Risk of Europe failures rises as economy recovers
European companies face increased risk of failure as the economy creeps out of recession.
European companies face increased risk of failure as the economy creeps out of recession, because they will need more working capital, credit insurance specialists and distressed debt investors warn.
Distressed debt investors and advisers predicted a second wave of restructurings throughout Europe in 2010, responding to a survey by Debtwire released on Tuesday.
Companies that have limped along by stripping costs to the bone may struggle to build inventories in an economic recovery if they cannot meet their working capital requirements, investors said.
The UK was the last major economy to say it had emerged from recession on Tuesday, with gross domestic product up 0.1 percent between October and December.
As firms start to grow again, they will need more credit from banks, or their suppliers will need to get more credit insurance coverage, to fuel that growth.
Without that credit, "companies try to accommodate more and bigger orders, which absorbs more more working capital, and they literally run out of cash," said Ian Hollyhomes, a London-based director at credit insurer Coface.
"Previous recessions have shown that whilst the economy starts improving, we have an increased level of corporate failures for a while," he said.
Tim Smith, head of the trade credit pratice at global insurance broker Marsh & McLennan Cos, said the start of recovery is a risky time for companies but added that insurance coverage will not worsen and should improve by mid-year.
"Most insurers have rebalanced their books and are more open to writing new credit this year," he said.
Companies also are helping the situation by providing more information to insurers, he said.
Credit insurers have a direct relationship only with suppliers, not with buyers themselves. "There is a missing link between the client's customer and us in providing insurance," Hollyhomes said.
Npower, the UK unit of German utility RWE, said companies need to be proactive in providing current data.
The typical 12 to 18-month lag time in filing financial records with the UK's Companies House means that rating agencies and insurers are now looking at a company's performance at the height of the credit crisis. Credit insurers turned down 71 percent of applications by npower for credit insurance coverage for customers in June 2009, said Wayne Mitchell, npower head of corporate sales. That figure has improved to less than 40 percent but is still far from the 95-99 percent acceptance before the crisis, he said.
"It is no good to us if market shrinks, so we want to help our customers get over their credit problems."
In one example, npower saw credit insurance withdrawn for a transport manufacturing company hit by a sector-wide credit rating downgrade.
This buyer solved the problem by providing confidential information on order books, sales forecasts and parent company support to npower and the credit insurer, Mitchell said.
More than 100 million pounds worth of credit insurance was withdrawn from npower's business customers in 2009, and the utility predicted it would continue to be an issue in 2010.
Around Europe, restructuring was expected to peak in the first half of 2010 by the majority of respondents to Debtwire's European Distressed Debt Survey.
The withdrawal of quantitative easing and a rise in interest rates will add to problems, investors said.
"Peak restructuring lies ahead, not behind us," said Richard Nevins, senior partner at Cadwalader, Wickersham & Taft.
"There is still some money to be made in a second wave," said Shaun O'Callaghan of FTI Consulting. "We are seeing a parting of the ways between those companies that can invest and those that can't find the money."
Reuters Last Mod: 26 Ocak 2010, 21:01