Dynamics Group AG: CORPORATE DISTRESS RISES IN EUROPE AND SWITZERLAND

Media Release

CORPORATE DISTRESS RISES IN EUROPE AND SWITZERLAND

Record number of companies have weak balance sheets with high levels of debt

Number of companies with weak balance sheets also increased in Switzerland

Consumer sector among worst performing sectors in Switzerland

Zürich, 26 June 2023 – Global professional services firm Alvarez & Marsal (A&M) has today published its bi-annual Alvarez & Marsal Distress Alert (ADA)¹, which assesses the financial performance and balance sheet robustness of more than 7,000² companies across Europe.

The alert finds that corporate distress in Europe has risen 20% since pre-pandemic, with nearly 700³ companies (8.4%) experiencing serious stress likely to necessitate restructuring action.

There are now 2,000 European corporates with weak balance sheets, a record 27.7% of all companies assessed. This reflects the significant amounts of debt that companies took on during a prolonged period of ultra-low interest rates, with the ability to repay these higher levels of debt falling under pressure due to the rising cost of capital.

While the proportion of companies with lacking performance contracted slightly in the latest analysis, from 13.3% to 12.8%, this masks challenges on the horizon. Companies’ ability to pass on higher costs to customers is waning and margins are expected to tighten through the year, with a corresponding impact on profitability.

Alessandro Farsaci, Managing Director and Head of Restructuring Switzerland at Alvarez & Marsal, said: “Corporate distress is increasing across Europe and balance sheets are at their weakest level since 2020. Despite a moderate improvement in performance more recently, driven by pent-up demand and price rises in selected sectors, many of the companies analysed in our study still need to deleverage, turn around their operations or continue their business transformation journeys.”

European sector trends

The consumer sector saw a significant increase of 25.44% year-on-year, with 12.3% of companies experiencing distress. This group, which includes fashion, electronics and furniture stores, is more heavily reliant on discretionary spending, with rising distress reflecting the worsening macroeconomic backdrop and the squeeze on household budgets.

Vulnerabilities in the automotive sector also accelerated in 2022, with 10.5% of these companies in distress, up 13% since last year. This highlights the long-term challenges that continue to hit firms’ profitability including the price of energy, supply chain problems and labour shortages.

The turmoil in Europe’s energy market has impacted operators, with 39 energy and utilities companies (or 11.1%) in distress, up 39%. Notably, the percentage of gas utilities companies in distress rose from 6.5% in 2021 to 19.4% last year, according to the alert. Increased price volatility left many energy suppliers struggling to pass on higher rates to customers, especially those that had sold contracts to clients with a fixed price at a historical value.

Paul Kirkbright, Managing Director and Head of EMEA Financial Restructuring Advisory at Alvarez & Marsal, said: “Energy-intensive sectors like automotive and manufacturing are suffering, as are the energy companies themselves. Consumer-facing sectors are also struggling to maintain profitability as costs rise and consumers tighten their belts. It will be critical for these companies to assess their short-term needs, while not losing sight of long-term growth and investment opportunities.”

Distress in Switzerland remains at low levels

In Switzerland, corporate distress has increased in 2022 compared with the prior year but remains at low levels compared to other European countries. This is showcased by an average robustness score of 5.1.

Moreover, the Swiss state aid package largely succeeded in shielding companies from the negative effects of the pandemic. The so-called Covid-19 bankruptcy gap – bankruptcies that did not occur between 2020 and 2022 due to financial state aid measures – has started to narrow, falling from 2,000 delayed bankruptcies in the third quarter of 2022 to 1,700 April 2023. In addition, bankruptcies were at a record high in the first quarter of 2023, with around 1,800 filings, 22% higher than the average seen in the 2017-19 period.

In line with absolute score and trend across the entire region of Europe, the consumer non-food sector is also among the hardest hit sectors in Switzerland, which is experiencing significant stress and 25% of these companies are vulnerable – this is mirrored across other markets in Europe like Spain and Italy, as discretionary consumer spending is reduced.

Alessandro Farscaci, Managing Director at Alvarez & Marsal, said: “Overall Swiss corporates have shown remarkable resilience and present the most conservative financing structures among European peers, including lower levels of debt. But the rising cost of interest, the skills shortages and overall global economic stability represent the biggest challenges in the short-term for Swiss corporates. Even though the strength of the Swiss franc is closely watched from an exporting perspective, at present the appreciation is less threatening given lower levels of inflation in Switzerland compared to its largest trading partners.”

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Notes to Editors

Methodology

A&M’s Financial Restructuring Advisory team has developed a methodology to assess performance and balance sheet robustness of European businesses, aiming to identify those that are in financial distress or may soon be heading in that direction.

The study includes more than 7,000 listed and private companies with over €20 million of annual revenues across 33 countries in Europe and the Middle East that consistently provided data for all years from 2019 to 2022.

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 7,500 people providing services 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.

Follow A&M on LinkedIn, Twitter, and Facebook. 

CONTACT:
Nicolas Weidmann
Dynamics Group, +41 (0)79 372 2981
 

Alessandro Farsaci
Alvarez & Marsal

^[1] The index analyses 18 KPIs to create two sub-scores: the performance score, 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. The scores are applied on a scale from zero (heavily impacted) to 10 (very solid situation). It covers private and public companies with revenues of more than €20 million. 

^[2] FY2022 analysis covers more than 7,000 companies. FY2021, FY2020 and FY2019 analyses cover 11,528 companies.

^[3] 688 in corporate distress, according to ADA analysis.