Distressed debt law changes aid funds in Germany and France

German and French legislators have made changes to their respective insolvency laws that could ultimately aid distressed debt investors in insolvent companies, according to Katherine Ashton, restructuring partner at international law firm Debevoise & Plimpton.

Provisions introduced in Germany allow for ‘debtor in possession financing’, which places at the front of the queue, in terms of creditor rights, those who make loans to companies that are in insolvency.

The concept already exists, and is used frequently, in the US where it can effectively encourage creditors to consider extending fresh credit to bankrupt companies.

Ashton (pictured) explains creditors could now lend to insolvent German, and French, companies knowing their rights will now sit at least on par with those of other creditors – arguably a justified reward for the risk being taken.

In France, the law, in particular the ‘procédure de sauvegarde‘ provisions introduced back in 2005 and the new accelerated ‘sauvegarde financière‘ introduced in 2010 applicable to purely financial creditors, allow similar priority for lenders to French companies in bankruptcy.

Both the French and German legal regimes are “more rehabilitative” than typically debtor-friendly insolvency laws on the Continent have been in the past, says Ashton.
She notes these changes should ultimately also benefit investors, as well as the companies that owe them money.

A second change benefiting creditors to German companies is newly introduced provisions allowing that country’s insolvency courts to sanction debt for equity swaps in an insolvency plan. In the past, an insolvency plan involving a debt for equity swap required the co-operation of the debtor’s shareholders. This could give them unjustified hold-out value.

“Now, German courts can say we think it is the best thing to do, to permit a cramdown on the shareholders,” Ashton explains.

 

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