13 July 2009
Green shoots aside, many companies, including German car manufacturer Opel, are not out of the woods. Frank Tschentscher highlights the obstacles remaining
With enough people and powerful magnifying glasses, it is always possible to identify green shoots of recovery. The rate at which companies in East Germany are filing for insolvency seems to have diminished, for example. But is this because things are looking better, or because there are so few left to file?
While we can all guess at where the global economy’s pendulum is right now, the simple truth is that it varies so hugely by industry and by jurisdiction that it cannot be summed up in one number. But there is a greater danger than this oversimplification - that when the recession is over, it will not be a case of ‘up, up and away’.
Current insolvency practices and customs may well be storing problems up for the future.
End of the road?
The classic example remains that of Philip Holzmann, a German construction company with a 153-year history, which includes the construction of the German Reichstag building. Propped up by taxpayers’ money and apparently rescued in 1999 by the then-chancellor Gerhard Schröder, the company finally collapsed in 2002, unable to attain finance for a further necessary restructuring bid. Its collapse resulted in the largest corporate collapse in Germany’s post-war history and a massive bill for German taxpayers.
A similar fate may easily be in store for other businesses around the globe and governments worldwide have had to make hard choices. Nowhere else has this manifested itself more clearly than in the US with President Obama’s decision to direct car giants Chrysler and General Motors (GM) into insolvency proceedings pursuant to Chapter 11 of the US Bankruptcy Code. Not too long ago any suggestion of this happening would have been scoffed at; however, with the recession now in full swing, traditional beliefs and perceived wisdom have to be reassessed.
In Germany the fallout of GM’s problems has brought long-struggling Opel into similar disrepair. There is concern that, like Philip Holzmann, its products may prove longer lasting than the company itself.
Opel is heavily reliant on government backing, but has proved such a complex problem to solve that politicians were careful not to commit themselves. If one were a cynic, one might add that it is, after all, an important election year in Germany. However, it is certainly true that the restructuring of Opel is not straightforward, and any investor will insist that the government takes on some of the risk that is inextricably attached to an acquisition of Opel. Lots of work then for business advisers and the legal profession, and no surprise therefore that consultants from around the globe have been retained by the various parties involved.
Negotiations with Canadian-Austrian automotive technology manufacturer Magna International, which received backing from the German government at a very early stage, seemed to proceed well, but there is no guarantee of success.
Should the negotiations fail and Opel later realise that, as has been suggested before, insolvency is the best or only option, it will be able to take comfort in the fact that Germany operates a very modern insolvency regime, tested over the years and with a proven track record. Well-known companies such as SinnLeffers and Ihr Platz were restructured successfully within formal insolvency proceedings and, under the application of an insolvency plan (the German equivalent of US Chapter 11 proceedings), emerged as a leaner, meaner and profitable operation.
But no matter how good the law, it ultimately boils down to the abilities and expertise of the person in charge of the proceedings, and it is here where the problem lies for Opel should it have to go down that road.
German insolvency judges will face the difficult task of identifying and appointing a sufficiently qualified expert professional to steer such an infamous case through. A case of this magnitude will require a skill set not many practitioners can offer. There is only a handful of recognised experts in Germany’s ‘super league’ of insolvency administrators who are experienced enough to handle such a case, and many of them have already been appointed in other, probably equally prominent, cases, such as Arcandor, Qimonda, Wedgewood’s German subsidiary Rosenthal or Woolworth Deutschland. If the courts were to resort to a less-experienced administrator, the consequences would be dire. Issues such as this can make those organisations deemed too big to fail too compromised to succeed.
This very specific example may only affect a small number of lawyers, but there are other issues lying ready to torpedo unaware companies.
One example is the temporarily relaxed balance sheet test recently introduced by the German government. It allows struggling businesses to assess their assets on going-concern values rather than liquidation values, always provided that on the balance of probabilities the company is more likely than not to continue as a going concern over the medium term. This has provided much-welcomed breathing space and room for manoeuvre, but this relaxation of Germany’s rigid filing code expires on 31 December 2010. Businesses ill-prepared for this may suddenly find offers of finance drying up in advance of this date as lenders rein in their risks, and an all-too-familiar illiquidity could cause mini-recessions through a number of companies that thought they had survived.
Opel, then, is unlikely to be the only company with interesting times ahead. As the magnifying glasses continue to search diligently, it must remembered that, even when green shoots start to come through, there will always be weeds to accompany them.
Frank Tschentscher is senior director of insolvency and restructuring at Schultze & Braun