Restructuring as an Opportunity: How Banks Protect Their Loan Portfolio

The concept of the restructuring owner (Sanierungseigentümer) helps to prevent loan defaults

By Ludwig Weber and Dietmar Haffa

As risks in corporate lending grow and corporate insolvencies climb, preventive risk provisioning is becoming an increasingly important focus for banks as a way of avoiding losses on the loans they have made. Central to this is not only early crisis detection through statutory warning systems, but also the implementation of targeted restructuring measures. The concept of the restructuring owner (Sanierungseigentümer) offers banks and shareholders a structured way to stabilising companies in economic difficulty, limit loan defaults and protect the value created.

Banks regularly test their alarm systems and motion detectors. Their economic warning systems need the same scrutiny – the safeguards that flag risks on the loans they have made and that come into play before financial damage occurs, or at least help to contain it. Such safeguards matter more and more, because loan demand at German banks is rising, not least because of the expected lending boom associated with the government’s planned multi-billion-euro infrastructure investment.

The Growing Importance of Risk Provisioning

Given the challenges facing companies and the continuing rise in insolvencies – which, according to calculations by the business information agency Creditreform, are at a ten-year high – the risk of loan defaults is growing for banks. The importance of risk provisioning continues to grow.

Potential loan risks need to be addressed early and proactively, which means tackling the underlying problems – finding and implementing lasting solutions. The EY Credit Market Study 2025 shows that, to date, banks have leaned increasingly on flexible forbearance measures such as maturity extensions, adjustments to interest and repayment terms, or temporary payment deferrals, in order to avoid payment defaults. In some cases, however, this merely postpones the default, because without an improvement in the borrower’s economic position such measures may bring short-term relief but do not solve the problem.

The mindset of “it’ll-be-fine” can quickly prove fatal for companies – and so for the banks that have lent them money. The economic fallout from the coronavirus pandemic and the war in Ukraine has shown all too clearly how reckless such complacency is. When one crisis runs straight into the next, a single wrong assumption can tip an otherwise sound company into deep trouble.

The Duty of Early Crisis Detection

Since the turn of the year 2020/2021, the Act on the Stabilisation and Restructuring Framework for Companies has been in force, now widely known by its acronym, StaRUG, after high-profile cases such as Varta and Leoni. Alongside pre-insolvency restructuring, early crisis detection and the implementation of a corresponding system are central elements of the Act. Section 1 of the StaRUG requires companies to maintain a crisis and risk early-detection system that picks up possible “developments that threaten the company’s survival” – that is, severe financial distress – early enough for suitable countermeasures to be taken.

Banks also benefit from this requirement, because the risk in lending falls when they know – and indeed insist – that companies run a warning system for potential crises. Lenders should therefore take the requirement in Section 1 of the StaRUG seriously and consider how they can gauge how resilient and viable the companies they finance, or wish to finance, really are. In this context, the implementation and use of an early crisis detection system can count in favour of a financial commitment, or may even be made a condition by the bank.

In volatile times such as these, though, no company is immune to running into difficulty. Alongside early crisis detection, banks should therefore also weigh the options open to them if part of a company, or an entire group they finance, is in trouble or threatens to fall into it. In such situations, the banks have often already lost a great deal of trust in management or in the shareholders. As a result, the lenders will advance no new money and roll over no existing loans as long as the ownership situation stays the same – even though fresh money is urgently needed for the turnaround. Companies that are still capable of being successfully restructured may therefore find themselves unable to secure new funding.

The good news is that there are ways to resolve the standoff between shareholders on one side and lenders on the other. One common solution is to transfer the company’s shares to a neutral trustee. But this is not always enough: even within a trust arrangement, the shareholders can still drag their feet.

