Corporate Finance: Bonds (in restructuring)

With a view to the burdens that various corona aid packages (see here, in German) may have left on the balance sheets of small and medium-sized enterprises in particular, alternative or supplementary means to classic loan financing become increasingly popular in Germany. Also, as is well known, the financing of the “transformation” of the German economy towards a “green economy” requires investments in the billions. Large companies like to “tap” the capital market for such financing projects by issuing bonds. Lufthansa, for example, was recently able to repay the state aid granted with the help of bond issues (here, in German). Against this background, in another article from my series on “Possibilities of corporate financing” – after sale and lease back (here) and promissory note loans (here) – I examine this time the corporate bond, with special attention to the so-called “Mittelstandsanleihe” or “mini-bond”. Additionally I will take a first look at the restructuring of the Eterna bond through a StaRUG-procedure, which took place last summer.

1. Basics

A “corporate bond” is simply a bond issued by a company. Under German law, bonds are legally classified as “bearer bonds”, see § 793 ff. BGB. The non-named designation of the respective owner of the corporate bonds (in such a case it would be a so-called “registered bond”) enables the paper to be transferred to third parties without further issues. In contrast to the promissory note loan, for example (see here again), the securitisation of the claim in a “tradable” document thus ensures marketability.

Before the financial crisis, corporate bonds were initially only issued by large German (listed) companies, and the volume of the individuell bonds issued was generally over 100 million euros (see here, in German). When, after the financial crisis, financing conditions were tightened, especially for SMEs (keyword: “Basel III”, here), both national and European policymakers focused on alternative, bank-independent forms of financing. Therefore, starting in 2010, market segments for the trading of so-called “Mittelstandsanleihen” (also known as “mini-bonds”) were established on numerous German stock exchanges – also with political support – which offered conditions for bond issues that were suitable for SMEs with minimum issue volumes of 10 to 25 million euros as well as lower disclosure obligations and rating requirements compared to the regulated bond market.

Bond issues are often advantageous for the issuing (medium-sized) company compared to a bank loan because the obligation to provide personal and material collateral associated with the latter does not exist or exists to a much lesser extent and the provisions included in the bond to protect the bondholders (“covenants”) usually fall short of the effect of corresponding loan conditions. Furthermore, the investors’ rights of termination are weaker compared to those of the issuers, increases in the financing volume are often also possible without the investors’ consent, and concrete earmarking of the funds raised is hardly ever found. Finally, the respective stock exchanges only state a limited prohibition on contractual subordination their general issuing conditions of (cf. e.g. § 19 para. 1 lit. d) AGB FV Deutsche Börse AG (“Scale“), here, in German). For this reason, corporate bonds in their current form – also with regard to the weaknesses in the involvement of “Capital Market Partners” required for the issue and the rating of a particular bond, the problems of which will not be discussed here – are sometimes described as a “first loss piece”, in which the investors are structurally disadvantaged compared to the existing creditors and shareholders due to the conception of the bond structure (see on the situation before 2014 here (in German); on corporate bonds in the crisis also below).

2. Market development

The newly created market for “Mittelstandsanleihen” grew considerably in the first few years: for example, the issued volume of such bonds increased from Euro 805 million in 2010 to Euro 2.352 billion at its (first) peak in 2013 (see here, in German). However, more often than not rather financially weak companies whose business model had already outlived its usefulness (see only here (in German), among others with the “German Pellets” case) used this marekt for refinancing purposes. Due to the increasing number of defaults (in retrospect it turned out that 60% of the bonds traded on the Stuttgart “Bond M” had to be restructured or defaulted completely (here, in German)), the – compared to the above description often even more lax – issuing conditions were tightened and the corresponding stock market segments, which were only founded in 2010, were partly “buried” (see Handelsblatt on the end of the “Bond M” standard, here, see also the analysis here, both in German).

While the corporate bond market in general continued to rise after 2013 and broke through the Euro 100 billion mark in 2018 (here, in German), the market for “Mittelstandsanleihen” initially continued to collapse and only recovered from 2017 onwards (here, in German). Despite Corona, the number and size of issues increased – after an interim slump – both in general (see again here, in German) and in the mid-market segment (here, in German). This is likely to be primarily due to the issuance of so-called “green bonds”, i.e. bonds that are intended to serve a (whatever form of) “sustainable” corporate development (here and in particular the analysis of the Deutsche Bundesbank here (both in German)).

3. Corporate bonds in the crisis

The question of the fate of corporate bonds in a crisis arises not only against the backdrop of the difficulties of “Mittelstandsanleihen” issued before 2013, as already indicated above, but also because of the recent restructuring of the corporate bond of Eterna Mode GmbH through StaRUG proceedings (see here for the basics on this new restructuring tool) before the Munich Insolvency Court (Ref.: 542 RES 2180/21) in the summer of 2021 (see only here and here, both in German). Eterna was ultimately able to impose a waiver of 87.5% of the nominal value of the bond on the bondholders. In other words, the investors only got back 12.5% of the capital they had paid in. How was this large haircut even possible? First, I will share some basic explanations on the restructuring of bonds in the different stages of the proceedings, before briefly looking at the outcome of the Eterna restructuring:

a) Out-of-court bond restructuring

If a bond-financed company enters a crisis, the question arises as to how, in view of the often thousands of bond investors, the bond can be included in an out-of-court consensual restructuring/reorganisation. Since the reform of the German Bond Act (Schuldverschreibungsgesetz – SchVG) in 2009, it is possible to resolve the deferrals or waivers of interest usually required outside of restructuring and insolvency proceedings by a 75% majority of the voting bondholders according to § 5 para. 3 SchVG, if the bond terms provide for corresponding amendments. If the option to amend the bond terms and conditions is missing, then a 100% approval of the creditors’ meeting is required outside formal proceedings – which is probably rather illusory. However, it should be noted that any bondholder who voted against a corresponding resolution (e.g. to extend the term of the bond) in the bonhdolders’ meeting (or the “vote without a meeting” possible under § 18 SchVG) is entitled to challenge the resolution under § 20 para. 2 SchVG. Unless a separate release is granted by the competent Higher Regional Court, cf. § 20 para. 4 SchVG, the resulting delay in the implementation of the shareholders’ resolution alone is likely to significantly jeopardise any restructuring and reorganisation efforts.

