Private Equity for Distressed Companies in Germany

Author(s): Andreas B. Kucher and Matthias Meitner

Source: The Journal of Private Equity , Winter 2004, Vol. 8, No. 1 (Winter 2004), pp.
55-62
Published by: Euromoney Institutional Investor PLC

Stable URL: https://www.jstor.org/stable/43503397

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 Private Equity for Distressed
Companies in Germany
Andreas B. Kucher and Matthias Meitner

Andreas B. Kucher I. INTRODUCTION internal factors on the demand for distressed

is a doctoral candidate at
companies by private equity firms, the respon-
the University of Rostock
dents in the first two surveys were asked about
in Germany.
panies in Germany using private the economic, legal, and capital market envi-
andreas.kucher@uni-rostock.de
equity have gained little attention ronment (external factors) as well as about
Matthias Meitner Restructurings panies thus equity far, thushavefar,induedueto asymmetri
Germanyc ingaifor-ned to of asymmetric distressed little using attention private infor- com- financing, management quality, and innova-
mation between (potential) equity holders and
is a research fellow at the
tion strength (internal factors). The financial
Centre for European the management of companies, as well as an
experts rated the factors on a scale from "1"
Economic Research (ZEW)
increasing influence of debt holders in severe (very positive influence on the demand) to "7"
in Mannheim, Germany.
meitner@zew.de
company crises.1 This also explains the low (very negative influence), with "4" being neu-
portion of turnaround financings of 1.1% tral. The first survey represents the general
(€26.4 mn) in 2003, as estimated by the German views of minority investors and the second
Private Equity and Venture Capital Associa- survey represents the special view of turn-
tion (BVK), despite growing insolvencies and around and buyout investors with a control-
company distress (2002: 2. 9%). 2 However, in ling interest in the distressed company. This
the recent past there has been a noticeable approach made it possible to stress differences
trend of traditional buyout funds buying dis- between minority investors and turnaround
tressed companies.3 Recent examples in Ger- and buyout investors regarding their invest-
many are the takeover of pay TV firm Premiere ment behavior in distressed companies. Typi-
Medien by Per mira Advisers (transaction size: cally, in the practice of so-called "turnaround
€1 bil ion) within the insolvency of the Kirch buyouts" traditional buyout funds and spe-
group, the purchase of loss-making Dystar Tex- cialized turnaround funds will assume a con-
tilfarben (owned by BASF, Bayer, and Aventis) trolling interest to influence their investments
by Platinum Equity (€560 mil ion), and the directly, and to perform a turnaround by pro-
sale of electronic group Moeller to Advent viding capital plus management capacity.4 From
International, forced by banks. a strategic, operational, and financial view-
This study is based on three written sur- point, We further examined 15 frequent causes
veys which were carried out in December of corporate distress as well as measures for
2003, March 2004, and June 2004 at the successful turnaround strategies (third survey).
Centre for European Economic Research Here we used a scale from "1" (agree) to "7"
(ZEW) in Mannheim, Germany. About 200 ("fully agree").
financial analysts and institutional investors par-
ticipated in each of the respective survey dates.
To measure the importance of external and

Winter 2004 The Journal of Private Equity 55

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Exhibit 1
Investors in Distressed Companies (Germany)

! I i
Banks | !
t i
! S
.sf ; Vulture Funds !
s» ! Lone Star, Farallón , Cerberus, Apollo, etc. i

^ '

^ ! Buyout Funds !
§ ¡ 3i, Carlyle, Bain, Permira, etc. '
Ř !

