How geopolitical pressure is reshaping Europe’s restructuring cycle

Europe’s corporate restructuring cycle continues to gather momentum, according to EY‑Parthenon’s latest Restructuring Pulse Survey of workout bankers conducted in March-April 2026. Across Europe, 60% of respondents reported that restructuring activity increased in the second half of 2025, whilst 73% expect it to rise again in H1 2026. Expectations for the peak of the cycle have once again been pushed out, from the first to the second half of 2026, following a similar six‑month shift in last autumn’s survey. Whilst 60% of respondents now expect the highest volume of cases in H2 2026, a further 22% do not anticipate the peak until H1 2027, underlining the increasingly prolonged nature of the cycle.

This repeated extension highlights two defining features of the current environment. As noted in previous surveys, many companies entered this period supported by strong liquidity positions and long‑dated, low‑interest debt. These buffers have delayed the crystallisation of distress, preventing a short, sharp correction. At the same time, the cycle has not been driven by a single trigger. Instead, it continues to be prolonged by successive and overlapping challenges that are preventing pressure from unwinding.

H2 2026 is the expected peak in restructuring activity

As pressures accumulate, the risk of a sharper increase in corporate distress grows. Conflict in the Middle East has added further uncertainty, supply‑side disruption and energy cost pressures, with a risk of second‑round effects on inflation, interest rates and growth. The survey reflects this growing risk, with energy and raw‑material costs identified as the most likely trigger of corporate restructuring in H1 2026, followed by weaker growth and declining sales, as well as geopolitical stress.

This pattern mirrors trends seen in the EY‑Parthenon UK Profit Warning analysis¹ and is reinforced by the latest EY CEO Survey,² which shows that 60% of European CEOs and 54% of UK CEOs now view geopolitical tension as the biggest risk to their business over the next 12 months.

Workout bankers expect industrial sectors to remain at the centre of Europe’s restructuring cycle; with the trend seen in previous surveys reinforced by the impact of tariffs and the Middle East conflict on energy and supply chain, with pressures now extending more clearly into agriculture.

Across these sectors, structurally high-cost bases, capital intensity and exposure to global trade flows are making businesses particularly sensitive to a more volatile, protectionist operating environment. At the same time, uneven global growth, shifting demand patterns and ongoing geopolitical disruption are compounding existing challenges, creating a more persistent and complex backdrop.

• Automotive is expected to be the most active restructuring sector for the third consecutive survey across Europe. Shifting market dynamics, high fixed‑cost structures and intensifying competition continue to collide with tighter regulation, tariffs and rising input costs. Tier 2 and 3 suppliers remain particularly exposed as Chinese competition, US tariffs and slower‑than‑expected electric‑vehicle adoption continue to compress margins. Uneven global growth is compounding these pressures, with weak demand in Europe and North America contributing to persistent overcapacity and under‑utilised plants, particularly in Western Europe.
• Manufacturing restructuring expectations also remain elevated. Sluggish growth and weakening demand are eroding revenues, whilst elevated and volatile energy costs — with further upside risk from continued price volatility — are weighing on margins. These pressures are reinforced by geopolitical uncertainty, trade friction and ongoing supply‑chain disruption. At the same time, manufacturers face significant investment demands linked to modernisation alongside rising regulatory and sustainability requirements. The picture is different in the UK, where manufacturing and automotive are less active than chemicals and construction.
• Agriculture has moved into sharper focus in this survey. Conflict in the Middle East has pushed up fertiliser, energy and logistics costs, intensifying an already challenging input environment. Rising labour costs, tighter regulation and climate volatility are adding further strain. At the same time, commodity price swings, weaker consumer demand in parts of Europe and ongoing supply chain disruption are squeezing margins. These pressures could be amplified by a strong El Niño, with the potential to disrupt weather patterns, drive yield uncertainty and add further volatility to global agricultural output.

Automotive expected to lead restructuring activity again in H2 2026

Pressure is also evident beyond the core industrial sectors. Whilst restructuring expectations for construction and building materials have eased across Europe as a whole, the sector continues to feature prominently in the UK data due to rising input and labour costs, alongside refinancing risk, should interest rates remain higher for longer. Transportation risks have risen due to concerns over fuel costs and demand volatility. Chemical sector stress is more localised, concentrated in Germany, the Low Countries, the UK and Poland. By contrast, consumer sectors feature less prominently overall, although pockets of localised pressure remain.

