issued by the German regulator (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin).

In 2010, the following Directives were implemented into German law with effect as of 1 January 2011:

  • Directive 2009/111/EC amending Directives 2006/48/EC, 2006/49/EC and  2007/64/EC as regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements, and crisis management (CRD II).

  • Directive 2009/27/EC amending certain Annexes to Directive 2006/49/EC as regards technical provisions concerning risk management (Risk Management Directive).

  • Directive 2009/44/EC amending Directive 98/26/EC on settlement finality in payment and securities settlement systems and Directive 2002/47/EC on financial collateral arrangements as regards linked systems and credit claim.

  • Directive 2009/83/EC amending certain Annexes to Directive 2006/48/EC as regards technical provisions concerning risk management.

The implementing statutes are the:

  • Gesetz zur Umsetzung der geänderten Bankenrichtlinie und der geänderten Kapitaladäquanzrichtlinie dated 24 November 2010 (CRD Amendments Implementation Act).

  • Verordnung zur weiteren Umsetzung der geänderten Bankenrichtline und der geänderten Kapitaladäquanzrichtlinie dated 8 October 2010.

In particular, Article 122a of Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions (CRD) was implemented into the German Banking Act (Kreditwesengesetz) (Articles 18a and 18b) setting a new legal framework for securitisations. Certain aspects of Directive 2010/76/EC amending Directives 2006/48/EC and 2006/49/EC as regards capital requirements for the trading book and for re-securitisations, and the supervisory review of remuneration policies (CRD III) which are relevant for securitisations had already been implemented by the CRD Amendments Implementation Act. However, the Implementation Act was enacted before the publication of CRD III and the remaining provisions must be implemented by 1 January 2012.

For further details of the new rules, see Question 3.

 

Reasons for doing a securitisation

3. Which of the reasons for doing a securitisation, as set out in the Model Guide, usually apply in your jurisdiction? In particular, how are the reasons for doing a securitisation in your jurisdiction affected by:
  • Accounting practices in your jurisdiction, such as application of the International Financial Reporting Standards (IFRS)?

  • National or supra-national rules concerning capital adequacy (such as the Basel International Convergence of Capital Measurement and Capital Standards: a Revised Framework (Basel II Accord) or the Capital Requirements Directive)? What authority in your jurisdiction regulates capital adequacy requirements?

Usual reasons for securitisation

For corporate originators cost savings and balance sheet benefits are typical reasons for doing a securitisation. Financial institutions are frequently looking for relief under applicable capital adequacy rules rather than for balance sheet benefits. In addition, securitisation can also be used as an alternative funding source.

Accounting practices

German originators can either publish IFRS or German generally accepted accounting principles (GAAP) compliant statements. However, individual financial statements (Einzelbilanz) prepared in accordance with German GAAP are required for tax purposes. Companies that form part of an international group frequently prepare both German GAAP and IFRS compliant statements to facilitate intra-group reporting and consolidation.

In the past the derecognition under German GAAP of trade receivables transferred in a securitisation and the resulting reduction of trade tax liability has been one of the motivations of German corporate originators to opt for a securitisation. In addition, the 2006 tax reform and the introduction of the interest barrier (Zinsschranke) which limits the deductibility of interest expenses has made receivables finance and securitisations an attractive alternative to debt funding. However, in the 2008 tax reform the definition of add-backs for trade tax purposes has been significantly broadened and the discount applied in a purchase of receivables is now treated as a deemed interest payment by the originator. Trade tax arbitrage is, therefore, no longer a reason for doing a securitisation.

Capital adequacy

Capital relief is one of the reasons for credit institutions (Kreditinstitute) and financial services institutions (Finanzdienstleistungsinstitute) for doing a securitisation. However, recent changes to Basel II and CRD II (see Question 2) have a significant impact on credit institutions and financial services institutions investing in, sponsoring or originating securitisation transactions. As of 1 January 2011, this includes a prohibition to invest in a securitisation transaction where the originator does not retain a net economic interest of at least 5% in the transaction on an ongoing basis. This amount will be increased to 10% from 2015 onwards. Transactions where the transfer of securitised assets occurred before 2011 are not affected by the new rules.

