Insolvencies to rise more than 10% in 2010 as funding problems increasingly threaten healthy companies

• New survey of insolvency administrators, workout bankers and financial investors
• Number of bankruptcies to rise further – main factors are recession, scarcity of financial resources and overcapacity
• Automotive industry and plant and machine construction particularly affected, German SMEs increasingly at risk
• Restructuring by insolvency administrators the most frequently chosen option for continuation prior to merger
• Strategic investors play biggest role in bidding contests

The number of insolvencies in Germany will continue to rise significantly in 2010. The main reasons are the recession, the limited availability of financial resources and overcapacity. Particularly affected are the automotive industry and plant and machine construction. But German SMEs are also facing increased risk. What is more, financing problems mean that increasingly even healthy businesses are getting into trouble. Mergers and acquisitions (M&A) are a key option for restructuring in cases of insolvency. Such transactions are currently only possible with a high equity share. Strategic investors have a clear advantage over financial investors in bidding contests. The most important success factors in M&A transactions are the reputation of the insolvency administrator and an efficient, transparent process.

"In 2010, healthy companies will increasingly face difficulties because of financing problems," says Dr. Gerd Sievers, Partner in the Corporate Performance Competence Center and expert in corporate finance at Roland Berger Strategy Consultants. "Government programs can only partially compensate for the finance problems." This is the core finding of the study "Insolvencies in Germany 2010 – Trends in the economic crisis." The study is based on a survey of financial investors, insolvency administrators and workout bankers carried out by experts at Roland Berger. The majority of those interviewed think that the number of companies filing for bankruptcy in 2010 will rise by at least an additional 10%. The main reasons given are the recession (85%), the scarcity of financial resources (71%) and excess capacity (63%).

Automotive industry most at risk

The automotive industry is considered most at risk of insolvency, followed by plant and machine construction and logistics. "Respondents considered financial services, telecommunications and media companies to be at least risk of insolvency," says Sievers. "However, they anticipate an increased risk of insolvency for German small and medium-sized enterprises (SMEs). Large companies and corporations are considered relatively safe." Insolvency is viewed as the worst restructuring option, especially by the managers of privately-owned companies. "Financing problems mean that increasingly businesses will get into trouble in 2010 even though they are basically healthy," says Sievers. "Government programs can only partially compensate for the finance problems."

M&A a preferred option

If the worst comes to the worst, restructuring by an insolvency administrator is the most likely option for continuation of the business (95%), followed by a quick M&A transaction (66%) and self-administration (53%). An important option in cases of insolvency is adjusting operating capacity and getting rid of old debt, say the experts. "M&A transactions offer major advantages over other restructuring options. They can be implemented fast, and the quick inflow of capital makes it possible to save at least the core of the business," says Sievers. "In addition, acquisition limits the business risk for creditors." Opportunities for debt financing for M&A transactions have worsened markedly, however. Thus 90% of respondents believe that the likelihood of such financing has fallen. "In 2010, a higher share of equity is expected," says Sievers. The survey backs this up, respondents increasingly foreseeing equity shares of over 60%. Only 5% of respondents believe that financial investors will be the dominant bidders for insolvent companies (compared to 55% for strategic investors). They see the advantages of strategic investors as lying in the preservation of the core of the business and in speedy implementation. "For all parties involved, the biggest factor in such transactions is the reputation and experience of the insolvency administrator," says Sievers.