I ¡ Turnaround Funds j
V i Alchemy, Nordwind, Orlando, Advisum, etc. «

Equity i _ ¡
Active Influence on Management - ► Passive

II. TYPES OF DISTRESSED COMPANIES banks and specialized mezzanine funds. In comparis
AND INVESTORS turnaround funds, buyout funds do not exert as much
ence on the management because their focus lies rathe
Distressed companies are defined as companies in
the provision of capital and the financial restructurin
which unplanned and temporally limited processes take
the company. Along with traditional buyout investors
place that threaten substantial goals and in theturnaround
worst case investors, vulture investors (i.e., distressed
cause bankruptcy.5 Distress may be furtherinvestors),
classified which
as are mosdy organized as hedge funds
strategic distress (threatening strategic goals, appear
e.g., market
in the distressed marketplace. Some vulture inve
share), operational distress (threatening operational goals,passively by buying and packaging company
act rather
e.g., profit margins), financial distress (threatening strategic
on the secondary markets, e.g., buying undervalued b
goals, e.g., cash flows), and insolvency (stock-based [bank-
on stock exchanges or loan portfolios of banks to p
ruptcy] or flow-based). from market inefficiencies.8 Others are aggressive m
The term "private equity" is increasingly used to that mostly purchase company debt (in o
participants
describe the universe of all venture investing, buyout
of court) and convert it to equity under a workout or
investing, and mezzanine investing in early stages (venture
ganization plan. Thus they limit their risks by direcdy
capital) or later stages (buyout capital) of the company busi-
encing the management and at the same time enhance
ness cycle, whereas private equity in a narrower sense through
return also value creating strategic, operationa
means buyout investing.6 Due to management experience,
financial restructuring activities.9
asset sizes, market shares, mature products, lowIncapital
the following study only "traditional invest
expenditures, etc., mature companies are generally lucra- companies were considered, i.e., tradi
in distressed
tive investments for buyout funds. Therefore, more
buyout andandturnaround funds that provide fresh e
more low-valued distressed companies in mature andphases
take of
controlling interest to actively influence
their business cycle become the target of specialized turn-
agement and the turnaround. As mentioned ab
around investors , which can be understood as a subsetstakes
minority of were also considered (first survey
buyout investors. The turnaround funds they manage mosdy
methodological reasons. In the following, "private
purchase equity or mezzanine capital from distressed
funds" com-
will be used in a wider sense only (including
panies to obtain a majority stake and to perform a strategic
ture and buyout funds), whereas "buyout funds" refe
and/or operational turnaround (see Exhibit Í). Traditional
buyout and turnaround funds that take a control
buyout funds usually invest in less precarious situations7 and
interest. "Turnaround buyouts" means the majority st
additionally borrow further debt or mezzanineof capital
buyoutfrom
and turnaround funds in distressed compan

56 Private Equity for Distressed Companies in Germany Winter 2004

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Exhibit 2
Future Relevance of Distressed Companies to Investors

III. RELEVANCE OF DISTRESSED COMPANIES the buyout market, however, is putting pressure on fun
FOR TURNAROUND AND BUYOUT FUNDS returns, and at the same time the internal rates of retu
of buyout funds have fallen from 24% to 9%. 14 On
1. Development of Distressed Companies
other side is a capital overhang of non-invested funds (s
and Private Equity Funds called "dry powder") which has to be invested w
increasing pressure of the limited partners. The total ca
The national bankruptcy statistics are generally a
ital overhang has accumulated from 1998 to 2002 wor
good indicator for an increase or decrease in the number
wide to $128 billion (Western Europe: $31 billion).15
of distressed companies. In 2003 corporate bankruptcies
The December 2003 survey of 199 respondents co
in Germany rose to a record high of 39,320 (+ 4.6% com-
firmed the trend of traditional buyout funds, seeking alt
pared to 2002), with total and to a great extent unrecov-
native investment opportunities and increasingly switch
erable claims of €42 billion.10 Adjusted by less relevant
to invest in distressed enterprises, due to low margi
younger firms with small sales volumes and only few
investment pressure of limited partners, and less att
employees (60% of the bankrupt companies existed eight
tive overall investment opportunities. Seventy-four p
years or less), about 15,700 firms in the later stages of
cent of the respondents estimated that the relevanc
their business cycles went bankrupt in 2003. 11 In the future
distressed companies to investors will increase in genera
a high number of companies can be assumed to be dis-
Thereof, 44% estimated that investors will invest in equit
tressed as well. Analysts and institutional investors esti-
while 45% assessed mezzanine as more relevant. Ten p
mated that about 15% of all German companies with sales
cent rated both forms of financing as equally relevant (
of €1 million or higher (50,000 companies) will become
Exhibit 2).
operationally or financially distressed within the next one
or two years.12
2. Relevance of External Factors
The preferences of private equity funds will move
with rising corporate distress. Since the bursting of the
According to the results of our first survey in
technology bubble in 2000, there has been a movement
December 2003, the dominant drivers for private equity
of funds raised from early-stage to late-stage (buyout stage),
investments in distressed companies will be the economic
which is also reflected by the investment behavior of the
outlook, as well as the increasing trend of institutional
general partners: In 2000, 56% of all European private
investors to consider alternative asset classes next to their
equity investments (total: €35 billion) were made from
blue-chip investments (see Exhibit 3).
venture capital funds, whereas 44% came from buyout
A positive economic outlook has a favorable effect on
funds. In 2003 the relation was 33%/67%, with total
the demand for distressed firms (mean values: 5.5 for turn-
investments of €28 billion.13 Increasing competition in
around buyouts and 5.3 for minority stakes respectively),

