The current market for so called Non-Performing-Loan (NPL)-transactions is ideal: On the one hand, a couple of German ship financing banks is under great pressure to dispose of numerous non-performing shipping loans; others intend to radically reduce their shipping portfolio due to strategic reasons. On the other hand, investors are looking for profitable investment opportunities in the shipping sector.
NPL-transactions can be a win-win for both parties:
- Banks can quickly and easily reduce their costs of capital for non-performing loans, reduce the increasing cost-pressure on internal workout-teams, and they can refocus on their core activities.
- Investors can profit from buying ships with potential for recovery at favourable prices.
It is therefore more than likely that the recent huge transaction we saw in the German market whereby Nord/LB sold a USD 1.5bn portfolio of shipping loans to KKR and an unnamed sovereign wealth fund was only the kick-off for many NPL-transactions to follow.
The legal landscape
Banks can outplace their credit risks in the capital market synthetically by way of Credit Default Swaps (CDS); or they can sell their credit exposure physically (True Sale). According to German law, rights under a loan agreement are generally transferable – either by way of assignment of rights (Abtretung) or by way of assignment and transfer by assumption of contract (Vertragsübernahme) of any rights and obligations. The corresponding security rights can also easily be transferred:
- The abstract acknowledgement of debt (abstraktes Schuldversprechen) can be assigned, whereby the ship mortgage as accessory right is automatically transferred by operation of law (cf. § 401 BGB). Other accessory rights like sureties (Bürgschaften) and pledges (Pfandrechte) are also automatically transferred by operation of law (cf. § 401 BGB) as soon as and to the extent the underlying credit rights are transferred.
- The ship’s earnings and insurances can be further assigned,
- Claims and rights under any guarantees can be further assigned.
A due diligence of the relevant loan agreements governing the rights to be sold and transferred should particularly pay attention to the following issues:
- Does the assignment or the assignment and transfer by way of assumption require the consent of the borrower and if so, has the borrower given his consent?
- In case of a syndicated loan, does the assignment or the assignment and transfer by way of assumption require the consent of all or the majority of the syndicate members and if so, has the required consent been given?
- Does the selling bank violate the bank secrecy by forwarding information to the buyer?
- In case of any third party guarantors, is their consent required and if so, have they given it?
Dr. Oliver Rossbach