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SMEs are struggling the most as higher interest rates squeeze
liquidity.
“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.
"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."
The study's broader corporate distress index that covers also
large companies eased slightly from February.
The report's definition of corporate distress includes
uncertainty about corporate financial health and ability to
service debts.
Britain was the most distressed country, squeezed between
stubbornly high inflation and aggressive rates hikes, hitting a
4.8 distressed level versus an average 3.9 for the overall
index.
Corporate distress also rose significantly in France, reaching
its highest since August 2020.
On April 29, Fitch downgraded France’s sovereign credit rating
to AA-, citing among other things concerns around its fiscal
deficit.
Sector-wise, real estate, unsurprisingly, was the most
distressed for the second consecutive three-month period, but
distress in the financial sector was also a cause for worry.
"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.
"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.”
The study, which aggregates data from more than 3,750 listed
companies and financial market indicators, is tracked against
default rates and shows a roughly 12 month-lag before distressed
levels translate into actual default rates.
S&P expects default rates for European sub-investment grade
companies to rise to 3.6% in March 2024 from 2.8% this March.
(Reporting by Chiara Elisei; Editing by Amanda Cooper and Jane
Merriman)
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