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The financial woes of the Pierer Mobility Group continue. Today, the PMG - parent company of KTM - announced they are to apply for a so-called judicial restructuring proceedings with self-administration. This is a form of bankruptcy protection, allowing a company to be reorganized and reach an agreement with its debtors.

While it is always dangerous to make comparison between legal jurisdictions, especially between systems based on the Napoleonic code and Roman law as found in most European countries, and those based on common law as found in the US and UK, the restructuring proceedings bear some similarity to chapter 11 bankruptcy protection in the US, although the conditions and operation are very different.

The website of the Austrian government has an explainer in English of the process of judicial restructuring with self-administration.

The application is necessary because PMG failed to secure a bridging loan needed to fill the shortfall in income this year and pay its creditors. That bridging loan was a sizable sum, in the "three-digit million range" as they stated in their press release. Without that money, they cannot pay their creditors, and could face insolvency.

The aim of the application is to reach an agreement with their creditors on a plan to reorganize the company, and continue as a going concern. Under the proposal by PMG, KTM AG, which represents 95% of the Pierer Mobility Group's turnover, will be treated as a separate entity for restructuring, and be the focus of the reorganization.

The reorganization concerns all KTM motorcycle brands, plus KTM Components and KTM F&E (the separate R&D department). KTM Racing is a 100% subsidiary of KTM AG, but the statement contains no information about racing as a separate entity.

By submitting the application, KTM now has until December 27th to submit a plan for restructuring the business. In this plan, they have to be able to demonstrate that they can repay at least 30% of their outstanding debts within 2 years. The remainder of the debt will then be written off.

In the results published for the first half of 2024, the net debt stood at €1.488 billion, on an annual turnover in 2023 of €2.7 billion. Creditors have until January 31st, 2025 to register their debts. Creditors can either approve or reject PMG's restructuring plan. If creditors reject the plan, then the next step would be insolvency proceedings.

Employees of PMG are not affected by the debt write down, and salaries will be paid in full while still employed, as will redundancy payments.

The application still has to be approved by an Austrian court. The court may decide to reject the application for self-administration, and appoint an administrator to oversee the restructuring.

The PMG expect the cost of the restructuring to be high. The statement says that they expect losses to be in the "very high three-digit million range". In plain terms, that means approaching €1 billion.

The restructuring plan involves a reduction in production capacity to bring current stock levels down to a more normal level. This will involve a temporary halt to production and the firing of staff. The details of the plan are not yet public, however.

KTM's problems have their roots in the Covid-19 pandemic. As with a lot of luxury goods makers, demand for motorcycles exploded in the aftermath of the pandemic, as restricted travel and working from home left people with a lot of disposable income and a limited number of things to spend it on. Supply chain issues with a range of components stuck on freight ships in ports shut down by the pandemic raised demand further, second-hand motorcycle prices going through the roof as a result.

Some companies, including KTM, fell for the idea that this would be the new normal, and expanded production capacity to meet demand. But as the world has returned to a new equilibrium, much closer to the pre-pandemic world, demand has fallen to pre-Covid levels. Inflation and rising interest rates has also cut into the willingness of consumers to splash out on leisure goods like bicycles and motorcycles.

All this has left KTM with a vast amount of unsold stock. According to the Austrian business magazine Profil, KTM AG has 100,000 unsold motorcycles, with a value of €1.4 billion sitting in warehouses and on dealer floors. This has also meant that KTM has had to support dealers sitting on unsold stock with various programs.

This is the scale of the problem PMG and KTM face. According to Austrian business channel Industriemagazin, the plan is to reduce staff by around 600 over the next 6 months, and reduce production from 112,000 units to 76,000, a reduction of nearly a third. As a signal to both employees and the market, PMG has slashed the size of its corporate board, consisting now of just Stefan Pierer and co-CEO Gottfried Neumeister, an executive with a history of dealing with companies struggling due to the aftermath of the pandemic.

KTM and PMG's problem is not that they are selling a product nobody wants, but that hubris led them to take on debt and expand beyond what the market would bear. Stefan Pierer and the board of PMG overestimated the size of the market, and are now left facing huge debts.

It seems unlikely that KTM will go out of business entirely. They have a very strong product line up and a very strong brand identity, across all of their brands (KTM, Husqvarna, GASGAS, and MV Agusta). They sold 382,000 units last year, a sign that there is a solid market among consumers for their bikes.

The obstacle KTM face is a mountain of debt. Which is where the restructuring application comes in. If they can restructure the debt - in effect, writing off the majority of it - then they can continue as a company.

PMG can also still hope for a financial lifeline, though it would come at a heavy price. The company has already had to deny rumors that Mark Mateschitz, son of the late Red Bull founder Dieter Mateschitz and heir to his post as CEO there, would be taking a stake in PMG.

