The Corona crisis is changing our entire economic life to date. Every day, there is a new household name in the press that has filed for insolvency. At the same time, many healthy companies are having to take on extremely high levels of debt as a result of the crisis in order to survive at all.
Will there also be international group insolvencies of large listed companies? Is the actual wave of insolvencies not expected until later - into 2021/22? And aren't some companies currently taking advantage of the situation to implement long overdue restructuring measures?
We 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 in insolvency law, you can look back on 19 years of professional experience as an insolvency administrator. What has changed about your work as a result of the current situation?
It has become much more intense. I don't know about 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 healthcare system or even your own office was going to organize itself. Even management and board members couldn't estimate how quickly this whole era would end again.
Then we heard about the various legal measures, about a supposed suspension of the obligation to file for insolvency. From the point of view of insolvency law, this led to a kind of lethargy in many cases. Here in Northern Germany, despite the crisis, there were significantly fewer insolvency applications than in the comparable period of previous years. Only companies that were already in a weak position filed for bankruptcy. In return, however, there was a mass of consulting assignments in which we examine whether insolvency - especially in the form of self-administration or protective shield proceedings - makes sense for the company and its shareholders, especially at the present time.
Many healthy companies are now having to take on extremely high levels of debt due to the crisis in order to survive at all. Won't the actual wave of insolvencies and the order boom then also only be expected after the fact - in about six to 12 months, into 2021/22?
We expect a second - and actually larger - wave to come from precisely these companies, which are complaining about a lack of income but are currently receiving loans from their principal bank or KfW to bridge the gap.
Many of these businesses will ultimately find that the resulting over-indebtedness means that they will have to fight these legacy burdens for years - without being able to make a distribution to shareholders in the long term. This has already resulted in a large number of consultations due to possible self-administration - i.e. the reorganization of the debtor under its own management. We assume that these will not only be advisory meetings, but will also result in many self-administration proceedings in the short, medium and long term. These will also be necessary: For many companies, it will not be feasible to fight this mountain of debt or, as some already fear, a debt-equity swap.
How can companies in lockdown - with ongoing costs and no sales - be turned around at all?
We have to make a distinction here. On the one hand, we have the situation in the companies that we look after in the insolvency proceedings as insolvency administrator or self-administrator together with the previous management: There, we are primarily active as entrepreneurs and continue the business operations. In this process, things also become extremely tight for us due to the loss or reduction of income. This is because after the insolvency proceedings are opened, we too have to bear all the costs, with the exception of the liabilities from the period before the insolvency proceedings were opened. Even if there are prospects of restructuring, these companies are not currently eligible for a KfW loan. This will only be granted to companies that - to put it simply - had positive results before December 31, 2019. If these do not exist, these companies will not receive a KfW loan - with the further consequence that they can currently only keep themselves going via short-time allowances. But even that is becoming increasingly difficult. If this measure can no longer be implemented beyond June 1, 2020, then some of the larger companies that we currently support in administration will also have to close their doors in the long term. That is one part.
And the other part?
This concerns the new applications that are now coming in: There are currently already the first procedures with the reasoning that the application had to be made because of Corona. But that is probably only half the story: These companies have already been in trouble before. However, there is the considerable advantage that these companies receive insolvency benefits for up to three months between the application and the opening of insolvency proceedings, do not pay any taxes and - thanks to the new law - may not have to pay rent for three months without the landlord having the option of terminating the contract. Consequently, these businesses have enormously few expenses, can usually be kept alive without any problems - even with low income - and can currently even be restructured much more easily than before: after all, they can focus primarily on long-term restructuring from the very first second - without the otherwise time-consuming problems of ongoing business operations.
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 in the case of large companies. Karstadt has already made a start. In the case of listed companies, on the other hand, I tend to assume that there will be considerable state assistance, ranging from indirect to direct equity investments, such as the City of Hamburg's stake in Hapag Lloyd in 2012.
Is the fate of Germany now in the hands of a few specialists?
In the major insolvency proceedings, there are indeed few administrators' offices and consulting companies that have this enormous manpower to handle such cases in good 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 harbor dangers? Jörn Weitzmann, Chairman of the Working Group "Insolvency Law and Restructuring" (DAV) recently warned in an interview with theHandelsblatt newspaper against a "suspension for too long". The reasons he gave were that it could lead to a "loss of confidence in the economy." In parallel, ""super zombies" would be bred".
