CORPORATE DISTRESS RISES TO RECORD LEVEL IN EUROPE - SWISS COMPANIES WERE RESILIENT IN 2023, BUT RESTRUCTURING ACTIVITY IS ON THE RISE

Media release

CORPORATE DISTRESS RISES TO RECORD LEVEL IN EUROPE 

SWISS COMPANIES WERE RESILIENT IN 2023, BUT RESTRUCTURING ACTIVITY IS ON THE RISE

Nearly 900 companies facing financial distress in Europe

Swiss companies proved to be the most robust in Europe

Healthcare and chemicals sector are the most critical industries in Switzerland

Zurich, 22 July 2024 – Global professional services firm Alvarez & Marsal (A&M) has today published its bi-annual Alvarez & Marsal Distress Alert (ADA), which assesses the financial performance and balance sheet robustness of more than 8,200 companies across Europe.

The alert finds that financial distress across European corporates has risen by 10% year-on-year, with 9.2% of European corporates now in distress. Ten out of 16 sectors saw a deterioration in corporate financial health, and over half (55%) of countries saw distress levels rise.

The analysis also shows that the share of businesses with weak balance sheets has reached a record 31.2%, which represents over 2,500 corporates. This reflects the impact of increased leverage, lower revenue generation, hit by slower consumer spending and increased expenses resulting from inflation, which is eroding companies’ ability to service their debt.

The dismal economic outlook has been especially problematic for corporates with overleveraged capital structures. With interest rates expected to come down slowly and remaining inflationary pressures proving difficult to tame, A&M expects a further increase in financial distress as cash flow pressures continue and maturities loom, giving rise to more restructuring activity.

UK and Germany among most distressed in Europe

The UK has seen the biggest year-on-year increase in corporate distress, with nearly one in ten (9.9%) companies now in distress, compared to 8.4% a year earlier. The stagnant economic conditions in the UK have also weighed on performance, with 15.1% of companies lacking performance in the past year. The proportion of companies lacking balance sheet robustness has also topped 30% for the first time since before 2020.

A similar proportion of German companies face distress (9.4%), which is the highest level since the start of the pandemic. The number lacking performance and balance sheet robustness has also grown in recent years, now accounting for 15.7% and 27.8% of all German corporates respectively.

Consumer-facing industries see the highest levels of distress in Europe with fashion retail emerging as the most distressed sector (18.8%). Falling consumer spending and the lingering impact of inflation on costs have weighed on the sector, as well as the recent supply chain crisis. Media and entertainment companies have also seen an increase in levels of corporate stress, with 14.4% of companies now facing corporate distress. Businesses in the construction and chemicals space are facing high levels of stress, too, with 10% and 11.7% of these companies in distress respectively. Chemicals companies have seen distress rise more than 40% since 2020, thanks to sagging demand, sustainability pressures and competition from other regions. Similarly, construction has suffered from a severe hit to demand owing to higher interest rates, plus rising costs and labour disruptions.

Alessandro Farsaci, Managing Director at A&M Switzerland says: "Economic growth across Europe remains weak affecting the Swiss export oriented companies and domestic consumer spending is depressed due to various factors, hitting financial performance and weakening the ability of highly leveraged businesses to service their debt and/or to adhere to their covenants. We are seeing a substantial increase in restructuring activity since a few months, and we expect more to come particularly as refinancing dates come closer. However, this turbulent period also presents an opportunity for companies to radically reassess their positions, particularly by enhancing balance sheets and operational efficiency, to emerge stronger for the long-term."

Distress level 2023 in Switzerland improved and remains at a low level

In Switzerland, corporate distress levels in 2023 remain at a low level compared to other European countries and has decreased to 5.2%, from 6.1% a year earlier, reflecting the country’s moderate economic recovery. Yet, roughly one in ten Swiss companies were lacking in performance, and balance sheets have weakened year-on-year, with 24.1% of firms lacking robustness. However, there has also been an increase in the restructuring activities in Switzerland over the last few months. Especially the pressure on hospitals and the recently increased refinancing challenges have weighed on healthcare. In 2023, 10.3% of such businesses were in distress, the highest percentage across sectors. Old tariffs, high inflation and energy costs as well as high investment needs have had a strong adverse impact on hospitals, with increased costs of personnel and goods contributing to performance issues, alongside increasing health insurance premia.

The A&M data also showed a worsening trend for construction companies, where demand has been hit by the impact of higher rates. Another industry group showing elevated levels of distress is Chemical & Others, underscoring structural challenges such as higher energy prices, the growing Chinese competition and the need to decarbonise operations.

Alessandro Farsaci, Managing Director at A&M Switzerland, says: "In a European comparison, Swiss companies have shown an astonishing resilience. However, throughout 2024, A&M observes that the deferred adverse effects of the pandemic, compounded with the rise in interest rates since 2022, are also hitting Swiss businesses’ earnings and balance sheets, leading to increased levels of restructuring activity. The recent decline in interest rates and the stabilization of inflation, though still at historically high levels, is creating favorable conditions for high refinancing volumes going forward.”


Methodology

A&M's financial restructuring advisory team has developed a methodology to assess the performance and balance sheet stability of European companies with the aim of identifying those companies that are in financial distress or may soon be heading in that direction. The study includes more than 8,200 listed and private companies, each with annual revenues exceeding €20 million, across 33 countries in Europe and the Middle East. These companies consistently provided data for all years from 2019 to 2023. The ADA index analyses 18 KPIs to create two sub-scores: the performance score, which is based on the company’s own income statement as well as related KPIs measured against its industry peers, and the robustness score, based on detailed balance sheet data.

About Alvarez & Marsal

Companies, investors and government entities around the world turn to Alvarez & Marsal (A&M) for leadership, action and results. Privately held since its founding in 1983, A&M is a leading global professional services firm that provides advisory, business performance improvement and turnaround management services. When conventional approaches are not enough to create transformation and drive change, clients seek our deep expertise and ability to deliver practical solutions to their unique problems. With over 10,000 people across six continents, we deliver tangible results for corporates, boards, private equity firms, law firms and government agencies facing complex challenges. Our senior leaders, and their teams, leverage A&M’s restructuring heritage to help companies act decisively, catapult growth and accelerate results. We are experienced operators, world-class consultants, former regulators and industry authorities with a shared commitment to telling clients what’s really needed for turning change into a strategic business asset, managing risk and unlocking value at every stage of growth.

To learn more, visit: AlvarezandMarsal.com.


CONTACT:  

Nicolas Weidmann
Dynamics Group,
+41 (0)79 372 2981
nwe@dynamicsgroup.ch

Alessandro Farsaci
Managing Director, Restructuring
Alvarez & Marsal
afarsaci@alvarezandmarsal.com