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The Weil European Distress Index

Corporate distress across key European markets has intensified over the last quarter, according to the latest Weil European Distress Index.

The quarterly study, which launched in December 2021 and aggregates data from more than 3,750 listed European corporates and financial market indicators, shows that despite recent resilience from major European financial markets, support from market fundamentals has deteriorated considerably over the last 12 months.

Corporate distress has accelerated faster in the UK than in the rest of Europe and is now at a two-year high. The main drivers continue to stem from weaker investment metrics, tighter liquidity and ongoing pressure on profitability. The Bank of England has warned that the UK economy is contracting and will continue to shrink for eight consecutive quarters to 2024.

Whilst difficult to unpick, the UK’s relative weakness can be partly attributed to both Brexit and the pandemic. Since the UK left the EU in January 2020, corporate distress has closely tracked the rest of Europe. In fact, Germany has experienced higher levels of distress overall. However, this has changed in recent months as economies adapt to the twin shocks of the pandemic and War in Ukraine, and Brexit has had demonstrable effects on UK supply chains, largely created by non-tariff barriers to trade.

There is also growing evidence to suggest that the UK economy has suffered disproportionately from the effects of the pandemic. The level of UK GDP compared with pre-Covid is down c.-0.7%, significantly less than the euro zone which is +2.1% higher and the US which is +4.2%.

The Weil European Distress Index

Corporates in Germany were the second most distressed group across the countries measured, a sharp reversal since the inaugural release of the Weil European Distress Index last year. In France, levels of distress rose to above average levels for the first time since October 2020, but it remains the least distressed country in Europe.

Spain and Italy have seen levels of distress rise sharply on last year and worsening over the last two quarters, driven by much weaker market fundamentals, pressure on liquidity and weaker investment metrics. However, distress remains markedly below levels seen in the UK and Germany.

Sector trends

Retail and Consumer Goods companies are the most distressed across all sectors as decade highs in inflation and rising interest rates squeeze household incomes. Meanwhile, retailers continue to face an increase in borrowing, operating and input costs which, against a backdrop of weaker demand, has put pressure on liquidity and profitability.

Real Estate companies across Europe have seen levels of distress rise significantly on last year and on the previous quarter. Distress has been pushed higher by increased risk metrics, weaker valuations and lower levels of liquidity, amid an outlook of rising interest rates and lower expectations of capital appreciation.

Distress for Industrials has continued to rise, driven by a deterioration in valuation metrics, weaker profitability and poorer investment metrics according to the latest data. Firms continue to face rising input and operating costs against a backdrop of slowing global demand

Meanwhile, European Healthcare companies have continued to see above average levels of distress over the last quarter. Liquidity and risk metrics have come under pressure as the pandemic comes to a period of containment and greater certainty.

Corporate distress can be defined as uncertainty about the fundamental value of financial assets, volatility and increases in perceived risk. It also refers to the disruption of the normal functioning of companies’ financial performance. There are several common characteristics of corporate distress: liquidity pressures, reduced profitability, rising insolvency risk, falling valuations and reduced return on investment.

Click here to read the full December 2022 report.

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