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.
The lender has an interest in variability to make his lending profitable. Variable 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 variable payment component and can calculate on the basis of the full loan life.
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, which may contain fewer statutory restrictions, this paper is about the case the agreement is govern by german law.
First the author is going to examine the legal situation and its problem for the lender, secondly he is going to discuss ways to scrutinize § 489 BGB by legalmethodological means, whereupon he will figure out, if there are contractual instruments to handle the issue.
Inhaltsverzeichnis (Table of Contents)
- A. Introduction: relevance of loans in project finance
- B. The law and its embedded asymmetry
- I. Legal situation of loan agreements: § 488 ff.
- 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?
- 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
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This paper explores the legal framework surrounding loan agreements in project finance, particularly focusing on the borrower's right to terminate the loan under German law. It examines the asymmetry inherent in this right, where the borrower has the option to terminate while the lender is obligated to accept it. The paper analyzes the legal and contractual mechanisms that can be employed to mitigate this asymmetry and protect the lender's interests. Key themes include:- The impact of statutory regulations on loan agreements in project finance
- The asymmetric nature of the borrower's right to terminate
- Legal-methodological scrutiny of § 489 BGB
- Contractual strategies for mitigating the borrower's termination option
- The role of performance-based payment components in project finance loans
Zusammenfassung der Kapitel (Chapter Summaries)
A. Introduction: relevance of loans in project finance
This introductory chapter outlines the significance of loans in project finance, highlighting their role alongside equity investment. It emphasizes the unique characteristics of loans in this context, particularly the reliance on internally generated cash flows for repayment and the inclusion of performance-based payment components.B. The law and its embedded asymmetry
This chapter delves into the legal framework surrounding loan agreements in Germany, specifically focusing on § 489 BGB. It examines the statutory provisions governing the borrower's right to terminate the loan, highlighting the distinction between fixed and variable interest rates and the implications for termination options. The chapter also discusses the compelling nature of § 489 and its implications for contractual freedom.C. Legal-methodological scrutiny of § 489 BGB
This chapter undertakes a legal-methodological analysis of § 489 BGB, exploring its teleological reduction and its constitutionality. It questions whether the purpose of § 489 aligns with the specific needs of project finance and considers potential legal loopholes.D. Contractual means to mitigate the borrower's option to terminate
This chapter explores various contractual strategies that can be employed to mitigate the borrower's right to terminate and protect the lender's interests. It discusses different approaches, including declining interest rates, performance-based payment components, renegotiation clauses, prepayment penalties, obligations towards third parties, and fixed-for-floating rate swaps.Schlüsselwörter (Keywords)
This paper focuses on the intersection of project finance, loan agreements, and German law. Key terms and concepts include: project finance, loan agreements, § 489 BGB, borrower's right to terminate, asymmetry, legal-methodological scrutiny, contractual mitigation, performance-based payment, fixed and variable interest rates, and compelling law.- Citar trabajo
- Paul Corleis (Autor), 2016, How To Avoid Prepayments, Múnich, GRIN Verlag, https://www.grin.com/document/339405
