Business insolvency, again on an upward trendIn 2023, globally a +19% increase

After two years of declines globally, the latest figures for 2022 confirm that the rebound in business insolvencies has already intensified for a growing number of advanced economies and emerging markets since the start of the year. Therefore, this year, in the second quarter, the global insolvency index registered its first quarterly increase of +8% after 2020, being very close to the moment when it will register a double-digit acceleration, immediately after the third quarter.

Thus, Allianz Trade analysts expect the global insolvency index to increase from 8% to at least +10% in Q3, compared to the same period last year. A main factor that kept the pressure on commodity prices high was also the spillover effect of the war in Ukraine, mainly through rising commodity prices and the various episodes of the Chinese blockade. At this stage, despite signs of normalization, most countries are still experiencing business insolvencies below pre-pandemic levels. Based on the latest YTD figures, one in four countries is already below or above the number of insolvencies recorded in the same period in 2019. Two of the markets are in Asia – Taiwan and Hong Kong – while four are in Western Europe – Spain, Great Britain, Switzerland and Denmark, with Finland very close to joining the list. In contrast, Central and Eastern Europe is the main contributor, with half of the countries in the region recording business insolvencies above 2019 levels (Turkey, Poland, the Czech Republic, Romania and Bulgaria), with the exception of Russia, Slovakia and the Baltic countries.

Rising insolvencies are already a reality for most countries, especially for major European markets such as the UK, France, Spain, the Netherlands, Belgium and Switzerland. However, the US, China, Germany, Italy and Brazil still have the lowest levels. Half of the countries surveyed by Allianz Trade analysts have already seen double-digit increases in business insolvencies for the first part of 2022. India saw +64% YTD growth in June, Singapore +42% in August, Australia +104 % in September and Taiwan +10% in August. In the Americas, the return reached +36% YTD since August in Canada. In Central and Eastern Europe, the upward trend is driven by the acceleration in Turkey (+69% in August), as well as in Bulgaria, Romania and the Baltic States. In Western Europe, the rebound is led by Austria (+92% YTD since September), the UK (+70% since September) and Belgium (+52% since August), but double-digit increases are also visible in countries such as Denmark , France, Ireland, Norway, Spain and Switzerland.

Europe has seen a return of insolvencies to pre-pandemic levels in almost 60% of industries, particularly tourism, manufacturing and B2C services. At the same time, the overall recovery is mainly due to the insolvencies of small companies and is confirmed by the moderate number of major insolvencies (58 cases in Q3 2022 and 182 in the first three quarters, compared to 187 and 332 for the same period in 2021 and 2020). Only a few countries saw a rebound in insolvencies broken down by sector: Belgium, France and the United Kingdom (see Table 1) – all three of which were among the countries with the largest decline in insolvencies in 2020/2021.

In Romania, the number of insolvencies increased by 10.7% for the first 9 months of 2022 compared to the same period last year, in line with global expectations for the current year. Although it is double-digit growth that comes amid worsening macroeconomic fundamentals hit by inflation and exacerbated by the impact of the war in Ukraine, an optimistic approach would signal a slight slowdown from the previous month when the advance for the first 8 months was 11.3%.

“If the experience of the last quarter of last year is relevant – when inflation had started to be felt in the economy – an acceleration of 1-2 percentage points would lead the rate of insolvencies to the area of +12-14% growth, which corresponds to a significant number over 6,000 insolvencies. The number is important as it would mark the return or exceeding of the 2019 level of 6,500 insolvencies, the pre-pandemic year that was not influenced by the state’s massive support measures in the economy,” points out Mihai Chipirliu, CFA Risk Director, Allianz Trade.

If in recent months the advance of energy prices has negatively influenced the profits of many economic segments, the successive increases in interest rates – natural countermeasures to the inflationary situation – will be the tip of the spear influencing net profits and liquidity in the coming quarters. In this sense, abandoning the triumphalist discourse, accepting the current climate and financial discipline will have to be enhanced by an optimal relationship with creditors.

