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The survey collects responses from workout banker professionals from the most prominent banking institutions in Central, Eastern and Southeastern Europe and Austria (the “Region”). It gathers their views on restructuring trends, solutions implemented and future expectations.
This fourth edition of the survey summarizes insights from workout bankers on their experience in the past 2H 2023 period and expectations from the 1H 2024 period and beyond. The survey covers more than 20[1] countries which are economically, politically, and culturally diverse. This also applies to the group of responding lenders. Therefore, you should read the survey results with this in mind.
For the earlier editions of the survey, please refer to the 1st Edition, 2nd Edition and 3rd Edition.
[1] Austria, Armenia, Azerbaijan, Bosnia and Herzegovina, Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Georgia, Greece, Hungary, Kosovo, Latvia, Lithuania, Malta, Poland, Romania, Serbia, Slovakia, Slovenia, Turkey, Ukraine
In brief
- Most of the respondents experienced increased number of workout cases in 2H 2023 (compared to 1H 2023).
- Increased restructuring activity is expected to accelerate in 1H 2024 (compared to 2H 2023), with the largest number of restructurings forecasted in 2H 2024.
- The main headwinds are ongoing cost-side pressures, softening demand and financing issues driven by persistently high interest rates.
- Construction, agriculture and real estate are expected to face highest restructuring activity, closely followed by the retail sector.
Restructuring activity
Most of the respondents (71%) experienced more workout cases in 2H 2023, compared to 1H 2023. However, this increase was up to 25% as noted by 67% of professionals (as highlighted on the chart), while only 4% saw even higher increase (mainly respondents from Austria and Poland). On the other hand, ca. 17% observed a reduced restructuring activity (especially for Croatia, Greece and Czechia).
What has been the trend in the number of workout cases in your loan portfolio over the last period (2H 2023)?
While in the first and second survey editions the respondents expected higher number of workout cases than the reality has shown afterwards, the third and fourth edition brought a correction – 73% of participants predicted increased activity in the 2H 2023 in the third edition which was then confirmed by 71% of respondents in the fourth edition. It will be interesting to see the actual activity for 1H 2024 in the next edition, as 72% expect a further (up to 50%) increase in the number of workout cases compared to 2H 2023.
What trend in the number of workout cases in your loan portfolio do you expect over the current period (1H 2024)?
Overall, it seems that 2024 will be a year with a lot of restructuring activity – the largest share of respondents (47%) expects the highest number of restructurings to occur in 2H 2024, followed by a sharp reduction in activity as expectations of (slow but steady) recovery toward the end of 2024, increased firms’ resilience after “learning their lessons” and reduced interest rates would likely provide a relief to the restructuring landscape.
Considering the situation on the markets, in which period do you expect the largest number of restructuring cases?
However, the predominantly negative sentiment remains. The top three main headwinds noted are cost-side pressures, being the “number 1” issue across all four survey editions, although its position has been weakening since the third survey edition. Declining sales were the second most frequently indicated pressure and having the opposite trend – increasingly more participants are flagging this issue. Financing issues (e.g., high interest rates, challenged refinancing, etc.) were ranked on the third place but compared to the third survey round, less participants highlighted this issue.
Restructuring activity in sectors
In terms of both actual and expected restructuring activity, a consistent group of sectors remained the top 5. Those sectors are construction, agriculture, real estate, manufacturing, and retail, in this order based on the highest expected restructuring activity for 1H 2024.
Top 10 sectors with highest restructuring activity
The construction sector remains at the top of sectors with the highest restructuring activity. It suffers from persistently high inflation which is driving up the costs of materials, energy, and labor. At the same time, asset prices and values are under pressure from high interest rates that reduce demand.
Agriculture sector is expected to be the second “hottest” sector in terms of restructuring activity in 1H 2024. The outlook worsened the most across all sectors. The businesses here are "squeezed from both sides". On the sell-side, unblocking the Black Sea ports in Ukraine in August 2023 finally enabled Ukraine to export production of their good 2021 and 2022 harvest years leading to a reduction in prices of agriculture commodities. On the cost side, high prices of fertilizers, fuels and energy remained. This results in margin erosion, reduced cash flow generation and generating potential liquidity pressures.
