31. May 2021 - Report
EPH Focus Restructuring Beyond Covid After crisis financing is before transformation financing
Enormous support with €100 billion in economic aid and €30 billion in short-time working benefits
The Corona pandemic is splitting the German economy. While the stationary retail businesses, service providers and culture businesses are still fighting for their existence, the manufacturing industry is emerging from the crisis quite stably. This has been helped by enormous support measures such as the EUR 30 billion short-time working scheme and the economic stabilization fund, which has a budget of around EUR 100 billion. More than EUR 50 billion in KfW loans, grants and guarantees are currently stabilizing the financing of critical companies. But here, too, a discrepancy is emerging. While access to financing is more difficult for the self-employed and small businesses in particular, which often only survive through direct assistance, corporations can obtain financing on favorable terms on the capital market despite billions in losses. Systemic relevance and low interest rates make this possible. But what about the backbone of the German economy, the small and medium sized businesses?
Liquidity requirements are growing, financing conditions are becoming more restrictive
As a rule, the aid has so far been used successfully to stabilize liquidity. Recently, however, there have been increasing bottlenecks and signs of more restrictive financing conditions. Free lines of credit for financing a restarting of business are becoming increasingly scarce. Moreover, loans are not gifts, but must bear interest and be repaid. The short-time working regulations are coming to an end, which again increases the need for liquidity. The risk of delivery and payment defaults is growing due to the reintroduction of the obligation to file for insolvency. At the same time, the EUR 30 billion government protection shield for trade credit insurers will end on June 30. Higher fees and even prepayment rules are expected for some industries. Corporate debts are at record levels and equity ratios are declining. Covenant breaches are expected to increase, as they are often based on equity ratios and leverages.
Existence saved, debt increased, transformation not financed
Many medium-sized companies have initially succeeded in securing their existence. However, continued existence and future viability are by no means certain. Crisis management was primarily short-term and stabilizing-consumptive. This does not only apply to the low-yield "zombie companies". " Only when the tide goes out do you discover who's been swimming naked. " (Buffet). Many industries were already in a state of upheaval in the past, and this has been exacerbated in the pandemic. New business models, digitalization and artificial intelligence were the exception. This meant that a lot of time was lost for the urgently needed adjustments to the incipient "decade of disruption" (Handelsblatt). Without an answer to the new ecological challenges, the energy transition and the Internet, German SMEs will lose out to the competition. Fundamental investments are needed for transformation.
Prerequisite: concept-based financing requirements
Whereas before the pandemic a glut of money, low interest rates and continuous economic growth still made favorable financing possible, there is now a paradigm shift. The time of situational, short-term structured covid emergency aid is over. Restructuring and transformation are a marathon race that requires concept-based financing. Future-proof business models, digital processes and environmental sustainability are the focus. For banks in particular, confidence in concepts, owners and management are therefore coming to the fore alongside the risk structure. In the event of doubt, they are increasingly quicker to decide to sell on loans.
Private debt can replace or complement bank financing
Private debt funds are a relevant alternative to bank financing. They are not subject to any officially regulated capital requirements and allow higher leverage ratios. The structuring options are significantly greater. However, a bullet structure and softer covenants are usually offset by higher costs. The promissory bill, which can be tailored to individual needs and structured with little effort, is becoming increasingly important. They can be used to attract new groups of investors quite easily.
The future needs trust: Equity
Mezzanine capital is recommended as close to equity as possible. The subordination and the "equity kicker", which is defined by the increase in enterprise value, enables it to be reported as equity. For higher financing requirements, capital market-based instruments such as bonds can also be considered. In this case, issuing costs and information requirements must be taken into account.
Authors: Norbert Strecker, David Rieken from CIC ConsultingPartner GmbH