In March 2002, Philipp Holzmann, Germany's second-largest construction company, filed for bankruptcy protection in court. While at the time of a previous crisis in 1999, many of Holzmann's creditor banks had decided to participate in a rehabilitation plan, the company has now been made the subject of insolvency proceedings. Taking advantage of Germany's recently revised insolvency provisions, many of Holzmann's workers - who agreed in 1999 to work unpaid overtime until such time as the company could afford to compensate them - still have hopes of saving their jobs.
On 21 March 2002, the German-based construction company Philipp Holzmann AG filed for bankruptcy protection in court. The collapse of Germany's second-largest construction company came after several leading banks, among others Deutsche Bank, Dresdner Bank, Commerzbank and HypoVereinsbank, failed to reach an agreement on a feasible rescue plan and on providing the company with new credit. Holzmann, which employs about 11,000 workers in Germany and another 12,000 employees in its international subsidiaries, lost EUR 237 million in 2001 alone, which was much more than the EUR 199 million loss which was expected as part of the company's long-term consolidation plan. With the recent turn of events, it seems that more than 100 years of company history have come to an end. This is not the first time, however, that Holzmann has been threatened by bankruptcy.
The first 'rehabilitation agreement'
In November 1999, two years before its recent collapse, Holzmann disclosed that it had amassed DEM 2.4 billion in potential losses from past property deals (DE0001226F). After negotiations with the main creditor banks on a rescue plan had failed, Chancellor Gerhard Schröder took a further initiative and finally convinced the banks to support a restructuring plan in order to save Holzmann from bankruptcy. The final agreement was based on a rescue package of DEM 4.3 billion, including public loan securities worth DEM 275 million.
Part of the deal to bail out Holzmann was a contribution by the company's workforce, which was aimed at reducing labour costs by 15%. A first agreement on this issue between the company's management and the works council was strongly opposed by the Building, Agricultural and Environment Union (IG Bauen-Agrar-Umwelt, IG BAU) as well as the two employers' associations for the construction industry, the Hauptverband der Deutschen Bauindustrie (HDB) and the Zentralverband des Deutschen Baugewerbes (ZDB), on legal grounds but also because other construction companies feared that Holzmann would gain an unfair competitive advantage. Later, IG BAU began to negotiate a rehabilitation agreement directly with Holzmann management. The agreement was finally concluded in January 2000. According to this 'company rehabilitation agreement' (Sanierungstarifvertrag), Holzmann's employees were required to work five additional hours per week for a period of 18 months. This extra working time was to be banked in individual working time accounts, and was to be paid or compensated by extra leisure time only if the company were to make money again - something that apparently never happened.
To implement the rescue plan, Holzmann's owners also decided to put in place a new management and to restructure its property holdings, the branch of the company's operations which was considered to have caused most of Holzmann's troubles. As it turned out, however, restructuring of the company's property assets was only partially successful and in addition the entire German construction industry was hit by an ongoing decline in general construction spending. Given that the construction market was in decline and overcapacity still prevalent, several companies were forced to enter into cut-throat competition which, in turn, led to a decline in companies' earnings.
Insolvency procedure: still hope for Holzmann's workers
When in March 2002 the major banks decided against another bail-out, Holzmann did not however just disappear. Since the 'red-Green' coalition government revised the insolvency law (Insolvenzordnung, InsO) in 1999, more emphasis has been given to rehabilitating large portions of the insolvent company and to safeguarding as many jobs as possible. According to the revised law, the general goal of continuing the company's operation now enjoys the same priority as satisfying the claims of creditors (section 1 InsO). While the regular insolvency procedure (Regel-Insolvenzverfahren) merely distributes companies' assets equally among the creditors, there is now also an option to set up an insolvency plan (Insolvenzplan) which may provide for a different distribution of assets. Such an alternative distribution is to be proposed by an authorised insolvency administrator. In a third option, called 'transferred rehabilitation' (übertragene Sanierung), a company's most vital and potentially profitable parts and assets are transferred to a newly created agency.
It is now up to Ottmar Hermann, the insolvency administrator appointed by the courts, to find out which of the different options provided by the insolvency law proves to be most feasible. Even at this early stage, a number of Holzmann's competitors have already signalled interest in buying some of the company's subsidiaries. Particularly in demand are Deutsche Asphalt, Holzmann's road construction subsidiary, the construction services branch HSG, as well as the US subsidiary JA Jones.
Social partners' responses
In a statement to the press, Ernst Ludwig-Laux, IG BAU's vice-president, expressed his hopes that the insolvency administrator would use his powers to save as many jobs as possible by way of selling off subsidiaries or by creating special agencies. He emphasised that his union was prepared to collaborate with the insolvency administrator. Mr Laux also asked Holzmann's workforce to continue working on Holzmann's 500 or so construction sites to increase the chances that work could go on under the leadership of new contractors.
Mr Laux, however, also expressed his regret that attempts to rescue the entire company had failed. In the union's view, there had still been a chance to save the company but it was mainly due to some banks' stubborn resistance that this attempt was doomed to fail. In the end, M. Laux argued, the economic damage caused by the insolvency would cost up to five times more than any rehabilitation plan. Willi Röll, the chair of Holzmann's company works council, in addition blamed the company's management for the insolvency because the latter had allegedly downplayed the crisis. The union is particularly upset about the fact that workers' contributions to the first rehabilitation plan now seem to be worthless. Because, as part of the 2000 agreement, employees have worked unpaid time to be banked in working time accounts, this contribution seems to have been lost forever. The union, however, is now considering taking the matter to court with the goal of claiming compensation for the hours banked in the time accounts.
Representatives of ZDB and HDB, however, take a different view of the Holzmann disaster. In a press statement, the ZDB president, Karl Robl, argued that even a company with a long history must be allowed to go into bankruptcy. According to Mr Robl, it would be unfair if large banks provided an unprofitable company with further credit, while at the same time not giving credit to small and medium-sized firms. ZDB, which predominantly represents small and medium-sized contractors, also doubts that the 1999 Holzmann rehabilitation agreement has done the industry any good. Mr Robl stated that it would have been much cheaper if bankruptcy had hit Holzmann in 1999, at the time when the first crisis became visible.
Michael Knipper, the general managing director of the HDB employers' association for large construction firms, by contrast, focused on the effects of state regulation of the construction industry. In a statement, Mr Knipper argued that it was striking to see Holzmann's US operations flourishing, while at the same time its domestic operations were in trouble. Mr Knipper particularly criticised the lack of transparent quality standards to be applied to contractors, the public laws on procurement, and the declining willingness of customers to pay their bills.
Commentary
Along with some other recent insolvencies, most predominantly Kirch Media, Holzmann will be an important test case for the new insolvency law. With the new opportunities for a reconciliation of interests, there is still a chance to rescue a significant share of Holzmann's jobs. While the legal platform is already in place, it will still take consent by Holzmann's major owners and creditors to make an alternative insolvency plan happen. Yet, it is not all clear if fewer jobs will be saved as part of a comprehensive insolvency plan than would have probably been the case under an alternative second rehabilitation agreement. However, even with a well-crafted and balanced insolvency plan, major stakeholders will have to suffer. It is not just the banks which are being asked to write off some of their money, it is also workers who had earlier accepted to work overtime without being compensated appropriately. Without a major trade union victory in court, Holzmann's insolvency will make those assets workers have banked in overtime accounts practically worthless. (Martin Behrens, Institute for Economic and Social Research, WSI)