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 | Preventing Insolvencies – Safeguarding Success in the Post-Covid Era

Preventing Insolvencies – Safeguarding Success in the Post-Covid Era

 

As things currently stand, the increase in the volume of insolvencies or the frequently discussed “wave of bankruptcies” looks merely to have been put on hold. Many companies should therefore take a very careful look at their situation and, where appropriate, implement measures to ensure their continuation as a going concern. The process of structural change likewise means that companies need to undertake an in-depth review of their market focus.

At the start of 2020, the German government temporarily suspended the obligation to file for insolvency where a company had become insolvent merely because of the pandemic. This provision ceased to apply on May 1, 2021. Experts unanimously expect to see a growing number of insolvencies over the coming months and years by comparison with previous years. Many companies should carefully scrutinize their liquidity situation, their business models and their market orientation – also on account of the general process of structural transformation – so as to exit or else avoid critical phases by means of timely restructuring and refinancing.

The economy is going through challenging times. On the one hand, in their forecasts the German government, international organizations and economists predict an average gross domestic product (GDP) growth rate of 3.5 percent for 2021 and of around 4.2 percent for 2022. On the other hand, many sectors have been very badly hit by the pandemic. Many companies’ economic plight has not yet been reflected in a rise in the volume of insolvencies. However, one in five companies in western Europe failed to turn a profit in 2020. “Following the coronavirus slump, these companies are among the leading candidates for insolvency over the next few years,” says Patrik-Ludwig Hantzsch, head of the economic research division of the credit bureau Creditreform.

The European Systemic Risk Board (ESRB) expects the volume of insolvencies in western Europe to rise by around 32 percent in 2021 by comparison with 2019. The Board therefore advises companies with a relatively favorable outlook to restructure their debts and to convert loans into grants. However, a reliable going forward forecast is not always a simple matter.

The key liquidity requirement arises where the volume of working capital once again increases and there is a need for investments, such as in the expansion of production facilities or digitalization. However, where banks are not prepared to provide additional or new funding for companies in difficulty, they will require the assistance of private investors or else there will be a need for restructuring at the same time, in order to avoid insolvencies. Yet Christian Ossig, chief executive of the Association of German Banks (Bundesverband deutscher Banken – BdB) agrees that these are on the increase. “We currently expect to see a possible rise in the number of corporate insolvencies continue over a number of years,” remarks Ossig.

Small and medium-sized enterprises must equally adopt a cautious approach during the transition to the post-Covid era – as established by a special coronavirus survey undertaken by the KfW investment and development bank: “Around one in three small and medium-sized enterprises has seen its equity cushion shrink during the pandemic to date,” comments Friedericke Köhler-Geib, chief economist at KfW.

Another current danger is failing to comply with the filing obligation for insolvencies which is now once again applicable since May 1, 2021. Lucas Flöther of the Gravenbrucher Kreis association of insolvency administrators does not expect to see a sudden rise in the number of insolvencies but does warn of the serious errors which companies risk committing out of ignorance: “It will take some time until word gets around that the filing obligations continue to apply,” says Flöther in an interview with Business Insider. He remarks that even after May 1 many companies will assume that the obligations to file for insolvency have been suspended for them – with correspondingly serious legal consequences. However, insolvency or else debtor-in-possession proceedings would be available as part of a strategic solution, in order to preserve a company on a medium- or long-term basis.

ZWhile all of the experts are reliant on estimates for the time being, the increase in the volume of insolvencies or the frequently discussed “wave of bankruptcies” looks merely to have been put on hold. Many companies should therefore take a very careful look at their situation and, where appropriate, implement measures to ensure their continuation as a going concern. At the same time, the process of structural transformation offers the possibility to implement a change of direction or to introduce lucrative business models – to safeguard success in the post-coronavirus era.