Insolvency study: Overall risk of insolvency is down, but SMEs are hard hit

Financing problems are the main reason

• 80% of those surveyed say SMEs face the most risk of going bust
• 57% of respondents expect financing problems to be the main cause of insolvency in 2011
• Overall risk of insolvency 5% lower in Germany in 2011
• Sale during insolvency proceedings is the most common continuation option
• Financial investors as buyers are catching up with strategic investors
• Better access to credit for transactions in an insolvency situation

In a generally better business environment, it is SMEs in particular that are affected by insolvency. Financing problems are the main cause, even in basically healthy companies; large companies and groups, by contrast, are barely affected. These are the findings of a new study, "Insolvency in Germany 2011 – Trends after the credit crunch", for which experts from Roland Berger Strategy Consultants surveyed 320 bankers, financial investors and insolvency administrators.

"The crisis has peaked, but not all German companies can relax now. SMEs in particular are at risk of insolvency," say Max Falckenberg and Gerd Sievers, Partners in the Corporate Performance and Corporate Finance Competence Centers at Roland Berger. 80% of survey respondents confirm this. Among large companies with sales of over EUR 500 million, the number of insolvencies will probably decline or stagnate. Due to the rosier business situation, respondents expect the number of insolvencies to fall by at least 5%.

Financing problems main cause of insolvency

The main reason SMEs go bust is financing, according to 57% of those surveyed: "Even basically healthy companies can run into trouble because of major financing problems," explains Roland Berger Partner Max Falckenberg. "In 2011, too, heavily indebted companies will find it hard to get fresh capital for necessary investments."

Sale is preferred continuation option for insolvent companies

In 2011, more mergers and acquisitions are expected as a result of insolvency. "Insolvency offers operationally healthy companies the chance to solve financing problems and guide the company into a secure future by selling it to new, solvent owners," says Gerd Sievers, drawing on his corporate finance experience. This is also confirmed by approximately 60% of the survey respondents who say that most distressed companies go for a quick M&A transaction or a rescue company in order to turn themselves around.

Financial investors catching up with strategic investors as buyers of insolvent companies

Although strategic investors are still the most frequent buyers in M&A transactions involving insolvent companies (43%), the percentage of financial investors has risen from 5% to 21% compared to 2010. And 74% of those surveyed see financial investors as potential buyers of distressed companies. "Strategic investors are particularly strong in optimizing operations at insolvent companies," explains Gerd Sievers. "But financial investors are increasingly realizing that the companies up for sale are basically sound. They just have a financing problem – this makes transactions increasingly interesting to this investor group."

Bigger chunk of debt financing possible in transactions involving insolvent companies

Regarding financing options for mergers and acquisitions, the situation is easing in 2011. Whereas last year, 90% of those surveyed assumed access to credit would get tougher, 20% now think that debt financing for mergers and acquisitions will improve. Correspondingly, most expect a falling proportion of equity financing for mergers and acquisitions of insolvent companies – 62% put the equity share at 15-45%. In 2010, 41% of those surveyed expected an equity share of over 60%.