PROPORTION OF DISTRESSED COMPANIES IN EUROPE RISES TO RECORD LEVEL – SWISS COMPANIES SHOW RESILIENCE SO FAR

Media release

PROPORTION OF DISTRESSED COMPANIES IN EUROPE RISES TO RECORD LEVEL – SWISS COMPANIES SHOW RESILIENCE SO FAR

One in 10 companies in Europe in difficulties

Swiss companies have so far proved relatively robust in a European comparison

Consumer goods sector is one of the most critical industries in Europe and Switzerland

Zurich, 21. February 2024 – Global professional services firm Alvarez & Marsal (A&M) has published its bi-annual Alvarez & Marsal Distress Alert (ADA)¹, which assesses the financial performance and balance sheet robustness of more than 4,500² companies across Europe.

The analysis finds that the percentage of companies in financial distress - a combination of a weak balance sheet and underperformance - rose to 9.8% in 2023. This is the highest level since the start of the pandemic in 2020. Across Europe, just under 10% of the companies surveyed are therefore affected by serious problems that require restructuring in the narrower sense.

The number of companies with weak balance sheets has increased further year-on-year and, at 31.3%, accounts for almost a third of all European companies. This also reflects the impact of rising financing costs and impending maturities in an environment of higher interest rates, with weak balance sheets continuing to be a driving factor for distress. The analysis shows that companies' weakening earnings position³ increasingly played a role. At the same time, the proportion of companies lacking capacity rose from 12.3% in 2022 to 14.8%, also the highest level since 2020.

Across Europe, consumer-related companies have been in the most trouble over the last 12 months. In the media and entertainment sector, 16.3% of companies are in difficulty, up from 13.3% in the previous year. Longer-term trends such as declining advertising revenues and the decentralization of content creation on social media platforms, combined with falling consumer demand, have put further pressure on the sector. Fashion companies' performance and balance sheets have also deteriorated in 2023, with 16.1% of companies in difficulty, up from 13.5% in 2022. Rising operating costs, such as rising wages and energy bills, and a decline in discretionary spending have hit the sector hard.

Germany had the highest proportion of distressed companies at 15%, a significant increase from 9% last year, reflecting the difficult business environment as it is the only country in mainland Europe experiencing a recession. The distressed nature of the German economy has continued to worsen, particularly in the capital-intensive real estate and construction sectors. Other countries with a high number of distressed companies are Benelux (12 %) and Italy (10.1 %).

Gioele Balmelli, Director at A&M Restructuring says: "European companies are under pressure from all sides as demand falls and financing costs rise. An increase in restructuring activity seems inevitable as more financial and operational interventions will be required to improve performance, reduce costs and optimize capital structures. Consumer confidence remains low and higher housing costs are weighing on demand, so the most difficult period may be yet to come. Companies need to take a holistic view of their situation to strengthen both their short-term position and their long-term competitiveness."

Insolvency risk in Switzerland remains at a low level

In Switzerland, the insolvency risk of companies in 2023 has decreased slightly compared to the previous year and remains at a stable level compared to other European countries.

However, the commodities and media sectors as well as the retail trade are under particular pressure. The risk and need for restructuring has increased noticeably here. For the first time, the healthcare sector is also showing the first signs of stress, albeit still at a low level. Although the proportion of companies in Switzerland with poor performance has fallen slightly from 13.3% to 12.8% in the latest analysis, there are still considerable challenges for the future. Swiss companies with a large share of exports, including to Germany, are particularly critical. In addition, companies are finding it increasingly difficult to pass on higher costs to their customers and the pressure on margins is expected to increase further over the course of the year, which may have a negative impact on earnings.

Alessandro Farsaci, Managing Director and Head of Restructuring Switzerland at Alvarez & Marsal, says: "In a European comparison, Swiss companies have so far been characterized by an astonishing resilience, which tends to be due to the more conservative financing structure. In the restructuring scene, however, an increase in loan agreement breaches has been observed since the end of 2023 and financial restructuring activity is on the rise. It is also evident that sectors such as commodities, media, retail and healthcare are also coming under increasing pressure in Switzerland and are therefore required to implement transformation programs or comprehensive restructurings."

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 covers listed and private companies with an annual turnover of more than 20 million euros in 33 countries in Europe and the Middle East and is based on data from more than 26,000 companies for the financial years 2020 to 2022 and from around 4,700 companies that have reported their financial results up to November 2023.

The ADA Index analyzes 18 KPIs to create two sub-scores: the performance score, which is based on the company's own income statement and related KPIs compared to its industry peers, and the robustness score, which is based on detailed balance sheet data.

About Alvarez & Marsal

Leading global companies, investors and public institutions worldwide turn to Alvarez & Marsal (A&M) for expert assistance in solving operational, financial and/or regulatory challenges. A&M has been privately held since its founding in 1983. When traditional approaches are not enough to effect transformation and drive change, our clients turn to our deep expertise and ability to deliver practical solutions to their unique problems.

With more than 9,000 people providing services across six continents, we deliver tangible results for companies, boards, private equity firms, law firms and government agencies facing complex challenges. Our leaders and their teams leverage A&M's restructuring experience to help companies take decisive action, accelerate growth and improve results. We are seasoned professionals and advisors, former regulators and industry authorities, working together to ensure our clients know what it takes to turn change into strategic business value, manage risk and create 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
nwe@dynamicsgroup.ch
 
Alessandro Farsaci
Managing Director, Restructuring
Alvarez & Marsal
afarsaci@alvarezandmarsal.com