- With buffers waning, most vulnerable corporates and sectors have been caught between a rock and hard place in 2023, with hospitality, transportation and wholesale/retail on the front line. Excess cash at non-financial corporates remained high in the first half of 2023 at EUR3.4bn in the Eurozone and USD2.5bn in the US, more than +30% above pre-pandemic levels. But this cash buffer remains highly concentrated in the hands of large firms and in specific sectors (tech, consumer discretionary). At the same time, net cash positions are dropping faster than economic activity. Besides hospitality, transportation and wholesale/retail, other sectors are catching up fast, in particular construction, where backlogs of work have been almost completed – especially in the residential segment.
- The ongoing profitability squeeze will challenge corporate liquidity and solvency. 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). Hence, corporates’ liquidity positions are worsening fast and prospects are not likely to improve before 2025. Corporates are also not getting additional relief from commodity and supply chains, while labor costs remain a constraint for a majority of them, mainly for consumer-driven services and construction. As a result, profitability is being squeezed: global earnings per share fell by -1.1% y/y in Q2 2023. Last but not least, higher-for-longer interest rates are deteriorating the solvency profile of several sectors, with real estate and durable goods, as well as those exposed to structurally high Working Capital Requirements (machinery and transport equipment, pharmaceuticals, electronics, construction) at the forefront. Globally, WCR stood at a record high and more than +2 days above pre-pandemic levels, reaching 86 days, amid rising prices and structural changes in supply chains, such as friend-shoring/nearshoring. While the upcoming price deceleration will help reduce this financing gap through lower Days Inventory Outstanding (DIOs), payment terms are likely to be an increasing drag in the coming quarters.
- In the context of the looming deterioration in payment terms, we don’t expect any significant changes in insolvency frameworks to occur in the next two years that would reduce business insolvencies. Changes in insolvency frameworks to limit an increase in business insolvencies (i.e. ‘early identifications’ of debt distress; ‘early restructuring’ via for instance out-of-court proceedings) have already been partially implemented in several large economies, such as the UK, France, Italy, South Korea, Japan, Singapore, Hong Kong and China. As it stands, there are no further discussions on strengthening these measures in the coming years as the focus is more on increasing tax receipts through measures such as e-invoicing, for example. However, initiatives around payment behavior are more numerous and advanced, notably in Europe. They aim at reducing (late) payments and incidents by ensuring a better monitoring and benchmarking of payments across Europe while reducing asymmetry of information. Indeed, Global Days Sales Outstanding (DSO) stand above 60 days in 47% of firms, and given the global environment, payment terms are likely to deteriorate further in 2024. One additional day of payment delay is equivalent to USD100bn in the US, USD90bn in the EU and USD140bn in China. Hence, this can pose risks in terms of supply chains as some firms might be encouraged to favor non-European suppliers (with longer payment terms), and be critical for fragile firms, notably SMEs. We estimate that 15% of SMEs in the UK, 14% in France, 9% in Italy and 7% in Germany remains more at risk to default in the coming four years because of weak fundamentals.
- Three out of five countries will reach pre-pandemic business insolvency levels by the end of 2024, including large markets such as the US and Germany. At the end of 2023, the normalization in business insolvencies will be complete in most advanced economies. Business insolvencies experienced double-digit increases in 55% of countries accounting for more than 60% of global GDP. Moreover, in countries accounting for 40% of global GDP, the rebound has been extremely high, such as the US (+47%), France (+36%), the Netherlands (+59%), Japan (+35%) and South Korea (+41%). Looking ahead, we expect the upside trend to accelerate in 2024, rising by +10% compared to the +4% previously expected. Growth figures would need to double to stabilize insolvency figures on both sides of the Atlantic, which will not occur before 2025 (-2% fall in global business insolvencies expected).
Authors
Maxime Lemerle
Allianz Trade
Allianz Trade