Transactions entered into before 2011 that involve revolving portfolios (such as under asset-backed commercial paper (ABCP) transactions) or managed portfolios (managed CLO/collateralised debt obligations (CDO) transactions) are grandfathered until 31 December 2014 but will become subject to the new rules from 2015 onwards.

The new rules require due diligence and monitoring by an institution entering into a securitisation transaction to have a comprehensive and thorough understanding of the positions and their underlying assets. In addition, the institution must regularly conduct stress tests.

 

The special purpose vehicle (SPV)

Establishing the SPV

4. How is an SPV established in your jurisdiction? Please explain:
  • What form does the SPV usually take and how is it set up?

  • What is the legal status of the SPV?

  • How is the SPV usually owned?

  • Are there any particular regulatory requirements that apply to the SPVs?

In Germany, both foreign and German SPVs are used for securitisation transactions. German SPVs are typically established in the form of a limited liability company (Gesellschaft mit beschränkter Haftung, GmbH). Since 2005 securitisation vehicles can be established under the True Sale Initiative (TSI) platform. While originally established to enhance true sale securitisations by credit institutions, the platform is open to all market participants. Since 2005 about 70 securitisations have been carried out using TSI SPVs. Shareholders of these SPVs are three charitable trusts committed to the promotion of science.

Provided the securitisation transaction does not involve the transfer of any undrawn commitments, no licensing requirements under the German Banking Act (Kreditwesengesetz) are generally triggered. Where the buyer is collecting and enforcing receivables purchased itself, it does not require a licence to do so. However, a third party servicer must have a collection licence under the German Legal Services Act (Rechtsberatungsgesetz). A seller continuing to provide these services in relation to its originated receivables is exempt from this requirement.

 
5. Is the SPV usually established in your jurisdiction or offshore? If established offshore, in what jurisdiction(s) are SPVs usually established and why? Are there any particular circumstances when it is advantageous to establish the SPV in your jurisdiction?

The place of the establishment of an SPV depends on a number of factors, including:

  • The type of originator (credit institution, financial services institution, corporate).

  • The type of assets.

  • Legal and tax considerations.

Since the trade tax privilege applies only to bank loan receivables, TSI SPVs or German SPVs are typically be used for that asset class. Foreign SPVs are generally established in Luxembourg, Ireland or Jersey. The reasons for this are a favourable legal and tax environment and, in relation to Luxembourg and Ireland, applicable double taxation treaties.

 

Ensuring the SPV is insolvency remote

6. Is it possible to make the SPV insolvency remote in your jurisdiction? If so, how is this usually achieved?

To make the SPV insolvency remote the following measures are usually taken:

  • Establishing the SPV in a corporate form, typically as a limited liability company (GmbH).

  • Limiting the SPV's business activities to those related to the securitisation transaction.

  • Ensuring that the management by directors is provided by a corporate service provider.

  • Not having any employees.

  • Outsourcing all business services (in particular, servicing either being provided by the originator or a third party service provider).

  • Inserting limited recourse and non-petition clauses in agreements entered into by the SPV.

 

Ensuring the SPV is treated separately from the originator

7. Is there a risk that the courts can treat the assets of the SPV as those of the originator if the originator becomes subject to insolvency proceedings? If so, can this be avoided/minimised?

Since the SPV is typically established as an orphan SPV with separate legal personality, it does not generally form part of the insolvent estate of the originator and its assets cannot be treated as those of the originator in the insolvency of the originator. However, a prerequisite for this separate treatment is that the transfer to the SPV qualifies as a true sale. In addition, certain clawback rules may apply. Most of these rules do not become relevant in a securitisation transaction as the transaction usually qualifies as a cash transaction (Bargeschäft). A cash transaction requires that on or about time of the assignment or transfer, respectively, the originator receives adequate consideration. If the transaction qualifies as a cash transaction the insolvency administrator can only rescind the transaction where he can demonstrate that either:

  • The transaction was entered into with the intention to prejudice creditors of the originator.

  • The buyer was not entitled to the assets assigned or transferred.

