Creating collateral security packages

Types of collateral

What types of collateral and security interests are available?

Under German law, security can be created over all present and after-acquired assets of a project company. There are two types of security: security over real property and security over personal property. A further distinction is made between accessory and non-accessory security.

Accessory security requires the existence of an underlying debt. Non-accessory security is, in principle, independent of the underlying debt but tied to it by way of separate security purpose agreements. Examples of accessory security are pledges, guarantees, letters of credit and mortgages over real estate. Examples of non-accessory security are assignments over rights or receivables, land charges and security transfers over movable property.

In project finance transactions, banks will usually require the following security:

  • a pledge over the shares in the project company as this allows for the most practical enforcement process;
  • a pledge over all bank accounts held by the company because this allows banks to restrict the project company’s disposal rights following an event of default;
  • an assignment or pledge over all receivables to capture all incoming cash flows in an event of default;
  • a security transfer over all movable assets; and
  • if applicable, security over all real estate owned by the project company by way of a land charge.

In addition, it is common practice for the banks to require that the project company, its central suppliers and the banks enter into direct agreements that provide a step-in mechanism by which the banks can enter into the critical supply contracts in the event of default.

Collateral perfecting

How is a security interest in each type of collateral perfected and how is its priority established? Are any fees, taxes or other charges payable to perfect a security interest and, if so, are there lawful techniques to minimise them? May a corporate entity, in the capacity of agent or trustee, hold collateral on behalf of the project lenders as the secured party? Is it necessary for the security agent and trustee to hold any licences to hold or enforce such security?

Share pledges over limited liability company shares must be notarised; all pledges must be notified to the company whose rights are being pledged. Land charges and mortgages must be registered at the relevant local land registry. The costs for the notary depend on the value of the underlying transaction that is being secured; the fees for the land registry differ from state to state.

Security interests other than the share pledges, land charges and mortgages discussed in question 1 do not require additional steps to be perfected. Theoretically, they could be concluded orally. There are no further fees, such as stamp tax, payable on these.

It is common in large-scale German law-governed project finance transactions that the security interest is held by an agent acting for the project lenders to facilitate a syndication. In the event of a bankruptcy of the security agent, the collateral will be excluded from its estate due to the fiduciary nature of the collateral.

As regards accessory security (ie, security that depends for its existence, scope and volume on the underlying debt), as a rule, the security interest is also made out in favour of the project lenders. Parallel debt language is commonly included in project finance documentation, and, while the German Federal Court of Justice has not yet ruled on it, lower courts have recognised the parallel debt clause concept.

Assuring absence of liens

How can a creditor assure itself as to the absence of liens with priority to the creditor’s lien?

Land charges and mortgages are registered with the local land registry. The filings are accessible to notaries and form a legal basis for good faith. Other securities (pledges, assignments and security transfers) are generally not registered and a creditor can only rely on legal due diligence and the assurances of its debtor that it has not granted prior security over its shares, accounts, rights, revenues or assets.

Enforcing collateral rights

Outside the context of a bankruptcy proceeding, what steps should a project lender take to enforce its rights as a secured party over the collateral?

Security enforcement outside of a bankruptcy proceeding differs, depending on the type of security. A share pledge is enforced by way of a public sale (ie, by way of an auction). This requires a notice period that is commonly limited to five business days. Pledgees may participate in such a sale. Pledgor and pledgee may agree on a private sale, but a forced private sale is not possible. In account pledges, it is not uncommon to let the occurrence of a default (rather than an event of default) trigger a rescission of the pledgor’s unfettered right to dispose over the cash on the pledged accounts. In this way, each disposal requires prior approval of the pledgees, thereby giving pledgees enhanced control rights over the accounts.

Enforcing collateral rights following bankruptcy

How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender to enforce its rights as a secured party over the collateral? Are there any preference periods, clawback rights or other preferential creditors’ rights with respect to the collateral? What entities are excluded from bankruptcy proceedings and what legislation applies to them? What processes other than court proceedings are available to seize the assets of the project company in an enforcement?

A bankruptcy proceeding in respect of the project company means that creditors are stayed from enforcing their rights as secured parties. Foreign creditors will be treated the same as German creditors. There are no other processes other than court proceedings available to seize the assets of the project company in an enforcement scenario in the context of a bankruptcy proceeding.

