This third edition of the survey summarizes insights from workout bankers on their experience in the past 1H 2023 period and expectations from the 2H 2023 period and beyond. The survey covers more than 25 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.
In brief
The European economy remains in stagnation. Despite a decrease in inflation, prices remain elevated, limiting growth in consumption. While the cycle of monetary policy tightening appears to be concluding, high interest rates continue to impact debt-servicing costs and credit conditions, constraining consumer spending and business investment.
Performance has continued to vary across sectors and countries. Energy-intensive and housing-related manufacturing has remained in recession, while most services, including tourism, have continued to grow, though at a slower pace. As a result, most Southern European and Balkan countries have continued to outpace countries in Central Europe focused on manufacturing.
The latest EY European Economic Outlook expects the European economy to recover gradually throughout 2024, due to increased real wages, stabilization of global manufacturing, the end of tight monetary policies and continued fiscal spending. EY forecasts average annual growth rates of 0.8% in 2024, accelerating to 2.1% in 2025.
However, a wide range of risks remain, which could negatively affect the expected growth. These include a manufacturing downturn due to monetary policy effects resulting in job losses and unemployment, geopolitical issues (Ukraine war, Middle East conflict escalation, etc.), stress in the banking sector, together with soaring prices of energy and food.
In the survey, broadly the same proportion of respondents experienced an increase in the number of workout cases in the third edition (48% in 1H 2023) as in the previous second edition (45% in 2H 2022). For the earlier editions of the survey results, please refer to the First Edition and Second Edition. However, a significant change can be observed in more negative expectations in the third edition, in which 73% of respondents expected to see increased restructuring situations in 2H 2023 (compared to 58% in the second edition).
Third edition:
Second edition:
Source: EY-Parthenon Restructuring Survey
While overall sentiment had become more negative among participants, more than half of those respondents expected only an increase in restructuring situations of up to 10% and not a “wave”.
On the positive side, expectations consistently appeared more pessimistic than reality. This might be related to the fact the markets have been very volatile and uncertain, which has made forming any robust outlook difficult. In addition, the prudent mindset of respondents may have resulted in more conservative expectations. In addition, the potential economic recovery, increased resilience of firms (having learnt from previous crises), lessening, or addressed supply-chain issues from past years, or simply having sold non-performing debt were reasons stated behind the reduced restructuring activity.
On the other hand, many companies had continued to face exposure to pressures and respondents noted:
While in the previous second edition of the survey, 57% of respondents expected the largest number of restructuring situations to occur in 2H 2023, in the third edition only 16% of respondents held this view. In 2H 2023, most respondents (68%) expected this peak to occur in 2024, especially in the first half (41%).
Respondents commented that firms have no liquidity headroom after exposure to market headwinds for an extended period, or restricted (or more costly) access to new financing.
Some bankers expected refinancing transactions to turn into restructurings driven by factors including:
On the positive side, declining inflation may encourage central banks to consider reducing interest rates, thus increasing economic activity. However, it takes time for this to turn into improved financial performance and liquidity for businesses.
From a sector perspective, construction, real estate and manufacturing consistently have had the highest restructuring activity across all three survey editions.
The construction and real estate sectors have suffered the negative impacts of rising interest rates, reducing both demand and asset values, operating cost-side pressures (including materials, energy, and wages) and workforce shortages. The collapse of the Signa Group in Austria with debts of around EUR 14.4b marks one of the largest situations in recent years.
Manufacturing firms typically operate cost and capital (thereby financing cost) intensive. Therefore, any increases in such cost components will have even more adverse impacts on these companies. Another pressure point stems from reduced consumer demand. Firms manufacturing discretionary products appear particularly vulnerable. Cost-passthrough to the end-customer (an extremely popular and successful tool of companies in the post COVID-19 period) is becoming increasingly difficult or even impossible. Massive de-stocking, another significant trend in this sector, adds up to a reduction in demand and contributes to the overall suite of pressures for firms in the sector.
Restructuring activity in the retail sector has also been steadily growing with each survey edition and will continue in the future.
Separately, high leverage (for example companies post leveraged buyout (LBO) transactions) under the current high interest rate environment represents a sector-agnostic pressure point and an indicator of potential capital structure pressures.
These perspectives align closely with the market insights and current restructuring experiences of the EY-Parthenon team in the Region.
Amend and extend debt restructuring has remained to be the main solution across all the three survey rounds indicated by around one-third of responses (as this solution presents fewer near-term negative consequences for borrowers and banks alike, albeit it may not address long-term and/or structural issues).
However, the frequency of amend and extend debt restructuring with debt write-off (or debt-for-equity swap) was picking up (9% responses for 1H 2023 (third edition) vs. 3% and 6% for 2H 2022(second edition) and 2Q 2022 (first edition), respectively). One of the reasons might have been replacement of shorter-term solutions (initially driven by limited forecasting ability due to challenging market conditions) by longer-term restructurings, requiring deeper interventions into the capital structure.
Like in 2H 2022, refinancing transactions also represented another typical transaction to address restructuring situations in 1H 2023 (10% of responses).
Surprisingly, fewer responses indicated “self-help” activities of companies such as asset sales (12% vs. 14% in 1H 2o23 vs. 2H 2022) and operational turnaround (3% vs. 5%), often a part of overall restructuring. We would have expected the opposite trend reflecting the increased focus of firms on their core business and addressing operating challenges. However, lenders might also address challenging situations by selling their debt (8% vs. 5%) or using the ultimate end-solution – insolvency (8% vs. 6%). These might partly explain why an increase in self-help activities activities was not indicated by the respondents.
In terms of new money for restructuring situations, existing banks were becoming less willing to provide new liquidity which we observed from the responses reducing from around one-third in 2Q 2022 to around one-fourth in 1H 2023. The same applies to new money from governmental bodies (8% in 1H 2023 vs. 11% and 13% in 2H 2022 and 2Q 2022, respectively). However, this could have been largely driven by the significant state support to companies during the post-COVID-19 period.
Nevertheless, the reduced appetite of governments and incumbent lenders was offset by other potential sources, such as existing and new shareholders, new local banks, private equity and distressed funds, or trade creditors – all more commonly contributing to the overall restructuring solution. Existing international financial institutions also appeared to be increasingly involved in the solutions.
While still the most common solution, there has been a decreasing trend in responses indicating consensual and out of court agreement of restructuring transactions (from 88% in 2Q 2022 to 76% in 1H 2023).
This can be explained by the opposite trend for the other implementation options – increasing formal in-court restructurings (from 3% to 9%), schemes of arrangement (from 0% to 4%) and security enforcements (from 6% to 8%).
The increased use of schemes of arrangement could be attributed to their wider availability across jurisdictions (post implementation of the European Restructuring Directive) and increasing number of precedents (becoming a tested “norm”). The increased number of formal in-court restructurings might be related to the increasing number of amend and extend restructurings with debt write-offs, which are typically more challenging restructurings to agree on.
EY-Parthenon teams provide insights into the restructuring market in the Region in the third edition of the EY Restructuring Pulse survey. The workout bankers’ community expected an increased number of restructuring situations in 2024, indicating the key drivers as softening demand in combination with elevated operating and financing costs. They expected construction, real estate, and manufacturing to remain the sectors facing the greatest restructuring activity, while the most common solution is still debt amend and extend restructuring. While existing banks less frequently provide new funds in restructuring situations, existing and new shareholders, new local banks, private equity and distressed funds, or trade creditors are becoming a more frequent source of liquidity. Restructuring is still predominantly implemented consensually and out-of-court. However, implementation of an increasing number of transactions takes place through formal in-court proceedings, enforcement of security or through a scheme.