Corporate distress in Europe has risen 10% year-on-year, with the UK and Germany remaining among the most distressed markets in Europe. A new study suggests that the UK’s economy is still struggling with the reduction of disposable income among its consumers – leaving many service-oriented businesses vulnerable.
With over 10,000 people across six continents, Alvarez & Marsal (A&M) delivers consulting expertise to corporates, boards, private equity firms, law firms and government agencies around the world. Twice a year, this includes the bi-annual A&M Distress Alert – which assesses the financial performance and balance sheet robustness of more than 8,200 companies across Europe.
The study centres on an index analysing 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. Covering both private and publicly traded companies with revenues over €20 million, the scores are applied on a scale from zero for the most impacted, to 10 for the most financially solid.
Source: Alvarez & Marsal
This methodology has found that the number of firms in corporate distress in Europe has risen by 10% year-on-year – seeing some 9.2% of the continent’s corporates now in distress. At the same time, 10 of Europe’s 16 industrial sectors saw a deterioration in corporate financial health, according to A&M, while 55% of countries saw distress levels rise.
The analysis also suggests the situation may further deteriorate in the near future – with ‘healthy’ companies in increasingly shaky positions too. The figures show that the share of businesses with weak balance sheets across Europe has reached a record 31.2%, which represents over 2,500 corporates. This reflects the impact of lower revenue generation, hit by slower consumer spending and increased expenses resulting from inflation, which is eroding companies’ ability to service their debt. With interest rates still high, and inflation still not falling rapidly, those companies will come under growing strain.
Chris Johnston, European co-head of financial and operational restructuring at A&M, said, “We still see significant challenges for corporates in the latter part of 2024 and into 2025. Economic growth across Europe remains weak and consumer spending is depressed, hitting corporate performance and weakening the ability of highly leveraged businesses to pay down their debt. It is now unavoidable that we will see an increase in restructuring activity, particularly as refinancing dates come closer.”
Source: Alvarez & Marsal
Those trends seem to be having a particularly pronounced impact on the health of UK companies – with the country outpacing much of the continent in its levels of distress. Having stood at 8.4% a year earlier, 9.9% of total companies in A&M’s dataset are now in distress – the biggest yearly increase across any country in the study.
Alessandro Farsaci, a managing director at A&M, added, “Consumer demand continues to be a drag on key sectors. While some economic indicators are improving, consumers are yet to feel the full impact on their finances and spending remains constrained. This will be concerning for management teams in a range of industries. With cash flow and profits under pressure, it will become harder to service debt and we could see more difficult refinancings and further insolvencies in the next 12 to 18 months ahead.”
The researchers point to pressures on disposable income as one of the key factors in the downward trend of the fashion retail sector, for example. The sector is the UK’s worst-trending, having seen the number of distressed businesses boom by 14.4% to hit 21% of all companies. These pressures also weighed on the media and entertainment services market, with consumers reducing their discretionary spending – coinciding with the impacts of the multi-month strikes in Hollywood leading to many productions grinding to a halt, and reducing the number of new products to sell. As a result, the media segment is the worst for businesses in distress – at a total of 21.6%.