The Concept of the Restructuring Owner

This is where the concept of the restructuring owner comes in, ensuring a professional, owner-driven and structured restructuring process that benefits both banks and shareholders. Once the shareholder has lost the lenders’ confidence, the restructuring owner takes over the shares in the ailing business from the outgoing owner. Typically, the former shareholder is promised a percentage of any eventual sale proceeds – in some cases combined with the option of a buy-back or of release from personal liability. For the banks that finance the restructuring by rolling over existing loans or granting new ones, the sale proceeds act as extra security for recovering their loans. If a restructuring succeeds, a slice of the value created in the turnaround thus still flows to the former owner. The bulk, however, goes to preserving the value of the collateral and, later, to recovering the loan for the lenders – effectively a return on investment, since they bore the financial risk of the restructuring.

For the bank there is a further advantage: whereas without the switch to a restructuring owner it would have walked away from financing the turnaround, the bank can now usually recover more than the restructuring loan itself. This gives the current owner at least a shot, if the restructuring succeeds, at sharing in the proceeds, buying the company back, or in some cases being released from personal liability. Without a restructuring owner – and without rolling over old loans or providing new funds – the shares would inevitably end up worthless.

In principle, though, the following holds: every restructuring has its own circumstances and its own requirements. Against that backdrop, three real-world examples show the situations in which the restructuring-owner model can work:

• International group with distressed subsidiaries: A Swiss holding company owned several offshore companies. The principal operating company was based in Spain, while the research-and-development company, organized as a public limited company, was located in Germany. The restructuring owner took over the entire group, and the distressed subsidiaries were restructured, sold, liquidated or shut down. Certain divisions were financed on a long-term basis, while smaller subsidiaries were liquidated following capital measures and adjustments under tax and commercial law.
• Operational split-up and lasting preservation of the going concern: A prefabricated-house producer carried out an operational split-up (Betriebsaufspaltung). The restructuring owner acquired one of the companies thus created, supported the company’s out-of-court restructuring over several years, and secured financing through its principal banks. Ultimately, in coordination with the parties involved, the restructuring owner sold the business operations via an asset deal, so that they were preserved on a lasting basis.
• Liquidation of a subsidiary: An English manufacturing company held all the shares in a German sales subsidiary. Once the English parent no longer wanted to keep this subsidiary active in the German market, the restructuring owner took over all the shares in the subsidiary and settled the employment-law issues as well as the challenges around the company pension scheme. The company was then liquidated. With the residual proceeds from the liquidation, the restructuring owner was even able to repay part of the shareholder loan.

A Last Chance to Restructure

It is worth being clear: the restructuring owner is not a trustee, an adviser or a venture-capital partner, but a service provider that takes over the shares and acts on its own account. Several factors are important to a successful turnaround here. The restructuring owner should have wide-ranging experience in restructuring and turning around companies in economic difficulty, because the special-purpose vehicle that acquires the shares for the restructuring must be tailored to each case. Unlike a trust solution, this also transfers economic ownership, so obstruction by the former shareholder can no longer block the restructuring. The restructuring owner thus offers a genuine “last chance to restructure”, free of emotion and speculative motives, and is a reliable partner to those involved, not focused on short-term profit maximisation.

To restructure successfully, the first step – in coordination with the financing banks – is to bring in suitable management consultants, or to fold in advisers already engaged. In doing so, the restructuring owner steers the process by orchestrating banks, management, advisers and staff, and serves as the point of contact for any existing banking pool. To this end, the restructuring owner has to understand how an out-of-court workout plays out and how it must be implemented. It must also be able to shape the continuation and sale of the company under restructuring conditions on its own account, both operationally and legally. For this, the restructuring owner needs expertise in handling financial creditors (lenders) and all other parties involved, such as employees, customers and suppliers.