In terms of preference periods and clawback rights, according to the German Insolvency Regulation, legal acts or transactions made prior to the opening of the insolvency proceedings that are disadvantageous to the creditors of the debtor (taken as a whole) can be challenged by the insolvency administrator. If such a challenge is accepted by the insolvency court, the challenged transaction has to be returned to its status quo ante and, therefore, any payment made to a creditor under it will have to be disgorged by the latter. The reasons for which a payment made to a creditor can be challenged are the following:

  • Transactions of congruent coverage: transactions made during the three months prior to the request to open insolvency proceedings, if the debtor was unable to pay its due debts on the date of the transaction and the creditor was aware of the debtor’s inability to pay its due debts, or, if the payment was made after such request, if the creditor was aware of the debtor’s inability to pay its due debts or of the request to open insolvency proceedings.
  • Transactions of incongruent coverage: transactions made during the last month prior to the request to open insolvency proceedings after such request, or made during the second or third month prior to such request, if the debtor was unable to pay its due debts on the date of the transaction or the creditor was aware of the disadvantage to the insolvency creditors arising from such transaction.
  • Directly detrimental transactions to the insolvency creditors: transactions made during the three months prior to the request to open insolvency proceedings, if the debtor was unable to pay its due debts on the date of such transaction and the creditor was aware of that, or if made after such request and if the creditor was aware of the debtor’s inability to pay its due debts or of the request to open insolvency proceedings.
  • Transaction of wilful disadvantage: transactions made during the 10 years prior to the request to open insolvency proceedings or subsequent to such request, if made with the intention to harm the creditors and the creditor was aware of such intention.
  • Transactions without consideration (gratuitous): transactions made during the four years prior to the request to open insolvency proceedings.
  • Shareholder loan transaction: a repayment of a shareholder loan is challengeable if it is made during the last year prior to the request to open insolvency proceedings or after such request.

Note that arm’s-length ‘cash transactions’, under which the debtor receives a previously agreed equivalent consideration within a short period of time (approximately up to one month) are exempted from clawback rules. This payment is not challengeable unless it qualifies as a wilful disadvantaging transaction.

Foreign exchange and withholding tax issues

Restrictions, controls, fees and taxes

What are the restrictions, controls, fees, taxes or other charges on foreign currency exchange?

There are no relevant restrictions, controls, fees, taxes or other charges on foreign currency exchange under German law-governed project finance transactions.

Investment returns

What are the restrictions, controls, fees and taxes on remittances of investment returns (dividends and capital) or payments of principal, interest or premiums on loans or bonds to parties in other jurisdictions?

There are no specific restrictions on remittances of investment returns or payments of principal, interest or premiums on loans or bonds to parties in other jurisdictions. However, payments made by a German resident to, or received from, a non-resident may under certain circumstances have to be notified by the party resident in Germany to the Deutsche Bundesbank for statistical purposes. Any omission of such notification will trigger an administrative fine under the German Foreign Trade and Payment Regulation, but will neither affect the validity or enforceability of any of the underlying project finance transaction agreements nor otherwise cause adverse legal consequences for non-residents receiving or making such payments.

Foreign earnings

Must project companies repatriate foreign earnings? If so, must they be converted to local currency and what further restrictions exist over their use?

There are no relevant statutory provisions requiring repatriation of foreign earnings under German law.

May project companies establish and maintain foreign currency accounts in other jurisdictions and locally?

Project companies established under German law may establish and maintain foreign currency accounts in and outside of Germany.

Foreign investment issues

Investment restrictions

What restrictions, fees and taxes exist on foreign investment in or ownership of a project and related companies? Do the restrictions also apply to foreign investors or creditors in the event of foreclosure on the project and related companies? Are there any bilateral investment treaties with key nation states or other international treaties that may afford relief from such restrictions? Would such activities require registration with any government authority?

Germany is open and welcoming towards foreign investments and, with few exceptions, places no restrictions on foreign investments. Pursuant to the German Foreign Trade and Payments Ordinance, the acquisition of 25 per cent or more of the voting rights by non-EU investors in a German company must be notified to the Federal Ministry of Economy. The threshold for such a notice is reduced to 10 per cent of voting rights, if the company, in which shares are acquired, operates ‘critical infrastructure’ (ie, infrastructure in the areas energy, IT, telecommunication, transport, health, water, food, financial services and insurance, whose impairment could endanger public safety); develops specific software for such infrastructure; is authorised to carry out organisational measures under section 110 of the German Telecommunications Act; produces (or has produced or has knowledge of such technology) technical equipment used for implementing statutory measures to monitor telecommunications; provides certain cloud-computing services; holds a licence for providing telematics infrastructure components or services pursuant to section 291b(1a) or (1e) of Book V of the German Social Code; or is a significant broadcasting, tele media or print media company contributing to the formation of public opinion. The Ministry can examine whether the acquisition endangers ‘the public order or security of the Federal Republic of Germany’. Such an examination is, however, naturally rare and is generally limited to acquisitions relating to sensitive areas such as the ones listed for the 10 per cent threshold.

