Germany the most distressed market in Europe

Consumer, retail and media sectors experience highest level of stress

London, 2^nd February 2024 – 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 4,500² companies across Europe.

The alert finds that corporate distress in Europe has risen to its highest level since the start of the pandemic, with nearly one in ten companies in distress. The proportion of corporates facing distress has risen by 10% since 2021.

The analysis shows a 20% year-on-year increase of companies experiencing weakening performance. This reflects the impact of inflation on earnings, notably higher wages and energy costs, as well as decelerating consumer demand.

The number of companies with weak balance sheets has also increased year-on-year, representing nearly one-third of all European corporates (31.3%). This reflects the impact of rising debt costs and upcoming maturities in a higher interest rate environment, with fragile balance sheets remaining a driving factor of distress.

Chris Johnston, Managing Director with A&M Restructuring, said: “European corporates are being squeezed on all sides, with reduced demand and higher costs, particularly debt servicing. An uptick in restructuring activity seems inevitable, as more financial and operational interventions will be needed to tackle underperformance, manage costs and right-size capital structures.”

Rising numbers of British and German companies facing distress

In the UK, levels of corporate distress are the highest since 2020 at 9.8%, with the proportion of companies in distress increasing 14% year-on-year. In addition, 14.6% of UK corporates are lacking performance, down on 2022 but an improvement compared to 2020 and 2021.

Three out of ten companies are also lacking balance sheet robustness, the highest level since before the pandemic, illustrating the impact of rising rates on debt servicing costs.

The German market showed the highest proportion of distress (15%), representing a sizeable jump from 9% last year, reflecting the tough business environment as the only country in Europe to experience recession.

Chris Johnston added: “Economic growth in the UK remains stubbornly weak. The gradual impact of mortgage holders coming off fixed-rate deals will weigh on consumer demand for a prolonged period, hitting corporate performance. Similarly, the German economy has heightened distress, particularly in the capital-intensive real estate and construction sectors.”

Consumer sectors under most stress

Across Europe, consumer-facing businesses have faced the highest levels of distress in the last 12 months. In the media and entertainment sector, 16.3% companies are in distress, compared to 13.3% the year before. Longer-term trends including declining advertising revenues and the decentralisation of content creation to social media platforms, combined with slumping consumer demand, have put more pressure on performance.

Fashion businesses also saw their performance and balance sheets deteriorating in 2023, with 16.1% of companies now in distress versus 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.

Chris Johnston said: “While few businesses are immune from declining consumer demand, those most exposed to changes in discretionary spending are being hit hardest. Consumer confidence remains low and higher mortgage costs are weighing on demand, meaning the toughest period could be yet to come. These businesses need to take a holistic view of their costs, financing and cashflow to assess both their short-term position and long-term sustainability.”

--

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.