The spiral of high prices with expensive money resurrects the nightmare of insolvencies in companies

The risk of corporate insolvency and its subsequent and more serious threat, the declarations of corporate suspension of payments, has not only reappeared, but has also adjusted its tensors to scales unknown since August 2020, when its alarms about liquidity restrictions reverberated by all latitudes of the planet after social confinement to curb the emergence of COVID-19, and faces the long hibernation of global economies. This is how he reveals Weil European Distress Indexcontrasted and biannual study with aggregated data from more than 3,750 firms from the Old Continent, which now attributes the anguish of the cash flows of companies to the aftermath of the inflationary centrifuge with the most revolutions in four decades and to the chrono-escalation of interest rates undertaken by the central banks of the high-income powers, a race against time with an uncertain duration and competitive pace.

The companies that are most showing their financial weaknesses in the internal market – or what is the same, those that have increased their risk of default – are the German, the British, the Italian, the Spanish and the French, in that order. “If this trajectory continues, we would expect greater disruptions to the liquidity statements of the private sector due to the scarcity of money and the tightening of credit conditions in the markets, with numerous firms and businesses strangled by the oppression that this turn of conditions exerts. on their cash flows and, consequently, increase their options for declaring suspension of payments”, warns Neil Devaney, co-president of Weil, Gotshal & Manges, a London-based law firm specializing in restructuring that produces this indicator.

For Devaney, "the economic outlook has changed significantly and has altered the financial statements of companies" between the diagnosis of last December and June.

In his opinion, the fifth consecutive upward movement of the Bank of England (BoE) with which money has already risen to 1.25%; the anti-fragmentation measures of sovereign debt and against the spreads of risk premiums between euro partners advanced by the ECB before its first bullish touch in July or the half-point escalation of monetary authorities such as the Swiss, which still maintains in negative territory (-0.5%) the rates linked to the Swiss franc, leave ample evidence of the greater difficulties of access to credit flows of the European private sector. Of the five continental markets on which its indicator reviews –those with the greatest economic and business dimension–, the German and, a very short distance away, the British are the ones that register the most turbulence. Especially among its retail and consumer goods firms. Among the metrics of the Weil barometer, parameters such as liquidity, profits or changes in risk assessment or in general market conditions stand out.

The Weil indicator also reveals that this phenomenon does not distinguish by corporate dimension. The small companies in the study jumped to the worsening scale for the third consecutive month and recovered the levels of September 2020. As a whole, the financial weaknesses of this group, with a capitalization of 5,000 million euros, "will deteriorate above the average” –says the report– due to “its obstacles to investment and its liquidity contractions” which, in turn, were caused by the disruptions derived from the war in Ukraine on its value chains, its impact on operating costs and the withdrawal of the fiscal stimuli released during the health crisis.

The medians revealed these same effects, but combined with a sharper decline in future confidence in their businesses and larger consequences on their income statements of "geopolitical uncertainties and economic and financial obscurantism" in the coming months, which will increase its chances of dissolution.

The multinationals are, in any case, the ones that assume the greatest risk of default, although at the same time they hold the most appropriate financial instruments to counteract or circumvent suspensions of payments. Large companies will have to deal with more substantial logistics, labor and utility expenses – especially electricity. In the same way that their disbursements will be of greater substance when acquiring raw materials and essential goods to feed their productive systems, with the consequent cuts in their profit margins. The war in Ukraine takes a heavier toll on them.

By markets, Weil's diagnosis focuses on the stormy economic situation of the five main European powers in their spring period, a quarter in which the investment climate and the state of health of companies' liquidity have suffered under a gradual and constant decrease in its stock market assets. Although this rain has not penetrated with the same intensity in them.

In Germany, its companies will have to undertake structural transformations that mitigate production disruptions and logistical and commercial bottlenecks, as well as its high energy costs due to its dependence on Russian oil and gas. In the United Kingdom is where the Weil experts detect more pronounced falls in profitability and profits and in household consumption, which totals two thirds of its GDP, due to the increase in the cost of living.

France is the only economy with a result of stress on its companies still in negative territory, in other words: without crossing the barrier of the latent risk of insolvency and with more restrained inflation, 5.1% in May. While on Italy and Spain they emphasize that they will be the most affected by the rate hikes prepared by the ECB, which will make a dent in the spending capacity of households and the investment capacity of their corporations.

Some parallel studies corroborate the concern of the British firm. The insurance multinational Allianz has just raised the number of business insolvencies in Germany by 2023 by 10 basis points, to 16,130 cases, while assuring that the German companies that have recently declared bankruptcy have admitted debt levels similar to those of the 2009 crisis. In 2021, the debt of non-financial companies accumulated in the European locomotive amounted to 48,100 million euros, still far from the 73,000 reached in 2009, but with monthly averages of debt due to declaration of defaults of 55 % higher, of 3.4 million euros, compared to the 2.2 million of the credit crunch of thirteen years ago. "The number of insolvencies, lower, has not been related to the severity of the bankruptcies," explains Maxime Lemerle, analyst at Allianz. Among other reasons – he explains – because "for the third consecutive year, the extension of these maturities has been increased due to the ideal financial conditions" of the last three years.

In Spain, Iberinform, the market research unit of Crédito y Caución, puts bankruptcy insolvencies up 2.2% in the first five months of the year and 3.3% in year-on-year terms at the end of last year. Month of May. With more accentuated declarations, of 220%, in the automotive sector, followed by 75% in the extractive industry and primary sector and 46% in transport. Although with little assumption of contingency plans, since only 20% of companies have commercial risk departments, according to its Credit Risk Management Study in Spain, which also warns that only 30% of firms created them since the financial crisis.

Axesor, a risk management firm, also brings a certain calm to the Hispanic market. According to its data, bankruptcy proceedings fell by 19% in April and closed the first quarter of the year with 1,951 open lawsuits, 3.13% below those recorded in the same period of 2021. Although it warns of the inflationary spiral and rate hikes as factors in the loss of purchasing power of families and the investment and financing capacity of companies, as well as the growing burden of indebtedness as a cause of “new sources of future uncertainty”.

In Coface, the export credit insurance multinational, they describe the paradox that has settled in the post-Covid business cycle and that explains the coexistence of episodes of deterioration in the financial health of companies with decreases in insolvencies and that was already visible before the outbreak of the military conflict in Ukraine. In several simulations and prospective calculations, "hidden insolvencies" can be seen, companies whose declaration of bankruptcy is only a matter of time, especially in Europe given the succession of events that have been unleashed in the geopolitical and economic-financial order and that have collided fully on the path to recovery.

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