These are dramatic weeks for René Benko and his Signa Group. The downturn in real estate markets threatens to bury the Austrian tycoon, who rose from humble beginnings to wealth. His extensive conglomerate of companies is facing serious difficulties. The very existence of the group is at stake. Prominent investors are turning away, or like consulting legend Roland Berger, looking to exit. Last Friday the pressure from creditors led co-shareholder Hans Peter Haselsteiner, former CEO of the construction company Strabag, to announce the impending withdrawal of Benko. Instead, German restructuring expert Arndt Geiwitz, who is already on board as an advisor, is set to take the reins.

Benko has agreed to a temporary change in leadership on the condition that shareholders participate in the financing of the restructuring, Haselsteiner said. Now, the billionaire major shareholder of Strabag SE is seeking these financial commitments from other investors, including German transport entrepreneur Klaus-Michael Kühne, Fressnapf founder Torsten Toeller, as well as investment vehicles associated with the French Peugeot family and the Swedish Rausings. "The company can be saved. It's not overindebted but in a challenging liquidity situation," Haselsteiner told the "Tiroler Tageszeitung." He expressed hope that all shareholders would go along with this plan, stating, "otherwise, it won't work."

The new strong man, restructuring expert Geiwitz, is expected to function as a sort of general proxy and additionally exercise the voting rights held by Benko and his foundations. If this materializes, which is not yet finalized, Benko's future could be in jeopardy. The dynamic entrepreneur controls roughly half of the shares of his Signa Group. In Germany, he is best known as the owner of the department store chain Galeria, which emerged from the merger of Karstadt and Kaufhof. Austrian construction magnate Haselsteiner is one of the major shareholders in Benko's estimated €23 billion real estate empire. Haselsteiner is urging his co-investors to provide more funds to Signa Holding GmbH in order to facilitate an orderly rescue. He is emerging as the driving force behind the company's restructuring, which is grappling with liquidity challenges that have led to the suspension of several construction projects, including the Elbtower in Hamburg.

Signa's restructuring expert, Geiwitz, who is known for his role in handling the Lufthansa crisis during the pandemic, faces a Herculean task. He must gain a comprehensive understanding of the liquidity and asset situation within the intricate empire, which comprises numerous companies. He needs to organize assets, separate the valuable and solidly financed real estate holdings from the problematic ones, and, most importantly, secure new investors.

Benko had relied on billions in external capital to establish Signa as a significant real estate owner in Europe. However, rising interest rates and falling property prices have made banks hesitant to provide further loans, partly due to increased scrutiny from European banking regulators.

A prerequisite for survival now is to rectify the organizational deficiencies and establish acceptable corporate governance. After all, the lack of transparency is a significant reason for the entire debacle. For outsiders, the conglomerate is challenging to comprehend, and current financial metrics are in short supply. As a privately held group, Signa is not subject to stringent disclosure requirements. There is no consolidated financial statement.

Signa Prime Selection AG co-owns the Selfridges department store in London and had plans to build the Elbtower, Germany's tallest building outside of Frankfurt, the construction of which has recently been halted. In 2022, the company reported a net loss of 750 million euros after taking a 1.17 billion euro write-down on property valuations. Signa Retail Selection, where significant retail activities are consolidated, reported a billion-euro loss for the fiscal year ending in September 2022, with nearly 1.4 billion euros.

The specifics of how Signa can be rescued remain unclear. Discussions are ongoing about a several-month standstill agreement between shareholders and creditors. Other observers consider a self-administered insolvency as a possibility. There are no reliable estimates available regarding the amount of the necessary financial injection, but it appears that several hundred million euros will be needed for the rescue.

The crisis of the real estate empire prompted the rating agency Fitch to downgrade Signa Development Selection AG, the issuer of a 300 million euro bond, to "CCC." The credit analysts cited liquidity issues that the developer of office and residential complexes, retail properties, and hotels had recently informed its shareholders about, as well as financing problems within other companies in the group.

