Germany: Turnaround playing field not ready for the crash

In September 2016, I published a comprehensive analysis (in German) of the potential impact of an economic crisis on the restructuring prospects for companies in Germany. The analysis is based on a total of seven theses, which I discussed in a (non-representative) survey among representatives from banks, funds, research and consulting.

  1. Fundamental data since the beginning of 2016 points towards an economic crisis – without even taking into consideration the consequences of Brexit. Due to the overall debt-level, the global economy will enter into a recession in the short- to midterm, possibly not even gradually but with a shock. This recession will not spare the German economy.
  2. Even if the level of that crisis only reached those of the last financial crisis, the fundamentals on which German enterprises  base their business planning would deteriorate so fast that their “business continuation prognosis” (which is important to avoid the insolvency ground for over-indebtedness) will most probably be gravely endangered.
  3. The situation of such enterprises could be aggravated by the fact that most banks have considerably reduced their “work-out-branches” in the previous years and that they will probably sell distressed loans quicker to fonds than before. The latter meaning that more often than before opportunistic, and more difficult to assess,  investors would participate in turnarounds.
  4. Also, the current very restrictive German jurisdiction on insolvency grounds, turnarounds and claw-back actions aimed at a (too?) early insolvency filing could “promote” a wave of insolvency filings of enterprises, which could actually be rescued, thereby (unintentionally) fueling the crisis.
  5. In addition, the (wrong) judgement of the Landgericht Frankfurt in Q-Cells will it make more difficult for turnaround-professionals, to attempt an out-of-court restructuring without running the risk of an enhanced liability and claw-back risk. Since the wheels of justice only turn slowly, a revision of this judgement (alone) will only become effective after the crisis hit home – and therefore too late.
  6. The consequence of the afore-described developments could be that a multitude of (otherwise viable) enterprises fall into insolvency. It is doubtful, that the (currently also consolidating) German IP industry will be in a position to handle such a wave of filings in a constructive manner – even less to fully exploit the turnaround potential in those enterprises.
  7. Even if the EU-Commission would be able to create further possibilities to rescue enterprises with its plans for a “pre-insolvency restructuring mechanism” proposed in autumn 2015, there is a considerable risk that the implementation of these measures also comes too late to only minimize the effects of the crash.

“Bedingt sanierungsbereit – Restrukturierung, Sanierung und Insolvenzverwaltung im Umbruch” (“Conditionally enabled for turnaround – (German) restructuring, turnaround and insolvency administration in turmoil”) ZInsO 2016, 1778

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