1

How collaterals are dealt with in Germany

Operational Training Session (OTS) on “Policies and Procedures for Collaterals”

Dieter Fleischer, Verband der Deutschen Bürgschaftsbanken (VDB)

Maribor, April 16th 2015

2

Agenda

Characteristics of the German Guarantee Banks

Features of the offer

Collateral requirements

Collateral - procedure

3

German Guarantee Banks – features of the offer

Non-profit and private self-help institution

Guarantee Banks are tax exempted due to their promotional mandate. Shareholders are all

major network partners in the economy: Chambers of Industry and Commerce, Chambers of

Craft Trades, trade and liberal profession associations, leading credit institutions / insurance

companies as well as the Banking Association. The Guarantee Banks operate in a

competitively neutral way.

Target group: founders of new businesses as well as small and medium-sized

enterprises (mainly on the basis of the EU definition: maximum of 250 employees,

maximum sales of EUR 50 million, maximum total assets of EUR 43 million)

Independent Guarantee Bank in each federal state

Counter guarantees granted by the federal government and the state of Baden-

Württemberg

4

German Guarantee Banks – features of the offer

“House bank principle” is a basic requirement

Cooperation with all credit institutions (competitively neutral)

House bank has to bear at least 20 % of the risk

House bank must comply with the conditions and requirements of the Guarantee Bank

House bank enters into collateral agreements and administers the collateral

House bank has to manage the guaranteed loan and the accompanying collateral apart

from other businesses with the borrower

Changes in the credit relationship (house bank – customer) require approval of the

Guarantee Bank (maturities, release of collateral etc.)

5

German Guarantee Banks – features of the offer

House bank has an obligation to provide periodic information (e.g.: outstanding

payments)

In the event of a default the house bank remains responsible for recovery

In the event of a default: house bank has the right to get a partial payment from the

Guarantee Bank (estimated default)

Default guaranties: House bank can only draw these down after the existing collateral

has been realised

6

Process for granting loans – house bank principle

Company

Entrepreneur House bank Application

Guarantee Bank Audit, possible discussions

Chambers, associations Involvement

Guarantee document

Sent to the house bank

Implementation of the

financing with the company

7

Why collateral?

For the borrower: In Germany collateral affects loan classification. In general, loan

classification is based on the financial condition of such entities as the borrower,

guarantor and collateral.

For the house bank: Collateral reduces the risk in case of default

For the Guarantee Bank: Reduction of risk and making sure, that house bank and

borrower do not shift all credit risks to the Guarantee Bank

8

Collateral requirements

In principle, a guarantee is issued regardless of any collateral (however, the objective is

to obtain personal / business collateral where possible)

Only collateral relating to the specific project is generally available to the Guarantee Bank

(e.g. in the case of machinery financing: transfer of the machinery by way of security)

Personal liability is generally required (exceptions are possible)

Special collateral may not be provided for the non-guaranteed portion of the loan

Collateral applies to the guaranteed and non-guaranteed loans on a proportionate basis

If, at a later date, the house bank participates on additional collateral for the part of the

credit, which is not covered by the guarantee, she has to arrange with the borrower, that

this collateral shall be liable proportionately for the guaranteed part of the loan as well as

for the part not covered by the guarantee.

9

Collateral requirements

Collateral may only be released or substituted with the consent of the Guarantee Bank

(no consent needed when cars or machinery are substituted when the value of the

collateral is not affected)

Collateral is valued very conservatively by Guarantee Bank

New: To simplify the house bank’s handling of collateral, the German Guarantee Banks

intend a marginal change of their general standard terms and conditions regarding the

duty of care of the house banks → the house bank is allowed to use the same degree of

care as it does in its own business (at present: higher degree of care required).

10

Types of collateral

Property / assets Type of Collateral

Factory promises, residence Land charge

Machinery, vehicles Transfer by way of security / Chattel mortgage

Inventory, goods depot Transfer by way of security

Shop fittings Transfer by way of security

Customer claim / account receivable (Blanket) Assignment / cession

Third parties / other persons Guarantee

Life insurance Assignment / cession

Credit balance Seizure

11

Collateral - procedure

Valuation of collateral

In determining the risk provision, collateral is valued in accordance with a defined

collateral valuation procedure (collateral catalogue). This valuation takes into account the

crucial commercial principle that the value of the collateral should be recoverable even in

the event of liquidation (principle of a loss-free valuation as defined in § 252 (2) no. 4 of

the German Commercial Code (HGB)).

12

Collateral - procedure

Extract from the collateral catalogue

Collateral Valuation approach

Land charge:

- Factory promises

- Home / residence

60 %*

80 %*

Blanket assignment 10 % (basis: value from the last balance

sheet minus creditors)

Transfer of inventories by way of security 10 % (basis: value from the last balance

sheet minus creditors)

Transfer of business equipment and shop fittings by way of

security

10 % (basis: book value, if not older than 18

months, otherwise = 0)

Machines / vehicles (new purchases) 50 % of purchase price

Business equipment and shop fittings (new purchases) 20 % of purchase price

These valuation approaches are standard rates. Additional risks are taken into account on a

case-by-case basis and may result in a lower valuation.

* The basis for the valuation is the loan value determined by the house bank. The calculation of the loan value is identical for all types of banks in Germany. But: each institution can determine the limit of this value as it pleases ( = the limit, up to which the house bank is willing to encumber the collateral)

13

Contact

Dieter Fleischer

Bürgschaftsbank Baden-Württemberg GmbH

Werastr. 13-17

70182 Stuttgart

Internet: www.buergschaftsbank.de

Phone: +49 711 1645 709

Mail: dieter.fleischer@buergschaftsbank.de