Frankfurt For a good decade, they hardly had anything to do: Experts for the restructuring of companies in distress had become almost superfluous in most economic sectors in the golden economic times with loose credit terms and steady growth.
One of the most experienced is Ralf Moldenhauer, senior partner at BCG. He believes that pragmatic financing solutions are needed first. These are, for example, simple loan extensions or better use of existing credit lines. All classical instruments would be required. “Currently, the main focus is on measures to secure and release liquidity. In six to eight weeks, it will be more the measures that improve results, ”says Moldenhauer.
Financial institutions provide liquidity both by granting loans at their own risk and by coordinating government aid offers. “The focus of the activities is therefore clearly in the area of financing. The investment bankers’ business with IPOs and bond issues, on the other hand, is likely to decline significantly for the time being, ”says Robert Urtheil, managing director and financial services expert at the international consulting firm Alix Partners.
Emergency sales of companies and parts of the group
There will also be profound changes in investment banking. Distressed companies and parts of the group are sold as part of mergers and acquisitions (M&A) in emergency sales. “It can be assumed that distressed M&A and firesales will be more important.
Because it will not be possible to ‘drag through’ non-performing subsidiaries and participations due to the limited financial resources, ”said the BCG expert. In addition, the measures currently underway by politicians are an important part of financing solutions.
This week, the federal government has launched an unprecedented aid package to support families, tenants, employees, the self-employed and companies. The Bundestag and Bundesrat approved several large protective shields and extensive changes to the law. With a supplementary budget of 156 billion euros, the federal government wants to mitigate the economic downturn.
The corona virus has pushed the global economy into a deep recession. Jan Hatzius, chief economist of Goldman Sachs, expects the gross national product to drop around one percent worldwide. “That would be stronger than in the year after the global financial crisis,” analyzes the expert. For him, the extent of this “sudden stop” that the world economy suffers is more apparent when looking at the quarterly comparisons. It shows that it is not just a global recession.
Based on hard data for China in January and February, Goldman Sachs expects the national product to plunge 42 percent year-over-year. In the United States, the bank reports a 24 percent slump in the second quarter in the United States. That would be two and a half times stronger than in the worst year since World War II.
Consolidation will accelerate in the future
“It is likely that in the second or third quarter it will be easier to assess how the pandemic will affect the economy and thus the goods and services produced, i.e. the social product, and how quickly a recovery will take place,” says Tibor Kossa, Co- Head of M&A for the German market at Goldman Sachs.
Regardless, the consequences of the pandemic would certainly accelerate consolidation across industries. The crisis is also likely to act as an accelerator for a realignment of companies where the restructuring has not yet progressed so far.
This could then again be particularly attractive for activists who will use the low valuations as soon as the environment has stabilized. Emergency capital increases, such as those seen in the banking sector in the 2008/2009 financial crisis, are currently not pending.
A long-term freeze of the companies – with the exception of certain industries such as air transport or tourism – is not possible according to the BCG analysis. “It is more likely that, after a shock and the short-term survival measures, the companies will concentrate on restructuring their business models sustainably,” says Moldenhauer.
Specialists for cash management or short-term cost management are required for the short-term measures mentioned. Alix Partners consultant Urtheil observes that the continuous monitoring and control of business capital is in the foreground alongside securing new sources of finance.
High ratings are over
In addition to the classic restructuring experts, there will be a clear need for employment lawyers and aid experts. The prices of companies would very likely also fall. “Surely no strong M&A activity is expected in the short term over the next four to eight weeks,” says Moldenhauer. The distressed M&A volume will increase.
However, the course is set for success afterwards in the crises. “The last financial crisis has shown that future market leaders will emerge in such phases. The exploration of strategic opportunities that arise from such disruptions should not be neglected, especially in crisis mode, ”says consultant Urtheil.
For example, transactions that were based on an exchange of shares made sense, especially if the share prices of companies developed similarly, according to Goldman.
More: M&A expert: “Reversing purchases because of Covid-19 is difficult”