Germany currently has 126 bilateral investment treaties in force (including with countries such as China, Qatar, Saudi Arabia, Singapore, Russia and the UAE) and is a party to the multilateral Energy Charter Treaty. These treaties contain wide-ranging guarantees for investors, including fair and equitable treatment, non-discrimination (national as well as most-favoured nation treatment) and protection from expropriation with full compensation. With the United States, Germany has concluded a Treaty of Friendship, Commerce and Navigation (FCN treaty), which includes similar but more limited guarantees. Moreover, unlike (most) bilateral investment treaties, the FCN treaty with the United States does not permit investors to directly enforce their rights against Germany through arbitration.

In general, German bilateral investment treaties do not contain specific market access provisions. Specific market access and investment liberalisation clauses are however contained in various free trade agreements entered into through the EU with countries such as Canada, Japan or Korea. Yet, these treaties typically contain exceptions, for example, for public security issues. Thus, whether these treaties afford relief from any applicable restrictions will depend on the respective treaty and on the facts of the case, in particular the restriction at issue.

Insurance restrictions

What restrictions, fees and taxes exist on insurance policies over project assets provided or guaranteed by foreign insurance companies? May such policies be payable to foreign secured creditors?

There are no relevant restrictions on insurance policies over project assets offered by foreign insurance companies; such policies may be payable to foreign secured creditors.

Worker restrictions

What restrictions exist on bringing in foreign workers, technicians or executives to work on a project?

As a member of the EU, Germany is bound by and respects the EU law principle of free movement of labour within the EU. Nevertheless, to the extent employees are working in Germany, German labour law applies. Workers from outside the EU must apply for a work permit.

Equipment restrictions

What restrictions exist on the importation of project equipment?

There are no relevant restrictions on the importation of project equipment other than tariffs applying on goods imported from outside the EU. Within the EU, no tariffs apply owing to the EU law principle of the freedom of movement of goods.

Nationalisation laws

What laws exist regarding the nationalisation or expropriation of project companies and assets? Are any forms of investment specially protected (from nationalisation or expropriation)?

The German Constitution recognises and protects private property. It may only be expropriated for the public good and upon payment of compensation. Also nationalisation (against compensation) is possible under the German Constitution but, so far, has never occurred. No form of investment is specially protected from nationalisation or expropriation. No special law on protection of foreign investments exists.

Fiscal treatment of foreign investment


What tax incentives or other incentives are provided preferentially to foreign investors or creditors? What taxes apply to foreign investments, loans, mortgages or other security documents, either for the purposes of effectiveness or registration?

There are no specific tax incentives or other incentives provided preferentially to foreign investors or creditors. Other than the costs of registration of land charges or mortgages and the costs for the notary in case of a share pledge over limited liability companies (which apply generally and are not specifically tailored to foreign investments), no other taxes, fees, costs or charges apply to foreign investments, loans, mortgages or other security documents.

Government authorities

Relevant authorities

What are the relevant government agencies or departments with authority over projects in the typical project sectors? What is the nature and extent of their authority? What is the history of state ownership in these sectors?

Regulatory authority in typical projects sectors differs depending on the sector. For example, regulatory authority regarding projects in the oil and gas sector is vested in the regional authorities. There is a two-step process regarding the exploitation of oil and gas in Germany. An initial permit is required for exploration and another for the actual extraction. As regards offshore wind farms, an operating permit issued by the the Federal Maritime and Hydrographic Agency of Germany (BSH) is required; whereas the energy grid is administered by the grid agency.

Regulation of natural resources


Who has title to natural resources? What rights may private parties acquire to these resources and what obligations does the holder have? May foreign parties acquire such rights?

Generally, the exploitation of natural resources requires a permit issued by the relevant competent authority. Usually, such a permit will be time-limited and subject to a number of provisions covering (eg, environmental, health and safety concerns). Foreign parties may participate in the tender processes for the issuance of the permits and will be as eligible as local parties so long as their bid satisfies the criteria specified by the relevant local authority and the applicable law.

Royalties and taxes

What royalties and taxes are payable on the extraction of natural resources, and are they revenue- or profit-based?

Royalties and taxes payable on the extraction of natural resources vary widely depending on the type of natural resource.

Export restrictions

What restrictions, fees or taxes exist on the export of natural resources?

There are no general restrictions, fees or taxes on the export of natural resources. However, specific regulation may apply to certain exports depending on the type of natural resource.

Legal issues of general application

Government permission

What government approvals are required for typical project finance transactions? What fees and other charges apply?

