Companies in permanent crisis: is a wave of bankruptcies approaching?

Insolvencies - Companies in permanent crisis: is a wave of bankruptcies approaching?

Weakened by the coronavirus years, high energy prices and rising interest rates, more and more companies in Germany are getting into difficulties. The credit agency Creditreform expects a significant increase in company insolvencies this year and a further rise in 2024. "Should we expect a wave of insolvencies or even an insolvency tsunami? We say quite clearly: No, we don't have to expect that," said Creditreform Managing Director Bernd Bütow in Frankfurt. "Overall, we assume that insolvencies will also increase next year, but not to an alarming level for the economy as a whole."

Based on data up to and including November, Creditreform estimates that 18,100 companies in Germany will have filed for insolvency by the end of the current year, around a quarter (23.5 percent) more than a year earlier. Looking ahead to 2024, the Head of Creditreform Economic Research, Patrik-Ludwig Hantzsch, said: "Based on current knowledge, around 20,000 is quite realistic." Hantzsch explained: "More and more companies are collapsing under the constant pressure of high energy prices and the interest rate turnaround." An estimated 205,000 jobs are threatened or lost this year due to company insolvencies.

Construction industry hit particularly hard

The retail, real estate and construction sectors have been hit particularly hard. The most prominent example is the collapse of Austrian real estate and retail investor René Benko's Signa Holding, which owns numerous commercial properties in Germany as well as the department store group Galeria Karstadt Kaufhof. Other well-known companies also ran into turbulence in 2023, such as the fashion retailer Peek & Cloppenburg KG Düsseldorf (P&C), whose restructuring was completed in October, and the hypermarket chain Mein Real.

According to Creditreform, the insolvency filing by Signa Real Estate Germany and Signa Holding shows how difficult the situation has become for project developers and property developers. Since the beginning of the war in Ukraine, the construction and real estate sector has been struggling with increased costs and higher interest rates. With 81 bankruptcies per 10,000 companies, the construction sector currently has the highest insolvency rate in Germany.

Small companies in particular are running out of money

According to Creditreform figures, more than 80 percent of bankrupt companies across all sectors are small firms with no more than ten employees. However, according to an analysis by the consulting firm Falkensteg, larger companies with an annual turnover of more than ten million euros are also going out of business much more frequently than a year ago. Falkensteg estimates that the number of insolvencies in this category could rise from 190 in the first three quarters to 260 for the year as a whole. In the past seven years, there were only more cases in 2020 with 292 major insolvencies.

A kind of "corona boomerang" can be observed, said Hantzsch: business models that were maintained thanks to state aid are now facing tough competition, and delayed structural reforms are a particular burden in view of the new challenges. In order to avert a wave of bankruptcies as a result of the pandemic, the state had granted temporary exemptions. By 2022, insolvency figures had risen again for the first time since the 2009 economic crisis.

Normalization instead of a wave of bankruptcies

The current increase is primarily a normalization of insolvency activity following the expiry of state aid, said Christoph Niering, Chairman of the Professional Association of Insolvency Administrators and Trustees in Germany (VID), recently: "We will no longer see an increase like the one we saw in the mid-noughties, with over 30,000 insolvencies per year, in the future."

The information service provider Crif takes a similar view, expecting an increase of 22.8 percent to 17,900 company insolvencies this year. Next year, the number could climb to as many as 20,000 cases. This would still be less than the average of just under 26,200 insolvencies per year since 1999, which peaked in 2003 with 39,320 cases.

According to Crif Germany Managing Director Frank Schlein, the majority of companies are still in a good financial position. However, the increasing number of major insolvencies could lead to further bankruptcies. "In some cases, domino effects will ensure that insolvent companies drag other companies into insolvency with them," explained Schlein.

In the case of consumer bankruptcies, the robust situation on the labor market has so far prevented an increase in the figures. Although the downward trend of the previous year has not continued, Creditreform estimates that the number of consumer insolvencies will remain virtually unchanged this year at 66,200 cases (2022: 65,930). However, the credit agency expects rising figures here too due to the weak economic outlook, especially as the over-indebtedness situation of many people has deteriorated significantly.