Germany You have a problem with your industrial sector and the headlines are becoming more and more negative. The recession in the traditionally powerful manufacturing sector (still close to 20% of the Gross Domestic Product of the locomotive of the eurozone) threatens to worsen while the authorities do not find a short-term way to stop the bleeding. The change in global demand, the involution of dynamics with China and the blow of Russian energy are giving the blow to a sector that already began to falter before covid. However, for some bargain hunters all this is assuming a succulent purchasing opportunity: acquire ‘pieces’ of the prestigious German industrial sector at an interesting price.
At the recent World Economic Forum in Davos, one of the topics of conversation among the bankers and advisors in attendance was the realization that venture capital firms are being attracted by Germany due to emerging tension and are seeking to buy family businesses at low cost and drive operational improvements. These venture capital or private equity firms (private equity) usually pursue investment in unlisted companies, entering their capital with controlling stakes, with the aim of transforming them to improve their efficiency and make them grow, BBVA Research explains.
The headline could be that there is a kind of liquidation in the famous sector of the Mittelstanda colloquial term used in Germany to refer to vast manufacturing business network that makes up intermediate-sized companies. To get an idea of what this segment of companies, neither very large nor very small, entails, the statistics speak for themselves.
According to data from the Research Institute for Small and Medium Enterprises (IfM) in Bonn, in 2021, approximately 3.37 million German companies were classified as small and medium-sized enterprises, representing 99.3% of the total number of companies. with sales of goods and services and/or employees. Approximately 19 million employees belonged to the Mittelstand in Germany in 2021, representing 54% of total employment. The export turnover of the Mittelstand German exports were about €227.7 billion in 2021, representing 15.9% of Germany’s total export turnover.
“The downturn in the industry means there is an opportunity to buy companies that are quite leveraged and in which you can inject capital“said Victor Kholsa, founder and chief investment officer of Strategic Value Partners, in an interview Bloomberg Television in Davos. “We can see that set of opportunities.”
Direct lenders like Ares Management or Blackstone have opened offices in Frankfurt and are proactively seeking to provide loans to German companies, including financing purchases by private equity. Among the objectives of the operations is the company Techem GmbH. This firm is a good example of the type of company that is being seen in this situation: based near Frankfurt, it was founded in 1952 and is dedicated to manufacturing equipment to measure water and electricity consumption and control heating and cooling.
As actors close to these potential operations point out, some are being surprised by the low credit quality shown by some of the companies seeking loans. Last year, lenders took over several German companies that had defaulted on loan agreements. Something that multiplies among investors the feeling that Germany’s problems are more than just a temporary blip.
Economic stagnation, real estate problems and the highest corporate insolvency rate in Europe They have caused bondholders to demand higher corporate spreads from German companies than in the euro area as a whole. This is a trend that has been increasing since Russia invaded Ukraine and caused the energy breakdown that has done so much damage to the German industry.
Loans to survive
Borrowers’ demand for investment in machinery, factories and technology has declined, creating the risk that national growth will be hampered in the long term as companies focus on overcoming the current struggle. And now concerns are growing about some lenders’ exposure to the shaky U.S. corporate real estate market.
The rise in interest rates in the last two years has aggravated the problems, especially in the real estate market. The lender Deutsche Pfandbriefbank said last week that had increased provisions for bad debtspointing out the “persistent weakness” of the real estate sector.
More than $13.6 billion in loans and bonds issued by the country’s companies suffered losses last month, 13 times more than in Italy, according to data compiled by BloombergNews. This points to a broader problem, since About 15% of German companies are currently in difficultythe highest rate in Europe, according to a report by the consulting firm Alvarez & Marsal.
“The difficulties are spreading to other sectors” in addition to real estate, construction and retail, which have been affected by inflation and rising borrowing costs, says Christian Ebner, managing director of the advisory team on financial restructuring. “The manufacturing sector is beginning to be affected” and the automotive sector “will continue to be a problem child.”
Many companies and owners are adopting the mantra “survive until 2025” in the belief that rate cuts by the European Central Bank (ECB) will make the debt burden more affordable and increase trading. Traders are currently betting on five reductions of 25 basis points in the euro zone this year.
“In the context of companies still in macroeconomic difficulties, it is a ray of light at the bottom of the horizon,” says Ebner, of Alvarez & Marsal. “Until lower rates translate into a tangible increase in the availability of solutions in the capital market, we will continue to see tensions.”