Are you familiar with Beilngries? No? It's not a gap in your knowledge if you’re unfamiliar with this small, quiet town in the Upper Bavarian district of Eichstätt, near Ingolstadt. However, Beilngries plays a crucial role in the fate of the agricultural trading company Baywa, which has slid into a self-inflicted existential crisis. Beilngries is home to the headquarters of Baywa's largest single shareholder, a publicly traded Munich-based SDax member with roots in the cooperative sector.

At Bayerische Raiffeisen Beteiligungs-AG (BRB), which holds a 33,8% stake in Baywa, the phones have been ringing off the hook since the heavily indebted conglomerate raised alarms in July, and officially declared itself in need of restructuring.

Baywa has amassed a mountain of debt totaling 11 billion euros, half of which consists of financial liabilities. The company risks being unable to repay these debts on time from operational cash flow, as interest expenses continue to rise. Insolvency due to inability to pay looms large.

The crisis is the result of a debt-financed expansion through acquisitions. When the era of low interest rates ended and market rates began to rise, Baywa found itself in a precarious position. Since mid-2023, the company has been reporting significant losses, eroding its equity.

Among Baywa's major creditor banks are many well-known names: the cooperative DZ Bank, Landesbank LBBW, HypoVereinsbank, Deutsche Bank, Commerzbank, and others. Baywa's existential crisis is also a crisis for the Volks- und Raiffeisenbanken (VR Group) of Germany's largest federal state by area. The 184 primary institutions of the white-blue financial network are deeply entangled in the mess. Collectively, they represent more than a quarter of the approximately 700 cooperative banks nationwide, which consider themselves a „family of associations“ – a solidarity community in both good and bad times.

The reputational damage is significant. Farmers who supply Baywa with their products and rely on the company for fertilizers and tractors are often also customers of the VR Group, particularly in southern Germany, and hold Baywa shares.

The Bavarian branch of this large family holds a majority stake of over 81% in BRB, which acts as a treasury holding managing twelve investments with a combined balance sheet value of around 1 billion euros for the group, including three held in trust for DZ Bank, which is also one of Baywa's creditors. BRB itself holds a 7.4% stake in the cooperative megabank based in Frankfurt am Main. Remarkably, Baywa itself is also a shareholder in BRB, with over 10%.

Cross-shareholdings are a fundamental characteristic of this group, and therein lies the crux of the problem. The web of connections and interdependencies within this family has, over decades, created a caste of officials who, through the accumulation of key positions, wield extraordinary power.

Two examples: Wolfgang Altmüller (58), the chairman of BRB's supervisory board, has also served on Baywa's supervisory board for ten years,. There, he is the second deputy chairman. Altmüller, a banker by profession and CEO of Rosenheimer Meine Volksbank Raiffeisenbank, the largest primary bank in Bavaria, is also the chairman of the advisory board of the National Association of German Cooperative Banks (BVR) in Berlin. BRB board member Wilhelm-Josef Oberhofer (56) has served on Baywa's supervisory board for nine years. There, he chairs the audit committee. Oberhofer is also the CEO of Raiffeisenbank Kempten-Oberallgäu.

These officials are now tasked with pulling the company out of the mud, bearing joint responsibility for Baywa's debacle due to their roles.

Like the other 14 members of the supervisory board, they supported the growth strategy of former CEO Klaus Josef Lutz (66), who led Baywa from 2008 to 2023. Now, they are facing the wreckage. The well-connected cooperative banker Gregor Scheller (66), who was until recently president of the Cooperative Association of Bavaria, stepped in as the new chief supervisor in May to help put out the fire.

Lutz's predecessor resigned months earlier after losing a power struggle with his CEO successor Marcus Pöllinger (45). Lutz had transitioned seamlessly into the role of chief supervisor to oversee his protégé Pöllinger. Ignoring the two-year cooling-off period recommended by the Corporate Governance Code was only possible with the approval of BRB, facilitated by Altmüller and Oberhofer.

This turned out to be a grave mistake. It’s likely that Lutz and Pöllinger were so preoccupied with their conflict that they lost sight of the company's risks.

Adding to the problem was the longtime CFO Andreas Helber, who, reportedly out of misplaced loyalty to the former CEO Lutz, failed to raise the red flag when the debt level became concerning years earlier.

This peculiar form of „cronyism“ laid the groundwork for Baywa's predicament. It’s a male-dominated parallel world of back-slapping within the cooperative family – preferably with a CSU party membership – in seemingly good times that, in extreme cases, leads to operational blindness.

Under the former long-serving chief supervisor Manfred Nüssel (CSU), who held the position for 22 years before passing the baton to Lutz, Baywa was known as a major donor to the CSU. The Franconian CSU politician served on Baywa's supervisory board for a total of 40 years. Against this backdrop, the Baywa affair is also a political issue. Bavarian Minister President Markus Söder (CSU) is considering state guarantees using taxpayer money for a rescue plan. Nüssel (76), now honorary chairman of the board, is said to have played a decisive role in Lutz's downfall in January of this year through shrewd maneuvering. He is also credited with ensuring that CSU politician Monika Hohlmeier was elected to the supervisory board. The daughter of former Bavarian Minister President Franz Josef Strauß (who died in 1988) and a member of the European Parliament has served on the board since 2013, representing the capital side.

Now, the cooperative banks as Baywa owners, along with the creditor banks, are likely to be forced to inject hundreds of millions of euros in fresh capital as part of a rescue package to plug financial holes, despite not yet knowing the company's current financial figures. Baywa plans to release this information at the end of September, by which time the restructuring report from Roland Berger, including a continuation forecast commissioned under creditor pressure, is expected to be ready. This effectively amounts to a blank check, which is risky as it goes against standard business prudence. Furthermore, Baywa could face significant additional liabilities due to ongoing impairment tests.

This is likely causing unease among some of the bankers involved, reviving memories of BRB's inglorious history. BRB emerged 38 years ago from the remains of the imploded Bayerische Raiffeisen-Zentralbank AG (BRZ). Megalomania was the cause of the collapse of an institution that nearly dragged down almost all cooperative primary banks in Bavaria. In search of lucrative revenue streams, BRZ took on large-scale real estate loans. When the real estate market collapsed in the mid-1980s due to an oversupply of housing, the bank had to write down 1.5 billion Deutsche Marks after a special audit due to many non-performing loans (affecting 15% of the portfolio). The equity was wiped out. A bailout within the family was too big a task for the VR Group at the time. BRZ faced closure.

DG Bank, one of the two predecessor institutions of DZ Bank, had to take over BRZ's assets at the behest of the financial supervisory authority through a legal merger to prevent a domino effect within the cooperative financial network. The responsible board members had to go.

Today, this issue is once again highly relevant in the financial industry, this time due to an oversupply of office real estate following the Covid-19 pandemic. The case of BRZ has striking parallels to the Baywa situation. Against this backdrop, some cooperative bankers may be hoping that the likely costly Baywa rescue does not create too large a hole in the balance sheets of the Bavarian VR Group.