Karstadt Kaufhof setting the precedents in Germany

All,

Karstadt Kaufhof are setting the precedents in Germany:

- Not a name we cover for lack of bonds, but interesting as a precedent under German “Schutzschirmverfahren" §270b. 

- It’s a DIP insolvency protection proceeding with the aim of an early submission of an almost pre-pack plan. The aim is not necessarily a sale of the business (hence the plan). 

- The legislation as per usual, allows companies to receive 3 months of salary pay from insolvency money and shed costs - including landlords and employees at short notice and to subsequently present a plan to creditors. Cram down applies. As ever, shareholders do lose a degree of control in the process to a “strong” our “weak” administrator. 

- Corona changes: Unusually, appears more debtor friendly with some recent amendments. For instance, shareholder loans made after stores were ordered to close remain payable (not if used to replace / recycle previous shareholder loans). In our view that is a good thing as it permits shareholders to support their companies more freely in these very uncertain times. But from a creditor perspective it is clearly worth factoring into calculations.

- In the case of Karstadt, Rene Benko made a cash contribution of E140m the week before filing. That loan remains payable and thus ranks de-facto ahead of employee rights and landlords. 

- Clearly the vast majority of these Schutzschirmverfahren end in an ordinary insolvency. But Karstadt Kaufhof had been in a turnaround phase and in times where the distress comes from an external source rather than the idiosyncratic underperformance of the company in question, we could envisage that a higher number of cases will be successful and - subject to a further cash injection within the scope of the plan - Karstadt Kaufhof might emerge with Benko retaining control.

Wolfgang