LONDON (Reuters) – Indebted companies in Europe, the Middle East and Africa face a race to refinance $500 billion in the first half of 2024, a challenge that could lead to the collapse of many so-called “zombie” companies even as interest rates could peak.
Companies facing rising debt costs after years of low rates will have to compete with investors for enough cash as banks reduce their risk exposure in anticipation of tougher capital rules.
According to an analysis by restructuring consultancy Alvarez & Marsal (A&M), provided to Reuters, the value of corporate loans and bonds maturing during the half-year is higher than in any other equivalent period between today and the end of 2025.
A crisis is looming, industry experts say: many weaker and smaller companies are seeking financing as government borrowing costs, which influence financing costs, skyrocket. If these companies are unable to obtain the liquidity they need at affordable rates, they risk becoming insolvent and having to make layoffs.
“Rising interest rates are becoming increasingly problematic for businesses, particularly ‘zombie’ businesses that have held on through a prolonged period of low interest rates, while barely being able to to service their debt,” explains Julie Palmer, partner at British restructuring firm Begbies Traynor.
“I think we’re finally starting to see the downfall of some of the zombies.”
The term “zombie” is used in an economic context to refer to businesses that rely on support from governments, lenders and investors to stay afloat.
This support can take the form of restructuring, reduced interest rates or more flexible financing terms, and can help banks avoid writing off certain loans.
The distress signals are already there. According to the latest official UK statistics, the number of business failures in England and Wales stood at 2,308 in August, an increase of 19% on the previous year.
Begbies Traynor’s quarterly Red Flag business difficulties report, covering the April-June period, revealed that 438,702 businesses in the UK were experiencing “significant” difficulties, an increase of 8.5% on last year.
British discount retailer Wilko was placed into administration this summer, leading to thousands of job cuts.
In France, Casino has just finalized a restructuring of its debt to avoid bankruptcy.
According to the Banque de France, business insolvencies in the country increased by 36.8% in September compared to the same period last year, to 51,160.
“Central banks are taking a break but are not ready to say that rate hikes are over,” said Nicola Marinelli, assistant professor of finance at Regent’s University, to Reuters. “Banks and private equity firms have been waiting to see if the tide turns, but higher rates are no longer there to hide.”
FAILURE SCENARIO
According to Paul Kirkbright, managing director of A&M’s restructuring practice, one major bank – which he does not name – currently directs 100 small business files per month to its restructuring team, ten times more than there are 18 months.
A senior banker told Reuters his bank planned to redeploy hundreds of staff to support struggling businesses if high financing costs and falling demand pushed more companies into bankruptcy.
But so far, corporate borrowers have shown few material signs of stress, two senior banking sources told Reuters.
This resistance is partly due to the liquidity injected into the economy during the pandemic. But refinancing needs cannot be postponed indefinitely.
“Our insolvency colleagues are already very busy with small businesses, because that’s always where it starts,” says Paul Kirkbright, adding that A&M’s US restructuring team has also seen an influx important files, a leading indicator for the European situation.
Stricter capital rules for banks, which will come into force from 2025, are also expected to limit the appetite for lending to businesses, industry experts add.
Katie Murray, NatWest’s chief financial officer, told a conference last month that her bank was concerned about the impact Basel III capital rules could have on small business lending.
Some lenders have tightened credit terms and even shed some customers – small businesses – altogether as they re-evaluate the profitability of those relationships, said Naresh Aggarwal, policy director of the Association of Corporate Treasurers. ‘business), adding that the construction and retail sectors were most affected by the tensions.
Companies in need of liquidity are also likely to turn to private equity firms, which are now more discerning.
(Reporting Sinead Cruise, Iain Withers, French version Corentin Chappron, edited by Blandine Hénault)
Copyright © 2023 Thomson Reuters