A slowing economy, corporate-bankruptcies and falling home prices in Eastern Germany, have led to German banks accumulating a number of problem loans on their balance sheets. A collective 250 billion of non-performing loans are estimated to be on German bank's books (see ASR 9/9/04) and, market sources say, the opportunity for a burgeoning German NPL securitization market are closer to realization.
"Recently, these banks have financed outside of the securitization market but securitization is being eyed as an exit strategy and we should see the first NPL deal emerge hopefully sometime this year," said a source at Mayer, Brown, Rowe & Maw. A number of German banks are currently restructuring their loan portfolios either by selling NPLs, spinning them off to subsidiaries, or selling them to third parties.
But legal hurdles persist on the back of a May 2004 ruling made by the Frankfurt Court of Appeal. The Frankfurt court stated that where a loan had been sold in breach of the lending bank's duty of confidentiality, the transfer of this loan would be void, according to Standard & Poor's. The court confirmed the grant of an injunctive relief. The court also made statements regarding whether the lending bank's confidentiality duty contained an implied prohibition on the assignment of a loan.
"The case caused a substantial amount of legal thinking in the context of securitization with a true sale of the assets," said analysts at S&P. "In particular, the German legal community wondered about the interaction between this Frankfurt case and the 1997 release from the Bundesaufsichtsamt fur das Kreditwesen (BAKred, now BaFin) setting out the circumstances in which a financial institution was able to sell assets in the context of securitization while complying with its duties of confidentiality."
According to a Banking & Financing update published by Mayer Brown Rowe & Maw, the Frankfurt court's decision had no relevance for non-performing loans. It was implicitly ruled that a loan receivable could be assigned if the debtor is in default or if the borrower's behaviour is otherwise unlawful. Under the data protection law with the outlined circumstances, a bank has a rightful interest to terminate the loan, assign the loan receivable and disclose the debtor's personal data to the assignee.
The court expressively recognized the assign ability of defaulted loan receivables in spite of the banking secrecy rules. "But the German market is still waiting on an outcome to the May decision where the courts granted an injunction in order to prevent the realization of a stock pledge, where it ruled that the assignment of underlying loan receivables had been void due to infringement on German banking secrecy rules," said one source at the firm. "The judgment of first instance was held in December and we expect the issue to be resolved at some point this year."
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