Debt Capital Markets Legislation
1. What are the main restrictions on offering and selling debt securities in your jurisdiction?
Main Restrictions on Offering and Selling Debt Securities
The main restriction on offering and selling debt securities in Germany is the need for a securities prospectus for a public offering and/or listing on a regulated market, under Regulation (EU) 1129/2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market (Prospectus Regulation).
In addition, certain types of debt securities, in particular "structured" finance products, also require a key information document containing the main features of the debt security under Regulation (EU) 1286/2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs Regulation).
Restrictions for Offers to the Public or Professional Investors
The "manufacturer" of the debt security (in most cases, the issuer) must establish a target market in compliance with Directive 2014/65/EU on markets in financial instruments (MiFID II), in particular as to whether the offering is directed only towards qualified investors or to the retail market.
2. What other legislation or guidelines do issuers and underwriters of debt securities need to be aware of in your jurisdiction?
Issuers and underwriters must comply with the following regulatory frameworks:
- The German Securities Prospectus Act (Wertpapierprospektgesetz), which contains, among other things, liability provisions relating to securities prospectuses.
- German Civil Code (Bürgerliches Gesetzbuch), containing regulations on contractual terms and conditions.
- German Bond Act (Schuldverschreibungsgesetz), governing the structuring of bond issues.
- Regulation (EU) 596/2014 on market abuse (Market Abuse Regulation), which imposes a number of post-listing obligations.
- MiFiD II.
Market Activity, Trends and Deals
3. Outline the main market activity and deals in your jurisdiction in the past year. Have any trends emerged in the last year?
Overall, 2020 was a rather weak year for corporate bonds in Germany in terms of issuance volume, while the number of transactions remained constant. Generally, the focus was on institutional investors as the target group rather than retail investors. In particular, small- and medium-sized companies (the SME growth market) suffered from the market impact of the COVID-19 crisis.
In 2020, a new type of product was introduced, a Green Federal Bond, which was issued for the first time in 2020 according to the "twin concept". This concept consists of issuing a conventional bond on similar terms together with its green counterpart. The product was very well received by the market and was oversubscribed several times.
In the second half of 2020, "contingent convertibles", were issued again, especially among professional investors. These are debt instruments issued mainly by European financial institutions. Contingent convertibles operate in a similar way to conventional convertible bonds. They have a specific strike price, above which the bond can be converted into equity or shares. Another name for these investments is enhanced capital note (ECN) and they are generally high-yield products, helping the issuer to absorb a loss of equity.
In 2021, the market became more active again. Green financing is expected to continue to grow with the EU Green Bond Standard being adopted this year, which will set out specific requirements for the issuance of green bonds on a voluntary basis throughout Europe and provide a regulatory instrument in this area for the first time.
Structuring a Debt Securities Issue
4. Are different structures used for debt securities issues to the public (retail issues) and issues to professional investors (wholesale issues)?
There are different structures for issuing debt securities to the public or to professional investors. If the debt security is to be sold to retail investors, there are some special features to be considered compared to marketing to professional investors. This applies especially with the issuance of bonds, where:
- The issuer must prepare and publish a securities prospectus.
- The terms and conditions are more strictly controlled, so that the issuer has less flexibility.
- Bonds sold to retail investors are usually also listed on the stock exchange to ensure a liquid secondary market.
- The bonds are denominated in a different way. Usually, a bond marketed to retail investors is denominated in EUR1,000 per bond, while those marketed to professional investors are denominated in EUR100,000 per bond.
- Additional product information must be distributed in addition to the securities prospectus for bonds marketed to retail investors.
Are trust structures used for issues of debt securities in your jurisdiction? If not, what are the main ways of structuring issues of debt securities in the debt capital markets/exchanges?
The concept of a trust is unknown In German law. Therefore, there are no German trust structures used in debt transactions.
In principle, there are two options for the issuance of debt securities under German law:
- Self-issuance directly from the issuer to the investor.
- Third-party issuance through one or more investment banks acting as intermediary.
The first only takes place in private placement structures. The latter is the standard.
If the issuer intends to raise debt capital over a longer period of time and in large volumes, it is possible and very common to set up an "issuance programme" such as a:
- Commercial Paper (CP) programme.
- (Euro-)Medium Term Note (MTN) programme.
- Debt Issuance Programme (DIP)).
In this case, a framework agreement is entered into between the issuer and a syndicate of banks, and the debt securities are issued in several tranches in accordance with the framework agreement. However, stand-alone bonds remain the most common form of issuance in Germany and are generally addressed to qualified investors.
