This fifth edition of the survey summarizes insights from the workout bankers on their experience in the past 1H-24 period and expectations from the current 2H-24 period and beyond. The survey covers more than 20[1] countries which are economically, politically, and culturally diverse, as are the group of responding lenders from more than 30 banking institutions. Therefore, you should bear this in mind when reading the survey results.
For earlier editions of the survey, please refer to: 1st Edition, 2nd Edition, 3rd Edition and 4th edition.
In brief
The growth in restructuring activity appears to be decelerating compared to the results of earlier survey editions. However, there are significant differences between sectors and countries.
In the previous 1H-24 period, around half of respondents (53%) saw an increase in the number of workout cases in their portfolios, compared to 2H-23 (the previous fourth edition saw 71% of bankers experience an increase). Most respondents (42% of 53%) expect an increase in restructurings of up to 25%.
The majority (62%) of the workout banker community expects even more restructurings for the current 2H-24 period. This anticipated increase in distressed activity in 2H-24 is very much in line with the latest EY UK&I’s Profit Warning study, which found an 11% rise of profit warnings from UK-registered companies in Q3-24 compared to the same period in the previous year. Further details can be found here: Analysis of UK Profit Warnings.
There are differences between countries within the survey results, though. For example, in Austria, Poland, Slovakia and Serbia the vast majority (>75%) of respondents expects more restructuring cases, while respondents from Croatia, the Czech Republic, Greece and Malta think they will see fewer restructurings in their portfolios. Like the 1H-24 period results, most of these respondents (55%) expect an increase in restructurings of up to 25%.
In this fifth survey edition, top-line pressures have finally overtaken the long-standing cost-side pressures as the main driver of restructuring activity, for both the past 1H-24 and current 2H-24 periods. Slower economic growth and geopolitical stress complete the top three expected pressures. High interest rates, previously a significant challenge, rated “only” seventh place.
The largest share of respondents expects the peak of restructuring activity to occur in 1H-25, consistent with the observation in earlier survey editions of expectation of the peak occurring in the following six-month period. However, this fifth edition differs from its earlier counterparts in expecting a prolonged higher number of restructurings for the near future. This appears consistent with the EY European Economic Outlook from October 2024. The European economy has been recovering at a modest pace. Despite rising real incomes, consumer spending has been increasing slowly, firms have become reluctant to invest amid decreasing capacity utilization and profit margins, elevated interest rates, and negative business and consumer sentiment.
Construction and building materials and real estate remain among the top sectors with the highest restructuring activity, scoring first and second place, respectively.
However, a new third place holder emerged — the automotive sector. This may not be that surprising considering the recent media coverage of large automotive players facing numerous market headwinds.
European original equipment manufacturers (OEMs) and leading automakers are facing challenges with declining car sales, especially in China and within the electric car segment. There is a material production overcapacity within the whole industry and commencement of production for new EVs is often being postponed, negatively impacting suppliers, who have invested significantly (often debt funded) in the transition from internal combustion engines. Revenues are then not coming from these new investments, while debt servicing and fixed costs are increasing, creating a liquidity squeeze and more restructuring situations. Solving such difficulties requires a complex response, beginning with quick wins and implementation of working capital measures to reduce the cash burn and gain breathing space, in which to develop and implement more comprehensive changes to reduce the high fixed cost base. This typically involves footprint rationalization and transition of production to lower-cost countries, tiered by underlying product complexity.
While not at the top of the list, transport and logistics experienced one of the highest increases in restructuring activity (together with the automotive sector), compared to the earlier fourth survey edition. Economic uncertainty, weak industrial production/consumption, labor shortages, fuel price fluctuations and progressively more stringent emission regulations are increasingly impacting the sector.
As expected, amend and extend debt restructuring remains the “bread and butter” restructuring solution with debt servicing and a covenant package tailored to the new forecast cash flow profile, reflecting the new norms in the markets. We have hypothesized in earlier survey editions that we might increasingly see operational turnarounds forming part of the overall solution and indeed this seems to be the case. Markets have fundamentally changed over the last several years with major market-disrupting events (COVID-19, the war in Ukraine and Middle East, trade wars, regulatory changes, green transitioning and technological changes), increasing volatility and overall uncertainty. Addressing such complex market changes often requires significant changes to company business models, together with making business operations as lean as possible to maximize operational efficiency. This survey edition quite clearly confirms this trend, both in terms of what bankers have seen in the past 1H-24 period as well as what they expect from the current 2H-24 period.
Other restructuring solutions do not exhibit any significant changes to previously observed trends.
Existing lenders and shareholders remain the most common sources of new funding into restructuring situations. They are likely to preserve their position and avoid dilution (security, ranking, ownership) from potential third parties willing to provide new funding but at high cost and downside protection, corresponding to the high risks involved.
However, the trend of existing stakeholders providing new money to restructuring situations appears to be fading. The role of new local banks, private equity funds and especially trade creditors offsets this. Similar to more frequent operational turnarounds, we expected the increased presence of trade creditors in restructuring discussions, together with financial institutions. This is due to suppliers representing, often significantly, an increasing burden in company operations. Company survival then requires such cost optimization and in exchange for extending payment terms and other concessions, suppliers want to extract value and protection of their position. This then leads to more complex restructurings with more stakeholders involved.
[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, Türkiye, Ukraine
Restructuring activity continues to rise, with most workout bankers reporting increased case loads in 1H-24 and anticipating further growth in 2H-24. Top-line pressures have replaced cost-side pressures as the primary drivers of restructuring, reflecting a shift in market dynamics. The most affected sectors include construction and building materials, real estate, and the emerging automotive sector.
Amend-and-extend solutions remain the dominant approach to restructurings, while operational turnarounds and new money providers are becoming increasingly important in resolving cases.