Restructuring

Corporate distress has risen to its highest level this year, as stimulus measures by European governments and central banks have begun to unwind, creating tighter conditions for business liquidity, as highlighted in our inaugural Weil European Distress Index report. The study, which aggregates data from more than 3,750 listed European corporates and financial market indicators, shows that a gap has opened between company fundamentals and market expectations.

The contribution to distress from pressures on liquidity – defined as a company’s ability to pay off its current debt obligations – has not been higher since the Global Financial Crisis (GFC) in 2008-09. This issue has become particularly problematic for corporates with a market cap of less than €5 billion, which are showing above-average levels of distress for the first time in over a year.

The findings follow a period in which government intervention and benign capital market conditions have suppressed corporate distress to historic lows. Not a single issuer of European investment grade or junk-rated corporate bonds has gone bankrupt in 2021, according to S&P Global Ratings. However, markets have begun to respond in recent weeks, partly driven by concerns over the Omicron variant. The ICE BoA Euro High Yield Index spread ended November at a high for the year of 371 having reached a low of 285 on 17 September 2021.

Tracking The Weil European Distress Index against the rate of European corporate defaults shows a lagged relationship, indicating that if the former continues to rise, a spike in the latter is unlikely to be far behind. 

Corporate distress can be defined as uncertainty about the fundamental value of financial assets, volatility and increases in perceived risk. It also refers to the disruption of the normal functioning of companies’ financial performance. There are several common characteristics of corporate distress: liquidity pressures, reduced profitability, rising insolvency risk, falling valuations and reduced return on investment.

Sector trends

The largest driver of distress came from Travel, Leisure & Hospitalitybusinesses. This sector was hit hardest by the pandemic, seeing levels of distress that surpassed those experienced during the GFC. Whilst the sector has recovered to some extent as social distancing restrictions have eased, the emergence of Omicron will raise fears of another softening in demand. Operators also face pressure on profitability in the coming months as they battle staff shortages and rising input costs.

Distress across Retail & Consumer Goods companies has picked up sharply from well below-average levels, reflecting renewed pressure on both liquidity and profitability. The sector received extraordinary levels of government support during the pandemic, and whilst the shift to online acted as a lifeline to many, challenges such as supply chain disruptions, rising operating costs and high return volumes have been putting pressure on margins.

Distress in a number of other sectors has declined, such as in Industrials resulting from growing demand for a wider variety goods including semi-conductors, autos, electronic equipment and chemicals.

Geographical trends

UK corporates experienced the highest levels of relative distress during the pandemic compared with other European markets. Distress has also been rising in recent months, driven by renewed pressure on liquidity and ongoing challenges to profitability.

In Germany, market factors remain solid, with the DAX recently reaching an all-time high. However, distress from liquidity is now at its highest level since 2012.

Levels of distress across businesses in France reached their highest point since February 2021, as mounting pressure from liquidity and profitability have intensified over the last few months. Corporate distress across Spain and Italy fell to decade lows in recent months, declining sharply on last year’s levels when companies continued to feel the effects of the pandemic. Initiatives to guarantee government backed loans administered by SACE S.p.A (the Italian Export Credit Agency) and the Spanish Official Credit Institute (ICO) have underpinned stability throughout the period.

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