The real estate sector is expected to be the third most active in terms of restructurings in 1H 2024. This sector has been negatively impacted by rising interest rates, reducing asset valuations and deteriorating demand. However, interest rate pressures and the related negative sentiment may have started to ease and together with better ability of developers to switch from selling assets under reduced demand/prices to renting their real estate benefiting, for example, from more attractive rental rates on the market, improves their position. Some countries have also implemented various state-level-measures to help increase demand which may likely speed up recovery in this sector.
Restructuring solutions
Without any surprises, amend and extend debt restructuring has remained the mainstream solution in 2H 2023 to address debt servicing pressures. Asset sales represented the second most frequent (part of the) restructuring solution.
The number of refinancing transactions increased, which may be resulting from maturing debt, including COVID-19 pandemic loans, and overall beliefs of market recovery returning to economic growth with less volatility and better forecasting ability. In addition, businesses may have already established alternative supply chains, sourced new end markets and have stabilised their operations – i.e., these are the “winners”.
However, insolvencies are still on the rise as liquidity reserves have been depleting after extended exposure to market pressures. This is due to a lack of proactive steps by businesses to adjust their business models to the new norm on the markets while receiving various government support schemes. Debt sales by banks have been an increasingly common tool to enable lenders to exit distressed exposures in both 1H 2023 and 2H 2023 periods.
The frequency of debt amend and extend with debt write-off transactions reduced considerably compared to 1H 2023, which might also correlate to a reduced number of situations where new equity formed part of the solution (as new equity rarely comes into the distressed situation without right-sizing the debt). Perhaps this might be driven by a lower number of “heavy duty” restructurings in 2H 2023 as 1H 2023 likely saw more situations where shorter-term solutions (initially driven by a limited forecasting ability due to challenging market conditions) have been replaced by longer-term restructurings, requiring deeper interventions into the capital structure.
What has been the most common restructuring solution used in your country/region over the last period (2nd half 2023)?
In terms of new money sources to distressed situations, there were not many surprises here either. As expected, existing banks and shareholders represented the main sources of new money in 2H 2023. New money from new local banks and new shareholders followed as 3rd and 4th most frequent source, though lagging quite significantly behind the first two. Governmental bodies have been playing a smaller and smaller role here as expected with a number of COVID-19 pandemic and other state support programmes ending across the region.
On the other hand, trade creditor support has been increasingly important in restructuring situations, and we commonly observe this trend in our engagements as well. The extended period of inflationary pressures increasing input supply costs required this to be addressed as part of the solution. Similarly, distressed funds have been playing an increasingly important role in providing new money into restructuring transactions. These players have higher risk appetite and can provide funding under flexible terms into such situations where commercial banks would not be able or willing to do so.
What has been the most frequent source of new funding for distressed situations in your portfolio over the last period (2nd half 2023)?
Restructuring implementation
While there was a minor decreasing trend in the number of consensual out of court restructurings, security enforcements, in-court restructurings and the use of schemes of arrangements were slowly rising. Undeniably, consensual out-of-court restructurings will likely always form the main implementation route and its proportion in the 2H 2023 period increased in exchange for a reduced number of formal in-court proceedings and schemes of arrangements. Security enforcements stabilized at 8% of respondents seeing this in 2H 2023.
What has been the primary implementation "route" for a solution with the stakeholders over the last period (2nd half 2023)?
Summary
In the 4th EY Restructuring Pulse survey, EY teams provide insights into the restructuring trends across Central, Eastern and Southeastern Europe and Austria. Workout bankers in the region anticipate an increase in restructuring situations in 1H 2024 compared to 2H 2023 and the highest number of restructuring cases are expected in 2H 2024 driven by ongoing cost-side pressures, declining demand and high(er) interest rates. The key sectors expected to face high restructuring activity are construction, agriculture, and real estate. In 2H 2023, there were less “heavy duty” restructurings, including debt write-offs, and more refinancing transactions. Therefore, in 2024 we might see more but “lighter” restructurings or stressed refinancings that will be predominantly implement out of court.