The government approvals required for project finance transactions vary, depending on the sector the transaction covers. For example, for offshore wind transactions, the project company must have a valid operating permit granted by the BSH. In principle, a banking licence is required to make loans available in Germany. However, these restrictions apply generally and are not specifically directed at project finance transactions owned or controlled by foreign parties.

Registration of financing

Must any of the financing or project documents be registered or filed with any government authority or otherwise comply with legal formalities to be valid or enforceable?

As discussed in question 2, certain securities require notarisation; pledges over rights must be notified to the company whose rights are being pledged to become valid. In some specific instances, the language used must be German (eg, decommissioning guarantees in offshore wind transactions).

Arbitration awards

How are international arbitration contractual provisions and awards recognised by local courts? Is the jurisdiction a member of the ICSID Convention or other prominent dispute resolution conventions? Are any types of disputes not arbitrable? Are any types of disputes subject to automatic domestic arbitration?

Foreign arbitral awards are recognised and enforced in Germany in accordance with applicable international treaties, in particular the 1958 New York Convention and the ICSID Convention. Moreover, Germany is party to the 1927 Geneva Convention on the Execution of Foreign Arbitral Awards and the 1961 European Convention on International Commercial Arbitration.

Domestic arbitration awards are enforced pursuant to sections 1059 and 1060 of the German Code of Civil Procedure (ZPO). These provisions, as with Germany’s entire arbitration law (contained in Book 10 of the ZPO), are based on the UNCITRAL Model Law of 1985.

The arbitrability or non-arbitrability of disputes is regulated by section 1030 of the ZPO. Basically, any claim under property law and any non-pecuniary claim the matter of which could be settled by parties can be submitted to arbitration. Non-arbitrability is therefore limited to very few instances such as disputes relating to tenancy relationships for residential space, most labour law disputes (except disputes between management and unions) and civil status matters (in particular, in family law). Corporate disputes are arbitrable, but in particular disputes relating to shareholder resolutions must fulfil certain formal and procedural requirements to be arbitrable.

Law governing agreements

Which jurisdiction’s law typically governs project agreements? Which jurisdiction’s law typically governs financing agreements? Which matters are governed by domestic law?

In general, parties may contractually agree on the governing law of their agreements. However, if the relevant assets are located in Germany, the corresponding project agreements will usually be governed by German law to ensure their enforceability in Germany.

Submission to foreign jurisdiction

Is a submission to a foreign jurisdiction and a waiver of immunity effective and enforceable?

Generally, any enforcement in Germany will be subject to the domestic and international rules of civil procedure and enforcement arising by statute or otherwise by operation of law, each as applied by the courts or other competent authorities in Germany. This, among other things, may require the translation of foreign language documents into the German language and may apportion costs between the parties otherwise than as contemplated in any document. The recognition and enforcement of a foreign judgment or arbitration award in Germany is, in particular, subject to the requirements and restrictions of:

  • the European Council Regulation (EC) No. 1215/2012 of 12 December 2012 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (recast), as amended from time to time;
  • sections 328, 723 and 724, 1054, 1060 and 1061 of the ZPO; and
  • the UN Convention of 10 June 1958 on the Recognition and Enforcement of Foreign Arbitration Awards.

The enforcement of rights with the assistance of a German court is subject to an advance on court fees and, if the petitioner is a foreign person domiciled outside the European Union and certain other countries benefiting from treaty exemptions, and the other party so requests, is also subject to the posting of a bond for anticipated costs of the litigation in an amount to be determined by the court.

Environmental, health and safety laws

Applicable regulations

What laws or regulations apply to typical project sectors? What regulatory bodies administer those laws?

The exploitation of infrastructure and natural resources is addressed in a wide set of detailed laws and regulations that also take environmental, health and safety concerns into account and are administered by a complex interplay between federal and local agencies or authorities.

Project companies

Principal business structures

What are the principal business structures of project companies? What are the principal sources of financing available to project companies?

Project companies are generally set up as special purpose vehicles (SPVs) and organised as either limited liability companies or limited partnerships. The most significant source of funding for project finance transactions (as opposed to PPP transactions) is bank debt.

Public-private partnership legislation

Applicable legislation

Has PPP-enabling legislation been enacted and, if so, at what level of government and is the legislation industry-specific?

There is no specific act on PPP projects or contracts in Germany. All general civil and regulatory standards apply to PPP projects. These also include, for example, laws on taxes, social security, minimum wage and trade unions, as well as health and safety. Being public projects, EU and national public procurement rules apply. Only the PPP Acceleration Act of 1 September 2005 formulates specific legal framework conditions. This act aimed to remove ‘obstacles and ambiguities’ that have hindered the implementation of PPPs in the past but failed to effect a major, long-term stimulus.

