Dieter Fleischer (Bürgschaftsbank Baden-Württemberg GmbH) Dieter Fleischer's presentation at the Operational Training Session held on the 16/17 April 2015 in Maribor.

1. 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. 2
Agenda
 Characteristics of the German Guarantee Banks
 Features of the offer
 Collateral requirements
 Collateral - procedure

3. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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