EMEA credit markets have faced a number of challenges in recent months from high inflation, rising interest rates and the war in Ukraine. The tough macroeconomic backdrop has led to a slowdown in primary issuance with more punitive coupons required to price deals versus the low coupons at the peak of the credit cycle. This has also meant a number of more unorthodox issuance transactions, such as amend-and-extend deals or exchange offers, have been required for issuers to get deals away.
Difficult primary market conditions combined with increased company operational strife in the current inflationary environment have also contributed to a repricing of default risk. Many analysts have predicted a rise in corporate issuer default rates in the coming year with a high dispersion among analyst forecasts. Rising inflation has led to reduced near-term operating margins as companies take time to pass on cost inflation as higher prices. Consumer incomes have also been squeezed and the cost of living crisis has led to a slowdown in the housing market.
In Europe, the high yield real estate sector has appeared on distressed investor radars as slow execution of selling assets, high loan-to-value ratios and corporate governance risks have all contributed to sliding debt prices.
The consumer sector has also offered opportunities for distressed debt investors, as disposable incomes come under pressure and and rising inflation puts pressure on margins. In the CEEMEA region, sovereigns and corporates are also at risk from a new restructuring wave following the Ukraine war.
Meanwhile, issuers with exposure to Russia, be it via operational presence in the country or simply by having Russia-linked stakeholders, have scrambled to sever those ties as they seek to dodge the international sanctions’ bullet. These extraordinary situations have generated novel questions that various courts across the globe, including those in the UK, have been grappling with.
There also remain other sectors and geographies appearing on the radars of distressed investors.
The energy sector has had a number of rulings such as the Energy Transfer Scheme, which can impact distressed sector investments while commodity prices remain volatile.
Spain could also be a geography to focus on with a new insolvency moratorium introduced by the government post-pandemic. The ABS market will also be a source of volatility given rising mortgage costs and falling property values.
The current economic backdrop clearly remains less benign than in recent years. But credit markets have witnessed systematic shocks in the past such as the COVID-19 pandemic, while long issuer maturity profiles mean the market can withstand a bear-case scenario of a closed issuance window in the short-term.
The number of opportunities for distressed debt participants can therefore increase should default rates continue to climb.
Head of High Yield, Debtwire
Head of Court Reporting EMEA, Debtwire
Key highlights from the report:
- State of play: 86% of respondents think debt restructuring activity is likely to increase in Europe in 2023 compared with the previous year, with 48% saying it is very likely.
- Rate rises raise red flags: 78% of respondents expect interest rate hikes will cause a new wave of insolvency filings in their region in 2023. In the DACH and Benelux regions, executives are particularly nervous about the impact of rates hikes and insolvencies, with 95% anticipating an insolvency surge linked to rate hikes.
- Regional focus: 50% of respondents say the UK & Ireland will see the greatest uptick in debt restructuring activity in 2023 compared to 2022, followed by Italy (35%).
- Legal matters: Nearly a third (29%) of respondents think that the introduction of the EU Directive on Restructuring and Insolvency has improved the early detection of financial distress in EU-based companies in their organisation to a great extent, while 32% argue it did so to some extent.
- ESG moves into the spotlight: 84% of respondents believe that companies without positive ESG records find it harder to attract funding when restructuring than companies with positive ESG records.
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