The scheme offers a credible implementation alternative, but no “one size fits all” solution exists for German credits.
German credits in sectors such as real estate, automotive, and energy face a worsening macro backdrop. At the same time, the available toolkit for financial restructurings has expanded, offering multiple options without the need for recourse to insolvency proceedings.
Since Germany implemented the EU Preventive Restructuring Directive and introduced its national scheme (the Corporate Stabilisation and Restructuring Act, or StaRUG) in early 2021, the StaRUG has become a credible implementation alternative, and one of the key options for non-consensual implementation planning. In 2021, only a few dozen German schemes were implemented for small and medium-size enterprises (SMEs), a testament to Germany’s economic strength and hot capital markets. This allowed debtors to refinance but often at a high cost. As the last quarter of 2022 and 2023 foreshadow a bleaker outlook from both a macro and an interest-rate perspective, next year is likely to bring a significant uptick in restructuring activity for German credits and a heightened focus on the StaRUG.
When to Use StaRUG
The StaRUG provides a toolkit tailor-made for financial restructurings, including flexible class composition, a cross-class cramdown (including of shareholders), and a moratorium. It combines attractive features from the UK’s Part 26 schemes of arrangement, Part 26A restructuring plans, and other UK legislation. To date, all German scheme cases have been non-public. From July 2022, debtors have had the option of a public version, which enjoys automatic EU-wide recognition under the EU Insolvency Regulation and is expected to be used for larger scale cross-border cases involving publicly listed debt and/or equity. The StaRUG process was designed to be approachable for issuers, with, for example, the ability to seek the court’s opinion on any matter on an informal and confidential basis before proposing a restructuring plan. At the same time, UK schemes of arrangement have retained their appeal as implementation tools for German credits. German debtors and their creditors can now choose between competing restructuring regimes that each avoid the taint of insolvency and value destruction.
No “One Size Fits All” Approach
In light of the multitude of implementation options, commercial considerations will increasingly drive the selection of the implementation tool. Negotiation of the commercial deal will thus often precede and shape decision-making in respect of the implementation route. Debtors and investors can therefore focus more on commercials and value preservation instead of process risks. Increased implementation options for German debtors will in turn drive creditor behaviour. While some differences in approach remain between, for example, the compromise of foreign law-governed debt between different restructuring regimes, the benefits of implementation optionality will generally reduce execution risks for debtors and creditors alike.
For German credits, any robust feasibility check on the available implementation options for a given commercial deal should include both StaRUG and the relevant UK implementation tool(s). Feasibility checks are most effective when undertaken 18 to 12 months prior to maturity. Leaving them any later is likely to reduce the availability of StaRUG as financial distress looms larger.
Löwen Plays Away
While StaRUG featured prominently in implementation planning for several high-profile cases in the past 12 months that were ultimately implemented consensually, a German arcade gaming group, Löwen Play GmbH, chose a different route. As an issuer of (originally) New York law-governed senior secured notes whose earnings were negatively impacted by new gambling business regulations and COVID-related lockdowns, the group needed to deleverage and new money to have a stable platform to drive business recovery. After considering all available implementation regimes, Löwen Play became the first German issuer post-Brexit to use a UK scheme of arrangement to implement its restructuring, with its being recognised in Germany.
While the Löwen Play restructuring successfully closed in May 2022, other German credits may differ in assessing their preferred implementation route for cross-border restructurings. In order to influence debtor decisions, international creditors may prefer the more tried-and-tested UK scheme route where available. However, in light of a worsening macro backdrop, it seems only a matter of time before a headline restructuring of a large and international German-based credit uses a StaRUG.