This year will make it clear just how well banks are able to cope with the consequences of the COVID-19 pandemic. According to some estimates, their most severe stress test since the global banking and financial crisis of 2007 still looms ahead of them. Against this background, we interviewed Holger Rabelt, Managing Director of Commerzbank AG. What does his new position as Divisional Manager for Corporate Reorganization and Restructuring entail? What has been a particularly decisive experience in his career so far? What developments does he expect for the economy and the banking sector and what measures does he recommend for companies and banks in the current situation? Read on to find out more.

Mr. Rabelt, you have been Managing Director at Commerzbank AG since 2008. Since July 2020, you have also been in charge of the Corporate Reorganization and Restructuring division. How did you prepare for your new position?

I prepared for twelve months – of which I spent a total of four months at our branch offices in London, Singapore and Shanghai. I got to know my future employees at these locations and carried out a “portfolio review”. Back in Germany, I spent several weeks at two renowned restructuring consultancies. That is, until Covid-19 hit. Like many others, I moved to home working. As of July 1, 2020, I have been co-managing the division together with my colleague, Mr. Hans-Joachim Weidtmann, who is very respected in the market. Since September 2020, responsibility for personnel and portfolio has passed to me. So, I took over the position especially well prepared. I am very grateful to both Mr. Weidtmann and Commerzbank for this.

You had your onboarding in the middle of the first lockdown. Would you say that this increased the level of difficulty and made it more challenging overall?

As far as the subject matter and portfolio are concerned, no. Even for banks as a whole, there have so far been fewer negative surprises and problems than expected. What made Covid-19 more difficult for me personally was more managing the areas I took over: I mostly did not know my new subordinates personally and was only able to meet them virtually on the screen. What this means in the long run, is that our collaboration still lacks familiarity and closeness.

What excites you about your job? Is there anything you particularly enjoy?

Yes, I like the challenges that come with it. On the one hand, there is the challenge of protecting the bank from losses – and that in times that are not easy for anyone. On the other hand, there are the difficulties of motivating the people involved and pulling them along – even if a project or a specific task is in itself ungrateful.

Can you give us a specific example?

Before moving to the Head Office in Frankfurt, I had worked in Hamburg for six and a half years, where I dismantled Commerzbank AG's shipping portfolio in what was still a crisis-ridden industry. At that time, we were looking at some 19 billion Euros. That was quite a challenge. In addition, however, I also had to lay off staff – or find a different position for the employees in the bank. Overall, however, we designed the termination of the business relationship with the shipping companies in a mutually satisfactory manner and also managed to keep our employees motivated through clear leadership and target specifications.

What aspects make your work much easier in comparable situations?

In addition to experience, credit knowledge, and an understanding of numbers and the industry, a vital aspect is knowledge of human nature. Insight here is key – both in leadership and in dealing and negotiating with customers. Especially in reorganizing and restructuring cases, you meet with the other person, i.e. the hurting company, where people are exposed to extreme physical but also mental stress. You then have to be able to talk to those affected with the necessary empathy.

I also have the frequent experience that entrepreneurs have problems recognizing the crisis their companies are facing in the first place. This is one of the most difficult hurdles you have to clear with customers. The conversations unfold accordingly. It helps immensely to be able to “read” negotiations, that is, to be able to assess their developments well.

You should never miss out on the necessary clarity: Without the full commitment of all those involved, reorganization or restructuring is not going to be successful. That is a fact. Thus, it is essential to assess the current situation, the intention to cooperate with all stakeholders involved and the formulation of the goal to be achieved together. In the end, I think a certain degree of composure and sovereignty are needed.

Is there a project in your career that you remember particularly well?

Yes, there is, even if it was more of an experience than a project. It happened a while ago but is still pretty informative: Before I started at Commerzbank in October 2008, I was working at IKBG. I worked on investments in structured credit portfolios, mostly ABS portfolios backed by US subprime mortgages. That is why I experienced the global financial crisis of 2007 “firsthand”. And also how a bank is there one day and gone the next! The only way we survived was through a government rescue package.

The speed with which IKBG was swept away, the helplessness, the stress – everything that went with it was in every way a decisive experience for me. And a great lesson. I had previously voiced my concerns about the US housing bubble busting. From my point of view, the developments in that direction were obvious – even if the full later extent of this crisis was not yet clear. The same thing can happen to companies in other industries, although possibly not quite as suddenly. Crises tend to build up over time but can culminate in a similar disaster if countermeasures are not taken.

What lessons have you explicitly drawn from this experience and can you use them to offer advice to companies and banks?

