Germany: Securitisation

The German securitisation market is quite mature and covers all established asset classes as well as some more exotic products.

While the most active public securitisation market remains the auto loan and lease sector, however, also residential mortgages and consumer loans play a significant role in the term ABS market.

The non-public market continues to see a very active trade receivables market in all relevant sectors of trade and service industries, often funded through ABCP programmes. It is widely expected that this market will further grow again in 2023 in light of funding needs of companies across Germany and rising interest rates in the bank lending market – where funding costs of ABCP have remained relatively stable.

Over and beyond that there is a large segment of transactions which use securitisation techniques, which are, however, designed to fall outside the scope of the Securitisation Regulation, typically by avoiding tranching. Such transactions are similar to securitisations but not quite identical in many respects – yet they have a significant market share. In this segment one also sees more exotic transactions, such as, for example, hereditary building rights transactions which are designed with long term bonds (of up to 100 years) and bring features such as inflation linkage.

Also supply chain finance transactions based on securitisation techniques are becoming increasingly common.

All assets which create a cash flow are capable of being included in a securitisation. In true sale transactions (as opposed to synthetic transactions, the assets also need to be capable of assignment or transfer). There are very few assets which typically cannot easily be securitised for reasons of legal restrictions, such as most notably, claims which result from a particularly confidential (and protected) underlying legal relationship, such as claims from lawyers against their clients or claims of doctors against their patients, unless, in each case, the relevant underlying debtor consents to the assignment and corresponding data transfer.

There is no dedicated German securitisation legislation. Relevant assets, to the extent that they constitute receivables (such as loans, lease payment claims or trade receivables) are typically assigned in the context of a sale under the German Civil Code (Bürgerliches Gesetzbuch).

Other assets may be securitised through different structures, such as secured loans (or commercially similar note structures), where usually tangible assets secure such loans or notes and form the basis of the underlying cash flows which form the subject of a transaction.

Assignments are dealt with under the German Civil Code (Bürgerliches Gesetzbuch) and the “true sale” concept is commercially implemented by ensuring that the relevant sale in the context of which the assignment stands is upheld as a sale in the insolvency of the assignor and not recharacterized into a secured loan. This requires that the sale takes place without any form of express or implied recourse. In other words, the originator needs to retain the entirety of the purchase price it has been paid, regardless of the subsequent development or materialising credit risk (credit risk being distinguished from other risks through the inability of a debtor to pay, rather than its unwillingness or lack of obligation to do so).

There is specific German legislation for covered bonds, namely the German Pfandbrief Act which governs bonds issued by Pfandbriefbanks and covered by mortgages over real estate, aircraft or ship as well as obligations of certain states as well as sub-divisions of states.

Moreover certain provisions of the German Banking Act provide for a refinancing register (Refinanzierungsregister) that can be used to facilitate securitisations by ring-fencing certain assets without an in rem transfer to an SPV, i.e. without assignment. Specifically, where the originator is a bank, it can register assets which it has sold (and is thereby obliged to transfer but has agreed not to transfer (yet)) in the refinancing register, giving the beneficiary of such registration (i.e. the purchaser of such registered assets) a claim for segretation in the insolvency of the registering bank.

Over and beyond that, the Securitisation Regulation applies in Germany and many transactions come to market which comply with the comparatively new segment of STS (Simple, Transparent and Standardised). This segment has also been expanded recently to cover new asset classes, including synthetic securitisations.

In a typical structure, an originator sells receivables to a special purpose entity (“SPV”) which funds the receivables through debt instruments from its own funding sources, ranging from bondholders in a public ABS transaction, over other special purpose entities and bank loans. The SPV typically appoints the originator to act as servicer of the receivables sold to the SPV. Debt instruments used by the SPV to fund the purchase of receivables vary from bonds and notes that qualify as securities under German law over certificated loans (Schuldscheine) to straight loans. Most structures use a trustee at the SPV level to hold all assets and rights of the SPV on trust for the benefit of the SPV’s funding sources. Where personal data of debtors is involved or receivables benefit from bank secrecy or other contractual confidentiality requirements, a data trustee structure is used.

