Download - Demystifying Schuldschein/NSV
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Demystifying
Schuldschein/NSV
Financial Markets Legal
Update Seminar 2019
Thomas Scharfenberg
23 May 2019
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Topics
◼ Schuldschein
– What is a Schuldschein?
– Parties to a Schuldschein
◼ NSV
– What is an NSV?
– Parties to an NSV
◼ Execution and timing
◼ Regulatory aspects
◼ Listing / Secondary trading / Accounting
◼ Investment restrictions
◼ Overview
◼ Digression: LMA Schuldschein Template
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Schuldschein
What is a Schuldschein?
◼ Certificate of Indebtedness (Schuldschein)
– it is merely a receipt, not a security
– evidences the lender‘s rights under an underlying (bilateral) loan agreement
(Schuldscheindarlehen – „SSD“)
– unilaterally issued by the borrower
– rights under the loan agreement enforceable without presentation and
surrender of the Schuldschein
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Schuldschein
What is a Schuldschein?
◼ Assignable Loan Agreement (Schuldscheindarlehen – „SSD“)
– Form:
typically in writing; oral (evidenced by the Schuldschein) is sufficient
– Documentation:
➢ in Germany typically a few pages long containing the commercial terms
of the agreement
➢ LMA Schuldschein Template
– Amendments:
➢ agreement between the borrower and all lenders required
➢ German Bond Act (Schuldverschreibungsgesetz – „SchVG“) does not
apply
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Schuldschein
What is a Schuldschein?
– German Civil Code (Bürgerliches Gesetzbuch - „BGB“) applies:
➢ § 314 BGB
termination right of either party without notice for „good cause“ (aus
wichtigem Grund)
➢ § 489 para. 1 BGB
termination rights of the borrower for fixed rate notes under certain
circumstances (in any event after 10 years) and for floating rate notes
with three months notice
➢ § 490 BGB
early termination right of the lender if the borrower’s financial
circumstances deteriorate materially
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Schuldschein
What is a Schuldschein?
– Transfer:
➢ assignment (Abtretung)
▪ valid without consent of the borrower
▪ § 354a German Commercial Code (Handelsgesetzbuch – „HGB“)
▪ original lender remains party of the SSD (information rights)
➢ assumption of contract (Vertragsübernahme)
▪ entire contractual relationship is transferred
▪ tripartite agreement – consent of borrower required
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Schuldschein
Parties to a Schuldschein
◼ Issuer / Borrower
– banks
– larger corporations
– public authorities
◼ Investor / Lender
– banks
– insurance companies
– investment funds
– pension schemes
◼ Registrar
◼ Paying agent
◼ Arranger / settlement agent / broker
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NSV
What is an NSV?
German law governed registered notes (Namensschuldverschreibungen – „NSV“)
◼ Form
– not the same as registered bonds/notes in the UK
– not securities within the meaning of the Prospectus Directive
– securities according to the BGB (more specific: „securities in a broader
sense“)
– evidenced by a certificate drawn up in the name of the investor
– basic principles in the BGB (e.g. § 314 BGB applies) but no specific regime
– collective safe custody
➢ generally (-)
➢ global (registered) note possible, provided that such global note is drawn
in the name of a central depositary
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NSV
What is an NSV?
◼ Documentation
– (sales) prospectus required according to the German Capital Investment Act
(Vermögensanlagengesetz – „VermAnlG“) if publicly offered
– private placement exemptions available, e.g.:
➢ „institutional investors“
➢ minimum denomination of EUR 200,000
– Terms & Conditions similar to bearer bond, however differences in:
➢ form and transfer
▪ assignment
▪ minimum transfer amount
▪ issuance of new certifictes in case of partial transfer
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NSV
What is an NSV?
➢ payments
▪ may only be claimed by person whose name is in the register
▪ at maturity, only upon surrender of the certificate
▪ generally no clearing – payments directly from paying agent to
investor
➢ counter claims
▪ restrictions regarding set-off rights due to investors in Germany often
holding NSV in restricted pool of assets (guarantee assets
(Sicherungvemögen))
▪ same applies for SSD
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NSV
What is an NSV?
◼ Amendments
– consent between issuer and all investors
– SchVG does not apply, unless NSV is evidenced by a global note drawn in
the name of a central depositary (see above)
◼ Transfer
– assignment (Abtretung) only
– no in rem transfer of the certificate required (but right to request certificate)
– without consent of the issuer
– § 354a HGB
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NSV
Parties to an NSV
◼ Issuer
◼ Investor
◼ Arranger / dealer
◼ Registrar
◼ Paying agent
◼ Calculation agent
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Execution and timing
SSD/NSV
◼ often executed orally or on the basis of a term sheet
◼ exchange of trade confirmations
◼ SSD/NSV documentation (including certificate) usually follows 2 – 3 weeks later
◼ Sample procedure for a bank acting as settlement agent:
– term sheet
– trade confirmation of the investor/issuer
– „Bi-Party“ Agreement between settlement agent and investor/issuer
– SSD/NSV documentation
– settlement
– physical delivery of SSD/NSV documentation
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Regulatory aspects
SSD/NSV
◼ German Banking Act (Kreditwesengesetz – „KWG“)
– SSD/NSV issuance may be qualified as banking business
➢ deposit taking business for the issuer/borrower (NSV is not bearer bond!)
