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. Last Updated: 07/27/2016

Holzmann in Shock Rescue Plea




FRANKFURT, Germany -- In Germany's biggest corporate scandal in five years, Philipp Holzmann AG, its second-largest builder, said it was close to insolvency and blamed former managers for "massive" breaches of duty.


The 150-year-old firm, which took a prominent role in rebuilding Germany after the World War II, said Monday that it had asked its creditor banks to back a restructuring involving the loss of more than 3,000 jobs, more than 10 percent of its work force.


Holzmann said it had discovered 2.4 billion Deutsche marks ($1.3 billion) in potential losses and had taken legal action against former management board members and staff. It named no names.


Talks with creditors, which include Deutsche Bank AG with a 15 percent stake, were continuing and further details would be released in due course, Holzmann said.


"The banks must now decide if they will back the program or not. I am very optimistic that the talks will lead to a good result," Holzmann chief executive Heinrich Binder said.


The announcement came as a complete surprise to investors. The builder had appeared to be recovering from four years of losses and had promised to break even this year. Holzmann's shares were suspended from trade indefinitely Monday.


"We are dealing with risks from old projects," Binder said. "These risks were withheld from the management board, they were concealed and then discovered during plausibility studies."


Analysts said that even if Holzmann does win the backing of its creditors, the company may lose its best assets.


"Even if it is rescued, this could see it stripped of its best assets like its U.S. operations. Holzmann's real estate portfolio is also very attractive to others," said Karl Debenham, construction analyst at Merrill Lynch in London. Deutsche Bank AG said it would back the restructuring if possible, and if other banks joined in. Its shares were down 1.3 percent to 69.85 euros ($72.22) in late trade.


Deutsche, often involved in company rescues due to its large shareholdings in German industry, said it expected its risk provisions to rise as a result of Holzmann's problems.


Shares in Belgian holding company Gevaert, Holzmann's biggest shareholder with a 30 percent stake, fell more than 8 percent to as low as 49.50 euros after the news.


The case could become Germany's biggest corporate rescue since the 1993 bailout of Metallgesellschaft AG.


And if Holzmann's own allegations against former staff prove correct, it could spiral into a real estate scandal rivaling the 1994 collapse of the Schneider property group.


Holzmann spokesman Gerhard Semar said a number of former executives had breached labor and criminal laws by knowingly engaging in bad real estate deals in Germany in the early 1990s.


The company had recently reassessed those transactions and discovered hidden losses so high that it was now overindebted and required bank help to stave off insolvency, he said.


"We discovered bad deals, and the reason given was that the market value of the projects had dropped or rental income was insufficient," he said.


"But we dug deeper and found that the deals had been done although it was clear from the outset that they would be bad. Then it became clear to us that there was wrongdoing."


Semar said Holzmann had taken legal action last week but would not say against whom.


Holzmann said most of Germany's major banks were involved as creditors.