How To Avoid Prepayments

Outline

A. Introduction: relevance of loans in project finance

B. The law and its embedded asymmetry
I. Legal situation of loan agreements: § 489
II. Compelling Law: § 489 sect. 4
III. The problem of a right of termination: Asymmetry
1. Optionality
2. Effects caused by compelling law
3. Effects specific in the context of project finance
4. Conclusion

C. Legal-methodological scrutiny of § 489 BGB
I. Teleological reduction
1. Does the telos of § 489 fit with project finance?
2. Legal loophole
II. Constitutionality

D. Contractual means to mitigate the borrower’s option to terminate
I. Declining interest rate
II. Combination of fixed and performance-based payment
III. Renegotiation clause
IV. Prepayment penalty clause
V. Obligations towards a third party
VI. Fixed-for-floating rate swaps

E. Conclusion

List of references

Canaris, Claus-Wilhelm, Die Kreditwürdigkeit gemäß § 247 BGB und der “Wandel der Normsituation”, Zeitschrift für Wirtschaftsund Bankrecht 1978, 686-701. Gardner, David/Wright, James, Project Finance, available online at: https://www.hsbcnet.com/gbm/attachments/products-services/financing/projectfinance.pdf (visited at 06. June 2016).

Heinz, Georg B./Roth, Herbert (Hrsg.), Beck’scher Online-Kommentar BGB, 39. Edition, München 2016.

Hey, Felix Christopher, Die Verfassungswidrigkeit des zwingenden Kündigungsrechts des Darlehensnehmers nach § 489 Abs. 1 Nr. 3 BGB, in: Heldrich, Andreas/Prölss, Jürgen/Koller, Ingo, Festschrift für Claus-Wilhelm Canaris, München 2007, S. 443 460.

Hopt, Klaus/Mülbert, Peter O., Die Darlehenskündigung nach § 609a BGB eine Bilanz der ersten drei Jahre, WM 1990, SonderB. Nr. 3.

Jungmann, Carsten, Auswirkungen der neuen Basler Eigenkapitalvereinbarung (“Basel II”) auf die Vertragsgestaltung festverzinslicher Kredite, Zeitschrift für Wirtschaftsund Bankrecht 2001, 1401-1407.

Köndgen, Johannes, Darlehen, Kredit und finanzierte Geschäfte nach neuem Schuldrecht Fortschritt oder Rückschritt?, Zeitschrift für Wirtschaftsund Bankrecht 2001, 1637-1648.

Looschelders, Dirk,Schuldrecht, Besonderer Teil, 11. Edition, 2016 München.

Mucke, Jörg/Stupp, Alexander,Die Auswirkung kreativer “Zins”-Vereinbarungen auf die

ordentlichen Kündogungsmöglichkeiten des Darlehensnehmers, Zeitschrift für Bankund Kapitalmarktrecht 2005, 20-27.

Rey, Martin, Entwicklung und moderne Tendenzen der Projektfinanzierung Zeitschrift für Bankund Kapitalmarktrecht 2001, 29-34.

Rottenburg, Franz v., Die Reform des gesetzlichen Kündigungsrechts für Darlehen statt Zinssatz-Fristenregelung -, Zeitschrift für Wirtschaftsund Bankrech 1987, 1-6. Rösler, Patrick/Wimmer, Konrad/Lang, Volker, Vorzeitige Beendigung von

Darlehensverträgen, München 2003.

Säcker, Franz J./Rixecker, Roland/Oetker, Hartmut/Limperg, Bettina(Hrsg.),Münchener

Kommentar zum Bürgerlichen Gesetzbuch, 6. Edition, München 2012.

Schulze, Reiner (Hsrg.), Bürgerliches Gesetzbuch, Handkommentar, 8. Edition, Baden-Baden 2014.

Stelling, Rainer, Die vorzeitige Ablösung festverzinslicher Realkredite, Baden-Baden 2000. Taleb, Nassim Nicholas, Antifragile: Things That Gain from Disorder, Random House, New York 2012.

A. Introduction: relevance of loans in project finance

Loans provided by banks and other lending institutions are beside equity one of the two main parts of project finance. While loans are usually secured by the assets of the equity investors, the repayment of the loan in project finance depends on the internally generated cashflows of the project company itself (limited recourse).¹

On the one hand, this means that loans in project finance have higher risk, on the other hand is to regard, that, since the lender wants to benefit from the projected growth of the project company, performance-based components of the payment such as cash settlements, roll-ups and equity kicker have been established. ²The lender has an interest in variability to make his lending profitable. Performance-based payment components share that they either gather up parts of the payment, or they first gain weight, once the company has grown and created significant own cash flow. As a consequence, the lender has a particular interest that the loan runs till its agreed end, so that he gets the performance-based payment component and can calculate on the basis of the full loan life.³ Whether and under what conditions a borrower can prepay a loan—and by that diminish the return and calculability of the lenders investment, the german civil law has specific statutory provisions about. While there are options to govern the loan agreement by foreign law,⁴ which may contain fewer statutory restrictions, this paper is about the case the agreement is govern by german law.

First I’m going to examine the legal situation and its problem for the lender, secondly I’m going to discuss ways to scrutinize § 489 BGB by legal-methodological means, whereupon I will figure out, if there are contractual instruments to handle the issue.

B. The law and its embedded asymmetry

I. Legal situation of loan agreements: § 488 ff.

According to § 488 sect. 1 BGB⁵ loan agreements basically consist of three elements: the principal amount, the interest rate and the date of maturity. Even though a maturity does not have to be defined according to § 488 sect. 3, it usually is part of the agreement. If so, the borrower is, according to § 488 sect. 1, obliged to retire on maturity date—yet, § 489 lays down that he can still retire before maturity date. The specific properties of the borrowers right to terminate the loan are determined by the type of interest rate. § 489 differentiates between fixed (sect. 1) and variable (sect. 2) interest rates: loans with fixed interest rates are callable at expiry of the agreed fixed interest period, which may be shorter than the loan term.⁶ In any case—whether the agreed interest period is ten or twenty years—termination is possible after ten years of the loan term have elapsed (sect. 1 no. 2). Loans with variable interest rates can be terminated at any time (sect. 2). Loans whose interest rate periodically adjust itself equal to a set money market reference rate (floaters) are callable to each period, even though the lender has no influence on the new rate. In conclusion this means that the variability of the loan determines under what conditions the borrower can prepay the loan; the more variable the interest, the greater the right of the borrower to terminate the contract, while it doesn’t matter, if the lender has influence on the rate—as in case of floaters.⁷

[...]

¹Gardner/Wright,Project Finance, p. 1 and 3.

²Cf.Mucke/Stupp,BKR 2005, 20 (20 f.);Rey,BKR 2001, 29 (33 f.).

³Looschelders,BT, recital 357 f.

⁴Mucke/Stupp,BKR 2005, 20 (26).

⁵German civil code; all here qouted §§ refering to the BGB.

⁶Looschelders,BT, recital 357 f.

⁷Cf.Mucke/Stupp,BKR 2005, 20 (21 f.)