There was a misleading press release on this right at the beginning: It exclusively stated that "the obligation to file for insolvency has been suspended". We had a correspondingly large number of advisory mandates where clients initially thought that the application no longer had to be filed unconditionally. That is humbug. The application must still be filed. Only if the reason for insolvency has occurred due to Corona and there are prospects of eliminating the existing insolvency will the obligation to file an application be suspended, initially until September 30, 2020. In this regard, the legislature has learned from the reconstruction aid laws in several respects. Among other things, it has established a presumption in the law for the question of whether the reason for insolvency has occurred due to Corona. Accordingly, anyone who was not insolvent on December 31, 2019, is presumed to have a Corona-related reason for insolvency.
On the "super zombies": I don't think any are 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 get KfW loans. It doesn't help here if you don't have to make the application by law: For liquidity reasons alone, you have to submit it down the road. The salaries - be it also the salaries reduced by short-time work - the accumulated old liabilities or the general costs can at some point no longer be paid. There are certainly some companies that were already in crisis before the pandemic that are currently relying on help from the banks and taking the opportunity to survive in the short term. But because of the banks' still restrictive lending policies, I don't think and hope that the number is large.
Do you see a danger that some companies may well exploit the current situation for long overdue restructuring?
There will definitely be entrepreneurs who take advantage of the Corona pandemic not only to pull loans quickly - perhaps only to do de facto debt restructurings - but also to use the Corona discussions to do overdue restructuring.
Let's take the case of Lufthansa-Germanwings. Lufthansa's Executive Board recently announced tough, and certainly necessary, restructuring measures instead of continuing to negotiate with various employee representatives. Germanwings was to be closed down and wound up for good. Do you think that the threat of insolvency caused by Corona will not also be used as a sword of Damocles against the unions?
Yes, we are also observing this case: companies that are simply and also sensibly taking advantage of the crisis to implement tougher labor law and structural measures. Measures that might have been difficult to implement before, when the economy was booming and the figures were good. These are measures that, beyond short-time work, consist of layoffs and collective bargaining. Certainly, such measures can be pursued a little more intensively at present than would actually be necessary. However, the goal of maintaining operations in the long term is worth striving for.
We are also noticing this ourselves. In the ongoing operations that we manage, we are currently able to negotiate with the unions in an extremely amicable manner. They themselves recognize the chaos that could reign if no such measures were taken and are far better able to communicate their involvement in reorganizing measures to their members.
In your view, is the cooperation between insolvency administrators and consultants also changing now? Because the usual course of restructuring provided for the use of management consultants long before the liquidity crisis. Now, companies seem to skip the various crisis stages starting with the strategy crisis and end up directly in insolvency.
I don't mean that companies skip the individual crisis stages: It's just that they do it faster, because overnight they no longer have any revenue coming in. And this rapidity of the missing revenues means that the individual steps - previously taken calmly - are now no longer effective. But this does not make management consultants obsolete: The first step still leads companies to their own lawyer, to the tax advisor, to their bank, who in turn refer them to the management consultant. I suspect that the working time of management consultants per mandate will be less. On the other hand, the workload will increase due to many more mandates, and we insolvency administrators will be increasingly involved as clients.
Long-term assignments will also change: A company is currently no longer accompanied by a consultant for the next six to eight months in order to jointly determine how it is developing and what personnel or structural changes need to be made. The crisis is already directly present. And ultimately, in the short term and for a short period of time, the scope of work will change a little. At the moment, a management consultant will primarily be interested in how the liquidity crisis can be absorbed. How, for example, individual production areas can be changed - that will take a back seat. At the moment, the question is: How quickly can the company generate income again, or: How can it obtain loans?
"Between the desire to avert bankruptcies and the caution not to grant loans under any circumstances whose repayment must be in doubt" - this is how Uwe Köstens, Managing Partner at enomyc, described the situation of banks in his recent commentary. What do you think about this?
The responsibility for deciding whether or not to grant loans also lies with the bank at this stage. It is only now no longer to be seen only in terms of business, but also in terms of the national economy. It is still the intensive duty of the individual bank - also by bringing in external consultants - to check whether it is investing in a company that will also 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 default, the house bank, with its knowledge from long-term support of the business, has the obligation to KfW - and thus to each individual - to check whether one can and should support this business in the long term. And this applies irrespective of whether or not the business has got into this situation through debt.
In conclusion, when will the economic consequences of the Corona crisis be felt?
The damage is there now and is increasing every day. But I believe that, with the exception of the suffering entrepreneurs and employees 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 - again - through tax and contribution increases. Fiscally, people won't follow suit so quickly - that would be counterproductive. I can't imagine that the state will already whip up taxes rapidly next year in order to neutralize the missing revenues - or rather the current expenditures. I believe that inflation will be taken into account and that the tax burden will not be increased until later. The opposite would be contrary to the much-needed revival of our economy.
Vielen Dank für das Gespräch, Dr. Thies.