b) Bond Restructuring under the StaRUG

Pursuant to § 19 para 6 SchVG, which has been in force since 1 January 2021, claims arising from bonds may be included in restructuring proceedings under the StaRUG, in which case the provisions contained in § 19 para 1 to 5 SchVG for insolvency proceedings will apply mutatis mutandis to the StaRUG proceedings. In this context, it could still prove problematic that the BGH applies the provisions of the German Insolvency Act (InsO) and not those of the SchVG for the determination of the required majorities for the adoption of resolutions (cf. BGH, judgement of 16 November 2017 – IX ZR 260/15, para. 12, in German). This distinction already plays a role in the case of a restructuring of the bond terms themselves, as § 5 para 3 SchVG “only” requires a 75% majority of the “participating voting rights”, whereas § 25 para 1 StaRUG requires a majority of 75% “of the voting rights in this group” for this purpose. In other words, 75% of all creditors in this group must vote in favour, and even non-participation in the vote is considered a rejection. The resulting differences in the outcome may be even more pronounced regarding the appointment of the “joint representative” of the bondholders: If the view of the BGH is applied to this appointment, a majority of 75% of the bond holders as “voting rights in this group” would be required for the appointment in accordance with the StaRUG, cf. again § 25 para. 1 StaRUG. In contrast, in the case of an appointment under the SchVG, a simple majority of the voting bondholders would be sufficient for the appointment of the joint representative, cf. § 7 in connection with § 5 para 4 SchVG. There is currently no known court decision on this issue, so that the currently unclear legal situation is likely to lead to considerable uncertainty in restructurings.

c) Bond restructuring under InsO

Pursuant to § 19 para. 2 SchVG, the insolvency court must convene a creditors’ meeting (of the bondholders only!) after the commencement of insolvency proceedings against the bond issuer’s assets for the purpose of electing a joint representative, if such representative had not been appointed before. This representative is then solely entitled and obliged to assert the rights of the creditors in the insolvency proceedings pursuant to § 19 para 3 SchVG. In other words, he is entitled and obliged to register the claim and to vote in the creditors’ meeting (e.g. on an insolvency plan).

d) Restructuring of the Eterna bond

In the case of the restructuring of the Eterna bond, a restructuring of the bond prior to the initiation of the StaRUG proceedings had failed because the required majorities were not reached, but at least a common representative was appointed at the creditors’ meeting – in accordance with the provisions of § 7 in conjunction with § 5 para SchVG already discussed above. This joint representative could then approve the restructuring of the bond terms and conditions as representative of all bond creditors pursuant to § 19 para. 3 SchVG (analogously) pursuant to § 2 para. 2 StaRUG (see also here, in German). The problem of the required qualified majorities discussed above thus did not arise at all in the Eterna case.

The joint representative then approved the restructuring of the bond to the extent described above. Although the previous majority shareholder also had to “lose some ground” by waiving a shareholder loan of 32.3 million euros, injecting further equity and accepting another shareholder (here, in German), he will also be able to participate in an “upside” of the restructuring, i.e. the increase in value of the company in the event of a successful restructuring, due to the retention of his shareholder position. In contrast, the bondholders are “out” after being paid the 12.5% (which is also supposed to cover the accrued interest!). As the cases of Air Berlin (here, in German) and Wirecard (here, in German) impressively show, they may have received even less, if not nothing, in an insolvency, but in such cases the existing shareholders also go home empty-handed. So there is much to suggest that Eterna should be seen as another example of bonds as the “first loss piece” in a company’s financial structure referred to above.


The rising issuance and volume figures for corporate bonds overall, and especially for SME bonds, at least indicates the financing pressure on SMEs due to the implementation of the Basel III conditions (because the financing volume extended to SMEs seems to have declined (at least due to the pandemic, cf. here, in German).

This increased “exposure” to corporate bonds is likely to be welcomed by policymakers at first. From the companies’ point of view, too, the “tradability” of the financing and the fundamentally simpler restructuring of bonds – especially compared to a “normal” bank loan – is likely to come at a favourable price with a somewhat higher interest rate. This is because the issuing company is likely to welcome bonds as a “first loss piece” just as much as the co-financing banks.

From the investors’ point of view, on the other hand, the risk pricing of this “investment product” – even in the current negative interest rate environment – is considered far too low. For example, the Eterna bond mentioned above had an interest coupon of only 7.75% (but even this interest was not paid). Nevertheless, in view of the now universally propagated “green bonds”, the number and volume of bonds issued is likely to increase even more – with, in case of doubt, mediocre transparency and quality of the respective issuers. In the event of a renewed phase of weakness in the capital markets, the astonished public will thus again be confronted with “surprising” news of defaults on corporate bonds.

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