➢ lending business for the investor
– banking business or financial services in Germany generally require banking
licence if
➢ commercially (gewerbsmäßig) or
➢ on a scale which requires a commercially organised business
undertaking (kaufmännischer Geschäftbetrieb)
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Regulatory aspects
SSD/NSV
NB: quite strict interpretation by BaFin
▪ commercially (gewerbsmäßig)
✓ if permanent in nature with the intention of profit making
▪ on a scale which requires a commercially organised business
undertaking (kaufmännischer Geschäftbetrieb)
✓ lending business if more than 100 loans or more than 20 loans with a
total notional amount > EUR 500,000
✓ deposit taking if more than 25 deposits or more than 5 deposits with
a total notional amount > EUR 12,500
◼ MiFID 2
– NSV generally (+) except for senior fixed rate NSVs issued by German CRR
credit institutions
– SSD (-)
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Listing / Secondary trading / Accounting
SSD/NSV
◼ Listing
– no exchange trading on German stock exchanges
◼ Secondary trading
– usually „buy and hold“ instruments
– no liquid secondary market
– sometimes traded OTC due to easy transfer of claims
– FinTechs and Hamburg Stock Exchange try to establish some type of
secondary market
◼ Accounting
– no mark-to-market valuation required
– valuation at face value
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Investment restrictions
SSD/NSV
◼ German credit institutions and financial institutions (-)
◼ German institutional investors (+)
– insurance companies and pension funds may only grant or acquire
SSD/NSV to EU corporates with respect to their guarantee assets
(Sicherungvemögen) if the borrower fulfils certain criteria resulting in a safe
and sound investment (e.g. appropriate credit rating, security…etc.)
– insurance companies are permitted to invest their guarantee assets
(Sicherungsvermögen) into SSD/NSV borrowed by EU credit institutions, EU
governments or other acceptable sub-governmental public bodies located in
the EU
– investment funds within the scope of the German Investment Code
(Kapitalanlagegesetzbuch – „KAGB“) must not grant any loans to third
parties, however, under certain exemptions they are allowed to purchase
SSD/NSV
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Overview
Comparison between Schuldschein, NSV and bearer bond/security
Schuldschein /
SSD
NSV Bearer
bond/security
Legal nature document
evidencing a loan
– not a security
security in a
broader sense
security
Enforceability of
rights
without
presentation and
surrender
withount
presentation and
surrender
upon presentation
and surrender
Transfer generally by way
of assignment
generally by way
of assignment
in rem transfer, i.e.
upon agreement
and „delivery“
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Overview
Comparison between Schuldschein, NSV and bearer bond/security
Schuldschein /
SSD
NSV Bearer
bond/security
Amendments agreement
between borrower
and all lenders
consent of all
holders required
consent of all
holders required
Application of
SchVG
No No/Yes Yes
Listing possible No No Yes
Clearing No No/Yes Yes
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Digression: LMA Schuldschein Template
LMA Template
◼ Aim
– Making market entry easier for non-German market participants
– Setting standard in a largely individual market
– Setting the scene of automation and (later) transformation into smart
contracts
– Enabling a functioning secondary market (platform eligibility)
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Digression: LMA Schuldschein Template
LMA Template
◼ Working assumptions
– Borrower is a German law private entity
– Agreement is governed by German law
– Denomination in EUR
– Borrower has investment grade rating or equivalent credit standing
– Terms are negotiated individually (no general terms of business)
– Granting of loan is permitted from a regulatory point of view
– Paying Agent located in Germany
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Digression: LMA Schuldschein Template
LMA Template
◼ Scope
– Interests of borrower and lender are equally weighted
– Documentation does not include syndicated loan style clauses
– Ancillary documentation such as paying agency agreement is not contained
– Specific clauses such as make-whole call provisions are not included but
wording is suggested in user‘s guide
– Downstream guarantee is foreseen as alternative
– Template is only starting point for the transaction – deviation from template
is welcomed
– Accounting is – absent a functioning secondary market – at face value
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Digression: LMA Schuldschein Template
LMA Template
◼ Certain peculiarities
– Representations and warranties have been omitted on purpose
– Covenants have been omitted on purpose
– Application of lender‘s general business terms is explicitly excluded
– Template does not foresee a Schuldschein certificate
– Transfer is by assumption of contract (Vertragsübernahme)
– Tax gross-up and increased cost clause are forseen
– Termination for „good cause“ (aus wichtigem Grund)
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Digression: LMA Schuldschein Template
Market perception
◼ Market participants are in a „wait and see“ mode
◼ LMA wants to review the template after one year
◼ „LMA seal“ used as marketing tool in non-German transactions
◼ Use of LMA standard can hardly be seen as being „off market“
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Please do not hesitate to contact us should you have any questions!
German DCM Team
Dr. Felix Biedermann
Partner Financial Markets, Frankfurt
T +49 69-90 74 54-71
M +49 1 51-52 76 40 42
Dr. Gabriele Röhl
Counsel Financial Markets, Frankfurt
T +49 69-90 74 54-91
M +49 1 51-16 24 43 51
Thomas Scharfenberg
Partner Financial Markets, Frankfurt
T +49 69-90 74 54-60
M +49 1 51-52 76 40 31
E Thomas [email protected]
Patricia Schneider
Associate Financial Markets, Frankfurt
T +49 69-90 74 54-42
M +49 1 51-16 24 40 45
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