Main Debt Capital Markets/Exchanges
6. What are the main debt securities markets/exchanges in your jurisdiction (including any exchange-regulated market or multi-lateral trading facility (MTF))?
A listing on a stock exchange is typical for larger offerings, to ensure a liquid secondary market.
There are two options for the listing:
- An admission to a regulated market.
- A listing in an unregulated market (Freiverkehr) regulated by the relevant stock exchange.
For admissions to the regulated market, the Luxembourg Euro multilateral trading facility market is highly dominant. Admission to the Irish Stock Exchange (GEM) is also widespread, especially for high-yield bonds.
In Germany, the most prominent unregulated markets for the listing of bonds are the:
- Frankfurt Stock Exchange (www.boerse-frankfurt.de).
- Stuttgart Stock Exchange (www.boerse-stuttgart.de).
The Frankfurt Stock Exchange has recently started a secial Green Bonds segment. This segment bundles all bonds admitted to trading on the Frankfurt Stock Exchange that meet the International Capital Markets Association (ICMA)'s rules for green bonds. This segment is intended to simplify the search for investors interested in environmentally conscious investments.
7. Who are the main regulators of the debt capital markets in your jurisdiction?
The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) (BaFin) is the competent authority for the approval of a prospectus in Germany. The prospectus approval is initially valid only in the country of the approving authority, but the prospectus can also be (on request and taking into account the European language regime) notified to regulatory authorities in other EEA countries. Afterwards, the securities described in the prospectus can be offered to the public in those countries (the "European Passport").
In addition, the Frankfurt Stock Exchange is organised as an institution under public law with partial legal capacity, and is subject to public supervision. It sets the rules for admission to trading in a regulated market. A private company (in the case of the Frankfurt Stock Exchange, Deutsche Börse AG) handles the applications for admission to trading on the unregulated market.
Listing Debt Securities and Admission to Trading
8. What are the main listing requirements for bonds and notes issued under programmes?
Corporate bonds can be admitted to the Prime Standard or included in the Scale segment of the Open Market at the Frankfurt Stock Exchange. The Scale segment generally sets less stringent eligibility requirements than the Prime Standard.
For the Prime Standard, the issuer must meet the following requirements for admission of the bond:
- Minimum bond volume of 100 million placed.
- Denomination of the bond in partial bonds of EUR1,000.
To be included in the Scale segment, the issuer must meet the following requirements:
- Compliance with national accounting standards for issuers with an EU domicile, or International Financial
- Reporting Standards (IFRS)
- A corporate history of at least two years.
- A placed bond volume of at least EUR20 million.
- A denomination of a maximum of EUR1,000.
- Fulfilment of certain financial ratios (for example, EBIT interest coverage of at least 1.5 and EBITDA interest coverage of at least 2.5).
Exceptions are possible for issuers with shares listed in the Frankfurt Stock Exchange, DAX or MDAX share indices.
The stock exchange determines the specific requirements for the admission or inclusion of securities in the various segments. The BaFin is then the primary authority responsible for supervising post-listing obligations.
For DIPs, there are some specifications due to the concrete features of this type of security. Individual draw-downs under a valid base prospectus are permissible if the final terms of the offering are published before the launch.
Minimum Size Requirements
See above, Main requirements.
Trading Record and Accounts
See above, Main requirements.
See above, Main requirements.
9. Are there different/additional listing requirements for other types of securities?
There are some additional requirements for the issuance of structured finance products (debt securities that are dependent on, typically, other securities that underlie them). The issuer must prepare an accompanying key information document in accordance with the PRIIPs Regulation containing the main features of the financial product. This is intended to enable investors to obtain sufficient information about the product in a clear form so that they are able to take an informed investment decision.
The stock exchange management imposes additional requirements if the issuer intends to list green bonds in the Green Bond segment on the Frankfurt Stock Exchange. Although the ICMA standard is not binding, it recommends (and the Frankfurt Stock Exchange follows this recommendation) the compilation of a green bond framework with the following components in accordance with the current market practice:
- Use of proceeds.
- Process for project evaluation and selection.
- Management of proceeds.
Continuing Obligations: Debt Securities
10. What are the main areas of continuing obligations applicable to companies with listed debt securities and the legislation or rules that apply?
Post-listing, various obligations arise that affect the issuer and its major shareholders, as well as directors and officers of the issuer. The most important post-listing obligations applicable for debt securities listed on a regulated market are:
- Submission of an annual financial report within four months of the end of the reporting period.
