Germany seeks to curb 'locust' investors

A draft bill emanating from the Ministry of Justice could restrict the volume of investments in distressed debt, including real estate debt.

Attempts by Germany to introduce a new law that would change the way private equity firms, hedge funds and banks invest in distressed debt in the country have been branded “onerous”.

German law practice Schultze & Braun has argued against the Ministry of Justice’s proposed draft Risk Limitation Bill saying it would hurt more companies than the intended private equity and hedge fund firms.

The draft legislation would give borrowers the option to inhibit investors purchasing their debt by having the right to opt for a non-assignable loan at the time of concluding the loan agreement.

Under the plans, there would also be a duty to inform borrowers if their loan was assigned to an investor, coupled with the right to damages if the lender compulsorily enforced repayment before default actually occurred. The right to damages would apply even if the lender had not been negligent in foreclosing a loan.

The law, which could come into force later this year if agreed by the German Parliament, was described by one advisor as “protectionist”, building on past government hostility towards private equity and hedge funds investor, particularly those based in London and New York. That includes Lone Star, the US investor that invested heavily in non performing loan portfolios in Germany in the first half of the decade and was famously branded “locust” by the now retired German vice chancellor Franz Müntefering.

Annerose Tashiro, a lawyer at Schultze & Braun, said:  “The German Ministry of Justice has adopted the attitude of the previous vice chancellor (Franz Müntefering). The result should these proposals be introduced, which is certainly the Minister of Justice’s intent, will result in less debt available to trade coupled with more onerous obligations.”

Tashiro said German media outlets have reported that some residential loans have been foreclosed before any default had taken place and that this had sometimes happened through negligence on the part of investors. The new law would give the borrower the power to sue regardless of negligence if their loan is foreclosed before default.

She added: “Such legislation will hurt more (firms) than the so-called locusts.  In fact, big losers will also be banks operating in Germany and also German businesses looking for loans.  The legislation will mean banks will find it harder to sell on debts, making lending to businesses a riskier proposition than before. This will in turn make them less willing to lend to businesses without strong collateral to protect them against any default.”

Details of the bill were published at the end of January and must now pass through the German Parliament before becoming effective.