 

The securities

Issuing the securities

8. Are the securities issued by the SPV usually publicly or privately issued?

Both public and private issues are common. In addition, there have also been a number of retained transactions recently, in particular to make use of the ECB refinancing facilities.

The following facts may also be relevant for selecting the type of placement or retention:

  • The volume of securities issued.

  • The transferred risks.

  • The market conditions.

  • Investor appetite

 
9. If the securities are publicly issued:
  • Are the securities usually listed on a regulated exchange in your jurisdiction or in another jurisdiction?

  • If in your jurisdiction, please briefly summarise the main documents required to make an application to list debt securities on the main regulated exchange in your jurisdiction. Are there any share capital requirements?

  • If a particular exchange (domestic or foreign) is usually chosen for listing the securities, please briefly summarise the main reasons for this.

A public listing on a regulated market is typically effected in Luxembourg or Ireland. This is mainly due to the straightforward listing rules and efficient and expeditious approval procedures. Some transactions can be listed on certain unregulated stock exchange market segments (Freiverkehr).

 

Constituting the securities

10. If the trust concept is not recognised in your jurisdiction, what document constitutes the securities issued by the SPV and how are the rights in them held?

German law does not recognise the concept of holding assets or security on trust as it is understood under English law. A German law trust (Treuhand) operates only contractually and is in many respects not comparable to the concept of an English law trust. In particular, merely agreeing on a trust over some assets, such as, for example, collections of receivables, would not suffice to separate these assets from the originator's estate.

Segregation of receivables from the estate of the originator can be achieved in several ways. The simplest solution is the notification of the third party debtors. However, this is often not desirable. As an alternative, separate accounts are normally set up for the sole purpose of collecting the assigned receivables. These are either accounts of the buyer but created in the originators' name or accounts of the originator pledged to the buyer or escrow accounts. In particular where an account is only pledged to the buyer, this is typically combined with automatic (daily) cash sweeps.

In relation to the securities issued by the SPV no trust arrangements are required. The securities will constitute direct and unconditional obligations of the issuer and will benefit from security granted over the issuer's assets to a security trustee through a contractual trust arrangement.

 

Transferring the receivables

Classes of receivables

11. What classes of receivables are usually securitised in your jurisdiction? Please explain any particular reasons (for example, the strength of the origination market) why such receivables are usually securitised and the progress of the market in securitising new classes of receivables.

The following securitisation products have been issued in the German market.

  • CMBS.

  • CDOs, including CLOs.

  • ABS in the narrower sense, including consumer loans, auto loans, credit card receivables, leasing receivables and pension claims.

  • RMBS.

Recently, the most common securitisations have been ABS in its narrower sense.

 

The transfer of the receivables from the originator to the SPV

12. How are the receivables usually transferred from the originator to the SPV (for example, assignment, novation, sub-participation, declaration of trust)? How is the transfer perfected? Are there any rules, requirements or exemptions that apply specifically to transferring receivables in a securitisation transaction?

German law governed receivables are generally assigned through a German law assignment agreement. The underlying purchase agreement governing the relationship between the originator and the buyer may be subject to a different governing law. However, as far as the German law receivables are concerned, German law will govern the assignability of the receivable, the relationship between the buyer and the debtor and the question of whether the assignment can be invoked against the debtor.

While written form is not required to make the assignment effective, typically the assignment is effected on the basis of a written agreement. Notice to the debtor of the assignment is not required to make the assignment effective. However, unless notified of the assignment (or having knowledge of the assignment otherwise), the debtor can discharge its debt by making payment to the originator (assignor) or declaring a set-off of claims it has against the originator. In addition, the debtor can invoke all defences it had against the originator at the time of the assignment. If the debtor is a consumer, the originator must notify it of the assignment and the details of the purchaser (see Question 15, Legislative Restrictions).

 
13. Are there any types of receivables that it is not possible or not practical to securitise in your jurisdiction (for example, future receivables)?

Both existing and future receivables can be securitised. However, future receivables must be clearly determinable (bestimmbar) to be validly assigned. Where a receivable is subject to a contractual restriction of assignment, it is recommended to obtain a relevant waiver or consent from the debtor before buying the receivables. There are also certain receivables being subject to legal restrictions of transfer (such as, for example, claims against the tax office) but these are typically not securitised.