The most affected are small companies

The shock of the interest rate increase is looming in the first half of 2023, along with the acceleration of wages. As expected, large corporate cash balances (still 43% above pre-Covid-19 levels in the US, +36% in the UK and +32% in the Eurozone) provided a significant buffer for monetary policy normalization in 2022. Analysts forecast that future key rate hikes in the US, UK and Eurozone should raise average corporate interest rates by another 200 basis points by mid-2023, which in turn will reduce margins by -1.5 pp in the US, -2.2 pp in the UK and more than -3pp in the Eurozone countries. Italy, Spain and France being the most at risk.

However, a strong short-term liquidity squeeze in Europe should be avoided as banks have stepped in to offset the bond market (+22% y/y in new loans YTD) and more than 50% of corporate loans have increased maturity to over five years, while only 20% increased by less than one year. For industrial sectors in Europe, the wage bill is higher compared to the US. Thus, growth of 4-5% in 2023 could remove on average between -0.5 pp and -1 pp from margins. In a context of low economic growth, rising wages and financing costs are most at risk in areas such as: construction, telecommunications, automotive, retail, home appliances, electronics.

To avoid the biggest annual growth since 2009, government support will increase in Europe if the recession doubles to -2.4% as a result of a stronger energy crisis. The current fiscal support, more targeted and focused on limiting the acceleration of the severity rates[4], is expected to reduce this increase in insolvency by more than -10 percentage points compared to 2022 for the largest European economies: -12 percentage points in Germany ( 2,600 firms respectively), -13 pp in France and Italy (6,700 and 1,900 firms respectively), -15 pp in the United Kingdom (4,300) and -24 pp in Spain (2,100). However, if the energy crisis worsens, intensifying the coming recession, governments will increase the size of fiscal support measures, as business insolvency would increase by a further +8 percentage points to +25% in 2023 in the EU – the largest increase annually from 2009 until now. To fully absorb the additional shock, fiscal support measures would need to rise to 5% of GDP on average. However, these large fiscal jumps can be much more contained under tight monetary policies.

After two years of declines, analysts expect an overall acceleration in business insolvencies (+10% in 2022 and +19% in 2023 globally). In Western Europe, the Insolvency Regime Shift Model, which uses thousands of macro-financial data series using machine learning, indicates that insolvency is expected to increase by more than +10% for both France and the UK in 2022, while it could decrease by more than – 10% in Italy, without a major increase in Germany. Insolvencies are expected to exceed 53,000 cases in France in 2023 (+29% from +46% in 2022), 27,000 cases in the UK (+51% and +10% respectively), 17,000 cases in Germany ( +5% and +17%) and 10,900 cases in Italy (-6% and +36%). The region should surpass pre-pandemic business insolvency levels in 2022 (+5%), despite mixed dynamics.

In Asia, China is expected to see 15% more insolvencies in 2023 amid low growth and the limited impact of monetary and fiscal easing. In the US, a +38% increase in business insolvencies is expected in 2023 as a result of tighter monetary and financial conditions, which will mean a return to over 20,000 insolvencies per year.

However, the insolvency of some important firms can still be observed, namely: companies that were already fragile before the pandemic but did not survive the interruption of the support measures that temporarily kept them alive, companies that failed to adapt business models to the structural changes created or intensified by the pandemic and companies directly exposed to the spillover effects of the invasion of Ukraine on the economic and financial cycle.

Energy will generate the biggest profitability shock

Looking ahead, the high cost of energy will remain the biggest shock to profitability, especially in European countries. At current levels, the price of energy would impact the profits of non-financial companies as pricing power will change amid falling demand. Thus, firms can cope with a price increase of less than 50% and 40% respectively in Germany and France, only if they pass on a quarter of the energy price increases to customers. Given the nature of the current crisis, governments have chosen to adopt more cash-based measures to offset the war-induced rise in energy prices. Indeed, for both political and economic reasons (high corporate leverage amid a rising interest rate environment), promoting corporate leverage to deal with the crisis could prove to be a mistake. Thus, the share of fragile SMEs in Great Britain, France and Germany is stabilized at 17%, 13% and 6% respectively, or almost 42,000 firms in Great Britain, 28,400 in Germany and over 18,700 in France, meaning that in on average, governments will “rescue” over 4,500 SMEs.

