What’s behind this acceleration? The recession in corporate revenues is gaining traction amid lower pricing power and weaker global demand: As of Q2 2023, the revenue recession has been broad-based across all regions for the first time since mid-2020 (-1.9% y/y). This combined with continued high costs is squeezing profitability. As a result, liquidity positions are worsening fast and not likely to improve before 2025.
“Companies still have a sizable amount of excess cash, EUR3.4bn in the Eurozone and USD2.5bn in the U.S. But these cash buffers remain highly concentrated in the hands of large firms and in specific sectors such as tech and consumer discretionary. And in general, most companies are unable to increase their cash positions through operations in the context of lower-for-longer economic growth. All in all, we expect two accelerations in global business insolvencies, with +6% in 2023 and +10% in 2024, after +1% in 2022”, states Aylin Somersan Coqui, CEO of Allianz Trade.
The most vulnerable corporates and sectors are caught between a rock and hard place in 2023, with hospitality, transportation and wholesale/retail on the front line. Other sectors are catching up fast, in particular construction, where backlogs of work have been almost completed – especially in the residential segment.
“At the same time, higher-for-longer interest rates are reducing demand in sectors such as real estate and durable goods, and will start pressuring solvency in highly indebted sectors, such as utilities and telecom, in addition to real estate, on both sides of the Atlantic. Moreover, global WCR currently stand at a record high of 86 days, more than +2 days above pre-pandemic levels. Higher interest rates also make it even more expensive for companies to finance structurally higher working capital requirements (WCR), which poses risks for sectors such as construction and machinery and transport equipment”, explains Maxime Lemerle, Lead Analyst for Insolvency Research.