March 26, 2020 12:07 pm

Corona crisis: bureaucracy does not save companies

A column by Peter Riedel, Head of Illiquid Products of Debitos GmbH

Vapiano is the first corona victim in Germany – and it will not be the last. Because the spread of the corona pandemic is hitting the German economy and local companies hard. The government is responding bureaucratically. But is this the right way to go?

To be clear: The corona crisis is not the reason why Vapiano has now gone bankrupt. The problems lie deeper at the Hamburg restaurant chain; the expansion of the pandemic in Germany and Europe only acted as a fire accelerator. Already since last year, Vapiano has been keeping itself afloat only through emergency financing: In May 2019, it was 30 million Euros, shortly before the outbreak of the corona crisis, CFO Lutz Scharpe secured another 10.7 million Euros.

However, Scharpe is now selling the Vapiano insolvency as the first major “corona bankruptcy” – and with good reason. After all, in recent weeks the German government has left out no opportunity to declare in grand words that no company in this country should slide into insolvency because of the corona crisis.

Finance Minister Scholz grabs the bazooka

Federal Finance Minister Olaf Scholz even spoke of the “bazooka” that Germany would now use to protect local companies. “This crisis affects us all. That’s why we are not thinking small, we are thinking big,” he said, offering companies the prospect of unlimited credit programmes.

Vapiano is now appealing to the politicians to put their words into action as quickly as possible – with the emphasis on ” quick”. But this could now become a problem.  Within a period of three weeks, the listed company would have to withdraw its application for insolvency. So far, however, the billions promised by the government for corona aid are not yet available.

The aid promised by the Federal Government is formally not allocated by the state, but by the private sector.  From 23 March, the respective house bank of the company concerned decide whether it considers the applicant to be creditworthy. The loan, which – depending on creditworthiness – is financed with one to seven percent interest, is then refinanced by KfW accordingly. The state bank assumes 90 percent of the credit risk. This means that if the banks issue a loan now under pressure and later default, they are left with 10 percent of the loan amount.

The bank consultant as “bottleneck”

Thousands of companies will run out of money in the coming weeks, that is as certain as the sun rises in the East. The first point of contact for entrepreneurs, managing directors and board members in need is the corporate customer advisor at their house bank. With a little bit of bad luck, however, the corresponding bank office is now closed – and the responsible employee sits in the home office to look after his school-age children.

According to Wikipedia, a “bottleneck is a phenomenon by which the performance or capacity of an entire system is severely limited by a single component”. The bank consultant we have just described is exactly such a thing. And it can be fatal for many German companies.

Credit demand increases massively

Some banks are already reporting that the number of inquiries from companies has doubled in the past few days. But it seems clear that this will take on completely different dimensions in the coming weeks. A KfW spokesman currently assumes that it will take two to three weeks for the money to flow to the companies. However, it remains to be seen whether this can be maintained when the full force of the corona crisis hits the German economy.

In addition, if the bank advisor’s desk simultaneously has a loan application from company A for 100 million euros and an application from company B for 60,000 euros – which one will he process first? If the credit volume is higher, the bank – assuming the same creditworthiness of the companies – will of course benefit much more in the end. The application from small companies runs the risk of slipping further and further down the priority list.

The question may be asked whether in this emergency situation it would not have generally been more sensible to rely on unbureaucratic state subsidies and equity capital support instead of expensive and often risky loans and tax concessions? This is a matter for debate. The fact is, however, that the Federal Government has decided to go down this path and that the entrepreneurs now have to pay for it – with all the consequences.

Unfortunately, it is to be feared that above all smaller companies will suffer from the new bureaucratic monster that the federal government has just created. Incidentally, Fintechs such as Penta, Auxmoney and Iwoca show that things could be different. Thanks to their digital infrastructure, the young companies are able to grant loans to SMEs in need within a few hours – quickly, efficiently and unbureaucratically. But the domestic banking landscape is by no means that far. Perhaps when the next crisis comes.

This post was written by Peter Riedel

Peter RiedelBefore starting at Debitos, Peter Riedel was working for HETA Asset Resolution in Vienna. Here he was working within the restructuring team.
Before he was with Merrill Lynch and Hudson Advisors Germany GmbH (special servicer from Lone Star Funds). In both positions he was responsible for the asset management, work-out and for the sale of real estate and Non-Performing Loans. One further step in his career was at PwC Frankfurt, where he was working in the Corporate Finance Real Estate division. Peter Riedel's vita includes a more than 15 year experience in work-out and sale of distressed loans. Mr. Riedel holds a law degree and the accreditation as attorney.

Website:
https://www.debitos.com

(Image rights: istockphoto.com/Cineberg)

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