Germany Zeros In on Risky Financial Products as Prokon Fails

Jan 23, 2014 9:28 am ET

(Updates with Prokon statement in sixth paragraph.)

Jan. 23 (Bloomberg) -- Germany is seeking greater protection for small investors after Prokon Regenerative Energien GmbH, a clean-energy developer that raised 1.4 billion euros ($1.9 billion) from them, filed for bankruptcy protection.

Prokon, which owns 314 wind turbines and employs about 1,300 people, filed for insolvency yesterday at a court in Itzehoe, where the company is based. The developer has sold profit-participation rights to about 75,000 investors, promising returns of 6 percent by generating sales from its power plants.

Prokon’s predicament has prompted calls for regulation of the “gray” capital markets, or those where loan agreements and trading practices are less strictly controlled than the official stock market. Holders of participation certificates can be the last creditors to be compensated in the event of a bankruptcy.

Financial watchdog BaFin should retain the “collective protection of consumers as an important target of its oversight responsibilities,” Justice and Consumer-Protection Minister Heiko Maas said today in a statement. His deputy, Gerd Billen, said in an interview with RBB radio that the government is considering banning the distribution of some financial products.

Bankruptcy fears prompted Prokon holders to cancel their investments, forcing the company to pay out according to the terms of the profit-participation agreement, draining its cash.

Dietmar Penzlin was named preliminary insolvency administrator, the company said. Prokon is “still well-situated on the operative side and optimistic that we can weather the current difficulties,” it said. “This doesn’t mean the end.”

‘Exceptional’ Case

Prokon’s model of selling participation rights makes it an “exceptional” and “legally complex” case, Marc Tuengler, managing director of Germany’s DSW private-investor lobby, said yesterday. As the certificates represent a hybrid of debt and equity, investors have subordinated debt claims and will only be compensated after other creditors have been satisfied, he said.

Prokon said earlier this month that “panic” withdrawals were forcing it to repay money it didn’t have. The developer on Jan. 10 asked investors to delay withdrawals through October, and said it needed agreement from 95 percent by Jan. 20. About half of investors backed the company, it said yesterday.

The insolvency won’t deter investments in clean-energy projects because it’s a special case of a business that promised more returns than it could pay out, said Felix Goedhart, chief executive officer of German investment company Capital Stage AG.

The insolvency “will strengthen the trend toward larger, more professional investors,” Goedhart said in an interview in Berlin. Capital Stage, Germany’s biggest solar-plant operator according to its website, would buy some of Prokon’s wind farms if they were available, he said.

Germany plans to restrict or ban the sale of risky financial products to retail investors following Prokon’s insolvency, Sueddeutsche Zeitung reported today, citing the ministries involved. The government seeks to give BaFin authorization to step in when needed, it said.

--With assistance from Rainer Buergin in Berlin. Editors: Alex Devine, Amanda Jordan