Winter 2004 The Journal of Private Equity 57

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because it reduces the risk of further deteriorations or by changes in the bankruptcy law. This is the case since
the creditor-oriented insolvency act favors majority
bankruptcy and therefore increases the chances of a suc-
investors, who can soften the concerns associated with
cessful turnaround. The slightly higher value for turn-
around buyouts suggests that active investors will financethe insolvency act by utilizing debt-equity swaps, for
example.
relatively more distressed firms in a strong economy, due
to generally higher potential losses (dead losses) in case of Rising interest rates reduce the attractiveness of dis-
a bad investment, compared to financings in a weak
tressed companies from the perspective of private equity
companies (mean values: 3.0 resp. 3.6). Obviously, fund
economy This relationship must also hold true in a weak
economy were the (majority) investor can directly influ-
managers become more and more risk averse while facing
ence the management and therefore reduce its risk andincreasing interest rate and leverage risks. According to the
redirect the flow of corporate resources to more highly
respondents, the consequences of increasing interest rates
valued uses. are more serious for turnaround buyouts than for minority
The stock market collapse of 2000, and therefore investments. An explanation for that could be the differ-
the need for alternative funding sources, also had a high ence in risk exposure due to unequal equity stakes:
impact on the demand for distressed companies (mean Investors are more likely to accept the consequences of
values: 4.4 resp. 4.3). The collapse of technology andunfavorable refinancing possibilities or decreasing asset
Internet stocks fueled the need for institutional investors values when they plan to invest rather small stakes in a
to search for alternative investments such as, for example, real company
estate, commodities, hedge funds, or private equity funds. The new equity capital requirements for banks, also
This could be a result of the high liquidity and capital known as Basel II, will have a negative impact on the
overhang (see section III. Í) which is invested at least par- demand for distressed companies from the perspective of
tially in distressed firms. This holds valid for minority and a turnaround buyout investor (mean value: 3.2) and a
majority stakeholders equally minority investor (mean value: 3.5). This result surprises
Upcoming changes in the German bankruptcy law for two reasons: Firstly, the expected increase in bor-
will not have any major impact on the investment behavior rowing costs and the potential credit squeeze for distressed
of private equity firms in respect to distressed companies companies should drive the demand for (non-bank) pri-
(mean values: 4.0 resp. 3.6). On the one hand, the planned vate equity 19 Secondly, the requirements for banks under-
amendments,16 such as the enhanced possibility to sell the taking private equity investments have also improved after
company before the "report meeting" (first meeting of the the release of the EU Capital Adequacy Directive.20 A
credit committee after filing for bankruptcy) and the more rational explanation for that is the date of the survey -
objective selection of an insolvency administrator by the which was before the disclosure of the EU Commission
insolvency courts, are presumably still inadequate. On the (July 14, 2004) - and the high dependence of private
other hand, buyouts of distressed companies that are near equity companies on bank funds (11.1% of the private
or in bankruptcy generally do not enjoy widespread pop- equity fundraising in Germany comes from banks).21 The
ularity in Germany.17 The planned modification of sec- new EU directive does not support the propositions of the
Third Consultative Paper of the Basel Capital Accord22
tion 22 of the German insolvency act ( Insolvenzordnung ,
InsO) regarding the sale of the distressed company before regarding capital requirements for the bank s equity invest-
the "report meeting" can be supported. However, the ments (up to 32% of invested equity), but rather suggests
acquirer then still becomes liable for all liabilities and debts a 13% capital requirement.23 To put it differently, the orig-
incurred by the seller (e.g., bank debt, account payables, inal proposition of the Basel Committee would have meant
overdue wages, tax liabilities), which effectively hampers substantial cost disadvantages for banks regarding equity
acquisitions. Moreover, the proceedings whereby insol- investments. Because of the new situation, no final con-
vency courts appoint insolvency administrators from a clusion with regard to the consequences of Basel II for the
small circle of well-known lawyers have been held to be attractiveness of distressed companies can be drawn.
in violation of German labor laws, as was recently con- As expected, locked capital markets also have a neg-
firmed in a judgment of the German Federal Constitu- ative impact on the demand of distressed companies for
tional Court ( Bundesverfassungsgericht ).18 A comparison of both minority and majority investments. The current
the results for minority and buyout investors reveals that weakness of the IPO markets (access to public equity) reduces
minority investors are apparently more negatively affected exit opportunities of private equity companies (mean

