Over the last few years, and especially during the COVID-19 pandemic, the German economy had proven to be rather resilient, even in light of operational challenges in the pandemic’s aftermath. However, an increasingly rapid succession of crises post-2020 triggered significantly higher interest rates, resulting in an eventual slowdown of the economy. This led to a very dynamic restructuring and distressed market in 2023 and 2024, which will remain active for at least another two years. In this Trends & Developments update, we provide an overview of four broad trends that have shaped markets in 2024 and will continue to do so in 2025.

• First, restructuring is now an economy-wide phenomenon, and cases are no longer clustered in waves in certain industries at certain times.
• Second, the number of companies in distress will continue to grow in 2025, and the restructuring solutions to rescue them will become more complex and sophisticated as a growing number of cases will require deleveraging measures.
• Third, debtors will continue to consider foreign restructuring tools as an important option, but the overall number of available options has increased.
• This is particularly true for German companies, as fourth, the StaRUG as the “German scheme” is emerging as a tested and trusted in-court tool to restructure both equity and complex debt structures.

Trend One: From Industry-Specific Restructuring Waves to a Broader Crisis

For the better part of the last decade, while the German economy as a whole was booming at record highs, restructuring and insolvency cases tended to cluster in certain industries. Following the global financial crisis, there was the shipping crisis, and a string of struggling (fashion) retailers, which were dealing with declining city centres and a growing trend of customers moving to online shopping. This was followed by transformation-related problems in the automotive industry and the broader manufacturing base, especially on the supplier level, and, finally, the distinct real estate crisis following the 2022 interest rate hikes in Europe and the US.

This picture has changed. While all these sector-specific challenges remain, distressed and restructuring cases are now to be found across the board.

In this overall environment, operational and financial challenges reinforce each other. Germany’s large manufacturing base and traditionally strong chemicals industry, for example, have been hit by high energy prices and interest rate hikes at a time when they continue to try to transform and become greener. At the same time, demand from China is slumping. Weathering these storms requires significant amounts of capital, which is challenging at a time when interest rates on substantial leverage continue to exceed their pre-2022 levels despite rate cuts on both sides of the Atlantic. This explains why being green does not make things necessarily easier: Not only have the “old” industries taken a hit, but there have been a number of high-profile restructuring and even insolvency cases surrounding the renewables industry as well.

The observation that restructuring cases are now scattered all over the economy does not only apply to sectors, but also to companies. While the 2010s saw only a limited number of truly large-cap restructurings (mostly in the retail and airline world), troubles have now reached Germany’s industrial behemoths. For example, Volkswagen, the country’s largest employer, braces for a fight with unions over downsizing and the closing of some of its factories.

From an investor’s standpoint, all of this is a mixed blessing. As discussed in depth in the next paragraphs, certain leveraged capital structures are hard to maintain in a world of elevated interest rates and a bearish market sentiment. A number of portfolio companies will struggle operationally. At the same time, the breadth of the current crisis may offer new opportunities to buy into Europe’s largest economy.

Trend Two: More Cases and the Need for Sophisticated Restructuring Solutions

The upcoming months will see an increasing number of new distressed cases heading to market as two trends converge: On one hand, there will be a number of upcoming maturities under the last-remaining low-interest loans and instruments that have been issued pre-2022, with these debtors facing the higher-rates environment for the first time. On the other hand, there will be a first wave of “re-restructurings” beginning in 2025 which will involve debt that was restructured at the beginning of the crisis and which will now need to be refinanced in the coming years and months.

Maturities post-2025 will have a certain advance effect in Germany more than elsewhere. For liability-related reasons, German entities will, on a rolling basis, evaluate their going concern prognosis for the upcoming 12 months at least. If they face maturities during this look-forward period, and are unable to refinance these instruments at market, they will need to enter into restructuring discussions well ahead of the actual maturity. This will push a number of later cases into the next year.

In addition, many of the distressed cases which are expected to come to market in 2025 will prove more complex than earlier cases, especially in the second group of “re-restructurings”. Until 2023, “amend and extend” transactions were a preferred solution to debtors’ liquidity problems, where rather than accepting a haircut, lenders agreed to extend maturities, leaving the debt stack itself unchanged. This was, to some extent, a bet on quick interest rate decreases that allowed (now) unsustainable capital structures to live another day.

