Distressed Debt Investing in Germany — Is the Big Wave Coming?

In the course of the global recession, numerous companies in Germany are also experiencing difficulties and are in danger of no longer being able to meet the interest and repayment obligations of their bank liabilities. Many financial investors specializing in investments in loans of troubled companies, so-called distressed debt, therefore expect a flood of investment opportunities in view of the rising volumes of distressed debt. But is a wave of distressed debt really rolling towards investors in Germany?

The financial market crisis has been on everyone's lips since the fall of 2008. Just a few months after the insolvency of Lehman Brothers in September 2008, it also hit the real economy. According to an analysis by the OECD, the world's major economies are in the worst recession in post-war history. This has concrete consequences for the German economy: according to current forecasts, gross domestic product is expected to decline by around six percent in 2009, and according to the German Federal Employment Agency, the number of unemployed could reach the 5 million mark again in 2010.

In the course of these developments, the topic of distressed debt investing, the purchase of loans that are threatened by an increased risk of default due to the economic development of the borrowing company, is gaining renewed relevance. In view of the recession, the high volumes of leveraged buyout financings and the notoriously low equity ratios, especially in the German Mittelstand, many market participants expect an increasing number of distressed debt situations in this country as well. Numerous companies will often hardly be able to make their interest and redemption payments, let alone raise new funds, due to a sometimes dramatic deterioration in sales and earnings. In the wake of the recession, the volume of bank liabilities that can be classified as distressed has increased significantly in Europe.