Many expected the credit crunch to result in an increasing number of restructurings but this has yet to materialise. This might be because portfolio companies are generally performing well, though it could also reflect the more lax covenants and lack of amortisation in pre-crunch deals.
“Restructuring was quite strong in Germany up to early 2007,” said Werner Meier at Cleary Gottlieb Steen & Hamilton. “At that point the economy was stronger than anticipated and in a series of cases borrowers, who many anticipated were close to default, were able to trade out of difficulties – often by accessing the debt market at favourable terms or being granted waivers which were reasonably easy to secure”.
While activity is low the complexity of the German restructuring regime creates opportunities for distressed debt investors not necessarily available elsewhere. Investors have been able to negotiate significant windfalls by trading on the nuisance value of holding even a small amount of subordinated debt in where inter creditor agreements require 100% lender approval to restructure.
Work outs are complicated by other issues, including potentially the personal liability of managers. Such issues have led to instances of regime shopping whereby entities, including Schefenacker and Deutsche Nickel, have been moved to alternative restructuring regimes. For now though restructuring opportunities and strategies remain largely hypothetical.
A significant credit event in Germany could well trigger a new pick up in restructuring activity, just as it could put a damper on the remaining syndication market. But the opposite could equally be true. That for now is the precarious position of the German LBO market.