In 2025, many of these maturities loom large for a second time, and especially highly leveraged structures are at risk. As the macro environment has not changed significantly (if at all), a second “amend and extend” will not be feasible for many debtors. These debtors will require deleveraging transactions in order to get a positive restructuring opinion by an independent third-party expert, as is required under German law. This will, in turn, make restructuring cases more complex – both regarding instruments to de-lever and instruments to participate if things develop better than expected (Besserungsschein).

The need for fresh money may also provide attractive deal options for opportunistic investors on both the debt and equity side. 2025’s converging dynamics will create a number of risks, and these risks will require strategic and contingency planning by all stakeholders. These sophisticated cases will offer more opportunities to any actor that takes the initiative and steers the process towards a favourable outcome or, at least, towards a relative best-case scenario. To do so, sponsors, debtors, and creditors will need to make optimal use of all the different restructuring tools that are available to them, both in-court and out-of-court.

Trend Three: Cross-Border Restructurings – One Viable Option Amongst Many

German companies, as well as their shareholders, continue to use foreign courts and legal systems to restructure their debt, with London continuing to be a destination of choice where companies can profit from two in-court restructuring proceedings: the long-established Scheme of Arrangement on the one hand, and the newer Part 26A Restructuring Plan on the other hand. In 2024, for example, the German holding company of a chemicals provider filed a Scheme application in the High Court. At the same time, two German real estate Restructuring Plans made their way through the London (appellate) court system.

There remain good reasons for German companies to seek the assistance of the English courts: Some debtors may need to restructure English-law-governed debt, and only English courts are permitted to do so. Other debtors may prefer the tried-and-tested English legal system, and want to rely on the substantial body of well-settled case law that has developed around the Scheme which now also informs judges’ thinking on Restructuring Plans. In addition, some cases may require one very specific legal feature, which German law lacks and which English law provides. However, as the StaRUG emerges as a versatile restructuring tool (as discussed below), we do not consider many cases to fall in this latter category.

This multitude of options, of course, affects the calculus of debtors, which consider their available options: While the English courts are quick to assume jurisdiction (based, for example, on English-law-governed debt in the capital structure), German debtors will need to worry in contested cases (as least) about enforcement and recognition of their Scheme or Restructuring Plan elsewhere. Here, post-Brexit, unanswered questions remain. To have a more convincing argument in terms of recognition, many debtors will still consider moving their so called “centre of main interests” to the UK. This can prove rather burdensome, both factually and legally, compared to using the now-available German restructuring tools.

In any case, there is a very positive message emerging from the above: Regardless of whether a company in distress chooses to move abroad or to stay at home, it has numerous options – and choosing the right restructuring tool can make all the difference.

Trend Four: The StaRUG as a Go-To Option For German-Law Restructurings

By now, the StaRUG as the “German scheme” has emerged as a viable implementation tool for mid- and large-cap restructurings alike. Initial comparisons of the StaRUG to a paper tiger are no longer heard. As the number of cases grows, stakeholders are becoming increasingly comfortable with using the instrument. This year has seen cases from virtually all industries. Real estate companies have relied on the StaRUG to restructure their debt just as much as online dating businesses, machine providers, or automotive and battery suppliers.

When looking at the court reports from 2023 and 2024, there are two groups of cases, in which stakeholders are likely to make use of the StaRUG and its restructuring toolbox.

• First, the StaRUG allows an investor and fresh money provider to substitute out-of-the-money shareholders, and take control of the business to restructure the company.
• Second, the StaRUG’s cram-down rules prove to be an expedient way to successfully restructure complex capital structures, especially in cases where an all-consensual solution is off the table due to certain holdout positions.

Investors as substitutes for out-of-the-money shareholders

Germany has seen a number of cases in which the StaRUG has been used to implement a restructuring solution led by an investor and fresh money provider which arranged a deal with the major creditors. Typically, the former shareholders were out of the money, and the lenders had to accept a haircut, while at the same time any sustainable solution required an equity contribution. Without a StaRUG case, this fact pattern would give the former equity holders a holdout position despite their shares being worthless in corporate finance terms.

