AUSTRIA Law and Practice

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

ty and senior debt and is typically used in real estate financing.

A PIK loan is a kind of mezzanine loan where the borrower is allowed to make interest payments in forms other than cash. PIK loans are commonly used in LBO structures. Typically, the payment of interest may be made by issuing another debt or by issuing of stock options. PIK loans are often taken if a company has liquidity problems but has the capability to pay interest without paying in cash form. This is attractive to companies that want to avoid making current cash outlays for debt interest, such as during a management or leveraged buyout or during a growth phase of the business. In order to protect their liquid assets, companies pay their liabilities with using new liabilities. Under Austrian law, there are generally no legal restrictions on the inclusion of PIK elements in the overall debt consideration.

3.3 Bridge Loans

Traditional bridge loans are temporary loans with an initial maturity of one year or less, put in place to bridge a potential gap between the announcement of an acquisition until a company can secure permanent financing, in particular if the timeline regarding a transaction does not allow for full syndication of the loan before closing. In Austria they are used for various scenarios, such as acquisition financings, LBOs and before bond issuance.

Bridge loans are interim financing options usually used by companies to solidify their short-term position until a long-term financing option can be arranged and they are normally used to fulfil a company’s short-term working capital needs. Bridge loans are often repaid by the final loan proceeds.

The interest rates of bridge loans depend on the credit rating and default risk of the borrower. However, the interest rates are higher than typical rates under ordinary circumstances – in addition, the documentation often provides for interest rate increases or additional fees periodically across the term of the loan or in case of extension.

The borrower is thus incentivised to repay the bridge loan as soon as possible.

3.4 Bonds/High-Yield Bonds

Bonds are not usually used for the initial funding of acquisitions. However, due to the strict requirements with respect to banking licences in Austria, the issuance of bonds is commonly used in acquisition financings and LBOs with Austrian companies involved.

Commercial lending is considered a regulated activity in Austria and thus requires a banking licence under the Austrian Banking Act if the respective lending business is deemed to be carried on in Austria. For non-banks it is possible to participate in the lending business only if this activity is exempted from the requirements of holding a banking licence (eg, acquisition of loan portfolios by special securitisation purpose entities or through the use of bonds and initial loans by credit institutions, which are transferred to new lenders outside of Austria after the first loan has been granted).

A banking licence otherwise required under the Austrian Banking Act can be lawfully circumvented if, instead of granting a loan, bonds are issued by the borrower and acquired by the lender. The issuance and purchase of bonds does not require a banking licence in Austria. There are signs that bonds may become cheaper than loans, which should give bond financing some