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2021 Country Focus: Germany

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Insolvencies and economic environment

As in many other countries, the number of insolvencies in Germany has fallen to a historically low level. After around 18,750 in 2019 and 16,076 in 2020, a moderate increase in insolvencies is expected for 2021, which is likely to accelerate in the coming years. (Source: Allianz research)

The GDP contracted by 5.3% in 2020 and is expected to recover by 3.1% in 2021 (4.0% in 2022). (Source: German Council of Economic Expertshttps://www.sachverstaendigenrat-wirtschaft.de/en/economic-outlook-2021.html?returnUrl=%2F&cHash=e7a0142b501031879a6bd211b109dc63)

The increase of insolvencies and the contraction of the GDP are related to a number of key factors, such as:

negative:

  • Late vaccination of the German population
positive:

  • Brisk demand for German export goods, especially from China,
  • Extensive state support programs for companies to counter the negative effects of the COVID-19 pandemic,
  • Suspension of the obligation to file for insolvency ending on April 30, 2021, following two prolongations since its introduction in March 2020, each time with reduced scope
    (Initially, the suspension applied to both illiquidity and over-indebtedness caused by the negative effects of the COVID pandemic. Later it was limited to illiquidity. From January until the end of April 2021, it again applied to both circumstances. However, it was limited to companies that applied for state support but did not receive it).

Still, compared to the situation prior to COVID-19, the level of uncertainty (divergence of base case vs. best-worst case) is high.

Expiry of the German state protection scheme for credit insurers

The German state protection scheme for credit insurers will expire on June 30, 2021 – this decision was taken by German Government and the participating credit insurers.

Following an extension of the scheme at the end of 2020, credit insurers and the German Government now believe that the measure is no longer needed, as significant parts of the economy have started to recover. Credit insurers believe they are in a position to properly assess and bear the risk. According to the carriers, policyholders generally do not have to worry about large credit limit reductions or cancelations. However, there are some credit limits in the portfolios that are currently maintained (only) due to the scheme. These credit limits will be reduced or canceled after June 30. In most cases, and where there is no immediate threat of a buyer defaulting, a notice period will apply to allow suppliers to adjust to the new situation.

Underwriting and renewals

Credit insurers aim to increase the premium level upon renewal, even for claims-free policies. However, when new business is attractive – from their point of view – the offers are occasionally quite aggressive, both in terms of pricing and the scope of cover offered.

Stabilization and Restructuring Framework – StaRUG

The new legislation “Stabilization and Restructuring Framework” (referred to in Germany as StaRUG) implements the EU Directive 2017/1132 (Directive on restructuring and insolvency). It came into force on January 1, 2021.

The main objectives are to:

  • Enable restructuring measures to be taken at an early stage
  • Provide access to early warning indicators
  • Provide debt relief for companies prior to (orderly) insolvency proceedings by implementing a debt settlement plan and suspending enforcement measures. The debt settlement plan must be approved by a 75% majority of creditors – no unanimous vote required as previously in pre-court proceedings
  • Allow the debtor to avoid the stigma of insolvency
  • Contribute (hopefully) to a “reorganization culture”.

Credit insurers have confirmed that debt settlement plans implemented under the Stabilization and Restructuring Framework will be considered under their trade credit policies and treated as a claim.

Article written by Sebastian Kentenich