France and Germany have the worst performing economies in Europe, but Britain is seen as doing reasonably well. On the positive side, there are clearly encouraging signs in Spain and Italy.
European companies are facing an increasingly challenging operating environment due to soaring inflation and rising borrowing costs while interest rates remain uncomfortably high. As a result, debt costs quickly become unaffordable, forcing several companies across industries to halt or postpone projects. This also affected capital investment and employment.
On the consumer side, rising inflation has increased the prices of various essential goods and services. As interest rates soar, the cost of mortgage loans also increases, and consumers’ disposable income is decreasing.
Key insights into the continent’s distress sector
The latest April 2024 Weil Europe Distress Index, which surveyed 3,750 listed European companies, revealed several key insights into the continent’s corporate distress sector.
Weyl considers 16 metrics across liquidity, profitability, risk, valuation, investments, and financial markets to measure distress levels across companies. It covers his five markets: Total Europe, UK, Germany, France and Spain-Italy.
The firm tracks companies across 10 industries, including retail and consumer goods, industrial products, healthcare, financial services, and oil and gas.
The 2024 report states that “a corporate crisis can be defined as an increase in uncertainty, volatility, or perceived risk regarding the fundamental value of financial assets. It also refers to disruption of normal functioning.” requirements. “
In particular, vulnerabilities appear to be increasing within highly leveraged and capital-intensive sectors. In addition, small businesses are significantly exposed to continued interest rate increases and credit rating declines, leading to further hardship. Sectors such as industrial, healthcare, retail, and real estate also suffered more severely.
Although Germany was Europe’s worst-affected market, other important economies such as Spain and Italy appear to be recovering on this front.
Neil Devaney, partner and co-head of Wiles London’s restructuring practice, said in a press release: “Europe’s business distress landscape is evolving. While geography and sector remain important factors in assessing a company’s financial outlook, we note that: The impact is far greater.
“The gap between small and large businesses appears to be widening, with small businesses being hit hardest by rising interest rates and liquidity challenges. Most acutely. Larger companies face the same market environment, but they tend to benefit from more diverse financing options and larger liquidity reserves, allowing them more flexibility in managing their capital structure. It will be like this.”
Which sectors in Europe are suffering the most?
Andrew Wilkinson, senior European restructuring partner and co-head of Wile’s London restructuring practice, also said in a press release:
“Current macroeconomic indicators paint a more nuanced picture than previously predicted, and we expect capital-intensive and highly leveraged companies to continue to feel pressure.
“Companies operating in the industrial, retail and real estate sectors are bearing the brunt of these pressures. Companies that can adjust their capital investment strategies will be better able to weather this storm.”
The real estate sector is the most distressed sector across the continent, mainly due to falling property values and refinancing issues. Moreover, real estate companies and real estate companies are increasingly indebted and struggling to service their debts, leaving little capital available for new investments or ongoing projects.
In the industrial sector, distress levels have increased compared to the previous quarter, mainly due to continued supply chain disruptions caused by Houthi attacks in the Red Sea. This has resulted in several ships having to circumnavigate the African continent, causing significant navigation time and delays.
This has resulted in several European companies suspending production of certain products due to shortages of key components and raw materials. Germany’s industrial sector is particularly suffering, as the German economy is already considered Europe’s sick man.
Similarly, the consumer and retail sectors have fallen far behind as households tighten their wallets due to the cost of living crisis and rising rents and mortgages. Young people are also taking on more debt than ever before, leaving them with significantly less disposable income to spend on luxury goods and luxuries. Several major companies in the UK and Europe have also faced a number of technical problems and bankruptcies in the past few months.
However, liquidity in the healthcare sector appears to be slightly higher than before, and investors are starting to feel cautiously optimistic, although overly leveraged companies remain a concern.
Germany remains the worst-affected market, Spain and Italy are on the mend
Germany remains Europe’s toughest country, with consumers and businesses alike shunning new investments amid a cost-of-living crisis and the lingering effects of the pandemic and the Russo-Ukrainian war.
Additionally, liquidity has also taken a hit as overall economic growth continues to be weak, with knock-on effects on profitability. Regarding Germany’s economic forecast for next year, Weill said: “German economic forecasts for 2024 show minimal growth, with increased risks due to dependence on exports and labor market rigidity.”
“Concerns about a potential recession loom, with risks of a decline in economic output as early as early 2024. Germany’s industrial sector is particularly strained by high interest rates, skilled labor shortages and extensive regulation. However, there are signs of easing inflation, with stable unemployment and low energy costs providing some optimism for a recovery within the next year. ”
Similarly, French companies have been above average distressed levels for nearly a year due to tight liquidity and reduced investment. Risk appetite has declined significantly, and economic growth has stagnated. Consumer confidence appeared to be recovering over the past few months, but it has also fallen sharply since February, largely due to weak retail sales.
UK performance appears to be improving, with the level of corporate distress slowing slightly, continuing last quarter’s trends. However, businesses continue to grapple with higher borrowing costs and higher debt burdens as a result of continued interest rate hikes. Refinancing conditions have also become stricter, leading to a decline in demand.
However, there may be signs of hope, as inflation appears to be finally coming down and the job market is proving more resilient than previously expected.
Meanwhile, Italy and Spain appear to be recovering positively, with distress levels decreasing significantly. Growth and expansion expectations for these two countries next year are also favorable compared to other European markets.