 
14. How is any security attached to the receivables transferred to the SPV? What are the perfection requirements?

German law distinguishes between accessory and abstract security rights (akzessorische und abstrakte Sicherungsrechte). Accessory security rights attach to the receivable and are automatically transferred with the receivable on the assignment of the receivable to the buyer. Abstract security rights are independent of the receivable secured by them (enforcement being limited by the security purpose and relevant contractual provisions) and do not automatically transfer together with the receivable but must be transferred separately.

Certain requirements must be observed when securitising mortgage loans or loans generally secured by a mortgage or land charge. A lien on real property can be created either by a mortgage, which is an accessory security right or by a land charge, which is an abstract security right. Both rights can be created in certificated form or as an uncertificated book entry in the land register. The assignment of a loan secured by a mortgage requires a written assignment of the loan and either:

  • Delivery of the mortgage certificate (certificated mortgage).

  • Registration of the transfer with the competent land register (uncertificated mortgage).

The assignment of a loan secured by a land charge can be effected independently of the transfer of the land charge. If the land charge is to be assigned at the same time, this requires an assignment agreement and either:

  • Delivery of the land charge certificate (certificated land charge).

  • Registration of the transfer with the competent land register (uncertificated land charge).

The vast majority of liens on real property in Germany are created in uncertificated form. Since 2005 mortgages and land charges can be registered in the refinancing register (Refinanzierungsregister). This registration enables the buyer to segregate these security rights in the insolvency of the originator, thereby allowing the buyer to save the substantial cost of registering the transfer of the mortgage or land charge in the land register.

 

Prohibitions on transfer

15. Are there any prohibitions on transferring the receivables or other issues restricting the transfer? For example, is a negative pledge enforceable, or are there any legislative provisions that affect the transfer of receivables (such as consumer or data protection rules)?

Contractual restrictions

Companies with a substantive buying power frequently include in their standard terms of purchase a restriction to assign the receivables. In addition, purchase contracts, loan agreements and other agreements may contain contractual assignability restrictions. Certain exemptions apply (section 354a, German Commercial Code), particularly where the receivable arose between merchants under a commercial transaction, allowing for a valid assignment despite the restriction. the debtor can continue to discharge its debt by paying to the originator or declaring a set-off of claims against the originator irrespective of its knowledge of the assignment.

Legislative restrictions

There are generally no specific legal restrictions disallowing the securitisation of assets which would be typically securitised. However, in relation to certain types of receivables specific rules apply. In particular, this includes receivables from consumer loans. In relation to these, the following applies:

  • The originator must notify the consumer of the assignment and the details of the buyer unless the parties agree that the originator shall exclusively continue to deal with the consumer.

  • The German Risk Limitation Act introduced certain minimum requirements in relation to the termination of a consumer loan, in particular, a loan can only be terminated on a non-payment of two successive instalments or an aggregate amount of more than 2.5% of the principal loan amount.

  • A prior consent of the consumer to the assignment of the loan is no longer effective if given in standard business terms unless the buyer is already identified and the consumer is granted an extraordinary termination right.

  • The buyer of a loan portfolio must inform consumer borrowers at least three months before the end of a period for which interest has been fixed whether or not it intends to prolong the loan and the relevant interest rate offered. The consumer borrower can then elect to continue the loan at the rate offered or terminate the loan.

 

Avoiding the transfer being re-characterised

16. Is there a risk that a transfer of title to the receivables will be re-characterised as a loan with security? If so, can this risk be avoided and/or minimised? Are true sale legal opinions typically delivered in your jurisdiction or does it depend on the asset type and/or provenance of the securitised asset?

German law does not contain specific provisions dealing with the prerequisites for a true sale. Case law relating to the qualification of factoring transactions has developed certain criteria for a true sale. In addition, the Institute of Chartered Accountants (Institut der Wirtschaftsprüfer, IdW) has developed certain criteria for the off-balance sheet treatment of a sale of receivables. Both sets of criteria should be taken into account when structuring a transaction which is to qualify as a true sale.

