In our series Personal-Financial.com explains we give a condensed overview of current economic topics. This time: the expected wave of bankruptcies in autumn – with an editor Thomas Steinmann. He already wrote about this topic for the 09/2020 issue.
In the summer one heard repeatedly warnings of a wave of bankruptcies in the fall. Is it justified to worry about it?
The background to this concern is a current special regulation for insolvency law. In March, the federal government suspended the obligation to apply for companies that got into an existential crisis as a result of the corona pandemic alone. This exception was temporarily valid until the end of September, but has now been extended to the end of December – albeit only partially. Because companies that have the reason for insolvency of insolvency and who can no longer pay wages and bills, for example, this grace period no longer applies since October 1st. You now need to file for bankruptcy. At the latest when the “normal” bankruptcy law comes into effect again – ie at the end of the year, if there is no renewed extension – the number of bankruptcies will increase. There will be no sudden surge in bankruptcies in October or November. But overall, the trend is increasing in the coming months.
What role has this special regulation played so far for troubled companies?
The extent of this regulation is really very far-reaching. This can also be seen in the number of corporate insolvencies in recent months, some of which are significantly below the level of previous years. The special regulation has given many companies at risk of insolvency a kind of immunity – at least if their economic crisis was triggered by the corona pandemic. The exception in bankruptcy law actually only applied to these cases – but it is not that easy to implement. Presumably there have been some companies since the spring that have benefited from this regulation without meeting the requirements. In fact, it is a matter of delaying bankruptcy.
How does corona insolvency differ from a “classic” one?
The decisive factor is whether or not the company was still fit before the Corona crisis. Auditors and lawyers use the term “companies in difficulty”, and there are clear indicators for this. Many auto suppliers, for example, were already in financial difficulties before the outbreak of the pandemic. Anyone who has already been to the restructuring department at their house banks cannot invoke the special regulation in insolvency law and is also not entitled to state aid, such as from KfW.
How can companies counteract filing for bankruptcy?
Over the next few months we will see numerous, and many companies, very tough restructuring programs. In some industries this is likely to be accompanied by a notable downsizing of staff, for example at the automotive supplier Continental, which wants to close its tire plant in Aachen. Plant closings will probably follow at other companies too. The department store group Galeria Karstadt Kaufhof, which has just got rid of billions in bankruptcy proceedings, is now closing more than 40 of its branches in order to keep costs down. Lufthansa is reducing more than 1,000 pilot positions and withdrawing part of its aircraft fleet because it is clear that the old passenger numbers will not come back for a few years at the earliest. In addition to restructuring and savings programs, many companies also have to try to attract new donors. The aim is to build up new equity and reduce their level of debt. But in the midst of a deep recession, that is of course a major challenge – especially in those industries that are particularly hard hit by the pandemic.
Where are most bankruptcies expected?
The catering and event industries are particularly hard hit because of the corona-related restrictions. The same applies to tourism, such as travel agencies and the coach industry. Parts of the retail trade such as fashion and shoe stores have also been hit after the past few months, as are many auto suppliers. Despite government support, it is clear that the clock is ticking for many companies here. Because the financial buffer is getting thinner and thinner with each month of the crisis. On the other hand, there are also sectors that are less severely affected and in some cases even benefit from the crisis. This includes almost the entire digital industry – such as the providers of tools and software for mobile working as well as the telecommunications industry. Certain segments of the retail sector also recorded a plus during the crisis, especially grocers and hardware stores. So there was a “corona economic effect” here.
You can find more infographics at Statista
Expect delayed bankruptcies
Keyword state support: In view of the economic situation, did the federal government’s aid measures go far enough?
The measures – in addition to the aid loans, this mainly includes short-time working – cushioned the free fall of a large number of companies in the acute phase of the crisis in spring. It would have been different without the state programs. Even compared to other EU countries, the federal government’s aid was generous and effective. It did not go perfectly in every single case, because there was also abuse and unjustifiably paid aid – for example, in the case of emergency aid for the self-employed and small businesses. These were paid out in a hurry to keep the recipients afloat. With the loan programs, for example through KfW, it will also become clear in the future which companies can repay the funds. Delayed bankruptcies can therefore also occur in the next few years. In the end, however, the state cannot save every single company.
So was the quick fix a good one too?
Judging by the requirements of this exceptional phase, by and large yes. With its intervention and aid programs with a volume of several hundred billion euros, the state prevented the total economic crash. Nobody can do anything for the corona pandemic. This also distinguishes this crisis from the financial crisis ten years ago, which was caused by massive misconduct by parts of the economy. However, some companies and industries were hit in advance – keyword: zombie companies. The dilemma is to separate exactly: There is the risk that the state, through its crisis aid, will also keep business models and companies afloat that had problems before the corona pandemic and would otherwise disappear from the market. Galeria Karstadt Kaufhof, for example, was already hit because the age of the department store is over thanks to the increasingly popular online trade. There are plenty of such examples. In the coming months, it will be crucial for the political decision-makers at the federal and state levels to weigh up precisely: The state must differentiate in which cases it makes sense and is sustainable to provide further help. Otherwise there is a risk that the state will hold back a necessary structural change. Then he would just postpone the crisis at some companies.
Do you already know ours Newsletter “The Week”? In your mailbox every Friday – if you want. Here you can sign up