Freitag, 4. Oktober 2019

Welcome to Debenture – and a starter on German bankruptcies

Over the last couple of weeks, we have gotten an enormous amount of positive feedback for our product First Data, which saves and indexes every bankruptcy case in Germany. It updates users automatically on any news on the case. 

As always, we found out a lot of things about our users that we did not know before. For example: we thought our users would only be distressed-debt-professionals. Interestingly, there are also lots of people such as small business owners who are using our website. As you can imagine, most of them did not know how to proceed after their debtor has filed for bankruptcy. Which is why we started to create a solution for that. You will see a first draft in a couple of days.

We now also know that we have lots of people outside Germany following debtors in Germany. Here is some really good news for all you people out there: it has always been one of our goals to make the bankruptcy market more efficient and therefore available to foreign professionals. A huge pain – obviously – is the different language. We are working on a solution for that, too.

Until then, let me start on some basics about the bankruptcy process in Germany and why so many distressed-debt-professionals are active in this field. This is not just a playing field in the US. It happens here in Germany. A LOT!

In order to understand why, you have to know the basic idea behind bankruptcies: in many cases, the business is actually a very good business. It simply did not have enough cash to pay its creditors in the short term. So they had to file for bankruptcy, even though it is a very good business.

It is hard to understand this at first. You have to go through many case studies (preferably by reading only) and then some more. I recommend reading Marty Whitman, Seth Klarman and Leucadia for starters, if you really want to get a hold of it. But Carl Icahn and Warren Buffett also did some of those and you can really learn a lot about the economics of reorganizing a company through bankruptcies by going through these case studies. 

Now: Germany used to be very different. The ideal bankruptcy here was often described something like this:

In an ideal case, the debtor files for bankruptcy just in that moment, where, after the bankruptcy process is completed, every creditor of the company gets what he is owed. 

In Germany, and actually most European countries, traditionally the idea was to liquidate the company after bankruptcy and sell the assets to pay the creditors, because the business does not work. If all goes well, creditors get their money back. It is a huge, huge drag on the economy to operate this way, even if all the creditors were to get back their money in full. But that, of course, almost never happens. For example: in bankruptcy cases that started in 2010 and ended in 2017, creditors got back 6.2% on average (I am only talking about corporate bankruptcies). The numbers vary from year to year, but in the end, you are not far of by assuming a number around this range.

But: as with any statistic, this is the average across 22.000 corporate bankruptcies each year. In some cases, creditors go empty-pocketed. In others, you might get back as much as 50% of your claim, sometimes even the full amount. The trick is to find out where. And this is what hedge funds try to do. They find out where they can buy debt and trade claims for less than they think they can get out after the bankruptcy is completed. I know fund managers who actually just do that: they calculate what they think is the market value of the assets and see if they can get the debt cheaper. Some advanced form of arbitrage.

But what the big funds, such as Cerberus, Oaktree and Apollo, do, is to buy the debt cheaply, actively influence the bankruptcy process so that the company is not liquidated, then reorganize it in the bankruptcy process and profit from the business itself, once it is restructured. Many times, they exchange their debt into common stock so that the company is no longer indebted after the bankruptcy. This happened in the cases of Beate Uhse, SKW Stahl and will also happen with Gerry Weber. We covered those reorganizations on Debenture-Research.

This shift from liquidation towards reorganization will continue in the future. According to a recent Financial Times article, several hedge fund managers are creating new funds for distress-debt-opportunities, many of them because they see huge opportunities in Europe. Plus: the EU has passed a law that orders EU-members to legislate preventive restructurings. Basically, this will allow companies to reorganize their liabilities before they have to file for bankruptcies. 

So, you see, distressed companies can provide lots of opportunities. Most of all: if it helps keeping the company alive – what’s the downside? It can be a much better outcome for the parties involved. But the first step must be to make data available to the players involved. Which is exactly why we built Debenture. See you soon.

Keine Kommentare:

Kommentar veröffentlichen