A key criterion for a true sale is the transfer of the credit risk (Delkredererisiko). Discounts should take into account the historical loss risk. A mismatch with historical loss risk may give rise to the argument that the credit risk was not effectively transferred. The same applies to deferred purchase price structures where these do not reflect actual risks (such as, for example, extended payment provisions or discounts which the originator of trade receivables may have granted to its debtors). The underlying documentation should also make it clear that the purchase price is for the originator to keep and that there can be no subsequent reductions.

Obligations for loss compensation such as an obligation to repurchase defaulted receivables or a loss guarantee exceeding the agreed default reserve should be avoided. In addition, call options of the originator to repurchase the sold receivables (other than a mere clean-up call) may also result in a recharacterisation of the transaction as a secured loan. Guarantees that the receivables exist, are legal, valid, binding and enforceable and are not subject to any defences (Einreden) or objections (Einwendungen) are permissible and have no negative impact on the qualification of a transaction as a true sale.

 

Ensuring the transfer cannot be unwound if the originator becomes insolvent

17. Can the originator (or a liquidator or other insolvency officer of the originator) unwind the transaction at a later date? If yes, on what grounds can this be done and what is the timescale for doing so? Can this risk be avoided or minimised?

Following a petition to open insolvency proceedings there are generally two stages:

  • Preliminary insolvency proceedings.

  • Insolvency proceedings.

Preliminary insolvency proceedings

Following the filing of an insolvency petition and before rendering a decision on whether or not to open a formal insolvency proceeding, the court typically appoints a preliminary insolvency administrator. During the preliminary proceedings:

  • The court assesses whether the assets of the insolvent company cover the costs of the insolvency proceeding.

  • The buyer of the receivables generally can continue to collect and service the receivables.

However, the court may order that persons owning assets not forming part of the insolvency estate must refrain from exercising their rights (such as the collection of receivables by the buyer) during the preliminary insolvency proceedings.

Insolvency proceedings

Provided the transaction constitutes a true sale, following the opening of insolvency proceedings the buyer can collect the receivables and exercise all other rights in relation to them.

If the transaction does not constitute a true sale it is recharacterised as a secured loan. This has the effect that the insolvency administrator can collect or otherwise enforce the receivables. The buyer is then entitled to preferential satisfaction (Absonderungsrecht) from the proceeds. However, the insolvency administrator is entitled to a cut from the collection proceeds (amounting to about 9% of the amount collected).

 

Establishing the applicable law

18. Are choice of law clauses in contracts usually recognised and enforced in your jurisdiction? If yes, is a particular law usually chosen to govern the transaction documents? Are there any circumstances when local law will override a choice of law?

Under German law and German conflict of law rules a distinction is generally made between the contractual arrangement to sell a receivable (the receivables purchase agreement) and the in rem transfer (assignment) of the receivable. A contractual choice of law by the parties to the receivables purchase agreement is generally recognised and upheld provided it does not violate German public order (ordre public). However, if the parties have chosen the law of a non-EU member state, German courts can apply mandatory provisions of EU law as implemented into German law irrespective of the choice of law. In addition, German courts may apply mandatory provisions of the law of the country where the contractual obligations must be performed.

German courts apply the law governing the receivable to determine the prerequisites for its assignment and the effectiveness of the assignment.

 

Security and risk

Creating security

19. Please briefly list the main types of security that can be taken over the various assets of the SPV in your jurisdiction, and the requirements to perfect such security.

Security over receivables and claims is commonly taken in the form of a security assignment. Common forms of security over tangible movable property are a pledge and a security transfer. Shares are typically pledged. Real property is charged by a mortgage or a land charge. A pledge requires notification of the debtor which is the reason why receivables are typically assigned rather than pledged. In addition, a pledge on tangible movable property requires possession which is often not practical. In these circumstances, a security transfer is the preferred means of taking security.

For detailed information on taking security over assets in Germany, see PLC Cross-border Finance Handbook 2011, Country Q&A, Germany.

 
20. How is the security granted by the SPV held for the investors? If the trust concept is recognised, are there any particular requirements for setting up a trust (for example, the security trustee providing some form of consideration)? Are foreign trusts recognised in your jurisdiction?

