European and Middle Eastern companies are much weaker

Nearly 30% of companies in Europe and the Middle East have weak balance sheets after firms fell into debt during the Covid-19 pandemic and now face severe pressure from rising interest rates and soaring inflation, as Bloomberg reports, citing Alvarez & Marsal .

In 2022, about 28% of companies will be considered in this category, while 8.4% will be considered in difficulty, the consultancy said in a report, highlighting the Middle East, Spain and Germany as the regions with the highest percentage of difficulty . -Bloomberg

Compared to last year, the number of companies with weak balance sheets has increased slightly – and by 12% from pre-pandemic levels, according to the report.

This reflects the amount of state-guaranteed debt that companies have taken on during the pandemic, leaving balance sheets "increasingly strained by heavy debt loads and higher interest rates," according to the report.

“Corporates' ability to generate profits to pay off higher debt levels is gradually shrinking,” write the report's authors, including Paul Kirkbright, head of financial restructuring for EMEA, and CEO Allesandro Farsaci.

What are the main weaknesses? Metrics such as net debt/Ebitda (debt to operating income), debt service coverage and interest coverage ratios.

Meanwhile, companies have had to contend with the ECB raising key rates by 400 basis points over the past year, adding to record inflationary pressures across the eurozone. As a result, weaker borrowers found themselves excluded from capital markets and less able to roll over existing debt.

The A&M study looked at 7,000 public and private companies with annual revenues of at least $22 million in 33 European and Middle Eastern countries.

What are the weakest sectors?

• Non-food consumer goods manufacturing companies
• Average
• Entertainment
• Energy and utilities

Companies that rely on consumer discretionary spending have seen their bad debt ratio rise to around 13% in 2022 compared to 8.5% in 2021. A sign of the progressive impoverishment of citizens.

For companies in the energy and utilities sectors, the turmoil in European commodity markets has had a "binary effect," according to the report. While some have achieved higher operating margins following soaring oil and gas prices, many utility companies have struggled to pass on higher rates to customers. According to the report, the percentage of gas companies in trouble rose to 19% in 2022 from 6.5% a year earlier.

Turning to individual countries, the authors stressed that Germany could be "ahead of the curve" in restructuring activity thanks to liquidity tests mandated by the country's legal framework. In Spain, although there is a high percentage of companies in difficulty, levels have decreased compared to the previous year, partly due to a "spectacular recovery in tourism", reads the report. -Bloomberg

According to Kirkbright and Farsaci, even tighter financial conditions and the recession will exacerbate the problems in the coming year, writing: “We expect that the tightening of conditions will force more companies to actively pursue deleveraging and restructuring measures”. to repay debts. Next year we will see some good ones.

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The article European and Middle Eastern companies are much weaker comes from Scenari Economici .

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This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/le-aziende-europee-e-mediorientali-sono-molto-piu-deboli/ on Tue, 27 Jun 2023 06:00:31 +0000.