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Exhibit 3
Relevance of External Factors

What is the influence of the following factors on the demand for distressed companies
from the point of view of a turnaround / buyout investor (a minority stake investor)?

Positive

economic growth Alternative Current changes in Poor access to Poor access to Rising interest

2 7(8) 15(21) 6(14) 48(40) 48(41) 55(50) 58(28)

3 2(14) 28(43) 30(68) 41 (40) 44(61) 43(34) 65(57)
4=neutral 17(21) 49(36) 107(68) 50(48) 56(30) 31 (29) 36(56)
5 59(52) 39(33) 28(16) 24(23) 22(33) 27(29) 8(22)
6 71 (54) 40(35) 6(6) 10(15) 6(10) 12(18) 11 (15)
7=very positive influence 33(37) 12(15) 1 (1) 4(6) 0(5) 2(7) 1 (2)
Total respondents 190(187) 189(185) 179(175) 191 (181) 189(187) 188(187) 190(186)
Mean value 5.5 (5.3) 4.4 (4.3) 4 (3.6) 3.4 (3.6) 3.2 (3.5) 3.2 (3.4) 3 (3.6)
Standard deviation

values: practice andBeyond

3.4 resp. 3.6). depends on the individual environment/exi
that,
industry of the company.
higher when investors In general, problems
hold bigger within
are more dependentmarkets and products,
onespecially
primary incomplete, immature,m
credit markets dueor outdated
to product
low lines or services, are difficult and
creditwort
expensive to equity
influence on private solve.25 investme
an investor will rather agree
Distressed firms with (extremely) to
high leverage are lessbe
actively manageattractive
it to investors (mean values:
(mean value: 3.5 resp. 3.2). For
3.2
minority investors this is true, due to higher bankruptcy
3. Relevance of Internal Factors risks. Turnaround and buyout funds assume risk aversion
despite their intended controlling stake, since restruc-
Insufficiently qualified management generally has aturing activities at highly leveraged companies presumably
take place more slowly and confront more obstacles. The
negative impact (mean values: 3.3 resp. 2.7) on the demand
for distressed companies among private equity funds lack
(see of demand at traditional buyout funds on the other
hand is justified in the above-mentioned restraints of these
Exhibit 4 ) . Mismanagement, however, is less of a consid-
eration for turnaround and buyout funds which possess investors
a regarding companies near or in bankruptcy.
greater influence on the company due to their majority
stake and their ability to change the existing management.
IV. CAUSES OF CORPORATE DISTRESS
A capable management is the sine qua non of any turn- AND TURNAROUND MEASURES
around.24 In particular, traditional buyout funds rarely
bring along management capacities, instead hiring spe- From the viewpoint of the risks and returns of tu
cialized turnaround managers from turnaround consul-around buyouts, the identification and analysis of
of distress as well as the success of turnaround measures
tancies if necessary. The costs associated thereby, and the
fact that incapable management affects company crises are important aspects. Both have been analyzed in section
more severely, reduces investor demand. III of the survey (see Exhibit 5).
