Holzmann Creditors Leave Deutsche Out in the Cold

Ailing German construction group Philipp Holzmann AG was heading for insolvency on Wednesday after its major shareholder and major creditor, Deutsche Bank AG, failed to get its rescue plan accepted by its fellow creditors, even in revised form.

People close to the matter said they expected the Holzmann management to file for insolvency before the end of Wednesday.

Though Deutsche made several changes to its proposed rescue package, Commerzbank, Dresdner Bank and HypoVereinsbank – three of Holzmann's ten biggest creditors – officially refused to support it.

According to analysts' estimates, Holzmann owes the three banks a total 367 million euros, while Deutsche is owed around 310 million euros. People in Frankfurt's banking circles said that Bankgesellschaft Berlin, which initially also opposed Deutsche's plans, changed its mind on Wednesday.

The bank was said to be ready in principle to support an interim solution for Holzmann, provided Deutsche presents a new strategy. The banks' tug-of-war over Holzmann, which has been going on for the past two weeks, is causing growing concern in the industry.

"This is becoming an unbearable situation for the workforce," said Holzmann's works' council chief Willi Röll. Still, the creditors appear to become increasingly entrenched in their positions.

In Frankfurt, there were rumors that if Holzmann does file for insolvency, Deutsche's loans to the group will be classed as liable capital, preventing the bank from enforcing its claims with an insolvency administrator.

But insolvency experts see this as an unlikely scenario.

They point out that although such a rule does come into effect whenever a creditor is also a major shareholder in a company, a number of other conditions also have to be met. In the case of Holzmann, it would be very difficult to make these conditions apply, they said.

Despite its lack of success so far, Deutsche intends to continue working on a solution for the construction group. The bank on Wednesday confirmed that it's in talks with Holzmann bondholders, who are prepared to convert 84 million euros of debt into shares or other securities in the group.

But even though this would enable Holzmann to convert the debt waiver into capital, thus reducing its excessive gearing levels, the move would not, in the view of experts, solve the group's fundamental problems.

The 150-year old company, which was saved from the brink of collapse in 1999 only through a personal intervention from Chancellor Gerhard Schröder, has been hit hard by a persistent slump in the German construction market and by losses from real-estate assets, which drove it deeper into the red last year and delayed a recovery from its previous crisis.

The government has already ruled out a repeat of its 1999 bailout, which was the biggest corporate rescue in recent German history.