Security granted by the SPV is held by a security trustee under a contractual trust agreement (see Question 10). The security trustee holds, administers and enforces the security on behalf and for the benefit of the noteholders. Since accessory security (such as mortgages or pledges) attaches to the secured rights, the security trustee must be a holder of secured obligations. This is usually achieved by parallel debt. A parallel debt is an undertaking by the obligor trough an abstract acknowledgement of debt (abstraktes Schuldanerkenntnis) to pay to the security trustee (as a creditor in its own right and not the noteholders' representative) the equivalent of what it owes to the noteholders. For further details, see PLC Cross-border Finance Handbook 2011, Country Q&A, Germany, Question 16.

 

Credit enhancement

21. What methods of credit enhancement are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the credit enhancement techniques set out in the Model Guide?

The following credit enhancement methods are commonly used:

  • Subordination. This involves tranching in different classes of notes with a subordination structure.

  • Excess spread. A positive difference between the interest received from the portfolio and the interest payable to the investors.

  • Over-collaterisation. The volume of notes issued is lower than the volume of the portfolio serving as security for the notes.

  • Cash collateral account. This involves pledging cash held in the SPV's account.

  • External enhancements. This may comprise, for example, credit insurance obtained for the receivables purchased (in particular where such insurance was taken out by the originator and transferred concurrently with the sale of receivables).

Commonly a combination of different credit enhancement techniques is applied. For further details on credit enhancement methods see Model Guide, Credit enhancement.

 

Risk management and liquidity support

22. What methods of liquidity support are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the provision of liquidity support as set out in the Model Guide?

Conduit transactions (see Model Guide, Multi-seller conduits) generally operate with liquidity facilities. In term transactions, liquidity support is typically provided in the form of cash reserves to cover specific structural risks and/or by establishing subordinated loan facilities.

For further details see Model guide, Risk management and liquidity support.

 

Cash flow in the structure

Distribution of funds

23. Please explain any variations to the cash flow index accompanying Diagram 9 of the Model Guide that apply in your jurisdiction.

The cash flow index accompanying Diagram 9 generally applies (see Model Guide, Diagram 9 and box, Cash flow index). Cash flows can also be structured with pre-enforcement and post-enforcement waterfalls to allow subordinated noteholders to benefit from cash flows in relation to interest payments before enforcement.

 

Profit extraction

24. What methods of profit extraction are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the profit extraction techniques set out in the Model Guide?

The profit extraction techniques set out in the Model Guide are also generally used in Germany (see Model Guide, Profit extraction). However, typically the originator does not hold equity securities in the SPV and deferred purchase price structures are less common and require careful structuring to avoid pitfalls in the insolvency of the SPV (see Question 17).

 

The role of the rating agencies

25. What is the sovereign rating of your jurisdiction? What factors impact on this and are there any specific factors in your jurisdiction that affect the rating of the securities issued by the SPV (for example, legal certainty or political issues)? How are such risks usually managed?

Long-term securities issued by the Federal Republic of Germany are rated AAA/Aaa/AAA (as of 27 June 2011) by Standard & Poor's, Moodys and Fitch, respectively. No political factors affect the rating of securities issued by the SPV, nor are there any issues of legal certainty which negatively affects the rating.

 

Tax issues

26. What tax issues arise in securitisations in your jurisdiction? In particular:
  • What transfer taxes may apply to the transfer of the receivables? Please give the applicable tax rates and explain how transfer taxes are usually dealt with.

  • Is withholding tax payable in certain circumstances? Please give the applicable tax rates and explain how withholding taxes are usually dealt with.

  • Are there any other tax issues that apply to securitisations in your jurisdiction?

Documentary taxes

Germany does not levy any stamp duty or other documentary taxes.

Withholding tax

Payments on receivables (including interest payments) are generally not subject to withholding taxes in Germany. Certain exceptions apply depending on the nature of the receivables. This includes (interest) payments by a German debtor on hybrid instruments such as, for example, participating loans, silent partnership, profit-contingent or convertible bonds. Currently the withholding tax (Kapitalertragssteuer) amounts to 26.375% of the interest paid on these instruments.

Withholding tax on interest (Zinsabschlag) applies also to:

  • Interest payments made by a credit institution or financial services institution.