A low innovation strength of crisis enterprises also The survey revealed that the primary causes of corporate
prevents private equity investors from investing (mean distress are definitely the economy /industry (mean 4.8),
financing
values: 3.0 resp. 2.7). As for the reason for this finding, it (4.7), and organization/management (4.6). This
is connected to the above argument regarding manage- result is not surprising, since those factors are identified
ment quality. The only difference is that in the casefrequently
of in many empirical studies as (most) common
causes for corporate crises.26 Company-specific factors
turnaround the mean value is higher. This suggests that
distressed companies that are weak in innovation canpredominate
be in general. Along with financing and orga-
restructured more easily than companies with bad man-nization/management problems, these are the defects in
agement. This finding cannot be confirmed in general
accounting/planning/controlling systems (4.3) and a strong

Winter 2004 The Journal of Private Equity 59

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EXHIBIT 4
Relevance of Internal Factors

What is the influence of the following factors on the

demand for distressed companies from the point of view
of a turnaround /buyout investor (a minority stake investor)?

Poor

High leverage management Low innovation

l=very negative influence 13(19) 26(56) 19(40)
2 52(61) 37(47) 66(65)
3 40(46) 37(33) 48(39)
4=neutral 36(18) 53(27) 31 (11)
5 17 (25) 17 (14) 8 (16)
6 22(12) 14(9) 11 (14)
7=very positive influence 7 (6) 5 (3) 5 (3)
Total respondents 187(187) 189(189) 188(188)
Mean value 3.5 (3.2) 3.3 (2.7) 3 (2.7)
Standard deviation

Exhibit 5
Causes of Distress and Turnaround Measures

dependence on customers and suppliers (4.1). External

noting that the causes and symptoms of distress are often
difficult to separate; thus causes are frequently unidenti-
causes for distressed situations such as "legal environment"
and "foreign competitors" are classified by the respon-
fied and symptoms are wrongly interpreted.
dents as rather modest sources of influence (4.0 each). An According to the analysts and institutional investors
exception to that is the assessment of the "economy/interviewed, successful measures for turning around distressed
industry" which is seen as the most important factor. In
companies frequently involve the organization and manage-
contrast, deficits in the fields of procurement, produc-
ment of the company (49% of answers) followed by changes
tion, products/services, human resources, research in and
financing (44%). This suggests that buyout investors in
development, and sales as well as overexpansion haveparticular
rel- can contribute substantially to the success of
atively little impact on corporate crises. While allrestructurings
these by bringing in fresh equity, debt, or mezza-
(internal) factors depend on the specific (internal and
nine capital as well as management and industry knowledge.
In addition, external factors like a favorable economic envi-
external) circumstances of a company, it is also worth

