This second edition of the survey summarizes insights from almost 100 workout bankers covering more than 25 countries in the CESA region and Austria. As the Region comprises economically, politically and culturally diverse countries, the survey results should be read with this in mind.
In brief
Despite market turbulence in recent years, the European economy has shown resilience and is expected to slowly pick up throughout the second half of 2023 and 2024. However, countries more reliant on manufacturing and vulnerable to natural gas price increases may face greater pressures. While inflation is declining, core inflation remains persistent due to tight labor markets. As central banks view addressing the inflation risk as a key objective, it is expected that their rates will stay higher for longer (please see Jul 23 EY European Economic Outlook). However, markets do not need to be in recession to see increased restructuring activity.
Based on the EY non-performing exposures tracker for Q4 2022, while non-performing loan (NPL) stock has been at historic lows, NPLs are projected to increase, mainly due to rising interest rates. This is further supported by the European banks’ Stage 2 loans (those performing but with higher risk), which increased year-on-year by 0.5 percentage points – reversing the decreasing trend seen throughout 2021 and exceeding the previous peak of 9.1% in Q4 2020.
The challenges that lie ahead may further be demonstrated by ca. 14% increase y-o-y in Austrian corporate insolvency rates in the first half of 2023.
EY survey results indicate upward trends in restructuring activity both in the second half of 2022 and the first half of 2023. However, compared to the first edition of the survey, fewer respondents commented on this phenomenon and the stated reasons were more balanced (positive and negative developments).
On the positive side, the reasons included a better-than-expected economic recovery, governments providing ongoing support, banks being supportive to provide forbearance measures, companies quite successful in adapting to new business circumstances and especially, large corporates still having solid cash reserves.
However, these have been offset by ongoing pressures on the cost side, including energy, re-shifting supply chains to purchase at higher costs, COVID-19 moratoria ending and starting to repay old and new COVID-19 loans. More frequently noted were also increasing wage pressures. Furthermore, respondents largely stressed rising interest rates from the ECB and other central banks (Poland, Czech Republic, Hungary and Romania), which have put significant pressures on liquidity.
Additionally, a new theme appeared – weakening demand. Respondents frequently commented on consumers’ deteriorating ability to spend money driven by salary increases well below inflation levels, increasing cost of living (mortgage, food and beverage, and energy costs increasing) and money invested in assets with questionable cash flows and valuations to protect against inflation. These reasons have resulted in savings being depleted and people changing habits from spending to saving. This makes it increasingly challenging for corporates to pass through the increased costs to end demand.
Source: EY-Parthenon Restructuring Survey
More than half of respondents expect the largest number of restructuring cases to occur in the second half of 2023 and almost a third expect them after 2023.
Key drivers include continuing operating and financing cost pressures with increasing influence from weakening demand and workforce recruitment and retention issues. Additionally, respondents commented on the natural time lag involved before pressures emerge, creditors gaining better understanding of borrowers’ financials in mid-2023, and that recent “kicking-the-can-down-the-road” amend and extend restructurings would need to be replaced by proper mid to long-term restructuring solutions.
These views are quite consistent with the EY-Parthenon team’s market observations and our current experience from restructuring transactions.
In the second half of 2022, agriculture, construction, manufacturing, and tourism and hospitality experienced the greatest number of restructuring cases. In the first half of 2023, construction and real estate were in the first two places, well ahead of the retail and manufacturing sectors in third and fourth.
As expected, continuing cost pressures and labor shortages, together with increasing interest costs and deteriorating consumer demand, have reduced market appetite for new real estate. This has a spill-over effect into other connected sectors, especially to those on the discretionary spending side.
An out-of-court agreed amend and extend restructuring was the most common solution, indicated by 31% of responses (down from 34% in the first edition of the survey). This preference can be explained by the fewer negative consequences it presents for banks. In contrast, an amend and extend with debt for equity swap or debt write-off has significantly greater negative impact on banks. Consequently, this was observed only in ca. 3% of responses (down from 6% in the first edition of the survey).
On the other side of the spectrum of solutions, insolvency/liquidations were noted in 6% of responses (down from 9% in the first edition of the survey).