While it is possible to use SPVs incorporated in Germany for bank originated loans, all other asset classes typically see SPVs incorporated outside Germany, often in Luxembourg or in Ireland. The background for this is that a German company which incurs long-term indebtedness (such as ABS term bonds or revolving ABCP) is subject to trade tax. Only SPVs purchasing bank loans from a bank are exempt from trade tax on long-term indebtedness. Accordingly, only bank loans are securitised via German SPVs (and even these are often securitised via non-German SPVs for reasons of transaction costs) and all other asset classes typically chose non-German SPV solutions. For a more detailed discussion of trade tax, please see (21) below.

The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) is the competent authority dealing with many aspects of securitisation, to the extent that bank regulated questions are concerned. For questions of tax, the local tax offices as well as the Federal Tax Office (Bundeszentralamt für Steuern) are involved, typically when questions are clarified prior to implanting a transaction through an advance tax ruling (which is possible in some instances).

The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) is the competent authority dealing with many aspects of securitisation, to the extent that bank regulated questions are concerned. For questions of tax, the local tax offices as well as the Federal Tax Office (Bundeszentralamt für Steuern) are involved, typically when questions are clarified prior to implanting a transaction through an advance tax ruling (which is possible in some instances).

Yes, see above, question 3.

Yes, the distinction is between public securitisations which usually are based on a public offering with a formal prospectus and private securitisations, which are privately placed transactions to a limited number of investors without public offering. The Asset-Backed Commercial Paper market forms part of the non-public market and covers the bulk of all trade-receivable securitisation transactions originated out of Germany. All of this is regulated by European regulations and similar in Germany as compared to other EU jurisdictions.

Not outside of the context of the Securitisation Regulation. Please also refer to our response to Question (10) below.

All securitisations, i.e. not only public transactions, need to follow the requirements of the Securitisation Regulation, in particular Art. 7 of the Securitisation Regulation.There are publicly available reporting templates to be used in the context of such disclosure and the data collection process needs to be ajusted in order to enable market participants to be compliant.

Yes, all securitisations need to satisfy the risk retention requirements of Art. 6 of the Securitisation Regulation. This can be achieved through all generally accepted methods (of vertical or horizontal risk retention techniques). 5% of the net economic risk needs to be retained either by the originator, sponsor or the original lender (in the case of loans). The relevant entity retaining the risk must not obtain credit protection against the retained risk and the method of risk retention cannot be changed during the term of the transaction.

Yes, as per Art. 5 of the Securitisation Regulation, investors are required to conduct extensive due diligence.

Where participants in a securitisation transaction breach rules of the Securitisation Regulation they may be subject to substantial fines which are directed at the institutions as well as against the responsible individuals involved in the relevant breach.

Typically only loans are securitised via German SPVs, which are, in such transactions incorporated as limited liability companies under German law – cf. also (4) and (21) in this context.

All other assets are securitised through non-German SPVs, usually in a jurisdiction inside of the European Union, often in Luxembourg, Ireland or The Netherlands.

SPVs cannot conduct banking business in Germany.

Where German SPVs are used, just as in any other jurisdiction: through the use of trustees to which the SPV creates security over all of its assets to disincentivise claims against the SPV as well as limited recourse and non-petition provisions to ensure that all contractual counterparties do not bring claims against the SPV in a manner which would endanger the SPVs commercial position or which would not be consistent with the priorities of payments agreed in the relevant transaction documents. The SPVs are held by charitable trusts and set-up as orphan entities.

Credit support may be provided in the form of a subordinated loan or note and/or in the form of overcollateralization meaning that the assets sold and transferred to the SPV are sold below par and issues an instrument to the Originator whereunder the Originator receives proceeds, if any, that remain after all other creditors claims have been discharged. Yet none of these credit support techniques should result in express or implied recourse so as to not endanger the “legal true sale” nature of a transaction that is not to be recharactirised into a secured loan in the originator’s insolvency (see also question 3 above).

A transfer of receivables is effected by agreement between assignor and assignee. The debtor does not need to be notified to achieve a legally valid transfer and a ‘true sale’.