One of the great lessons learned for me is: “Be on your guard, anticipate eventualities, but do not be afraid”. In the current situation, I advise borrowers to weatherproof their balance sheets, to be prepared so they can always react quickly – come what may. Companies must be able to do this – it is essential to secure your own position by protecting liquidity, reducing costs and stretching investments. This also applies to banks: if the economy starts to look as if it is about to topple, they will have to move to more restrictive granting of credits. However, only living according to the “worst case” scenario would also be fatal. There will always be a tomorrow and companies and banks will have to be able to react to that too.

In addition to securing liquidity, reducing costs, stretching investments: do you have another recommendation that is often ignored?

Yes, I recommend companies to strengthen their “passive side”. What do I mean by that? In good times, many companies tend to look for loans where the interest rates are cheapest. But not every new bank is ready to face the crisis with its customers. This is why I advise companies to secure financing with their core banks and, if necessary, by means of a syndicated loan. The integration of bilateral financing – at least via what is known as an “intercreditor agreement” – also makes sense.

 

What are the advantages?

In this way, companies effectively secure through-financing, even if the banks can terminate the contract in the event of breaches of covenants or other violations of the credit conditions. Ultimately, however, in my opinion it is important and also a good signal to other groups of creditors of a company to deal with a crisis with five to eight core banks – depending on the size of the company and credit, more – instead of a large number of smaller, bilateral and more inhomogeneous banks.

Overall, how do you assess the effects of the COVID-19 pandemic on the economy and what is the future of banking?

I expect an increasing number of bankruptcies. Especially in the smaller companies and the catering, tourism, aviation sectors including suppliers and offline retailers. In the case of large market participants with a strong international/national position and a more sustainable business model, we are going to see protracted restructuring phases. I expect haircuts on bank loans or bonds, debt-equity swaps and other measures. All of this will be necessary in order to adequately take into account the sometimes sharp rise in liabilities in the form of bank loans and/or bonds. In some sectors, unfortunately, we will not see a rapid return to pre-pandemic levels – and in a few others there might be no permanent return at all.

So far, there have been only a few negative surprises and problem cases on the banking side of things. Some of the companies reacted very quickly and supported their liquidity themselves with state development loans or other credit funds. We banks, too, have made liquidity available with our own funds in some cases so that initial problems could be bridged – at least temporarily. However, the economic aftermath for banks will be felt in the next two and a half years. I also expect a significant increase in the portfolio I manage and with it the corresponding degree of stress on the resources.

The German Corporate Stabilization and Restructuring Act (StaRUG) came into force on January 1, 2021. In your opinion, what can it do?

The StaRUG establishes a legal framework in German law for the implementation of bankruptcy-avoiding restructuring. Hence the term “preventive restructuring framework”. This procedure has been around for a long time internationally, where it is known as an “arrangement scheme”. It defines the possibility for overriding individual groups of creditors with a qualified majority as “cross-class cram-down”. With the StaRUG, German legislation is now being brought into line with international standards. From my perspective, the greatest achievement here is that the gap between pre-insolvency restructuring and restructuring is closed as part of a formal and comprehensive insolvency procedure. This creates the possibility of financial restructuring – even in the face of resistance of individual participants outside of insolvency proceedings.

In your opinion, are there both advantages and disadvantages in this?

It remains to be seen whether and how successfully German restructuring practice will utilize the StaRUG. However, the aspect of an operational or performance-related restructuring parallel to that of the bank/liabilities seems important to me because they are still two sides of the same coin. In my opinion, one will not work without the other: I do not understand why a restructuring case should be treated differently under the preventive restructuring framework in 2021 ‒ from a purely economic point of view ‒ than if the same case had been handled, say, in November 2020 as pre-bankruptcy reorganization with operational reorganization.

In other words: A “cheap” restructuring of the liabilities side, for example by waiving partial claims without simultaneous efforts on the part of the company and its stakeholders, will not be possible. In this respect, performance-related aspects in the context of the restructuring or reorganization of companies will continue to be of great importance – especially against the background of the, in my opinion, expected strong increase in reorganization cases in the wake of the COVID-19 pandemic. The money to service the sharply increased debt must come from operational cost-cutting and other optimization measures in particular.

Another possible obstacle to the StaRUG could be that the scope of the preventive restructuring framework is only accessible to German companies or foreign companies with COMI in Germany, while international corporations will have to use foreign proceedings in parallel. This may result in complex procedures. But multi-jurisdiction restructuring is unfortunately never easy anyway.

The retail sector is currently starting up again bit by bit. What is at the top of your list when public life picks up again?

Definitely a visit to a Spanish restaurant and tapas with the family!

Thank you for the interview, Mr. Rabelt.

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