German companies are expected to go bust at a higher rate this year following a sharp increase in insolvencies in 2023, as businesses hit by high energy costs and the end of pandemic aid throw in the towel.
Restructuring experts warn that many “zombie” companies kept afloat after the coronavirus pandemic by generous government aid and a suspension of the obligation to file for bankruptcy — which caused insolvencies to drop to unusually low levels — are now collapsing.
Since the start of this year, several well-known German companies — including the department store chain Galeria Karstadt Kaufhof and Hamburg-based bag maker Bree, whose customers include Chancellor Olaf Scholz — have filed for insolvency.
The ranks of struggling companies have been swelling because of Germany’s economic stagnation, combined with high interest rates, rising wages, elevated energy prices and a government budget squeeze. This is expected to push insolvencies up by between 10 per cent and 30 per cent this year, experts warn, taking them above pre-pandemic levels.
One such company is 85-year-old wooden toymaker Haba. Delivery failures caused by “wrong decisions” on IT systems at Haba’s online children’s clothing operation compounded the “heavy burden” the company was already enduring from the soaring cost of energy and wood, according to spokesperson Ilka Kunzelmann.
Ultimately, it was too much for the family-owned business based in Bad Rodach, a spa town in central Germany. Haba was granted insolvency by a court in December and expects to emerge in March after it has shed about a third of its 1,500 employees, shut its online clothing arm and sold a school furniture factory.
Steffen Müller, head of bankruptcy research at the Halle Institute for Economic Research, said the monthly rate of German insolvencies it tracks, which excludes unregistered companies that have few employees, has risen since last summer above the pre-pandemic average for the first time. In December, it hit its highest level for at least seven years.
“For the next two to three months we will definitely see higher insolvency numbers, you can see that from the early filing numbers,” said Müller. “The government gave a lot of aid to firms that had low productivity before the pandemic. That prolonged their lives. But now they have to repay the aid and many are struggling to do so.”
Figures released last week by the federal statistics agency showed the number of companies filing for bankruptcy in district courts had increased more than 24 per cent in the 10 months to October, compared with the same period of 2022.
You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.
Germany’s economics ministry said the business environment was “challenging” but played down the scale of the problem, saying: “In the longer-term perspective, and in comparison to the period before the pandemic, corporate insolvencies are currently not at a noticeably high level.”
Wolfgang Steiger, head of the opposition CDU party’s economic council, blamed the government’s “disastrous economic policy” for causing Germany’s insolvency rate to rise faster than many other countries. “High costs for energy and labour, which are a home-made problem, combined with the skills shortage, are causing financial distress for an increasing number of companies in Germany.”
The German economy contracted 0.4 per cent in the third quarter compared with the same period a year earlier after sharp falls in retail sales, exports and industrial production.
Growth in the country is expected to pick up to 0.6 per cent this year, according to the OECD. But it would still be one of the world’s weakest large economies and several analysts have cut their forecasts since the government slashed spending plans to fill a €60bn hole in its budget left by a constitutional court ruling against off-balance sheet funds.
As part of the budget cuts, Berlin this month ended the temporary low rate of VAT on restaurant meals it introduced during the pandemic, prompting warnings that thousands of eateries would go out of business. More than 15,000 restaurants, snack bars and cafés in Germany are at risk, according to data provider Crif, which estimated that insolvencies in the sector would rise again this year after jumping 36.5 per cent to 1,600 last year.
The German insurance association recently warned of a “massive increase in payment defaults” after credit insurers paid out more than €1.2bn in 2023, up 44 per cent on 2022. “We see significantly more and greater damage from insolvencies and delayed payments than in the previous year,” said the GDV’s Thomas Langen, who predicted German insolvencies would rise 10 per cent this year.
Jonas Eckhardt, specialist at restructuring advisers Falkensteg, said the weak economy was making it harder for companies to pass on higher energy, labour and raw material costs via higher prices. “The big question is — how much of this can I offload on my customers?”
He is predicting that insolvencies will rise more than 30 per cent in 2024 among companies with annual revenues in excess of €10mn.
The sharp rise in interest rates by the European Central Bank to tackle inflation has also made it harder for companies to emerge from insolvency by finding new investors, Eckhardt added. Only 52 per cent of companies could be saved through insolvency at the end of last year, down from 62 per cent two years ago, according to data from Falkensteg.
“Investors have become more risk-averse, and are holding back,” he said. “Those that still want to [take over an insolvent company] face higher financing costs. So it’s a high-risk transaction.”
This drying-up of investment and financing has hit younger, more vulnerable companies. Almost 300 German start-ups filed for insolvency last year, a 65 per cent increase from 2022, according to data provider Startupdetector. Among them was solar-powered car company Sono Motors, online trader Social Chain and anti-fraud software maker Fraugster.
Many of the bigger companies going bust last year were fashion retailers, transport providers, real estate companies and auto suppliers. There were also high numbers of collapses among German care homes and clinics as they struggled to pass on higher wage and energy costs to the health insurance system.
Bankruptcies have been rising across much of the world, according to German insurer Allianz, which forecast a 6 per cent increase in global insolvency numbers last year and a 10 per cent rise this year.
“Germany was lagging behind other countries, such as France, the Nordic countries and the Netherlands,” said Maxime Lemerle, lead adviser on insolvency research at Allianz. “But it is catching up with the trend definitely to the upside.”
While it is yet to match the high levels of corporate distress after the 2008 financial crisis, Lemerle said the recent rise of bankruptcies in Germany and elsewhere was now “more than a normalisation, but not yet a tsunami”.
Source: Economy - ft.com