However, as long as the debtor is not notified of the transfer, the debtor may discharge the receivable by making payment to the assignor and, thereupon, the assignee can recover the payment only from the assignor, not from the receivable debtor. In other words: in practice, the receivable debtor is not required to double-pay prior to being notified of the assignment. However, following notification of the assignment and corresponding instructions to pay to the assignee, a debtor who continues to make payments to the originator will be obliged to make payment to the assignee. This is subject to an exception in the German Commercial Code for certain transactions: if the debtor was a merchant who had agreed a prohibition on assignment with the assignor, the assignment would still be valid, yet the debtor would have the right to continue to discharge its debt by payment to the assignor despite the prohibition on assignment and validity of the assignment.

A legally valid transfer and ‘true sale’ can be effected as set out above even if an assignment of receivables is prohibited pursuant to the agreement between the assignor and the debtor subject to the requirements of section 354a German Commercial Code. If an assignment is made despite a prohibition pursuant to the agreement between the assignor and the debtor, the debtor may discharge the receivable by making payment to the assignor even if the debtor has been notified of the assignment.

Mortgages/land charges are transferred by way of agreement between the transferor and the transferee and registration of the transfer with the competent land register which is associated with land register fees. Certificated mortgages/land charges (Briefhypotheken/-grundschulden) are transferred by agreement between transferor and transferee and hand-over of the mortgage/land charge certificate.

Ring fencing of assets without legal transfer can be achieved by use of a refinancing register, cf. (3) above.

As mentioned, inter alia, in the context of (3) above, the “true sale“, however, also requires that the sale of assets is not recharacterised into a secured loan for reasons of recourse. This is a second element that, over and beyond the valid transfer of receivables itself, is key in the context of the true sale analysis.

A transfer of receivables is effected by agreement between assignor and assignee. The debtor does not need to be notified to achieve a legally valid transfer and a ‘true sale’.

However, as long as the debtor is not notified of the transfer, the debtor may discharge the receivable by making payment to the assignor and, thereupon, the assignee can recover the payment only from the assignor, not from the receivable debtor. In other words: in practice, the receivable debtor is not required to double-pay prior to being notified of the assignment. However, following notification of the assignment and corresponding instructions to pay to the assignee, a debtor who continues to make payments to the originator will be obliged to make payment to the assignee. This is subject to an exception in the German Commercial Code for certain transactions: if the debtor was a merchant who had agreed a prohibition on assignment with the assignor, the assignment would still be valid, yet the debtor would have the right to continue to discharge its debt by payment to the assignor despite the prohibition on assignment and validity of the assignment.

A legally valid transfer and ‘true sale’ can be effected as set out above even if an assignment of receivables is prohibited pursuant to the agreement between the assignor and the debtor subject to the requirements of section 354a German Commercial Code. If an assignment is made despite a prohibition pursuant to the agreement between the assignor and the debtor, the debtor may discharge the receivable by making payment to the assignor even if the debtor has been notified of the assignment.

Mortgages/land charges are transferred by way of agreement between the transferor and the transferee and registration of the transfer with the competent land register which is associated with land register fees. Certificated mortgages/land charges (Briefhypotheken/-grundschulden) are transferred by agreement between transferor and transferee and hand-over of the mortgage/land charge certificate.

Ring fencing of assets without legal transfer can be achieved by use of a refinancing register, cf. (3) above.

As mentioned, inter alia, in the context of (3) above, the “true sale“, however, also requires that the sale of assets is not recharacterised into a secured loan for reasons of recourse. This is a second element that, over and beyond the valid transfer of receivables itself, is key in the context of the true sale analysis.

If debtors are natural persons, a data trustee structure is typically put in place. Under such structure, the originator and seller of receivables provides the SPV with lists of the receivables which entail debtor information only in encrypted form.

A notary, financial institution or similarly reliable entity is appointed as data trustee. The originator provides the data trustee with a decryption key that enables the decryption of the encrypted debtor information.

The originator acts as servicer and collects the receivables thereby avoiding a need for transfer of unencrypted debtor information or decryption of the encrypted debtor data in the ordinary course.

The data trustee is entitled and obliged to pass on the decryption key to the SPV (or the security trustee or a substitute servicer on behalf of the SPV) only if the originator/servicer defaults on the servicing or with respect to debtors that default on the payment of receivbales owed by them.