In the other direction, there have been more asset sales (14% now vs. 9% previously) and debt refinancing transactions (11% vs. 6%), broadly offsetting the reduction in amend and extend restructurings and insolvency/liquidation situations.
This change could be explained by: (i) more “kicking the can” type of restructurings after the initial stages of the war in Ukraine with limited forward-looking visibility that prevents structuring a longer-term solution and (ii) “lost cases” being hit the hardest by pressures which were resolved first (through liquidation). Now, the restructuring focus may be moving more toward longer-term restructurings of more viable businesses.
As expected in the first survey edition, “self-help” activities of companies such as asset disposals (14% vs. 9%) and operational turnaround (5% vs. 3%) are increasingly becoming part of financial restructuring solutions. This could indicate companies’ increased focus on the core business and on addressing operating challenges driven by the current turbulent market circumstances.
Remaining solutions have not recorded any significant swings in responses. New equity from existing shareholders or new shareholders were observed roughly by 10% or 5% of respondents, respectively, in both survey editions.
Similarly, new debt from existing lenders or new lenders was seen by ca. 7% or 2%, respectively, in both survey editions.
What has been the most common restructuring solution in 2H 2022?
Borrowers needed to present a credible business plan based on well-substantiated assumptions. This remained the most important aspect identified in enabling successful restructuring in both survey editions. In light of increasing difficulties to “read” the market amid positive news interplaying with a number of negative headwinds, forecasting has become increasingly challenging. Working with scenario and case analyses will become more important and more flexible capital structure solutions may be required to avoid repetitive restructurings.
While a clean debt service payment track record prior to adverse market events (COVID-19, the Ukraine war) was considered as the next priority in the first survey edition, the respondents in the second edition prioritized the need for forecasts to show the capacity to begin repaying debt in the new high-inflation, high-interest, weakening demand world with an increasingly uncertain outlook.
Therefore, it is expected that new restructurings will not only reach larger corporates (as these are typically followed by restructurings of SMEs), but will also become more complex, more difficult to structure, requiring greater concessions from stakeholders and take longer to execute.
More than 80% of respondents have seen restructuring transactions implemented out of court and mutually agreed. Security was enforced in only 8% of cases and in 5% of cases a formal in-court restructuring proceeding was used.
Interestingly, 4% of respondents saw a restructuring transaction implemented through a scheme of arrangement (incl. those implemented under the European Restructuring Directive), compared to no observations in the first edition. While this may in part be driven by the increased number of respondents in the second survey edition, we believe this also shows an increasing tendency to implement restructuring transactions through a scheme, given its wider availability in more jurisdictions.
|
Implementation method |
1st edition |
2nd edition |
|
Agreed out-of-court restructuring |
90.3% |
82.1% |
|
Enforcement of security |
6.5% |
8.4% |
|
Formal in-court restructuring |
3.2% |
5.3% |
|
Scheme of arrangement(1) |
0.0% |
4.2% |
(1) Incl. those implemented under the European Restructuring Directive
Restructuring transactions were single all-lender agreements in 36% of cases, while a series of bilateral agreements applied to 22%. The remaining 42% of situations were implemented as combinations. This may indicate a practical approach towards restructurings where most material debt instruments are restructured according to tight schedules. This outweighs the risks of remaining bilateral agreements triggering wider defaults in capital structures.
*Albania, Armenia, Azerbaijan, Bosnia and Herzegovina, Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Georgia, Greece, Hungary, Kazakhstan, Kosovo, Kyrgyzstan, Latvia, Lithuania, Malta, Moldova, Montenegro, North Macedonia, Poland, Romania, Serbia, Slovakia, Slovenia, Turkey, Ukraine, Uzbekistan
EY-Parthenon teams provide insights into the restructuring market in Central, Eastern and Southeastern Europe and Central Asia and Austria in the second EY Restructuring Pulse survey. The workout bankers’ community expects an increased number of restructuring situations in 2023. The key drivers indicated were rising financing costs, weakening demand and cost-side pressures. Construction, real estate, retail, and manufacturing are the sectors expected to face the highest restructuring activity. Based on the survey, almost 80% of restructuring situations in the second half of 2022 were settled out of court. The most common solution implemented was debt amend and extend restructuring (30%).