  • Interest or capital gain on securities paid out by a credit institution or financial services institution in its capacity as custodian.

No withholding applies if the recipient (economic owner) is either:

  • A credit institution or a financial services institution.

  • Not resident in Germany for tax purposes.

Value added tax (VAT)

Germany generally imposes VAT at a rate of 19% on sale of goods and services. The sale of receivables is exempt from VAT (but the seller can elect to waive this exemption).

A buyer of receivables can be liable for unpaid VAT which the originator was required to pay on a sale of goods or services in relation to which the receivables arose. However, this applies only if the buyer collects the receivables. If and to the extent the buyer pays consideration for the receivable (and the originator can freely dispose of the purchase price), the receivable is deemed not to be collected by the buyer according to a circular published by the Federal Ministry of Finance. Therefore, the risk of the buyer in a securitisation transaction is limited to VAT on the difference between the nominal amount of the receivable and the purchase price paid to the originator.

In addition, fees for collection agent services are also subject to VAT at a rate of 19%. If and to the extent the buyer assumes the collection of the receivables according to the German tax authorities the buyer is deemed to render collection services to the originator. No VAT taxable collection services are deemed to be rendered where the originator continues to collect the receivables, as is customary in securitisation transactions.

Corporate income tax and trade tax

Corporate income tax and trade tax are generally levied on all corporate entities subject to resident or non-resident taxation in Germany. The SPV is only generally subject to these taxes if it has been established in Germany. If the SPV has been established in a foreign jurisdiction it is not taxable in Germany solely by virtue of purchasing receivables. If the receivables give rise to income from German source exceptions can apply.

Collection and administration of the receivables by the originator as the buyer's collection agent does not make the buyer subject to taxation in Germany. However, the transaction must be carefully structured to avoid pitfalls such as creating a permanent establishment or a permanent representative in Germany, which result in German taxation.

 

Synthetic securitisations

27. Are synthetic securitisations possible in your jurisdiction? If so, please briefly explain any particularly common structures used. Are there any particular reasons for doing a synthetic securitisation in your jurisdiction?

Synthetic securitisations have for many years dominated CMBS, RMBS and CDO transactions in Germany. Until the formation of TSI in 2005 securitisations by German credit institutions and financial services institutions were generally effected synthetically. Kreditanstalt für Wiederaufbau established two platforms for synthetic securitisations:

  • PROMISE (Promotional Mittelstands Loan Securitisation ®) for the securitisation of SME loans.

  • PROVIDE (Provide Residential Mortgage Securitisation ®) for the securitisation of residential mortgage loans.

The standardised features of these platforms include:

  • A synthetic partially funded structure.

  • The same type of collateral.

  • A loss allocation procedure.

  • An SPV established in Ireland.

 

Other securitisation structures

28. Which of the various structures, set out in the Model Guide or otherwise, are commonly used in your jurisdiction?

Several German banks are sponsors of offshore multi-seller ABCP conduits.

 

Reform

29. Please summarise any reform proposals and state whether they are likely to come into force and, if so, when. For example, what structuring trends do you foresee and will they be driven mainly by regulatory changes, risk management, new credit rating methodology, economic necessity, or other factors?

To the extent that CRD III has not been implemented by the CRD Amendments Implementation Act yet (see Question 2), it must be implemented into German law by 1 January 2012. In addition, it is expected that similar provisions will be implemented in relation to the investment of insurance undertakings in securitisation transactions.

 

Contributor details

Ingrid Kalisch

Kaye Scholer LLP

T +49 69 2 5494 250
F +49 69 2 5494 4444
E ingrid.kalisch@kayescholer.com
W www.kayescholer.com

Qualified. Frankfurt Bar, 1989; registered as a Foreign Lawyer with the Law Society of England and Wales

Areas of practice. Structured finance; syndicated lending; acquisition finance; project finance; ECA finance; receivables finance.

Recent transactions

  • Advising a consumer bank in connection with two securitisation transactions.
  • Advising a Landesbank in connection with the restructuring of securitised commercial mortgage loans.
  • Advising a major international bank in connection with the restructuring of the corporate financing for a listed company, including the relevant acquisition finance facilities.

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