Taken together, the sectors most prominently featured in the survey share high sensitivity to macroeconomic, fiscal and geopolitical forces alongside local and sector‑specific challenges. Their continued prominence in the restructuring cycle may be of concern for policymakers, given their strategic importance to European economies and their central role in employment, investment and supply chains.

Workout bankers across all regions expect corporate restructuring activity to increase in 2026, but, in a reversal of the previous survey, the centre of momentum has shifted decisively from East to West. More than 80% of respondents in Western Europe expect activity in their portfolios to rise in H1 2026, with just over half forecasting growth of more than 10%. This compares with around 70% expecting a rise in Eastern Europe, with a third expecting double‑digit growth. When asked where activity will concentrate, respondents point to Germany, France and the UK, reflecting mounting pressure on Europe’s industrial core and wider macro‑level stresses.

Despite rising pressure, workout bankers still expect consensual approaches to dominate in H1 2026. Amend and extend transactions remained the most common corporate restructuring solution in 2025 and are expected to retain that position into 2026, followed by operational turnaround and refinancing. Spain stands out as an outlier, with refinancing expected to play a leading role. Consistent with previous surveys, existing lenders and shareholders remain the primary sources of new funding. However, expectations continue to shift towards a greater role for distressed debt funds, especially in the UK, Spain and Poland. Whilst these investors can bring flexibility and risk appetite, their involvement increases the need for clear alignment across the capital structure.

Sources of new funding for organizations undergoing restructuring

The survey also highlights a shift towards deeper operational and structural change. Expectations for accelerated M&A are increasing across Europe, with the UK expectations higher than average, reflecting comparatively deep private equity markets and service‑heavy sectors where consolidation can deliver rapid synergies. Liability management exercises (LMEs) are expected to play a greater role, according to just under 30% of respondents across Europe, rising to 50% in the UK, where they are expected to be most prevalent, up from 40% in the previous survey. This aligns with a broader shift towards more tailored and innovative restructuring solutions, particularly in markets like the UK, with more flexible legal frameworks.

Fundamentally, this is not a passive market. As restructuring pressure builds, lender support is becoming increasingly conditional. Workout bankers consistently rank existing shareholder support and a credible, executable business plan as the two most important criteria when determining borrower support. This raises the bar for companies seeking continued backing and reinforces the importance of early engagement, clear strategic direction and alignment across stakeholders to preserve value.
 
What should companies and their stakeholders do now?

1. Address issues early to avoid escalation

Escalating cost pressures, renewed energy shocks and persistent geopolitical uncertainty increase the risk of deeper stress, particularly for UK businesses exposed to higher borrowing costs and energy volatility. Early action preserves optionality and protects value.

This requires building near-term financial visibility through robust cash flow forecasting and downside scenario planning, with a clear view on interest rate and cost sensitivities. Early engagement is critical to maintain flexibility, whilst proactive liquidity management—through working capital and asset optimisation—can create time and strategic headroom.

2. Combine financial solutions with decisive business transformation

As pressure mounts, companies will increasingly need to go beyond balance sheet fixes to address underlying performance issues, particularly in sectors facing demand softness and cost inflation.

Financial restructuring needs to be paired with decisive operational action. This includes driving margin through cost discipline and efficiency measures, whilst reshaping the business, exiting underperforming areas and refocussing on profitable, resilient segments.

3. Tailor strategies to local markets, capital structures and creditor expectations

Fragmentation across regions and sectors demands locally grounded strategies, clear alignment across stakeholders and jurisdiction‑specific execution.

Effective strategies require a detailed understanding of local restructuring tools and processes, alongside the dynamics of different creditor groups such as banks, direct lenders and special situations funds. Aligning these stakeholders early, whilst reflecting sector-specific pressures and capital structure nuances, is key to executing transactions efficiently and preserving value.

Special thanks to David Koudela, EY-Parthenon Director, Turnaround and Restructuring Strategy, Ernst & Young, s.r.o. for his support in conducting this survey.

Summary

European workout bankers surveyed by EY-Parthenon expect restructuring activity to rise further, peaking in H2 2026, particularly in Western Europe and industrial sectors. However, the outlook varies sharply by country, shaped by local economic conditions, sector exposure and geopolitical risk. This environment reinforces the need for early, locally tailored and strategically aligned restructuring strategies to navigate an increasingly complex European landscape.