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ronment (43%), and an advantageous change in the legal ENDNOTES
environment (27%), but also changes that can be controlled
by management, such as improvements in accounting/plan- *For the agency theory see E. Fama, "Agency Prob

ning/controlling systems (30%) or dismissals (20%), do have and the Theory of the Firm/' in Journal of Political Econom

a positive effect on successful turnarounds. (1980), pp. 288-307; M.C.Jensen and W.H. Meckling, "T
Exhibit 5 illustrates the expected relationship of the Firm: Managerial Behavior, Agency Costs and Ow

between the importance of a cause of distress and the suc- ship Structure," in Journal of Financial Economics , 3 (197
305-360.
cess of a turnaround by changes in that field of cause. The
2According to the German Private Equity and Venture
relatively high turnaround probability in the legal envi-
Capital Association (BVK), total private equity investments in
ronment as well as in the fields of organization/manage-
Germany (all stages) in 2003 added up to €2.4 billion. Total
ment, products/ services, and human resources, however,
capital managed: €39.9 billion (187 private equity companies).
stresses the importance of changes and restructuring activ-
Non-members (e.g., foreign funds) were not considered.
ities in those areas, independently of particular reasons of 3See M. Cecil, and D. Fugazy, "Private Equity Firms
distress. However, this statement must not be overweighed, Court Distressed Funds," in Mergers & Acquisitions Report , Vol.
since in practice, the proceedings to overcome a corpo- 15, No. 16 (2002), pp. 1-3.
rate crisis depend heavily on the particular company being 4See for example S.C. Gilson, "Investing in Distressed
distressed. Situations: A Market Survey," in Financial Analysts Journal , Vol.
51, No. 6 (1995), pp. 8-27.
V. SUMMARY 5See R. Müller, Krisenmanagement in der Unternehmung:
Vorgehen , Maßnahmen u. Organisation , 2nd ed., Frankfurt am
Main, 1986, p. 15; U. Krystek, Unternehmungskrisen , Wiesbaden,
In the present study concerning the future devel-
1987, p. 6; and Schendel et al., "Corporate Turnaround Strate-
opment of private equity for distressed companies in Ger-
gies: A Study of Profit Decline and Recovery," in Journal of
many, new insights were gathered based on a detailed
General Management , 3 (1976), pp. 3-11.
survey regarding investment behavior, attractiveness of
6See for example definitions by NVCA, E VC A, BVK
distressed companies, causes of corporate distress,
(Online).and
turnaround measures. Contrary to the development 7See of
for example "Q&A with Wilbur Ross," in Buyout ,
the turnaround financing stage classified by the German
Vol. 16, No. 13 (2003), p. 29.
Venture Capital Association (BVK), the significance ofGilson, p. 13, n. 4, D.R. Williams, and S.N. Roy,
8See
distressed companies for private equity funds and there-
"Merger and Acquisition Strategies for the Distressed Com-
fore mainly for traditional buyout funds will pany," in D. DiNapoli, ed., Workouts & Turnarounds II: Global
increase.
However, the behavior of investors seems to be increas-Strategies for the Next Century, New York, 2001,
Restructuring
pp. 424-436;
ingly risk averse: The more stable the economy (low and P.G. Gaughan, Mergers, Acquisitions and Cor-
porate Restructurings , New York, 1999, pp. 453-454.
interest rates and positive expectations), the earlier the
9See Gilson, p. 11, n. 4. Gilson s definition also catego-
stage of the distress, the more qualified the management
rizes turnaround investors (who rather invest in equity) as
of the companies, and the better the potential exit pos-
"proactive vulture investors." In practice, however, the ten-
sibilities for the investors, the more likely is an equity
dency of separating equity-oriented turnaround investors and
investment from the perspective of a buyout and turn-vulture investors predominates. See Williams and
debt-oriented
around investor. The expected correlation between causes
Roy, n. 8; Gaughan, n. 8.
of distress and turnaround strategies indicates that 10See
with Statistisches Bundesamt, http://www.destatis.de/
an increasing importance of the causes of distress, the
basis/d/insol/insoltabl.php. However, the trend is weakening
and the total
probability of a turnaround rises if problems are solved in claims were actually falling (2002: €62 billion).
the respective fields of causes. It is remarkable, though,nSee
thatStatistisches Bundesamt, www.destatis.de/presse/
deutsch/pk/2004/insolvenzen_stat_hahlen.htm.
this correlation is weak only in internal areas such as orga-
nization/management, products/services, and human 12Total number of German companies: 3.384 million, of
which 10 % have sales over €1 million. See Institut flir Mittel-
resources. We therefore conclude that restructuring strate-
standsforschung, http://www.ifin-bonn.org/ dienste/ daten.htm;
gies of investors in those fields do not depend on the
causes of distress.
Bundesverband Dt. Banken, "Daten, Fakten, Argumente -
Mittelstandsfinanzierung vor neuen Herausforderungen," Berlin,
2003, p. 11.

