Insolvency: More and more companies are collapsing under the weight of debt

At the beginning of 2024, the number of corporate bankruptcies worldwide climbed to its highest level since 2009. Such a trend has not been observed since the global financial crisis, stated in its March report – and also cited one of the reasons: the combination of high interest rates and persistent inflation. It is driving up the number of payment defaults – to 29 cases since the beginning of the year. There has been an increase in bankruptcies, particularly in Europe, which indicates weak consumer sentiment.

Analysts expect the trend to gain momentum over the course of 2024. The continued weakness of European consumers will therefore lead to further defaults by the end of the year. This is suggested by the high number of companies with low ratings. In January alone, the global bankruptcy rate rose well above the long-term average. Recently, developments in Europe in particular have contributed to the peak: the number of payment defaults will be more than twice as high in 2023 compared to the same period last year.

Debts due become a problem

According to the rating agency, failed debt restructuring agreements in particular played a significant role in the poor start to the year. Many companies struggled with highly leveraged capital structures and impending debt maturities. Current high-risk loans are therefore above their five-year average in both the USA and Europe.

By sector, companies in the consumer goods, entertainment and media sectors have been particularly affected since the beginning of the year, the analysts write. They accounted for around half of the outages in January. About 40 percent of February outages in the U.S. and Europe were concentrated in the healthcare and entertainment industries. S&P Global expects “continued high levels of defaults” in the media, healthcare and consumer discretionary sectors. In Europe, the metal and steel sectors have also suffered recently, and in emerging countries such as Brazil and Argentina, the transport and infrastructure sectors have suffered.

Bankruptcies in Germany have increased by double digits

In mid-March, the Federal Statistical Office also reported a sharp increase in corporate insolvencies for Germany compared to the start of 2023. According to preliminary information from Destatis, the number of regular insolvencies filed – this affects corporations and partnerships – increased by 18.1 percent in February 2024 compared to the same month of the previous year. In January it had already increased by 26.2 percent compared to the same month last year. In many cases, the actual time of business closures was almost three months earlier. “Since June 2023, double-digit growth rates have been observed compared to the previous year,” says the statistics office – although for this period they are still slightly below pre-Corona levels.

In 2023 as a whole, company bankruptcies in Germany were 22 percent higher than the previous year. The district courts reported 17,814 filed corporate insolvencies. However, the strong increase is partly statistical, because only a slight increase was observed in 2022 compared to the Corona year 2021, in which only a small number of companies had to stop due to numerous special regulations. Compared to the pre-Corona year 2019, corporate insolvencies in 2023 were even 5 percent lower.

Even in historical comparison, the number of insolvencies in 2009 – i.e. during the financial and economic crisis – was significantly higher at 32,687 cases than in 2023. However, last year, with 138 cases, 38 percent more “major insolvencies” were registered than in the previous year. At the same time, according to a study by the credit agency Creditreform, one in ten companies in the catering industry went out of business – the majority of them being small companies with up to ten employees.

Increasing defaults until the end of the year

Ratings agency S&P Global expects defaults in Europe to remain elevated in the near term, with a slight increase in the summer, until the region’s rate stabilizes by December 2024. The base scenario is supported by wage growth and falling inflation. It is also expected that, as in 2023, consumer-dependent sectors are “likely to lead” the number of defaults in the current year – including consumer goods as well as media and entertainment. Losses in the European chemical and healthcare industries could also be relatively high.

In a global economy, especially sectors such as hospitality, transport and retail are on an economic tightrope. Significant cash cushions – largely in the hands of large companies in industries such as technology and consumer discretionary – were shrinking faster than actual economic activity, an analysis said last October. This affects not only sectors already facing difficult times, such as hospitality, transport and wholesale and retail, but also sectors such as construction.

According to Allianz, reduced pricing power and weaker global demand has led to a broad sales recession across all regions – the worst since mid-2020. “This means companies are quickly losing their financial cushion, and a quick turnaround is not in sight, probably not before 2025.” At the same time, higher and longer-lasting interest rates not only made life difficult for sectors such as real estate and durable goods, they caused them also problems for companies with high working capital needs, such as manufacturers of machinery and transportation equipment, pharmaceuticals and electronics, and construction.