An obvious choice would be for Indian automotive giant and KTM partner Bajaj to take a larger stake. Currently, a majority stake of 74.9% of PMG is held by Pierer Bajaj AG, 50.1% of which is owned by Pierer Industrie AG, and 49.9% is owned by Bajaj Auto International Holdings BV, the European investment arm of the Indian giant. All bar 0.1% of the remainder of the shares are traded on the Vienna and Zurich stock markets.

Bajaj bought their stake for €198.1 million in a series of deals starting in 2007, with the last deal coming in 2021. For Bajaj to expand their stake to cover the missing finance would mean Stefan Pierer losing his controlling share in the company. The judicial restructuring would avoid that.

What does this mean for KTM's MotoGP project? The company currently spends around €70 million a year to go racing, some of which is funded by sponsors such as Red Bull. The statement issued by PMG does not mention racing, though in the video released below, featuring Pierer and Neumeister, the company slogan READY TO RACE appears at the end. In previous statements, Pit Beirer has made it clear that racing is part of KTM's DNA and that they will continue to compete.

But there is no doubt that the racing program will be affected to some extent. There are unconfirmed reports that projects with some subcontractors have been delayed. That may not affect the racing program immediately, but it could slow development.

Withdrawal from MotoGP before the current contract period ends in December 2026 would be costly. When Suzuki pulled out, they basically had to hand their entire racing program over to Dorna, who sold various parts of it on to other companies. KTM would find themselves in a similar situation, unless they went bankrupt, in which case Dorna would become just one of many creditors.

(Update: Pit Beirer and Hubert Trunkenpolz tell Speedweek that they will be racing in MotoGP next year.)

Below is the video issued by PMG on the KTM YouTube channel, and below that, the official announcement.

The ad hoc investor statement from the Pierer Mobility Group appears below:

PIERER Mobility AG: KTM AG prepares application for judicial restructuring proceedings with self-administration

26-Nov-2024 / 13:58 CET/CEST

Disclosure of an inside information acc. to Article 17 MAR of the Regulation (EU) No 596/2014, transmitted by EQS News - a service of EQS Group AG.

The issuer is solely responsible for the content of this announcement.

Ad hoc notification pursuant to Article 17 of Regulation (EU) No 596/2014 (MAR)

Ad hoc announcement pursuant to Art. 53 LR

Wels, November 26, 2024

PIERER Mobility AG: KTM AG prepares application for judicial restructuring proceedings with self-administration

KTM AG, a wholly owned subsidiary of PIERER Mobility AG, will apply for the initiation of judicial restructuring proceedings with self-administration (Sanierungsverfahren unter Eigenverwaltung) on November 29, 2024. The financing requirements of KTM AG currently amount to a high three-digit million figure. The management now does not expect to be able to secure the necessary interim financing in time.

The Executive Board of KTM AG therefore decided today to file the application for the initiation of judicial restructuring proceedings with self-administration over the assets of KTM AG and its subsidiaries KTM Components GmbH and KTM F&E GmbH. The proceedings give the opportunity to continue to manage the assets under supervision and to reorganize the KTM Group independently. All other subsidiaries of KTM AG, in particular all sales companies, are not affected.

The aim of the proceedings is to agree a reorganization plan with the creditors within 90 days. Redimensioning the group should not only secure the continued existence of the KTM Group in the long term, but also create the basis for emerging stronger from the proceeding.

A redimensioning of production should lead to a gradual adjustment in excess stock at KTM and its dealers over the next two years. This will result in a reduction in operating performance at the Austrian sites totalling over EUR 1 billion in the years 2025 and 2026.

The restructuring process will result in additional potential losses, for example due to one-off expenses such as necessary write-downs (e.g. for capitalized development costs) and costs for staff reductions as well as the shortfall in fixed costs due to the reduced operating performance and other costs arising from the restructuring process.

Consequently, for the current 2024 financial year, the company expects a negative annual net result in the very high three-digit million range due to the aforementioned reasons.

Legal notice

THIS ANNOUNCEMENT DOES NOT CONSTITUTE AN OFFER OF SECURITIES FOR SALE OR A SOLICITATION OF AN OFFER TO PURCHASE SECURITIES OF PIERER MOBILITY AG. IT IS NOT FOR DISTRIBUTION, TRANSMISSION OR PUBLICATION, DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, IN OR INTO THE UNITED STATES, AUSTRALIA, CANADA, JAPAN OR SOUTH AFRICA OR ANY OTHER JURISDICTION IN WHICH THE DISTRIBUTION OF THIS ANNOUNCEMENT WOULD BE UNLAWFUL.

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