Bankruptcy applications are increasing – willingness to invest is dwindling – only just under one in three companies can be realigned through restructuring
By Rainer Eckert *)
In Germany, the number of corporate bankruptcies is increasing, while at the same time the chances of rescue from company bankruptcies are steadily decreasing. In the first half of 2024 alone, according to data collected by various consulting companies and research institutes, insolvency applications are said to have increased by around 30% compared to the same period last year – for companies with sales of 10 million euros or more, so-called major insolvencies, there were even around 40% more applications than a year before.
Experts agree that this is not the end of the trend. Numerous studies support the thesis and paint a bleak picture: the market’s willingness to invest is dwindling, especially when it comes to takeovers. Potential investors are also speculating that the downturn may not be over yet.
The statistics show that the chances of companies being rescued have decreased dramatically since 2020. While in the first Corona year more than one in two businesses were able to be realigned for the future through restructuring, in the last year of 2023 it was only just under one in three applicants. This trend is accelerating the closure of companies and, at first, further worsening the already ailing overall economic conditions. However, in this multi-complex interaction of different interrelated economic factors, recovery and renewal can be expected in the long term.
Investors cautious
A look at the current situation shows that the willingness of large investors and lenders to invest has almost reached zero. Markets that are difficult to predict and global uncertainties, the move away from zero interest rate policy and geopolitical tensions are causing investors to hesitate. Anyone who still risks their money does so with extreme caution – but more and more often this no longer happens at all. International investors are currently often avoiding Germany – not least because of high energy costs and excessive bureaucracy.
Banks are holding back
The result: Hardly any money flows into new projects and the market is increasingly stagnating. The shortage of skilled workers and rising raw material costs also contribute to investors holding back. Companies are facing skyrocketing energy and raw material prices as uncertainties in global supply chains continue.
The banks are also holding back. The time when lending was generous is long gone. Instead, the financial institutions have tightened the reins and drastically tightened the requirements for creditworthiness and resilience of business models. Companies that previously had no problem getting loans now have to meet strict requirements and can no longer rely on easy sources of financing.
At the same time, the markets are volatile and the euro has lost value, making imports more expensive. As financing options dwindle, consumer prices and wages continue to rise, although not as quickly as last year.
Way out of business
The result is an increase in business closures. Without investments and with rising operating costs, many entrepreneurs see no other way out than to close the business. Even if there is little hope for the fate of individual businesses, each of these crises also offers opportunities for general economic development: the closures free up resources – capital, skilled workers, market shares – that can be used by new, innovative companies.
Here lies the opportunity for an economic restart and for the realignment of the markets. These adjustments can lead to more efficient use of resources as new companies fill the gaps with modern business models and technologies. There is also the possibility that industries will become more specialized and therefore more competitive.
At the same time, consolidation within industries, such as through mergers or acquisitions, can lead to the creation of larger, more stable players that can compete globally.
State aid
There are certainly numerous companies that have a core worth preserving – be it technical know-how, specialized jobs or a central position in the supply chain. When such companies fall, the impact often spreads widely. Nevertheless, government rescue attempts in the past have often been misguided.
All too often, money was used to keep companies alive whose business models had long been outdated. The result: valuable resources were pumped into economic “zombie companies” that blocked the necessary renewal in the market. There is also a positive side to these companies going out of business: closures release energy that can flow into more efficient and competitive companies. This process is a natural and therefore necessary engine for progress and prosperity.
Galeria and Meyer Werft
Looking back, state interventions have rarely been successful in the Federal Republic’s recent economic history. If prominent companies get into difficulties, there seems to be a great temptation for politicians to grant state aid. Unlike at the beginning of the corona pandemic, there is now a structural crisis and not a shock situation caused by an external event.
Despite massive aid, the Galeria Karstadt Kaufhof department store chain ended up in insolvency proceedings for the third time. It remains to be seen whether it will now be possible to maintain a business model that no longer appears to meet today’s demand.
It remains to be seen whether it will be possible to maintain the shipbuilding industry in Germany with billions in aid. As part of overcoming the crisis at Meyer Werft, private investors had shown no interest in the business model; the state should also ask itself whether the chosen concept is potentially sustainable for the future.
Innovation bottleneck
Especially when you take into account that banks, for example, also have to assess the ecological sustainability of a business model when granting loans. This will certainly mean a difficult trade-off for the production of gigantic cruise ships in the middle of the country.
Based on the experience of the past few years, it is definitely worth discussing whether Germany should continue to stick to uncompetitive business models. The funds used for rescue could alternatively be used to make the neglected infrastructure in Germany competitive again. Roads, railway lines and hospitals require investments worth billions. The money invested would create jobs in both the short and long term. The bureaucratic hurdles must also be drastically reduced: approval procedures and court processes sometimes take so long that, in extreme cases, the institutions are no longer perceived as functioning by European and international standards.
New opportunities
In my capacity as co-chair of the Insolvency Law & Restructuring Working Group in the German Bar Association, I am constantly experiencing new political regulations. This also corresponds to my impression from practice that the concrete implementation of projects takes so much time that, in the eyes of those involved, they are not implemented. The restructuring industry is primarily looking for more tangible and applicable approaches to simplify procedures for insolvent companies.
It will certainly take some time before this happens, which, initially marked by even more drastic economic crises, will ultimately lead to a reversal and new opportunities. The perspective and positive outlook for a country in an investment-friendly, innovative and confident environment remains.
*) Dr. Rainer Eckert is a founding partner of the law firm Eckert Rechtsanwälte, a lecturer at Leibniz University Hannover and, since 2022, chairman of the Insolvency Law & Restructuring Working Group in the German Lawyers’ Association.
Dr. Rainer Eckert is a founding partner of the law firm Eckert Rechtsanwälte, headquartered in Hanover. The law firm, which has offices in 19 German cities, is one of the leading German restructuring and insolvency law firms. Eckert is a specialist lawyer for tax law as well as insolvency and restructuring law with a focus on corporate law, company sales and insolvency law. He completed his doctorate in insolvency law. The 61-year-old is a lecturer at Leibniz University Hannover and has been chairman of the Insolvency Law & Restructuring Working Group in the German Lawyers’ Association since 2022. Photo: Eckert Lawyers
*) Dr. Rainer Eckert is a founding partner of the law firm Eckert Rechtsanwälte, a lecturer at Leibniz University Hannover and, since 2022, chairman of the Insolvency Law & Restructuring Working Group in the German Lawyers’ Association.
