Corporate distress among SMEs hits 2020 levels
Corporate distress among small- and medium-sized enterprises (SMEs) in Europe is at a three-year high, as firms face liquidity pressures amid higher borrowing costs.
A quarterly index compiled by law firm Weil, Gotshal and Manges revealed a widening gulf in distress levels according to company size.
Large corporates, defined as those with a market capitalisation of more than €25bn (£21.4bn), are weathering the storm better than their small- and medium-sized counterparts.
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“It should come as no surprise that smaller corporates are the first to feel the strain,” said Andrew Wilkinson, co-head of Weil’s London restructuring practice, quoted by Reuters.
“Whereas large companies have the scale to access deep pools of capital, diversify their funding and hedge exposures, smaller corporates have fewer options. They also lack the pricing power of larger corporates in an inflationary environment.”
Distress among UK corporates rose on the previous quarter and is significantly above last year’s levels, the index found. The UK remains the most distressed major market in Europe, significantly higher than France, Spain and Italy.
Read more: One in 10 businesses at risk of insolvency as pandemic hits turnover and cash reserves
Weil noted that inflation continues to climb in the UK, unlike other major economies in Europe, while mortgage costs have also risen, putting pressure on household incomes.
Property remains the most distressed sector for the second quarter, due to a squeeze on liquidity, weakening investment metrics and deteriorating profitability.
The healthcare and financial services sectors have also seen a sharp deterioration, Weil found.
“The cracks are continuing to emerge in the real estate market, both from a commercial and residential perspective [and]recent bank failures have added to fears that credit will become less available and more expensive,” said Neil Devaney, co-head of Weil’s London restructuring practice, quoted by Reuters.
“This, coupled with a sharp fall in property prices and structural changes arising from the pandemic, has been causing headaches for corporates,” he said. “We’re also seeing certain markets facing further pressures – such as in the UK, where mortgage rates have soared.”
Weil’s quarterly index aggregates data from more than 3,750 listed corporates and financial market indicators.
2,552 businesses collapsed during the month, which was higher than levels seen while Covid support measures were in place, and also higher than pre-pandemic numbers.
