How do you keep a company running when there's no money in the bank? It's a question that thousands of investors in Germany and the United States are asking themselves right about now.
German Pellets, a leading global manufacturer of wood particles for heating, based in Wismar in northern Germany, filed for bankruptcy last week in Germany. Now, a bankruptcy administrator has found just €5,000 ($5,500) in cash left on hand in the company, Handelsblatt has learned from sources.
A casualty of the plunging global oil price, the firm’s collapse has dealt a blow both to Germany’s renewable energy sector, and to confidence in high-yielding mid-sized company bonds that have proven popular among investors in the past.
Thousands of small investors worry whether it will be possible to resume operations and keep the company going.
It now seems that German Pellets was in much worse shape than anyone realized; €5,000 isn’t even enough for one day’s worth of electricity and gasoline, let alone to pay off creditors and employees. The company has more than €400 million in outstanding costs and liabilities.
But the real story of how this German company ran itself into the ground is a tale that runs across both sides of the Atlantic – and involves some major names in the financial world.
So where did the money go? A look at the German company’s books suggests more than €150 million in capital may have been quietly siphoned to a U.S. foundation, linked to the family founders, which invested the money in huge production sites in the United States.
The money may also have been shifted to placate some major U.S. investors. A group of powerful funds bought more than $500 million in municipal bonds from the two U.S. production facilities linked to German Pellets.
It may not be enough. If the business in the United States goes belly up too, then everything could be left hanging on German Pellets in Wismar.
In Germany, the person in charge of cleaning up this mess is Bettina Schmudde, a court-appointed bankruptcy administrator from the international law firm of White & Case, and she has a mammoth task ahead of her.
Production facilities in Europe have been idle for several weeks. Now, she'll have to restart the company from scratch and look far and wide for funds to keep the operation running.
Meantime, thousands of small investors worry whether they’ll ever get their money back.
With annual revenues of €600 million in its latest reporting, German Pellets financed itself mainly through bonds. The company collected €226 million ($251.3 million) in Germany, in addition to profit participation rights of €44 million.
In the United States, bonds totaling $546 million (€490 million) were issued by two Texas and Louisiana production firms that are linked to German Pellets.
The U.S. bondholders include large investment funds such as Putnam and Invesco, according to Bloomberg, a financial data service company. One of the largest individual creditors is the investor group KKR. According to Bloomberg, it acquired bonds worth $95 million at the end of 2013.
Some of these powerful U.S. creditors could soon be making claims from Ms. Schmudde in Wismar, too. German Pellets issued credit guarantees to the two U.S.-operated plants, along with extensive delivery and acceptance guarantees, according to the global investment bank Houlihan Lokey.
While the bankruptcy may have been filed in Germany, the U.S. operations are also on shaky ground. A bond issued by the factory in Louisiana was not serviced in January. It marked the first such default, though the company hasn’t so far said it will default on any other debts.
In Germany, the situation came to a head last week, once it became clear that a €52-million German loan due at the end of March could not be paid. A meeting of investors and creditors scheduled for last Wednesday was rescheduled. Instead, the company quickly filed for bankruptcy that same day.
Since last week, Ms. Schmudde and her team have been making their way through data and documents. In talks with management, they had originally discussed whether it might be possible to restructure German Pellets and continue operations.
Now, with no money found in the bank, inside sources indicated the funds to restart production would have to come from new, so-called mass credits or also from investors.
It will be simpler to find money for the wages and salaries for the 280 employees in Germany. For a period of three months, the German state pays insolvency money. That means wages can be paid at least until the end of March, Ms. Schmudde said. Furthermore, she is examining whether some of that insolveny money can be advanced, so employees can receive payment without much delay.
The fact that German Pellets has almost nothing is left in its coffers makes it all the more surprising that the company originally sought to manage its own bankruptcy. That would have left Peter Leibold, the founder and chief executive, in charge of its operations, along with Frank Günther, the restructuring manager he had selected.
That option was rejected by a German court last Wednesday. With such little cash left on hand, it is a wonder Mr. Leibold believed they could have continued operations on their own.
The question is, again, what happened to all the cash?
Just six months ago, German Pellets still seemed to be relatively healthy. The firm's last semiannual report, issued for the first half of 2015, stated the company had cash holdings of €14 million on June 1, 2015.
Inside sources said much of the cash and checks could have already been pledged to pay bills. Even the company's self-appointed restructuring manager, Mr. Günther, may have been duped.
The last-available semiannual figures are also puzzling in other ways: €154 million in available assets, for instance, was booked immediately after the reserves as “claims and other assets.” This amounts to 30 percent of the balance sheet total. Wouldn’t it have been possible to free up some of that amount to pay back investors?
There is no further explanation about these items in the balance sheet, but it seems unlikely the money will come back to Germany.
“I fear that a large part of these claims are now worthless,” said Michale Olbrich, head of the Auditing Institute at Germany’s Saarland University.
Particularly unsettling is a huge item labeled “Financial Assets” and totaling €178 million. This money also seems to have disappeared from the company.
Where did it all go? An answer might lie buried in the company’s sales brochure for profit participation rights, which were offered to investors right up to the end.
A brief note in the brochure states that in the first half of 2015 alone, German Pellets funneled €50.4 million to the United States, where it has business ties with pellet production sites in Louisiana and Texas. The money was intended as “loans” to “assure production” there.
Nor is it the first time that money has ended up in the United States. In December 2014, the company noted “Other Loans” amounting to €114 million on its books.
According to the rating agency Creditreform, the money was for the most part funneled to a foundation belonging to the Leibold family. The foundation then invested it as equity capital in the two U.S. pellet factories. These sites made deliveries to German Pellets and other company customers, but they are only linked to the company indirectly through the foundation.
The financial trickery has likely left German investors out in the cold. By shifting the money to the United States, the creditor-capital of investors in German Pellets, which had a high priority for repayment, was transformed into proprietary capital in the two U.S. firms, with subordinate priority.
In other words, it is the U.S. funds that invested in the two production plants that now have priority. If their loans are not paid back, they could lay claim to the capital of the German investors that ended up in the United States.
And if that’s not enough, the U.S. investors could still come after the parent company German Pellets – which could make a Herculean task for liquidator Bettina Schmudde.
Gertrud Hussla is a financial editor for Handelsblatt based in Düsseldorf. Christopher Cermak of Handelsblatt Global Edition also contributed to this story. To contact the author: firstname.lastname@example.org