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When the number of German companies filing for insolvencies fell in 2019 for the tenth year in a row, Joachim Ponseck was expecting the tide to soon turn. He’s still waiting.
I was predicting a wave of insolvencies for the year to come,” says the Baker McKenzie partner. “Now I am much more cautious.”
Besides the glaringly obvious one and a few long-troubled high street retailers, hardly any companies in Germany have gone bust during the pandemic. “At the moment the companies that are in insolvency are either the ones that are in super desperate situations or where an insolvency is used to implement a pre-packaged restructuring plan,” says Petra Brenner, a partner at Ernst & Young.
The result is that 2020 marked a 20-year low for the number of enterprises filing proceedings.
Part of that is down to rule changes implemented by the German authorities during lockdowns.
Pre-crisis, German businesses were required by law to file for insolvency if they ran out of cash. That requirement was suspended during the pandemic.
Yet even after that rule was reintroduced in May bankruptcies are yet to pick up. Still in place for many companies, however, is Kurzarbeit — Germany’s equivalent of the UK’s furlough scheme, which enables companies to pay workers who are surplus to requirements through government funds.
Under the scheme, many companies are allowed to use the support up until the end of this year. But the numbers drawing on the support have already fallen sharply. The Munich-based Ifo think-tank, which puts together monthly figures on Kurzarbeit usage, said the number of workers covered by the scheme fell below a million for the first time since the pandemic began in August.
There are still 688,000 people covered by the benefit, the largest portion of which work in hospitality.
A more important part of the government support may have come from KfW, the national development bank, which pledged to cover a portion of banks’ losses on loans extended to companies that needed credit during the pandemic.
“As a result of governmental efforts to mitigate losses and damages caused by anti-Covid measures, money remains cheap. KfW backing also gives banks comfort to finance troubled companies, because they are saying ‘KfW has our back’,” says Brenner, who adds that lawmakers may be especially reluctant to remove support right now, as it would cost jobs. “Elections are coming. No politician wants it to look as if the government is failing to secure the ordinary workers’ house, in particular as a lot of people have been hit hard by the anti-COVID measures taken by the government.”
Both Brenner and Ponseck think the conditions created by the European Central Bank’s aggressive monetary easing are a big factor in explaining why there’s been a dearth of insolvencies.
“It’s down to the economic policies of the central banks. It’s created an environment in which there is an easy access to liquidity and banks tend to be indulgent, they are more likely to accept covenant breaches,” says Ponseck. “Real estate and equities are so highly valued that funds are looking desperately for affordable investment targets and will invest in anything that moves.”
“In times of negative interest rates, pension funds, insurance companies and high net worth individuals are seeking for higher returns,” says Brenner. “The debt funds they invest in are competing with banks to finance the same companies. Debt funds are under investment pressure, in order to get their returns, they take risks a banker wouldn’t.”
Ironically, it may only be when conditions pick up that businesses file. “Insolvencies are a lagging indicator, which tend to go up when conditions already improve,” says Ponseck. “We need to see what the next half year will bring.”
One reason for this may be that, as order books fill up, firms will feel the pinch. “With fewer orders, you need to order fewer materials. You’re not going to go insolvent due to illiquidity if you don’t actually need cash to buy things,” says Jürgen Erbe, an insolvency administrator at Schultze & Braun. “There’s trouble ahead, we need to see how businesses fare during the next half-year as order books fill up and banks financing of working capital by banks for raw materials have to be bought.”
Still, few are expecting anything as grim as feared when lockdowns began. “Insolvencies will rise,” says Erbe. “But it won’t be the end of the world and not nearly as bad as people thought at the start of the pandemic.”
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