Here’s why Germany’s economy remains the most distressed in Europe

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European companies have been facing an increasingly difficult business environment, due to soaring inflation, as well as higher borrowing costs, as interest rates continue to remain uncomfortably high. As such, several companies across industries have had to halt or postpone projects, due to the cost of debt rapidly becoming unaffordable. This has also impacted capital investments and hiring.

On the consumer side, increasing inflation has caused price rises across a variety of necessities and services. Surging interest rates have also bumped up the cost of mortgages, leaving consumers with less disposable income.

Key insights into the continent’s distress sector

The latest April 2024 Weil European Distress Index, surveying 3,750 European listed companies revealed several key insights in the continent’s corporate distress sector.

Weil takes into account 16 indicators, across liquidity, profitability, risk, valuation, investment and financial markets to measure distress levels across corporates. It looks at five markets, namely Total Europe, UK, Germany, France and Spain-Italy.

The company surveys companies across 10 industries, such as retail and consumer goods, industrials, healthcare, financial services, oil and gas and more.

The 2024 report says: “Corporate distress can be defined as uncertainty about the fundamental value of financial assets, volatility and increase in perceived risk. It also refers to the disruption of the normal functioning of company financial performance, including their ability to fulfil their debt requirements.”

In particular, there seemed to be increased vulnerability within highly leveraged and capital-intensive sectors. Furthermore, smaller companies were considerably more exposed to continuous interest rate rises, as well as lower credit ratings, leading to more distress. Industries such as industrials, healthcare, retail and real estate were also more distressed.

Germany was the most distressed market in Europe, however, other important economies such as Spain and Italy seem to be recovering in this aspect.

Neil Devaney, partner and co-head of Weil’s London Restructuring practice, said in a press release: “The landscape in Europe corporate distress is evolving. Whilst geography and sector continue to be important factors in assessing companies’ financial prospects, we’re seeing the size of businesses having a much greater impact on their levels of distress.

“There appears to be a growing disparity between small and large corporates, with smaller firms having been hit hardest by rising interest rates and liquidity challenges. Those on the cusp of refinancing are feeling this most acutely. Whilst larger companies face the same market conditions, they tend to benefit from more diverse funding options and greater liquidity reserves, providing them with more flexibility to manage their capital structures.”

Which European sectors are facing the most distress?

Andrew Wilkinson, senior European restructuring partner and co-head of Weil’s London Restructuring practice also said in the press release: “Whilst some sectors show signs of recovery, distress levels remain comparatively high.

“With the current macroeconomic indicators presenting a more nuanced picture than previous forecasts, we can expect capital-intensive and highly leveraged businesses to continue to feel pressure.

“Those operating in the industrials, retail and real estate sectors are bearing the brunt of these pressures. Businesses able to adjust their capital investment strategies will fare better in weathering the storm.”

The real estate sector is the one which is seeing the most distress throughout the continent, mainly due to falling property values and refinancing woes. Furthermore, increasingly debt-ridden real estate and property firms are struggling to service their debt, leaving little available capital for new investments, or ongoing projects.

The industrials sector has seen distress levels rising, as compared to the last quarter, mainly due to the ongoing supply chain chaos caused by the Houthi attacks in the Red Sea. This has led to several ships having to travel around the African continent, thus adding considerable time and delays to journeys.

This has resulted in several European companies stopping the production of certain goods, due to a lack of key parts and input materials. The German industrial sector is especially suffering, due to the German economy already being seen as the sick man of Europe.

Similarly, the consumer and retail sector has also been lagging considerably, as households tighten purse strings, due to the cost of living crisis and rising rents and mortgages. Younger people are also taking on more debt than ever, which is leaving them with significantly less disposable income to spend on upper-scale or luxury items. Several high-street businesses in the UK and Europe have also faced a slew of tech problems and insolvencies in the last few months.

However, the healthcare sector seems to be seeing slightly more liquidity than before, with investors starting to be cautiously optimistic, although overtly leveraged firms continue to be a concern.

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