The latest Weil European Distress Index sounds an unwelcome alarm in the world of European corporate distress, revealing a deepening crisis marked by persistent challenges in profitability and a stark lack of investment across over 3,750 listed corporates. For us at REFIRE, it's no great surprise that the law firm's Index spotlights the real estate sector as the most distressed, confronted by a range of problems.
The last quarter of 2023 highlights a significant shift, with falling profitability emerging as the primary driver of corporate distress. This comes at a critical juncture for European companies grappling with economic fluctuations, market uncertainty, and the dual challenge of managing rising costs while sustaining production.
Germany, traditionally regarded as THE European economic powerhouse, emerges as the most distressed market in Europe. Deteriorating investment metrics, liquidity pressures, and stagnant profitability contribute to the bleak economic outlook, with a projected 0.4% contraction in its economy for 2024.
UK and the rest of Europe
While there's a slight easing of corporate distress in the UK compared to the previous quarter, it remains significantly higher than the same period last year. Weil identifies weakened investment metrics, tightened liquidity, and reduced profitability as ongoing challenges, exacerbated by the impact of higher interest rates.
Traditionally the least distressed market, France now ranks third in the latest quarter. Deteriorating investment metrics, growing pressures on liquidity and profitability, declining GDP, and a contracting manufacturing sector contribute to a shifting economic landscape.
Despite being the least distressed regions, Spain and Italy experience distress levels above the long-run average, influenced by falling profitability and weaker investment, says the latest Index reading.
Real estate sector hit the worst
The real estate sector is the most distressed of all corporate fields of activity, facing the burden of high interest rates, constraining financial flexibility and increasing the cost of capital. Real estate companies are contending with falling valuations, impacting asset portfolios and overall financial health. Profit margins are being squeezed by escalating energy and construction costs, while increasingly expensive financing options are adding to companies' financial misery.
The Healthcare sector follows closely as the second most distressed, grappling with the dual impact of higher interest rates and increasing debt servicing costs. Retail and Consumer Goods companies are also witnessing heightened distress, influenced by higher remortgage rates, escalating rents, and eroding discretionary spending power.
According to Andrew Wilkinson, senior European restructuring partner at Weil, "As the real estate sector takes the lead in distress within Europe, it’s clear that investment hesitancy and rising costs are symptoms of a larger economic malaise. High leverage poses a significant vulnerability in an unforgiving market, where companies confront rising costs against a backdrop of falling valuations."
His colleague Neil Devaney, partner and co-head of Weil’s London restructuring practice, adds, "Corporate distress remains elevated, with profitability at the core of the problem for many companies, as they struggle with increased costs and challenges to supply and production. Though there are some signs of economic improvement, overall distress is at higher levels than this time last year."
Weil's definition of corporate distress broadly covers uncertainty about the fundamental value of financial assets, volatility and increases in perceived risk. The firm defines several characteristics common to corporate distress, such as liquidity pressures, reduced profitability, rising insolvency risk, falling valuations and reduced return on investment.
