One in fifteen European companies are facing significant pressure to restructure this year after being hit by higher financing costs and weakening consumer demand, with Germany, Austria and the Nordics particularly under strain, according to a report by Boston Consulting Group.
Around a third of businesses in Germany and Austria also face what BCG dubs “transformation pressure” or early signs of weakening performance and financial stability which require improvement, the consulting firm said in a presentation Monday. That compares with around 21% across Europe as a whole, an increase from 14% in 2023.
The company compiled financial information from more than 2,000 public companies in Europe, and drew on company statements and interviews.
The pressure in Austria and Germany in part comes from the “structure of the sectors,” said Jochen Schönfelder, a senior partner at BCG in Cologne. “One reason is the high exposure to China and Russia, with the second being a high exposure to energy-heavy industries.” He also noted the two countries had been particularly impacted by the “consumer crisis,” with demand slumping for fashion and other items.
Real estate, telecommunications, media and technology firms and retail were the three sectors most under stress across Europe. Around 68% of real estate companies are showing these early signs of strain, up from around 26% in 2023, according to BCG.
The data highlights how the continent is still confronting the after-effects of the rapid rise in central bank interest rates, as well as the surge in raw material and energy prices following Russia’s invasion of Ukraine. While there are signs of economic recovery in Europe, financing costs are still expected to stay at elevated levels, with markets only fully pricing around two rate cuts this year from the European Central Bank.
Higher Rates
Higher interest rates have been a key driver of the weakness in more capital-intensive sectors such as telecommunications and industrials, according to the report. As well as this, industrial companies across Europe have faced continued competition from countries such as China and need to invest in their businesses to adapt to regulation such as the EU Green Deal.
The retail sector is also experiencing increased risk sensitivity from banks, with limited availability of debt and equity for developing retail real estate as well, according to BCG. That comes alongside headwinds such as increased labor costs and supply chain disruption.
However, even with this pressure, there have been fewer debt restructuring processes than anticipated, according to Schönfelder. Part of that is down to the fact that lenders have been willing to do amend-and-extend transactions, which push out the maturity of the debt and tweak some of the terms.
“In many refinancing situations, companies and creditors are just trying to kick the can down the road,” said Schönfelder, adding that the problem will still need to be dealt with when the new maturity is reached.