Restructuring of promissory notes

Boom in promissory note market

Promissory note loans are an often used building block of corporate finance in overcoming credit history, fostered by the pressure of investors. Thus, the promissory notes market is growing further in accordance with the growth observed in previous years. With a volume of EUR 27 billion its value is only marginally higher than in 2016 (EUR 25,4 billion); however, in 2017 the volume is also spread across noticeably more placements. Promissory notes are attractive to borrowers because they enable access to institutional Investors, who would otherwise not participate in conventional banking consortia. Furthermore, the promissory note loan is particularly interesting to borrowers due to its minimal effort for documentation and the absence of follow up obligations under capital markets law, which arise for example when issuing bonds.

The largest group of investors for promissory notes are still private banks and savings banks. However, due to its recent success promissory note loans have also attracted the attention of new groups of investors. Thus, in the last two years almost half of promissory notes were issued by non-German companies and therefore placed accordingly internationally. Especially foreign credit institutions are increasingly involved with documentation and placing of promissory notes. Given that issuers of promissory notes often do not dispose of an external rating, the credit quality can only be assessed limitedly. Thus, the risk of the investment in promissory notes is accordingly higher for the creditor.

The advantages of promissory notes, especially the distribution of the loan amount on many creditors, become a disadvantage in issuer’s crisis, because the borrower is then faced with many creditors, which can assert their rights individually. Unlike in a syndicated loan agreement, there is no legal relationship between the lenders. As a result of this, changes to the agreement cannot be implemented by way of a majority decision of the creditors, but instead a unanimous decision is needed. On the other hand, each creditor can exercise its rights, such as the right of termination, independently from the other creditors.

The problem in restructuring of promissory note loans is aggravated by the fact that promissory notes are frequently used as a building block in financing in combination with other financing tools (e.g. syndicated loans, bilateral loans, bonds, factoring and securitisation programs). In case of a breach of the terms of a promissory note this can lead to a crisis in the issuer's group because there is a risk that the breach will affect not only the issuer but also other companies in a group, e.g., if they have assumed joint liability for the obligations under the promissory notes. Another risk is that the breach of contract through cross-default clauses may trigger grounds for termination in other financial instruments of the group. Facing a multitude of lenders in this situation of impending termination is a disadvantage for the borrower in comparison to other forms of financing.

However, there are various contractual arrangements to deal with these problems in the terms and conditions of a promissory note. Whether it may be that for certain decisions, majority clauses are introduced, that the investors in the promissory notes must appoint a common representative, or that the transferability of promissory notes is limited. Although these regulations do not yet correspond to the "typical" promissory note loan, there inclusion should be considered in order to avoid or facilitate the restructuring of promissory notes in the crisis of a borrower. For details we would like to draw your attention to the article "Schuldscheindarlehensverträge in der Restrukturierung" by Nikolai Warneke and Florian Becker, which appeared in issue 28 of Zeitschrift für Wirtschaftsrecht (ZIP).