Public bonds: Private equity's way into the Mittelstand?

The study Mittelstandsanleihen in Deutschland, jointly conducted by financial advisory service providers Apollo Corporate Finance and Mountainpeak Capital, highlights the imminent need for fresh equity for many Mittelstand businesses. Although only 11 SMEs will see their bonds mature in 2015, next year that figure will triple to 33.

"Restructuring is an event where Mittelstand companies have to make a decision that is not necessarily within their control," says Gero Wendenburg, partner at Mountainpeak Capital. "There are outside pressures being imposed on them and, in this case, they need alternative financing." He urges such companies to make decisions proactively. "I would expect that the market for lending via minibonds is not as accessible now as it has been. Our recommendation to many of these companies is to start the process early and to consider the whole spectrum of financing alternatives available."

Indeed, not all companies have fared well under the weight of bond repayments and the industry has already seen pockets of opportunity opening up in the space. In February, Deutsche Private Equity announced it had acquired biogas specialist MT-Energie Service from parent company MT Energie. The company had filed for insolvency in October 2014 after issuing public bonds worth €30m in 2012. Prior to the filing, it saw its credit rating drop from a B to a C in September last year.

Swiss GP Capvis got in on the action in February too, acquiring industrial machinery company Rena. The company had begun insolvency proceedings under self-administration in March 2014 after failing to win a financing package to cover debts at subsidiary SH+E. Rena had issued bonds in both 2010 and 2013.

Early warning
The effects of unrepayable bonds were felt as early as last year. MS Deutschland Holding, a tourism company comprising both the cruise ship MS Deutschland and the shipping company Peter Deilmann, initially received an A rating on its issuance of bonds on the Prime Standard market of the Frankfurt Stock Exchange in 2012. Two years later, Munich-based Callista Private Equity bought the company out of insolvency.

Events such as these may be the catalyst needed to provoke SMEs to act before it is too late. Mechanical and plant engineering group Dürr is one such company that brought private equity on board before the creditors came calling. In August, Dürr shed its non-core aircraft assembly division, Aircraft & Technologies Systems, to Deutsche Beteilungs subsidiary Broetje.

Other firms have been similarly proactive in refinancing their loans, but are still in need of additional capital to consolidate their positions. Hamburg-based shipping company Rickmers announced a successful refinancing at the end of February, while at the same time highlighting its objective "to increase the internal financing scope for long-term growth". Wendenburg estimates the group had issued public bonds worth in the region of €250m and required a further €50–100m in equity. A long-term investor from the private equity industry could be the answer.

The Mittelstand's perceived aversion to private equity appears set to be eroded in the next five years. As SMEs are forced to look for capital from other sources to solve bond repayment problems, GPs may increasingly be taken into consideration earlier in the process, rather than as a last resort. "The Mittelstand needs to be more open to private capital because it has a different profile," says Wendenburg. "Although SMEs don't want to dilute their stakes and don't want to give up ownership, considering private equity means they wouldn't have to report publicly and would have a healthier balance sheet, ultimately providing them with more financial flexibility."

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• DACH
• Restructuring
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• Unq2015Apr