However, there is a mature, developed PPP market in Germany. Over the past 15 years, a large number of projects have been implemented in almost all public sectors, ranging from multi-billion public infrastructure (mainly motorways), small to large office buildings for public administration, individual schools and whole portfolios of schools, to military or defence, police and security authorities, prisons, medium to large hospitals and even municipal swimming pools. Projects were carried out at federal, state and municipal level.

PPP - limitations

Legal limitations

What, if any, are the practical and legal limitations on PPP transactions?

As mentioned, the civil law framework and regulatory requirements apply to PPP projects, the regulations of the Act against Restraints of Competition and section 7 of the Federal Budget Code (economic efficiency, economy, cost and performance accounting) are particularly relevant.

If the private partner is to be authorised to take authoritative decisions as regards third parties, a special public law mandate is required. Such an entrustment must be given in a parliamentary decision or on the basis of such a decision. Such a transfer of tasks has been effected for the operator of the German toll system, which has been entrusted with the collection of tolls for the use of motorways by heavy goods vehicles (see section 8(2) Act on Levying Tolls on Federal Motorways). However, such a delegation of tasks is the exception in PPP projects. In most cases, the private partner only acts as an administrative assistant. In general, the use of direct force or coercion is limited to the public sector and may not therefore be exercised by private contractors (applies, eg, to prison projects).

With regard to financing PPP projects, owing to the current ‘zero-interest market’ there has been a steady trend away from project finance to forfeiting models with waiver of objection. More projects are now realised with only a limited financing element.

PPP - transactions

Significant transactions

What have been the most significant PPP transactions completed to date in your jurisdiction?

Numerous PPP significant transactions have already been carried out in Germany. Some significant examples include the following.

  • federal highway A10/A24 Neuruppin-border Berlin/Brandenburg (total investment €500 million);
  • federal highway A8 Ulm - Augsburg-West (total investment €410 million); and
  • federal highway A1 AD Buchholz-motorway junction Bremer Kreuz (total investment €650 million). This project is currently the subject of a large lawsuit (€780 million. Originally the project should have been refinanced on the SPV side from a share of the truck tolls incurred on the motorway section. But traffic fell considerably short of the SPV’s expectations, which caused it financial difficulties. The federal government argues that the SPV took over the utilisation risk and resulting losses.
  • the Herkules IT project of the Bundeswehr (started in 2007, at that time the largest PPP project in Europe with a total volume over €4.3 billion);
  • helicopter simulation systems in Schaumburg (total investment €245 million); and
  • structural renovation of the Fürst-Wrede-Kaserne near Munich (total investment €60 million).
Structural engineering (including healthcare subsector)
  • University Hospital Schleswig-Holstein - 49 clinics and approximately 2,400 beds (total investment €520 million);
  • the West German Proton Therapy Centre at the University Hospital of Essen (total investment €136 million);
  • the new building of the Federal Ministry of Education and Research (BMBF) in Berlin (total investment €115 million);
  • renovation and conversion of a group of buildings under monument protection in Berlin for the Federal Ministry of Health; and
  • the new building of the Police Headquarters in South-East Hesse (project volume 400 million).
  • a packet of 14 vocational schools in Hamburg (total investment €320 million);
  • renovation, expansion and operation of four Cologne schools at three locations (total investment €214 million);
  • construction of three schools and four gymnasiums for the city of Nuremberg (total investment €63 million); and
  • a packet of three schools in Offenbach for 2,500 pupils (total investment €60 million).

Some ambitious projects, especially in the healthcare sector, have been redesigned or cancelled owing to technical or operational issues (eg, the Particle Therapy Centre Kiel North European Radiooncological Centre Kiel (total investment of over €250 million) or Hochtaunuskliniken new clinics (total investment €200 million)). The West German Proton Therapy Centre in Essen has also terminated its PPP and continues operation in-house.


Recent developments

In addition to the above, are there any emerging trends or ‘hot topics’ in project finance in your jurisdiction?

Key developments of the past year30 In addition to the above, are there any emerging trends or ‘hot topics’ in project finance in your jurisdiction?

Traditionally, German borrowers turned to banks for debt, however; debt funds are increasingly emerging as lenders in project finance transactions in Germany, in particular in the renewable energy sector. Non-German debt funds have taken the lead in this because of their experience in assessing the risks associated with lending transactions (as opposed to equity positions) but German debt funds are rapidly catching up. While most of the lending activities of debt funds focus on mezzanine or subordinated debt, a number of experienced debt funds have noted their interest in taking on senior positions going forward.