Yes, credit rating agencies are regulated pursuant to European regulations No. 1060/2009 and 462/2013 which are directly applicable in Germany.

Generally, German tax is payble by an SPV if that SPV is located in Germany or has an establishment in Germany for tax purposes.

If one of the aforesaid prerequisites is met, German trade tax is payable by the SPV. Generally, for trade tax purposes, only 75% of interest payable by the SPV on the notes or other instruments issued is deductible for the purposes of the determination of the taxable profit. An exemption to the effect that interest is fully deductible applies if the assets that are securitized have been originated by a bank or under certain transactions qualifying as banking business.

Generally, for German income tax purposes, interest payable by the SPV is fully deductible. If, over the term of a transaction, the assets of the SPV become impaired due to a deterioration of the creditworthiness of debtors or value of collateral, this may have to be taken into account in the SPVs tax accounts. If any such impairment does not result in any non-payment by debtors, this may result in an extraordinary profit of the SPV for the period during which payment in full is made or the impairment ceases to exist, which extraordinary profit is generally subject to income tax.

Depending on how the servicing and back-up servicing (if any) of securitised receivables is structured, such servicing/back-up servicing may constitute a service and the corresponding remuneration for the servicing my be subject to VAT.

Lastly, where the securitised receivables are themselves subject to VAT and such VAT is not paid to the tax authorities by the Originator, the SPV may be liable to pay such VAT to the tax authorities.

An additional structuring task in a securitisation is to achieve tax neutrality of the structure. In more complex structures, such tax neutrality can be covered with a binding tax ruling, which can be obtained from the German tax authorities if the SPV is located in Germany for tax purposes and the potential benefit of which then needs to be weighted against the aforesaid trade tax aspects.

There are no specific hurdles in Germany for cross-border transactions. Typically, trade receivables transactions involve multiple originator and debtor jurisdictions.

Transactions regularly provide for more or less detailed and extensive IBOR replacement provisions, but, in the case of floating interest rate transactions, not yet frequently for actual IBOR replacements.

The general German civil law framework is favorable, reliable and predictable for securitisations.

Trade tax is often quoted as the reason why securitisations other than loan receivables securitisations with a German incorporated SPV (which are exempt from trade tax) are commercially problematic.

To a very large extent, requlatory requirements applicable in Germany to securitisations are European requirements. While such requirements have added significantly to the transparency of securitisations, they have also burdened originators and investors significantly. Whether such requirements have struck the balance right between on the one hand protecting market participants and the securitisation market in general and on the other facilitating securitisation as a financing and re-financing instrument is sometimes debated. Yet the new rules have returned a certain stability to the market in most European jurisdictions, including in Germany.

There is an ongoing intitiative in which we participate to broaden also the scope of assets which can be securitised to include future flow receivables as well as receivables which are presently difficult to securitise due to confidentiality or other legal issues (such as health care receivables).

Covid-19 has substantially impacted many areas of the German economy and various legislative measures have been adopted over the course of the years 2020 and 2021 to deal with its effects and “soften the blow” to market participants and consumers in various sectors.

The most recent improvements that have been introduced as a result of the pandemic have been the modification of the Securitisation Regulation to now also allow Non-Performing Loan Securitisations and Synthetic Securitisations become part of the STS Segment. Otherwise the impact from Covid can be said to be limited and largely “over” in the sense that the backlog of transactions that have been delayed as much by COVID as much as by the uncertainties caused by the war in Ukraine has resulted in a sentiment that companies now want to originate more transactions, especially in the space of trade receivables transactions.

Covid-19 has substantially impacted many areas of the German economy and various legislative measures have been adopted over the course of the years 2020 and 2021 to deal with its effects and “soften the blow” to market participants and consumers in various sectors.

The most recent improvements that have been introduced as a result of the pandemic have been the modification of the Securitisation Regulation to now also allow Non-Performing Loan Securitisations and Synthetic Securitisations become part of the STS Segment. Otherwise the impact from Covid can be said to be limited and largely “over” in the sense that the backlog of transactions that have been delayed as much by COVID as much as by the uncertainties caused by the war in Ukraine has resulted in a sentiment that companies now want to originate more transactions, especially in the space of trade receivables transactions.