- Submission of half-yearly financial reports within three months after end of reporting period.
- Submission of quarterly statements within two months after end of reporting period.
- Continuous updating, publication and submission of a corporate calendar.
- Publication and communication of insider information in English
All reports and documents must be transmitted to Deutsche Börse AG through the Exchange Reporting System. The post-listing obligations must be fulfilled in German and English.
The fulfilment of these obligations is supervised by BaFin.
11. Do the continuing obligations apply to overseas companies with listed debt securities?
There is no differentiation between the continuing obligations of national and overseas companies if debt securities are listed in Germany. If the obligations relating to the prohibitions on market manipulation and insider dealing are fulfilled in another EEA state, they do not have to be additionally fulfilled in Germany.
12. What are the penalties for breaching the continuing obligations?
Violations of the post-listing obligations can result in:
- Criminal and misdemeanour sanctions.
- Administrative measures.
- Civil liabilities.
- Sanctions under competition law.
Fines of up to EUR2.5 million can be imposed on legal entities, and up to EUR1 million on natural persons. BaFin can also prohibit natural persons from trading securities on their own account for a period of up to two years. A sanctions committee decides on the consequences of violations of duties under the rules of the Frankfurt Stock Exchange, which can include:
- Administrative fines.
- Public reprimands.
- The exclusion from trading for up to 30 days.
Advisers and Documents: Debt Securities Issue
13. Outline the role of advisers used and main documents produced when issuing and listing debt securities.
The managers' counsel typically drafts the terms and conditions and the placement agreement, while the issuer's counsel looks after the required resolutions to be taken by the corporate bodies of the issuer.
The following documents will be discussed and prepared together with the banks, legal advisors and/or auditors:
- Signing/closing memorandum.
- Paying agency agreement.
- Trustee agreement under foreign law (if applicable).
- Comfort letter.
There are only small differences in the documentation between wholesale and retail debt securities issues, as the documents above are internationally generally highly standardised to best market practice. The underwriting agreement for retail offerings may contain other representations and warranties. The legal opinions, disclosure letters and comfort letters are drafted in accordance with general standards and do not differentiate between retail and wholesale debt securities issues.
Debt Prospectus/Main Offering Document
14. When is a prospectus (or other main offering document) required? What are the main publication/delivery requirements?
In principle, a prospectus must be prepared for every public offering of securities and their admission to trading on a regulated market. Securities include:
- Securitised debt instruments, including, among other things, certificates and structured finance products.
The prospectus requirement extends to participatory loans, subordinated loans or other comparable forms of investments that grant or provide the prospect of interest and repayment or an asset-based cash settlement in exchange for the temporary provision of liquidity. After the preparation of the prospectus, it must be filed with the competent authority, which in Germany, depending on the place of offering and/or listing and the registered seat of the issuer, is the BaFin. After several rounds of comments and re-filings, the securities prospectus must be approved by the competent authority before being published on the issuer's website ahead of the public offering.
15. Are there any exemptions from the requirements for publication/delivery of a prospectus (or other main offering document)?
A prospectus for the public offering of debt securities is not required if:
- The offer volume is below EUR8 million.
- The offer is addressed exclusively to qualified investors.
- The offer is addressed to fewer than 150 natural or legal persons per EEA member state who are not qualified investors.
- The offering has a minimum denomination of EUR100,000.
- The issuance is of government bonds.
- The bond:
- is issued continuously or repeatedly by a credit institution;
- has an aggregate total equivalent value in the EU of less than EUR75 million per credit institution over a period of 12 months;
- is not subordinated, convertible or exchangeable;
- does not entitle the holder to subscribe to or acquire other types of securities; and
- is not linked to a derivative.
However, even if a prospectus is not required, additional requirements under the German Securities Prospectus Act may apply when selling the bond to retail investors.
16. What are the main content/disclosure requirements for a prospectus (or other main offering document)? What main categories of information are included?
The mandatory contents of a prospectus vary depending on the particular type of security and offering. A standard prospectus for the issuance of debt securities to the public mainly includes the following:
- Summary of the prospectus.
- Risk factors.
- Description of the business.
- General information about the issuer.
- Trend information.
- Material contracts.
- Information on the governing bodies of the company.
- Financial information about the issuer, including historical financial statements according to IFRS or applicable national standards for the last two years prior to the offering.
- Recent developments and outlook.
