Debt-laden companies across Europe, the Middle East, and Africa are facing a significant challenge as they scramble to refinance $500 billion in the first half of 2024. This rush to secure enough cash for refinancing comes as banks reduce risk ahead of stricter capital rules. Analysis by restructuring consultancy Alvarez & Marsal (A&M) reveals that the value of company loans and bonds maturing in this six-month period is higher than any other equivalent period until the end of 2025.
Financial experts warn that a crisis is on the horizon, with smaller and weaker businesses seeking new private loans and public debt deals just as government borrowing costs, which influence loan rates, increase globally. Failure to secure affordable rates could result in insolvencies and job losses.
Julie Palmer, a partner at UK restructuring firm Begbies Traynor, explains that interest rate rises are becoming a growing concern for “zombie” businesses that have barely managed to service their debt during a sustained period of low interest rates. She believes that the fall of some of these businesses is now beginning.
The term “zombie” refers to businesses that rely on support from governments, lenders, and investors to stay afloat. This support often includes restructuring loan repayments, offering reduced rates, or providing more relaxed terms, which can help banks avoid loan write-offs.
Signs of distress are already evident. Official data from Britain’s Office of National Statistics shows that corporate insolvencies in England and Wales rose by 19% in August compared to the previous year. Begbies Traynor’s quarterly Red Flag Report on corporate distress revealed that 438,702 businesses across the UK were in “significant” distress during the April-June period, an increase of 8.5% from the previous year.
For instance, British discount retailer Wilko fell into administration earlier this year, resulting in thousands of job cuts. France’s sixth-largest retailer, Casino, recently completed a debt restructuring to avoid bankruptcy.
Nicola Marinelli, assistant professor of finance at Regent’s University, highlights that central banks are taking a breather but are not ready to declare that rate hikes are over. This uncertainty means that banks and private equity firms can no longer hide from the impact of higher rates.
The Bank of England has cautioned lenders against underestimating the risk of corporate loan defaults. It warns against relying on models that measure risk across entire sectors rather than individual borrowers. During the second quarter, England and Wales experienced the highest number of company insolvencies since 2009.
One major bank is reportedly referring 100 small businesses per month to its restructuring team, a tenfold increase from 18 months ago. Another senior banker reveals that their bank plans to redeploy hundreds of staff to support distressed business customers if high funding costs and weak consumer demand push more companies to the brink.
Despite these challenges, business borrowers have thus far shown little material signs of stress, according to two senior banking sources. This resilience can be partly attributed to the liquidity injected into the economy during the pandemic. However, year-end asset quality reviews by banks will be crucial in determining the underlying strength of loans.
Bank of England data indicates that gross lending in the first half of 2023 was 12% lower than the previous six-month period. UK Finance, a trade body, described demand for borrowing among smaller firms as “muted” in its Q2 Business Finance Review. However, the need for refinancing cannot be delayed indefinitely.
A&M’s Paul Kirkbright warns that the firm’s insolvency colleagues are already busy with smaller businesses, as this is typically where economic distress first emerges. A significant influx of cases reported by A&M’s U.S. restructuring team is also seen as a leading indicator for Europe.
The increased interest rates and the end of COVID stimulus have caused distress for many Main Street businesses in the United States. U.S.-based hedge fund Legalist has reportedly received over 300 applications for funding since January.
The introduction of tougher capital rules for banks from 2025 is expected to limit support for companies in need of fresh funding. Katie Murray, CFO at NatWest Group, expressed concerns about how Basel III capital rules might impact small business lending.
Lenders have tightened credit terms and even offloaded some smaller business customers as they assess the profitability of these relationships. Naresh Aggarwal, policy director of the Association of Corporate Treasurers, points out that strains are most evident in the construction and retail sectors.
Firms without significant asset bases are finding it challenging to access anything beyond vanilla, loan-to-value-based finance from mainstream banks. Loans based on core profit are much harder to secure, according to Ravi Anand, managing director of specialist lender ThinCats.
Companies in need of cash may also turn to private equity firms, although these firms are increasingly discerning about the companies they support. The failure of any large corporation could have a “contamination effect,” warns Tim Metzgen, an A&M managing director.
The refinancing challenge faced by debt-laden companies is akin to a tightrope walk, with potential headw
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