The days when insolvency was equivalent to the liquidation of a company are long over. Owing to a variety of reorganisation options, companies in difficulties now have a chance of being rescued.
Creditreform investigated the question of the extent to which companies in reorganisation are ultimately in a better position in connection with insolvency than companies in conventional insolvency.
The improvements in the debt and liquidity ratios show how the reorganisation measures stabilise and put the affected company back onto the market.
The days when insolvency was equivalent to the liquidation of a company are long over. Owing to a variety of reorganisation options, companies in difficulties now have a chance of being rescued.
A well-known current case is that of Galeria Kaufhof Karstadt, which, however, with the third insolvency application in a few years, represents an argument in favour of those who see the insolvency of even larger companies more as an obligation to liquidate than as an opportunity to restructure. In connection with the compilation of figures on the current insolvency situation, Creditreform also investigated the question of the extent to which companies in reorganisation are ultimately in a better position in connection with insolvency than companies in conventional insolvency.
First of all, it should be noted that insolvency proceedings also offer the possibility of reorganisation. The proceedings initially provide protection against foreclosure or the realisation of collateral. Creditors waive part of their claims and other instruments are used to maintain liquidity for business operations. With the so-called ‘transferring reorganisation’, the struggling company can be sold. Naturally, this is not easy to implement and after some time leads to the company eventually being liquidated. Especially with the many major insolvencies that characterise the current market, self-management is the best option. It is crucial that the previous management remains in office, that a trustee rather than a liquidator is appointed and, finally, that an insolvency plan - with the involvement of the creditors - forms the basis for stringent further proceedings.
How successful are reorganisations?
Do the new options in insolvency law really do fulfil the hopes of a successful turnaround resulting in a marketable company? As the most comprehensive collection of historical and current balance sheets, the Creditreform database offers an excellent starting point for comparing certain key figures of insolvent and reorganised companies. Two structural key figures - the ‘’debt-to-earnings ratio‘’ and the ‘’liquidity ratio‘’ - are decisive for the statements.
Due to the late publication requirement for financial reporting in Germany, only annual financial statements from 2021 and 2022 could be analysed. Only companies with an annual turnover of more than €43 million were included - companies that therefore do not meet the definition of a medium-sized company. In this context, however, it should also be noted that the restructuring options only really justify their expense for larger companies. The high number of insolvencies affects smaller companies, which have to attempt a reorganisation out of court in consultation with important creditors and banks before each insolvency.
Are there substantial assets left?
The balance between equity and liabilities is important for the substance of a company. For this purpose, a key figure is formed which compares the information on the financing. Companies from all sectors of the economy were included in the analysis. The sector will also play a role in determining a ‘healthy’ ratio of equity to borrowed capital. It is assumed here that the ratio of debt to equity may not be more than twice as high. This is referred to as a debt-equity ratio of 2. Only 0.7 per cent of companies in insolvency proceedings have such a solid level of debt. This figure rises to 16.4 per cent when they are undergoing restructuring or reorganisation.
Nevertheless, it should be noted that the gearing ratio in the higher range above 10 - debt capital is at least ten times as high as equity - is found in 30.3 per cent of companies in insolvency proceedings and in 25.5 per cent of companies undergoing restructuring. Finally, the proportion of companies with a debt-to-equity ratio of 50 or more was also analysed. This is 62.1 per cent of companies in insolvency proceedings and 49.1 per cent in restructuring - whether in protective shield, self-management or transferring restructuring. It should be noted that the company continues to be significantly weaker in terms of its debt-equity ratio, even in restructuring.
At least the year-on-year comparison of companies between 2021 and 2022 shows an improvement. In the case of the strong equity situation with a level of less than 2, there was an increase of almost 4 percentage points within one year and a decrease of more than 5 percentage points for the affected companies with a high debt/equity ratio of over 50. With regard to this balance sheet ratio, it is therefore clear that the reorganisation is taking effect.
It's all about the financial solvency
Companies undergoing reorganisation also perform better than insolvent companies in terms of liquidity. Liquidity determines the solvency of a company and only a few companies have to file for insolvency due to over-indebtedness. Even the threat of insolvency is a reason for insolvency, but it only enables those affected to go to court. Liquid assets - plus current assets determines the liquidity ratio.
This is counterbalanced by current liabilities. If the value is above 1, the liquidity is sufficient. If the value is lower than 1, the company has too few funds available to settle its current liabilities. In the context of payment defaults, it should be considered that current assets, such as those tied up in stock, could not easily be used to settle invoices. A healthy company should have a liquidity ratio of well over 1.
In the case of insolvent companies, almost 30 per cent of the companies in the proceedings only have a value of max. 0.5. The proportion of companies with such an insufficient liquidity cushion in the restructuring is only 11.4 per cent. The difference becomes very clear with a liquidity value of over 2.0, which almost 52 per cent of the companies in restructuring, but only 23.9 per cent in insolvency proceedings, reported. As with over-indebtedness, an improvement in the liquidity ratio can also be seen in the restructured companies within just one year - the good value of over 2.0 was achieved by 43 per cent of the selected companies in 2021 (8.9 percentage points more in 2022). This contrasts with companies in insolvency proceedings, where 33.3 per cent were still able to deliver a ratio of over 2 in 2021 - one year later, however, it was already 9.4 percentage points lower.
The improvements in the debt and liquidity ratios show how the reorganisation measures put the affected company back on track. Even if there are always short-term subsequent insolvencies, the restructuring-friendly insolvency law is the ideal way to bring companies back onto the market and stabilise them.
From Creditreform
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