AUSTRIA Law and Practice

Contributed by: Markus Fellner, Florian Kranebitter and Mario Burger, Fellner Wratzfeld & Partners

A distinction must be made between opinions that confirm, inter alia, the validity and enforceability of loan and security agreements (“enforceability opinion”) and those that confirm the existence of the borrower or guarantor as well as the fact that all necessary board resolutions have been passed and that the signatory of the agreements has the corresponding power of representation (“capacity opinion”). In addition, certain expert opinions are often obtained to confirm certain tax assumptions (“tax opinion”).

Usually, lender’s counsel issues enforceability opinions and borrower’s counsel issues capacity opinions. If guarantees are obtained from foreign subsidiaries, the entire opinion with respect to those subsidiaries is often provided by the local counsel engaged by the borrower.

3. Structures

3.1 Senior Loans

Senior loans (with various tranches with different maturities) are the most important instruments for debt-financing of acquisitions. They are considered as the least expensive form of financing the purchase price and are usually more secured than any other debt, such as subordinated loans (Nachrangdarlehen), because senior loans are usually collateralised by assets. Additionally, other financing products are increasingly used for acquisition financing in Austria, such as mezzanine debt and hybrid instruments. Overall, senior loans have the lowest cost of capital compared to other tranches in the capital structure. The interest rates on senior loans are typically lower than those on other debt components in the capital structure. In the case of liquidation, senior debt must be paid back first before other creditors receive payment. Senior debt is also ranked higher than high-yield debt in the capital structure.

It is quite common that multi-tranche senior loans are granted, which provide for different maturities. Senior loans are commonly used for the required working capital of the target company.

Senior loans are accessible by various businesses and widely offered by banks. The banks generally have low costs of funding and a profitable spread between costs and the interest rate they charge to their borrowers.

3.2 Mezzanine/Payment-in-Kind (PIK) Loans

It can be observed in the market that alternative forms of financing have increased in recent years; not least because of the current economic instability caused by Russia’s war in Ukraine and the aftermath of COVID-19.

Mezzanine loans are provided in the form of unsecured or subordinated loans (Nachrangdarlehen) often combined with a high interest rate or a so-called equity kicker.

Inter-creditor agreements or the respective security documentation can clarify the relation between mezzanine creditors and other creditors by way of contractually subordinating the claims of the mezzanine creditors; or alternatively through a structural subordination of the mezzanine tranches. In addition, it is possible to grant second-rank collateral for most security interests regulated under Austrian law.

With regard to a company’s capital structure, mezzanine finance stands between equity and debt, and thus is hybrid. The main purpose of mezzanine loans is filling the gap between equi-