Winter 2004 The Journal of Private Equity 61

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 13See A. Karundale, 2003 Survey of Pan-European Private
Equity & Venture Capital Activity , Available at
www.ventureeconomics. com/ vec/download/evcageneva2004
.ppt (24.08.2004).
14The returns are calculated as five-year rolling IRRs; see
D. Bernard, Benchmarking Private Equity ,
www.ventureeconomics.com/ vec/ download/EVCACFO.ppt,
p. 70.
15See PWC/3Í, Global Private Equity 2003 , http://www.
3i.com/pdfdir/ gpe_report_2003.pdf, p. 10.
16See Bundesministerium der Justiz, "Entwurf eines
Gesetzes zur Änderung der Insolvenzordnung, des Bürgerlichen
Gesetzbuches und anderer Gesetze," http://www.brak.de/seiten/
pdf/Gesetzesentwuerfe/ inso.pdf.
17See C. Hollenberg, "Private Equity-Fähigkeit von
Sanierungsfällen," in Venture Capital, Sonderausgabe "Mittel-
standsfinanzierung ," 2003, pp. 78-79.
18See www.bundesverfassungsgericht.de/bverfg_cgi/
entscheidungen/frames/ (BVerfG, 1 BvR 135/00, August/3/
2004).
19See NRW.Bank, "Beteiligungskapital im Mittelstand -
Perspektiven in NRW" (ZEW-Study), Düsseldorf, 2004, pp. 57-
58. According to the KfW banking group, for the "typical
Mittelstands-Portfolio" (of small and medium-sized German
companies) with an average rating of BB- (Ba3) or worse, an
increase in borrowing costs is expected; see KfW, Basel II -
aktueller Stand und Auswirkungen auf die Mittels tandsfinanzierung ,
February 2003, www.kfw.de/de/research/Sonderthem68/
BaselIIRat45/Arbeitspapier_BaselII.pdf.
62 Private Equity for Distressed Companies in Germany Winter 2004
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20See European Commission, www.europa.eu.int/comm/
internal_market/regcapital/index_en.htm.
21See BVK, BVK Gesamtstatistik 2003 , www.bvk-ev.de/
bvk.php/cat/66.
22For the Basel Capital Accord (Third Consultative Paper),
see www.bis.org/bcbs/bcbscp3.htm.
23The European Commission adopted a proposal for the
amendment of the Consolidated Banking Directive (2000/
12/EC) and the Capital Adequacy Directive (93/6/EEC) on
July 14, 2004 to enforce Basel II within the European Union:
www.europa.eu.int/ comm/internal_market/ regcapital/index_
en.htm#consequences.
24See section IV and R.G. Quintero and R.D. Timpson,
Determining Whether a Company Is Really a Turnaround
Candidate," in S.N. Levine, ed., Investing in Bankruptcies and
Turnarounds , New York, 1991, pp. 283-309.
25See for example D.B. Bibeault, Corporate Turnaround:
How Managers Turn Losers into Winners , New York, 1982, pp.
111-112; R.G. Quintero, and R.D. Timpson, n. 24, pp. 305-
306.
26See for example: W. Reske et al., Insolvenzursachen mit-
telständischer Betriebe - Eine empirische Analyse , 2nd ed., Göt-
tingen, 1978; Deutsche Bundesbank, Monatsberichte der Deutschen
Bundesbank , 44 (1992), pp. 30-36.
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