Corporate distress in the UK has risen to its highest level since June 2020, despite easing marginally across other key European markets, according to the latest Weil European Distress Index.
The quarterly study, which aggregates data from more than 3,750 listed corporates and financial market indicators, reveals an increasingly mixed picture across Europe. While remaining above long-run average levels, distress has eased in most key European markets, a result of moderating expectations of a deep and prolonged recession throughout the continent, with faster falls in inflation and a stronger boost from pent-up demand.
However, corporates in the UK – the only major economy still expected to enter a recession this year – continue to experience growing levels of distress, widening a gap that already exists with Germany, France, Italy and Spain.
UK economy continues to face significant headwinds, as corporates battle with higher inflation, higher operating costs and higher input costs. The Bank of England has increased base rates faster than the European Central Bank, meaning the cost of servicing and raising debt has also risen faster and more considerably in the UK.
The UK housing market is also struggling with the drag of higher mortgage rates and a sharper increase in the cost-of-living. Private rental prices paid by tenants in the UK increased by 4.4% in the 12 months to January 2023, representing the largest annual percentage change since this UK series began in January 2016. Consumer confidence and discretionary incomes remain squeezed – affecting two thirds of overall spend in the UK. It comes as Chancellor Jeremy Hunt announced that higher taxes will remain for the foreseeable in order to keep on top of public finances.
In terms of outlook, it should be noted that two million UK households have fixed rate mortgages coming to an end during 2023. These households will need to remortgage at elevated interest rates, resulting in an estimated additional hit to discretionary spending of £225 per month at current average rates of 4.7% on a £150,000 mortgage balance, according to Retail Economics. In many cases, affordability will be extremely tight. On the continent by contrast, most mortgages are taken out on floating rates.
Corporates in Germany were the second most distressed across the European markets included, but saw levels of distress moderate mildly on the previous quarter. This is likely to reflect a more optimistic outlook for the economy, given the expected avoidance of recession and stronger financial markets. With the economy reliant on manufacturing, ongoing softness in global demand continues to play a key role in distress expectations for German corporates.
Andrew Wilkinson, Senior European Restructuring Partner and Co-Head of Weil’s London Restructuring practice, said: “European corporates have shown remarkable resilience in face of the financial and operational challenges of the last 12-months. In some sectors, business confidence is rebounding. Yet, corporate debt levels remain at historic highs, and there is a lag between base rate hikes and their impact on underlying business performance. The collapse of Silicon Valley Bank shows that not all implications of such a dramatic change in monetary policy are foreseeable.”
“Risk remains firmly on the downside, particularly in the UK and Germany.”