German Pellets

Bonds Burning Up

Familienunternehmen German Pellets, Standort Wismar, Produzent von Holzpellets und Einstreu fuer Pferde, PERSONEN: Kathrin Leibold, Geschaeftsfuehrerin von German Horse Pellets und ihr Vater Peter Leibold, Geschaeftsfuehrender Gesellschafter von German Pellets
With German Pellets' bonds falling, the company's CEO, Peter Leibold, and his daughter Kathrin Leibold, are in a difficult position.
  • Why it matters

    Why it matters

    The troubles facing German Pellets and its bond investors highlight the risk of investing in so-called Mittelstand bonds issued by small and medium-sized businesses in Germany.

  • Facts


    • German Pellets appears to have run into financial trouble and its bondholders face losses of up to 100 percent of their investments.
    • A 7.25 percent coupon bond maturing on April 1, 2016 was trading at just 8 percent of its nominal value Monday, down from 96 percent in mid-January.
    • German Pellets is one of the biggest issuers on the so-called Mittelstand bond market, which has been tarnished by defaults in recent years.
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German Pellets, a leading maker of wood pellets for heating, plans to file for bankruptcy on Wednesday, Handelsblatt has learned. It marks the latest major setback for the country’s renewable-energy industry and another warning sign for investors taking chances on high-yielding midsize German companies.

The court filing could impact thousands of investors, including some in the United States. German Pellets ran up too much high-interest debt to fund its ambitious growth plans, borrowing some €226 million. The firm’s next bond payment, borrowed at an interest rate of 7.25 percent, was due April 1.

For weeks, signs have been ominous for the firm with a turnover of €600 million, or $670 million. Handelsblatt and wood industry news service Euwid have learned that pellet production in several of the company’s plants came to a standstill last week and that some employees’ salaries were paid late.

The company, which claims to be one of the world’s leading makers of wood pellets for heating, declined to comment. However, the company on Tuesday abruptly canceled a meeting with bondholders that had been set for Wednesday.

Should a German court approve the company’s plans, German Pellets hopes to be able to manage its own assets in insolvency under the watch of an administrator, sources told Handelsblatt. German bank Commerzbank, credit insurer Euler Hermes, the labor union Coface and the federal labor agency are all expected to be part of a preliminary committee of creditors assigned to negotiate with the company.

The insolvency is being filed under the recommendation of Frank Günther, a recovery expert with Munich-based agency One Square Advisors.

Creditors of two U.S. production sites linked to German Pellets may also be affected. Investors bought bonds totaling $546 million in the United States.

Signs that something was wrong have been piling up over the last few weeks. An employee from a company located next to a German Pellets plant in the town of Wismar said she hadn’t seen trucks entering or leaving the plant in two weeks.

Rating agency Creditreform had earlier said the was an 80 percent chance that the company would become insolvent. At the end of November 2015, its equity capital ratio amounted to just 5.4 percent, Creditreform estimated.

A 7.25-percent coupon bond maturing on April 1, 2016 was trading at just 8 percent of its nominal value Monday, down from 96 percent in mid-January.

The company’s capital was depleted by the transfer of money to a foundation that invested it in huge production sites in the United States.

“Overall the Pellets group had far too much debt,” said Daniel Bauer, board member at German private investor lobby SdK. “That made the entire group much too vulnerable.”

German Pellets is one of the biggest issuers of so-called Mittelstand bonds sold by small and medium-sized companies. Such bonds have been widely issued in recent years, but have also been unreliable, as firms sought to reduce their reliance on increasingly tight bank lending in the wake of the 2008 financial crisis.

Thousands of investors who bought Deutsche Pellets bonds worth €226 million now face losses of up to 100 percent of their investment. Holders of profit participation certificates totaling €44 million could also be hit.

Creditors of two U.S. production sites linked to German Pellets may also be affected. Investors bought bonds totaling $546 million in the United States. In total, €760 million of investors’ money is at risk.

This isn’t the first Mittelstand bond to cause investors palpitations. According to rating agency Scope, some 40 such bonds with a volume of €1.2 billion have defaulted, including packet soup maker Zamek, fashion design company Strenesse, wind power company Windreich and bicycle manufacturer Mifa.

On Feb. 10, German investors have to approve whether to extend the maturity of a €52 million bond maturing in April by 2 years.

Mittelstand bonds were meant to be an alternative to bank credit. That was the idea when the Stuttgart Stock Exchange launched its Mittelstand segment BondM six years ago. Düsseldorf, Munich and the main stock exchange Frankfurt followed suit. They asked banks and consultancies to act as coaches to ensure that the businesses were fit for the capital market. But many companies went bust before their bonds matured.

One of those coaches was Quirin Bank, which advised German Pellets and other Mittelstand firms on their bond issues. Quirin chief executive, Karl-Matthäus Schmidt, said private investors should steer clear of Mittelstand bonds.

“The typical small investor can’t spread his risk broadly enough with Mittelstand bonds due to a lack of volume,” he said.

He isn’t surprised that many bonds go bust. “They are high-interest bonds. One shouldn’t get too shocked by such defaults. Otherwise one wouldn’t get 7 percent more than the risk-free interest rate.”

German Pellets has wobbled after a rapid expansion under company founder and main shareholder Peter Leibold.

The company had to stop the sale of further profit participation rights because it might not be able to repay them.

HIT Holzindustrie Torgau, a maker of wooden pallets, cancelled a cooperation deal with German Pellets because of outstanding payments. Kago, a maker of fireplaces with links to German Pellets, is insolvent. And now a distribution subsidiary, Firestixx Holz-Energie, has filed for insolvency as well.

German Pellets always presented itself as a solid investment. Its motto was “renewable and profitable.” Wood pellets are made from sawdust and burnt in fireplaces, industrial plants or power stations.

Production at German Pellets is believed to have stopped because of a lack of fresh raw materials.

The drama extends far beyond Germany. The company’s links with two production sites in the United States, the Urania plant of Louisiana Pellets Inc. and the Woodville plant of Texas Pellets Inc., could become sinkholes for German investors.

These U.S. sites don’t directly belong to German Pellets, but the company gave them extensive supply and purchase guarantees. In addition, the German Pellets group has agreed substantial guarantees for bonds issued by Texas Pellets, according to a paper by consultancies Houlihan Lokey and CMS Hasche Sigle.

German investors must have realized the financial problems when they received the invitation to a creditors’ meeting on February 10. The buyers of the €52 million bond maturing in April were asked to agree to extend the maturity by two years  — at lower interest rates.

On Tuesday, however, German Pellets canceled the meeting, a company spokeswoman told Handelsblatt. The company’s management was currently in talks and would give details later, the spokeswoman said.


Gertrud Hussla covers finance and pension planning for Handelsblatt in the Düsseldorf bureau. Katharina Schneider is an editor in the finance section of Handelsblatt. Ms. Schneider covers the newest tax changes, consumer rights and private investment. To contact the authors: and

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