The shift to a triad of mild recession in advanced economies, low growth in emerging markets and higher rate inflation have increased corporate risks, mainly in the construction, transport, telecommunications, machinery and equipment, retail, home appliances, electronics sectors , automobiles and textiles. Thus, the demand outlook, prolonged production constraints (energy and input prices, labor shortages and still-unnormalized supply chains) and larger financing issues (access and cost) are expected to affect both profitability and liquidity of non-financial corporations.

Analysts estimate that future key rate hikes in the US, UK and Eurozone should raise average corporate interest rates by another 200bp by mid-2023, reducing corporate margins by -1.5 percentage points in the US, – 2.2 percentage points in the UK and more than -3 percentage points in the Eurozone countries. Italy, Spain and France are most at risk. However, strong short-term liquidity pressure in Europe should be avoided as banks stepped in to offset the bond market (+22% y/y in new loans YTD). In addition, more than 50% of corporate loans increased their maturity to more than five years, while only 20% increased to less than one year. Without an energy price cap, non-financial corporations would not be able to avoid losses, as rising energy prices would see intermediate consumption rise by more than +70% as their pricing power declines as demand rapidly slows.

One in two countries will be above pre-pandemic levels in 2023

Allianz Trade specialists forecast a return of business insolvencies of +10% in 2022 and +19% in 2023 (compared to +10% and 14% respectively previously expected). In Western Europe, the pattern of insolvency regime change indicates that it should be greater than 10% for both France and the UK in 2022, while they should range between 0% and – 10% in Germany and fall by more than -10% in Italy. In this context, Western Europe is set to exceed its pre-pandemic regional level of business insolvencies in 2022, despite mixed dynamics in the region, where Italy records fewer insolvencies (-6% y/y), Germany is close stable (+5%), with the UK and France seeing a strong rebound of +51% and +46% respectively. Insolvencies in France are expected to increase by +12,000 cases to reach 53,200 in 2023 and only slightly exceed 2019 levels (+3%), despite a noticeable recovery (+29%).

In Germany, insolvency is expected to remain below 2019 levels, despite a possible rebound in 2023 that would reach +17%, equivalent to 2,450 firms. In addition, experts expect the government to remain prepared to act in a targeted manner, as it has done to save some of the worst-hit utilities, including through additional temporary adjustments to restructuring and insolvency laws, but also through the temporary suspension of the obligation to file the declaration of insolvency, if necessary. In Italy, the mix of post-lockdown recovery and state measures has proven successful in limiting the number of insolvencies well below their pre-pandemic levels, with 7,160 cases in 2020, 8,498 cases in 2021 and around 8,000 cases in 2022, if the recovery expected in the fourth quarter of 2022 materializes.

Spain is the country with the highest risk of insolvency in both 2022 and 2023, as the post-pandemic recovery, state support and multiple extensions of the insolvency moratorium did not have the expected effects and led to an increase in business insolvencies of +30% in 2021 and +11% YTD in September 2022. While in the UK, the return of insolvencies should be significant for both 2022 and 2023. Normalization started quickly with the phasing out of support measures in a domestic context aggravated by Brexit issues.

For Africa, the Middle East and Central and Eastern Europe, corporate insolvencies are already above pre-pandemic regional levels. Thus further increases are expected in 2023 to a new record, especially in South Africa, Morocco and Turkey. And in Asia, China is expected to keep its annual insolvency level under control from 2022, thanks to a low starting point and despite increased difficulties for companies most exposed to international trade and restrictions related to Covid-19, especially in construction sector.

The US, because of the recession and related issues (funding) should trigger a return of insolvencies from the historical lows reached in 2021 (14,290 cases) that extended into 2022 (14,570 cases expected).

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