It is possible to prepare a base prospectus if a debt security is issued as part of a DIP. This form of prospectus makes it possible to initially include all necessary information (for example, on the issuer) in the base prospectus, but to determine individual terms and conditions of the offer only shortly before the public offering and to publish them in the final terms and conditions without further review by BaFin. This allows for an accelerated approval of the "new" part of the prospectus before the issuance.
17. Who is responsible for the prospectus (or other main offering document) and/or who is liable for its contents?
The responsibility for the content of the prospectus must be expressly assumed by the offeror, issuer and bank(s) as the applicant for admission or guarantor. The persons responsible for the prospectus are generally liable for incorrect and/or incomplete material information in the prospectus. Prospectus liability is not governed by European law but is subject to national regulation (this is the German Securities Prospectus Act in Germany).
If a key information document is also published, a retail investor can claim damages against its creator if the document or its translation:
- Is misleading or inaccurate.
- Does not comply with the relevant parts of the legally binding pre-contractual and contractual documents.
- Does not comply with the legal requirements.
In contrast to prospectus liability, liability for the key information document is directly regulated by EU law. The claim is directed against the creators, that is, any natural or legal person who issues a key information document or modifies it with regard to its risk or return profile or its costs. These can include, for example, fund managers, insurance companies, credit institutions or investment firms. Compensation for damages includes losses incurred by retail investors.
Timetable: Debt Securities Issue
18. What is a typical timetable for issuing and listing debt securities?
A typical timetable for issuing and listing debt securities can cover several weeks, if not months, in particular in case of a debt-issuance programme for which a new base prospectus must be drafted. If there is already a valid prospectus on which the issuance can be based, the process is much shorter. The timetable typically includes the following phases:
- Preparation of transaction documents (terms and conditions, agreement, resolutions).
- Selection of advisors.
- Market sounding.
- Issuance, payment and settlement.
After the settlement, the issuer must follow the applicable post-listing obligations.
Tax: Debt Securities Issue
19. What are the main tax issues when issuing and listing debt securities?
The tax issues when issuing and listing debt securities are highly fact-specific and there is no general tax advice.
Clearing and Settlement of Debt Securities
20. How are debt securities cleared and settled and what currency are debt securities typically issued in? Are there special considerations for holding, clearing and settling debt securities issued in foreign currencies?
Debt securities are typically issued in Euro, although some are (dual)listed in the US and denominated in US dollars.
In principle, there are no special features for debt securities denominated in foreign currencies, with the exception of special settlement requirements for the paying agent.
21. Are there any proposals for reform of debt capital markets/exchanges? When will these proposals be likely to come into force?
The EU aims to create a Capital Markets Union in the long term. Although no immediate reform of the capital markets is currently intended, far-reaching changes can be expected at European level as part of the EU Green Deal and the Action Plan for Sustainable Finance. The following changes are expected:
- Changes in the organisation of UCITS and AIFs.
- Changes in the capital requirements of banks and credit institutions.
- Proposals for amendment and European harmonisation of the reporting guidelines on corporate social responsibility.
- Enhanced disclosure requirements for certain capital market products.
In addition, a recent change in German law allows for companies to issue token-based bonds for the first time. The German parliament (Bundestag) passed the necessary law for the introduction of electronic securities (Gesetz über elektronische Wertpapiere) in May 2021. Under the new law, securities will no longer be issued in paper form and will only be issued and deposited in an electronic register. The European Investment Bank has already made use of this new feature and issued a digital bond in 2021 based on blockchain technology.
Stock Exchanges and Regulatory Authorities by Jurisdiction
Frankfurt Stock Exchange (www.boerse-frankfurt.de), including the following segments:
- Prime Standard.
- Green Bonds.
Financial Market Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) (BaFin) (www.bafin.de)
Withholding Tax on Interest and Stamp/Transfer Duties Relating to Debt Instruments
Is there any withholding tax on interest payable on debt instruments, and what is the rate?
Are any exemptions commonly used for withholding tax?
Are there any stamp or transfer duties or notaries' fees payable on issues or transfers of debt instruments, and what is the rate?
Are any exemptions from stamp/transfer duties or notaries' fees commonly used?
For certain debt instruments a 25% withholding tax and a 5.5% solidarity surcharge are payable.
Certain exemptions may be available, depending on the tax status of the investor.
Authored by Michael Schlitt und Susanne Ries.
The authors thank Laura Esmaty and Sophie Wollenweber for their assistance in drafting this article.