The corona crisis is changing the entire economic environment in which we live. Every day a new well-known name is in the press, which has filed for bankruptcy. At the same time, many healthy companies have to run up extremely high debts due to the crisis in order to survive at all. Will there also be international group insolvencies of large listed companies? Is the true wave of insolvencies still to come – in the years 2021/22? And aren’t some companies currently taking advantage of the situation for long-overdue restructuring measures? We have interviewed Dr. Tjark Thies, a specialist in insolvency law at Reimer Rechtsanwälte. How does he assess the current situation and its effects?
Dr. Thies, as a specialist lawyer for insolvency law, you look back on 19 years of professional experience as an insolvency administrator. What has changed in your work as a result of the current situation?
It has become much more intensive. I don’t know what happened to you personally, but many were in a state of limbo at the beginning of the corona crisis. You didn’t know what was really happening, how the world, the health system, or even your own office would become organized. Even the management and the board of directors could not estimate how quickly this whole era would end again.
Then one heard about the various legal measures, about an alleged suspension of the obligation to file for insolvency. From the point of view of insolvency law, this led in many cases to a kind of lethargy. Here in Northern Germany, despite the crisis, there were far fewer applications for insolvency than in the comparable period in previous years. Only companies that were already weak before filed applications. In return, however, a mass of consultancy assignments have resulted in which we examine whether insolvency – especially in the form of debtor-in-possession or in-protective-shield proceedings – is not sensible for the company and its shareholders, especially at the present time.
Due to the crisis, many healthy companies are now having to run up extremely high levels of debt in order to survive at all. Isn’t the actual wave of insolvencies and the boom in orders expected to follow – in six to 12 months, for example, in 2021/22?
We are expecting a second – and actually bigger – wave by precisely those companies that are complaining about a lack of income but are currently receiving loans from their house bank or KfW to bridge the gap.
Many of these businesses will ultimately have to find out that the resulting over indebtedness means that they will have to fight against these legacy debts for years – without being able to make a long-term distribution to the shareholders. This is already the reason for the large number of advisory discussions due to possible debtor-in-possession proceedings. We assume that these will not only be advisory discussions but that many self-administration proceedings will also result from this in the short, medium, and long term. These proceedings will also become necessary; for many companies it will not be feasible to fight against this mountain of debt or, as some already fear, against a debt-equity swap.
How can companies in lockdown – with running costs and no revenues – be restructured at all?
We have to make a distinction here. On the one hand, we have the situation in the companies we are looking after that are in insolvency proceedings as insolvency administrators or debtor in possession together with the previous management; there we are primarily active as entrepreneurs and continue the business operations. For us, too, the situation becomes extremely tight due to the loss or reduction of income. After the opening of insolvency proceedings, we too have to bear all costs with the exception of liabilities from the period before the opening of insolvency proceedings. However, even if there is a chance of restructuring, these companies are not currently receiving a KfW loan. This will only be granted to companies that – to put it simply – had positive results before December 31, 2019. If these were not achieved, those companies will not receive a KfW loan – with the further consequence that they are currently only able to keep themselves going by means of short-time-work compensation. But even this is becoming increasingly difficult. If this measure can no longer be implemented beyond June 1, 2020, then some of the larger enterprises that we are currently supporting in administration will also have to close their doors in the long term. That is one part.
And the other part?
That concerns the new applications that are now coming in: there are already the first cases of applications being made on the grounds that the corona crisis was the reason. But that is probably only half the truth: these businesses have been in trouble before. But here there is the considerable advantage that in the period between the application and the opening of insolvency proceedings, these businesses receive the insolvency money for up to three months, pay no taxes, and – thanks to the new law – are allowed to not pay rent for three months without the landlord having the option of terminating the contract. As a result, these businesses have enormously low expenses, can usually be kept alive without any problems – even with a low income – and can currently be restructured much more easily than before. After all, from the first second on, they can concentrate primarily on long-term restructuring without the otherwise time-consuming problems of running a business.
You already mentioned the situation of larger companies. Do you also expect international group insolvencies of really large listed companies?
I also fear some proceedings for large companies. Karstadt has already made a start. In the case of listed companies, on the other hand, I rather assume that there will be considerable state support, ranging from indirect to direct investments, such as the participation of the city of Hamburg in Hapag Lloyd in 2012.
Does the fate of Germany now lie in the hands of a few specialists?
In the major insolvency proceedings, there are actually few administration offices and consulting companies that have the enormous manpower to handle such cases with a clear conscience.
Now the obligation to file for insolvency is suspended for a short time and under certain conditions. What do you think? Does this also entail risks? Jörn Weitzmann, chairman of the working group Insolvency Law and Restructuring (DAV), recently warned in an interview with the Handelsblatt newspaper against a “too-long suspension.” He gave as reasons that it could lead to a “loss of confidence in the economy.” At the same time, “super zombies” were being bred.