Economic and Legal Limits and Room for Manoeuvre

The restructuring owner moderates and coordinates the process but also assumes responsibility for the necessary entrepreneurial decisions. To do so, it must understand the economic and legal limits – and the room for maneuvering within them. It must also be able to head off an impending, or remedy an existing, inability to pay (illiquidity), and should be able to assess the associated civil-law and criminal-law risks. Given all this, the restructuring owner can craft a bespoke structure in each case to balance the competing interests, as the following three examples show:

• Release of the shareholder from liability: If a shareholder no longer wishes to be involved but wants to be released from liability, this can be arranged.
• Sharing in the value created: A shareholder wants to share in the upside of the restructuring; this is secured through a contract for the benefit of third parties.
• Buy-back of the shares: A shareholder has reserved the option to buy their shares back. Such a structure is also possible.

For its work and the responsibility it takes on, the restructuring owner receives a flat fee. On top of this comes a percentage share in any eventual sale proceeds.

Advantages in the Sale of Loan Portfolios

One way for banks to minimize losses on outstanding loans is to sell loan portfolios to investors. Such transactions generally bring advantages to both sellers and buyers:

• For corporate lenders, and banks especially, selling NPL portfolios helps to clean up their balance sheets. It also eases the load on their settlement and back-office (loan-administration) teams, streamlines processes, saves on litigation costs and frees up liquidity, since they recover at least part of the bad debt.
• By acquiring the portfolio, the buyers of NPL portfolios in the corporate segment step into the creditor’s shoes and can therefore recover their money by enforcing the claims, or take a stake in the debtor company, for example via a debt-equity swap and/or an insolvency plan.

A restructuring can then unlock the value of the stake acquired via a debt-equity swap , to be cashed in by selling the shares in the restructured company. For such investments, well-developed secondary markets have grown up internationally and, increasingly in recent years, in Germany too.

Taking a stake in the debtor company via a debt-equity swap, together with its restructuring, is in principle open to existing corporate lenders and banks too, even without selling their NPL portfolio. Another route is for them, as creditors, to influence the debtor’s out-of-court or court-led restructuring. This option is likewise available to buyers of NPL portfolios.

In addition, both corporate lenders and banks as well as buyers of NPL portfolios can get at the collateral – for example, by more easily acquiring properties subject to land charges that secure the bad debt. Here, an incentive for the buyer of NPL portfolios is the possible discount on the bad debt. A key consideration for NPL buyers is delivering risk-adjusted returns to their investors. To achieve these, leaner organisational structures, a high degree of specialization and greater flexibility in the search for viable solutions are essential. For sellers and buyers alike, what makes or breaks an NPL deal is the earnings potential of the portfolio. To determine that potential, and on that basis the price for the NPL portfolios, a comprehensive due diligence review is required. This makes it possible to assess the claims and the opportunities and risks they carry. The time factor matters here too: how quickly does the seller need the deal closed? And how quickly does the investor want, or need, to realise the acquired claims with refinancing in mind?

During the deal, sellers and buyers need to agree practical arrangements for cooperating and sharing information. It is also vital for both sides that deals are structured and documented so that the transfer of the claims, and the new owner’s title, can be clearly evidenced. Throughout the process, all formal requirements must be observed too – for example, in the assignment of claims already filed with the insolvency schedule, of other enforcement titles, of GmbH shares transferred by way of security, or of land charges.

In NPL transactions, tax aspects are also of great importance, particularly for the investor. When acquiring non-performing loans from companies abroad, for instance, the question is whether there is a double-taxation treaty with the country where the company is based. The answer may, among other things, determine where the investor’s acquiring entity should be domiciled for tax purposes.

Conclusion

To keep a borrower out of financial trouble, banks should turn to early crisis detection in good time – which the legislator also requires of them in Section 1 of the StaRUG. If a crisis nevertheless occurs and the financing bank loses confidence in management and/or the shareholders, the restructuring-owner model offers a strong chance of preventing or heading off loan defaults. Even so, the right restructuring path should always be assessed case by case. Here, well-founded crisis expertise plays an important role.

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About the authors

Ludwig Weber and Dietmar Haffa also comment on pre-insolvency restructuring instruments in the NPL Barometer 2026.

This article first appeared in German in the BKS Annual Publication 2026.