The German word “Mittelstand” normally has positive connotations, both in Germany and abroad, where the name given to small and midsize firms is associated with economic strength and high-quality workmanship. If there is one thing incompatible with this image, it’s the troubled financial instrument that goes by the same name: the Mittelstand bond.
A relatively new financing product for German firms seeking new sources of credit after the 2008 financial crisis, the Mittelstand bond has already cost investors about €500 million ($638 million) through a series of bankruptcies of midsize firms. They are at risk of losing at least €1 billion amid fears that three out of four issuers since 2010 will have to default or restructure payments.
At stake is the reputation and creditworthiness of Germany’s entire vaunted Mittelstand, the backbone of Europe’s largest economy. The sector may now struggle to secure new loans for expansion as a result.
New issuances of such bonds plunged in the first half of this year due to the scandals and are on pace for their lowest level since 2010.
“The series of business failures doesn’t just jeopardize the Mittelstand bond segment, but also threatens to discredit all midsized companies,” said Klaus Nieding, an attorney specializing in capital markets who often represents small investors in legal cases. He estimated investors have lost half a billion euros in the Mittelstand market since 2010.