Right at the beginning there was a misleading press release about this: it stated exclusively that the obligation to file for bankruptcy was suspended. We had a correspondingly large number of consultancy mandates, and those clients initially thought that the application for insolvency would no longer have to be made unconditionally. That is humbug. The application must still be filed. Only if the reason for insolvency is corona related and there are prospects of eliminating the existing inability to pay will the obligation to file an application be suspended, initially until September 30, 2020. The legislator has learned from the Aufbauhilfegesetze in several respects. Among other things, it has enshrined a presumption in the law for the question of whether the reason for insolvency is corona related. Anyone who was not insolvent on December 31, 2019, will be presumed to have had the reason for insolvency as a result of the corona crisis.
To the “super zombies”: I don’t think they’re being bred. These companies were already bankrupt before the crisis. But for the most part, they will not survive on the market because they will not receive KfW loans. It doesn’t help here if you don’t have to file the application by law: for liquidity reasons alone, you will have to apply for it later. The salaries – whether they are reduced by short-time work or not – the accumulated old liabilities, and the general costs can no longer be paid at some point. There are certainly some companies that were already in crisis before the pandemic and that are currently relying on the help of the banks to seize the opportunity for short-term survival. But because of the still-restrictive lending policies of the banks, I do not think nor hope that the number is large.
Do you see the danger that some companies could take advantage of the current situation to carry out long-overdue restructuring?
There will definitely be entrepreneurs who take advantage of the corona pandemic not only to draw down loans quickly – perhaps only to make de facto debt rescheduling – but also to use the corona discussions to carry out overdue restructuring.
Take the case of Lufthansa-Germanwings. The Lufthansa executive board recently announced tough, and certainly necessary, restructuring measures instead of continuing to negotiate with various employee representatives. Germanwings was to be finally closed and wound up. Do you think that the imminent insolvency caused by corona is not also being used as a Sword of Damocles against the trade unions?
Yes, we are also observing this case: companies that are simply and sensibly exploiting the crisis to implement tougher labor-law and structural measures – measures that might have been difficult to implement before, when the economy was flourishing and the figures were good. These are measures that, in addition to short-time work, consist of redundancies and collective bargaining. It is certainly possible to implement such measures a little more intensively than is actually necessary at present. However, the goal of maintaining the company in the long term is desirable.
We are also noticing this ourselves. In the ongoing operations that we manage, we are currently able to negotiate with the trade unions in a very consensual manner. They themselves recognize the chaos that could reign if no such measures are taken, and they are much better able to communicate their involvement in reorganization measures to their members.
Do you think that the cooperation between insolvency administrators and advisors is now also changing? After all, the usual course of restructuring provided for the use of management consultants long before the liquidity crisis. Now companies seem to skip the various stages of the crisis from the strategy stage onwards and end up directly in insolvency.
I do not mean that companies skip the individual crisis stages. It’s just that it’s faster because they have no more revenue overnight. And this speed of missing receipts means that the individual steps – which were previously taken at leisure – are now no longer effective. But that doesn’t make management consultants obsolete. The first step still takes companies to their own lawyer, tax consultant, and house bank, who in turn refer them to the management consultant. I suspect that the working time of management consultants per mandate will be lower. On the other hand, the workload will increase due to many more mandates, and we insolvency administrators as clients will be added more often.
The long-term assignment will also change. At present, a company is no longer accompanied by a consultant for the next six to eight months to jointly determine how it is developing and what personnel or structural changes need to be made. The crisis is already directly present. And finally, in the short term and for a short period of time, the work area will change a little. A management consultant will currently be primarily interested in how the liquidity crisis can be absorbed. How, for example, individual production areas can be changed – that will take a back seat. The current question is: how quickly can the company generate income again, or how does it get credit?
“Between the desire to avert bankruptcies and the caution not to grant loans, the repayment of which must be questioned.” This is how Uwe Köstens, managing partner at enomyc, recently described the situation of the banks in his commentary. What do you think about this?
The responsibility of whether or not to grant loans lies with the bank, even in the current phase. It is only now that it is no longer only a business but also an economic issue. It is still the intensive duty of the individual bank – also by calling in external consultants – to examine whether it is investing in a company that will survive on the market in the long term with the resulting balance sheet and cash flow. And even if KfW assumes 100 percent of the loan loss, the house bank, with the knowledge it has gained from its long-term support of the business, has an obligation to KfW – and thus to each individual – to check whether this business can and should be supported in the long term. And this applies regardless of whether the business has gotten into this situation through debt or not.
Finally, what is your estimate: when will the economic consequences of the corona crisis be felt?
The damage exists now and is increasing daily. But I believe that, with the exception of the entrepreneurs who are suffering and the employees who are burdened by short-time work, the majority will really only feel it in the next two to five years. Then the whole horror scenario will become clear – once again – through increases in taxes and contributions. Fiscal measures will not be implemented so quickly – that would be counterproductive. I cannot imagine that next year the state will already whip up taxes at a rapid rate to neutralize the missing revenues – or rather the current expenditures. I believe that inflation will be accepted and that the tax burden will only be increased later. The opposite would be contrary to the much-needed revival of our economy.
Thank you very much for the interview, Dr. Thies.