In June 2023, Standard & Poor's had already downgraded Signa Development Selection, whose gross development value the rating agency estimated at 7.9 billion euros, to "B−." The company, which is 53.6% owned by the Signa Holding founded by Benko in 1999 and carries a total debt of approximately 2 billion euros, had "reported weaker credit metrics than expected, primarily due to a sharp drop in demand for commercial real estate, delays in planned sales of development projects due to rising interest rates, and uncertainties regarding future valuations of commercial properties," commented analyst Manish Kejriwal in Dublin.

In addition to its two main business areas of real estate and retail, Signa is also active in the media sector. It holds stakes in the Austrian daily newspapers "Kronen Zeitung" and "Kurier." According to the company's website, the real estate division manages over 27 billion euros in gross asset value. In addition, there is a gross development volume of 25 billion euros, mostly related to future projects. The most significant properties in Austria, Germany, and other European countries are consolidated within Signa Prime Selection, including the KaDeWe building in Berlin and the prestigious Elbtower development project in the Hamburg Hafencity, which has encountered setbacks.

Signa Prime ranks among the largest real estate companies in Europe. Its US subsidiary is associated with the well-known Chrysler Building in New York. In the retail sector, Signa owns not only Galeria but also the British luxury department store group Selfridges, the Swiss department store chain Globus, the luxury department store KaDeWe, and various online platforms.

Prominent Signa shareholders may now have an incentive to inject additional funds, as equity investors typically stand at the end of the line to recover their money in the event of insolvency. Roland Berger, the German consulting expert, has exercised a sale option to sell back his 1.6% stake in Signa Prime.

The logistics entrepreneur Kühne, who owns 10% of the company, has rejected demands for a direct stake in the halted Elbtower project in his hometown of Hamburg. The poor financial condition of Signa became evident with the insolvency of online sports retailer Signa Sports United (SSU) and several subsidiary companies last October. The companies filed for bankruptcy after Signa Holding halted a commitment of 150 million euros in financing. This move by Signa led to the SSU crisis, which had only been brought to the New York Stock Exchange two years earlier through a merger with a Special Purpose Acquisition Company (SPAC).

Now, the restructuring expert Geiwitz must assess the extent of the financing gaps. This process may take three to four weeks, according to statements from Haselsteiner.

Immediate repayment obligations include a privately issued bond of 200 million euros due at the end of November and profit participation rights due at year-end, as reported by the Bloomberg news agency from Signa Prime's annual report. "No one knows how much the amount will be for the shareholders," Haselsteiner told the "Tiroler Tageszeitung." The company will not be dismantled, "but it will certainly need to be streamlined."

During the long real estate boom, Signa benefited from substantial valuation gains that paved the way for new loans. However, this dynamic has now reversed. Falling property values are eroding equity. The rapid increase in interest rates is making financing more expensive, a factor affecting the entire real estate industry. Additionally, the skyrocketing costs of building materials have added to the challenges. Sales are needed to contain the debt and generate liquidity. Signa has already divested numerous holdings and properties, including the Austrian furniture chain Kika/Leiner, which subsequently went bankrupt. Half of the shares in the KaDeWe building in Berlin were sold to the Thai Central Group. In June, asset manager Commerz Real acquired the "Mynd" high-rise project and the Galeria Weltstadthaus at Alexanderplatz in Berlin from Signa. In August 2022, Commerz Real attained 25% of the Elbtower project through the open-ended real estate fund Hausinvest.

Due to the immensely increased construction costs, Signa is particularly affected because of the large volume of development projects. Constant infusion of fresh capital is necessary to finance the ongoing work at construction sites. In Germany, several major property developers have already faced financial challenges in recent weeks, including Düsseldorf-based Gerchgroup with a 4 billion euro project volume, Nuremberg-based Project Group, luxury real estate developer Euroboden from Grünwald near Munich, Düsseldorf's Development Partner, and Hamburg's Revitalis. In July, project developer Centrum had already filed for insolvency. Property developers act as general contractors. They handle large sums of money to purchase materials and construction services and then pass these expenses on to the end users of the property. Projects span over several years, which implies the risk that conditions can fundamentally change, as is happening now.

After the interruption of construction at the Elbtower, Hamburg's Mayor Peter Tschentscher ruled out state financial assistance for the major project. The city will "not assume any financial burdens," said the SPD politician.