Barclays Capital analysts said that a new German law designed to give bondholders more rights and flexibility missed a chance to provide some much needed clarity on the future of securitizations.
The new German Debenture Act became effective on Aug. 5 and applies to all new bonds governed by German law.
Bondholders in existing transactions can decide by a 75% majority vote to have the new rules apply to their transaction as well. The new law expands and updates the rights set out in the old law from 1899, after a 16-year legislative review process.
The law applies to structured finance bonds, each class of notes, such as in a typical multi-tranche securitization, is treated as a separate bond for the purposes of the law.
Issuer obligations must meet new transparency requirements and be focused on enabling bondholders to determine the issuer’s exact obligations, as set out in bonds' terms and conditions.
Changes to the terms and conditions under the new law are possible either by agreement of the issuer and all bondholders or by the majority resolution of the bondholders of the issuer’s proposed changes. Material changes to the terms and conditions require a mandatory 75% majority vote.
The new law does not provide any specific rules for securitization with multiple bond tranches. “The treatment of each bond tranche in the same transaction as a separate bond does not help settle the possible conflicts between junior and senior tranches,” Barclays analysts said. “In the end it will be likely that any changes to the terms and conditions in a securitization deal will require a 75% majority resolution from each individual tranche.”
However, analysts said that the appeal for potential modification to the terms and condition has a time limit of one month and will provide more certainty to bondholders than under the old law, where no time limit was stated.
