Why early realization of collateral is required for syndicated loans in the distress case — and why the public auction is structurally superior to distressed M&A.
If syndicated financing gets into difficulties, time becomes a liability-relevant factor. Early realization before the opening of insolvency proceedings is generally not an escalation step, but proper risk management. The service agent is legally authorized to commission the liquidation when the pledge is ready. Deutsche Pfandverwertung enables fast, legally compliant and final realization — often within a few weeks — and structurally reduces the risks of liability, reputation and loss of value.
Initial situation: syndicated financing under stress
In practice, larger financings are regularly structured via bank syndicates or financier syndicates. The aim is to spread risk, ease the regulatory burden and bundle volumes. As long as a commitment is properly serviced, the syndicate structure remains largely in the background.
However, when a covenant breach, a payment default or a restructuring situation occurs, the parameters shift abruptly. Collateral becomes the guiding principle, decision-making processes slow down and liability and reputational risks come to the fore. At this stage at the latest, the central question arises as to the legally compliant, enforceable and economically viable recovery path.
Role of the lead manager and the service agent in the distressed case
The consortium leader is the lead institute within the consortium. He coordinates, structures and represents the consortium externally. Legally, the consortium makes decisions in accordance with the consortium agreement; in practice, however, the consortium leader determines the course, in particular by preparing majority resolutions and selecting external consultants.
In the distressed case, a service agent or security agent regularly comes to the fore. Its authority to realize does not result from the position of the lead manager, but solely from the collateral structure. The decisive factors are the collateral agreement, the conditions for the maturity of the pledge and contractual legitimation by the syndicate or the security agent. If this is the case, the service agent is legally authorized to commission external liquidation agents with the realization of the collateral. The assignment is not a dispositive decision on the “whether” of the realization, but the operational implementation of an existing lien position.
Collateral realization in a consortium — legal guidelines
The decisive factor is not the management role, but the structure of the collateral. These can be provided in parallel in favor of all syndicate members or held centrally via a security agent. The power of realization always follows the pledge of rights or the security agreement, not the consortium leadership.
In practice, however, syndicated agreements often lead to internal approval requirements, majority quorums and de facto blockades — even if the collateral is objectively ready for pledging. Particularly in the case of complex collateral, this causes considerable time and value losses and increases the liability pressure on the parties involved.
Special feature: Pledges of rights and intangible assets
The realization of pledges of rights, in particular company shares, trademarks, patents and other intangible assets, is of central importance. Section 166 (1) InsO does not apply to these securities. In its ruling of 27.10.2022 (IX ZR 145/21), the Federal Court of Justice clarified that the insolvency administrator has no right of realization of its own. The right of realization remains exclusively with the pledgee or collateral holder.
For the consortium leader and service agent, this means the ability to act immediately without having to wait for insolvency law concepts, a clear allocation of responsibilities and a considerable strategic advantage over negotiation-driven transaction solutions.
Impending insolvency as a break in the exploitation logic
The threat of insolvency is not merely an economic turning point, but a legal one. As long as insolvency proceedings have not yet been opened, collateral holders have the greatest possible scope for action. This decreases with every delay.
Delays regularly lead to a loss of value due to operational downtime, customer migration, loss of expertise and reputational damage. At the same time, the legal overlaps caused by administrators, courts and creditors’ committees increase with the filing for insolvency. Even where the right to liquidation continues to exist in law, practical enforceability deteriorates considerably.
The economically optimal realization is therefore regularly before, not after, the opening of insolvency proceedings.
Distressed M&A as a realization path — structural weaknesses
The previously frequently practiced realization via distressed M&A processes or private sales is associated with considerable disadvantages in the consortium. Such processes are characterized by complex due diligence structures, exclusive negotiations, ongoing renegotiations and dependencies on approval situations at shareholder, administrator or court level.
For consortium leaders, this results in increased under-selling, liability and reputational risks, while minority consortium members retain de facto blocking options.
The timeline is also crucial: in practice, a distressed M&A process regularly takes at least 90 days — often longer. This transaction route is therefore typically not suitable for short-term liquidation windows in the run-up to an impending insolvency; the delay immediately becomes a value and liability risk.
Speed and finality cannot usually be achieved in these structures.
Public auction as a timely, legally compliant realization path
On the other hand, the public auction is the legally prescribed form of realization of the pledge of rights. It enables prompt implementation, rules out renegotiation and leads to objective, market-driven pricing. The award represents a final act of sovereignty and creates legal finality.
Contrary to widespread assumptions, speed in the distressed case is not at odds with revenue optimization. Rather, markets reward transparency, finality and clear procedures. Early liquidations regularly attract more bidders than later forced or emergency solutions.
Deutsche Pfandverwertung as a partner for legally compliant, transparent, final and fast collateral enforcement
Deutsche Pfandverwertung is structurally designed to implement time-critical realizations in a legally compliant manner. Public auctions can be held within around three weeks of the order being placed; a time window of four to six weeks is preferred in order to achieve an optimum balance between market approach, preparation and realization of proceeds.
This speed is not achieved by compromising on legal compliance, but through standardized processes, institutionalized procedures and many years of experience.
Consortium capability and liability relief
Deutsche Pfandverwertung does not act as a party, but as a neutral liquidation mechanism. In the consortium in particular, the public auction acts as an institutionalized balance of interests. There are no privileged individual deals, all market participants have the same information, and the price is determined exclusively by the market.
For the consortium leader and service agent, this means a structural reduction in liability. The exit is objectively justifiable, internally acceptable to a majority and externally defensible.
Finality instead of open-ended negotiations
Not every distress situation is an M&A case. Particularly in the case of pledges of rights and intangible collateral, the public auction is not a stopgap measure, but a legally provided, enforceable and low-liability realization path.
Commissioning Deutsche Pfandverwertung at an early stage makes it possible to secure values, limit liability risks and create economic clarity — before insolvency law mechanisms narrow the scope for action.
Conclusion
In a distressed case, time is the scarcest asset. Anyone shifting realization to an M&A process regularly accepts delays of at least three months and thus a considerable risk of loss of value, blockades and subsequent justification and liability debates. In contrast, a legally compliant auction process structured via Deutsche Pfandverwertung creates finality, transparency and objective market pricing — and enables the consortium to realize its collateral in a narrow time window before insolvency law mechanisms narrow the scope for action.
If you, as a creditor, want to sell your property securely and in compliance with the law, make sure that a public bid is accepted by an auctioneer — whether in person or live online.
Further information on collateral enforcement — practical, strategic and legally compliant — can be found on our website:
www.deutsche-pfandverwertung.de
We are publicly appointed and sworn auctioneers with many years of experience in the field of collateral enforcement.
Contact us — together for a successful result!
Further articles on the topic
M&A‑Abbruch bei Insolvenzeröffnung: zwingend bei Absonderungen verpfändeter Unternehmensanteile und IP-Rechten
Verwertung von verpfändeten Unternehmensanteilen oder Rechten im Insolvenzfall
Sonderrechte des Gläubigers bei Insolvenz des Schuldners
Pfandrechte an Geschäftsanteilen: optimiertes Verwertungsinstrument in der Forderungsrealisierung durch Anteilsverkauf
Pledge of rights — everything you need to know explained. A pledge of rights can relate to things, i.e. physical objects, as well as to rights of any kind, such as company shares, patents, securities, IP rights, domains, licenses or trademark rights.