While the details may differ, all these cases follow a similar logic: When there is no equity value left (and only then, one may add), all shares are written off through the StaRUG, and new shares are issued which are subscribed to by the fresh money provider. In many cases, the subscription right is an exclusive one for the investor under a pre-agreed deal with the lenders, which accept a haircut. This requires, at least in our view, that a lege artis process has been conducted prior to the StaRUG proceedings, which has shown that this is the only realistic restructuring option for the company to avoid insolvency. If the StaRUG debtor is a listed entity, its listing will cease once its old shares are written off. The fresh-money-shareholder may therefore not only take control when saving the company but may also take the asset private.

This latter string of cases has attracted criticism from capital investors, their lobby groups, and a few academics. The StaRUG has become, the argument runs, akin to a squeeze-out, albeit without the minority protections usually found in takeover codes. In our view, this argument ignores at least three key points: First, these cases are transactions of last resort, when all other efforts have demonstrably failed. Second, the lost shares are out of the money, and giving them a hold-out position is not justified. Third, there are a number of minority protections in the StaRUG itself. Against this background, the majority of voices in Germany agree with the logic applied in these recent cases.

Is shareholder consent required to initiate StaRUG proceedings?

In the future, the number of StaRUG cases is poised to rise even further, and there is one line of cases that may prove particularly important: As discussed, out-of-the-money shareholders may find themselves losing their shares via StaRUG proceedings. Hence the question has arisen (and is still strongly debated) whether filing a StaRUG case requires in-advance shareholder consent under general corporate law principles. For stock corporations (Aktiengesellschaften), it is fair to say that this should now have been answered in the negative by a couple of court rulings, starting with the very first large-cap StaRUG case in 2023 (Leoni).

What seems to be settled law in relation to stock corporations remains controversial when a limited liability company (Gesellschaft mit beschränkter Haftung) is concerned. 2024 saw the Stuttgart Court of Appeal giving the first appellate-level judgment on this critical issue, and its answer could not be clearer – there is no need to obtain a shareholder approval before filing a StaRUG case, at least when insolvency is the only alternative. However, a number of lobby groups continue to try and push the German legislature to amend and clarify the StaRUG in this regard.

Restructuring complex (cross-border) capital structures and, potentially, bonds

The other main use case of the StaRUG is to restructure complex capital structures, especially when there are holdout attempts. The StaRUG, after all, allows decisions to be taken by a 75% majority in each class of creditors, and a majority of creditor classes may even outvote dissenting classes. Here, the StaRUG functions so well that there is little news in this regard. This may be the strongest testament to its success.

In terms of international recognition, 2024 saw the first StaRUG Chapter 15. In Re Spark Networks SE, the US Bankruptcy Court for the District of Delaware gave full force and effect to the StaRUG debt-to-equity restructuring of a German-based debtor. Nothing in the opinion suggests that this was an exceptional case. If stakeholders in complex cross-border structures choose a StaRUG solution in the future, they can therefore not only expect an increasingly tried-and-tested tool in Germany but can also expect swift recognition of the restructuring in the US and its financial centres.

The StaRUG also helps to address one problem that is somewhat peculiar to German capital structures, in which so-called loan notes (Schuldscheindarlehen) are a recurring issue. These instruments bear many characteristics of a bond with one crucial exception: they are loans, not bonds, and as such, cannot be restructured using the majority rules of the German Bond Act (Schulverschreibungsgesetz). Here, the StaRUG complements the restructuring toolbox. Before its majority rules, modifying the terms of these loan notes required unanimity, and considerable effort went into locating all loan note holders and addressing their holdout position. This is now much easier. In fact, there have been a few StaRUG cases in 2024 whose sole purpose were to force all loan noteholders into a deal that had been otherwise agreed by all stakeholders.

This leads to the sole area of high-profile restructurings, where there have been no major StaRUG cases so far: Over the last few years, no major cross-border German bond has been restructured through a StaRUG (although there were cases that involved bonds more generally). These cases are still being dealt with through the tried-and-tested means of the German Bond Act (Schulverschreibungsgesetz), while we note that there have been a couple of cases in which a StaRUG had been prepared as a “plan B”, which ultimately was not needed. If the StaRUG continues on its current trajectory, this may soon change. That is the StaRUG’s story after all: Step by step, case by case, it becomes the pre-eminent go-to tool for German in-court restructurings.