LONDON — European governments are not the only ones struggling with debt. So are some of the region’s companies.
As profits and sales slip, some European businesses are scrambling to pay their bills. Because banks are reluctant to lend, the fear is that companies will not be able to borrow the cash they need and will be forced to take drastic action, further weighing on the economy.
“There’s a lack of business confidence across Europe” said Jonathan Loynes, chief European economist in London at the research organization Capital Economics. “Lending to the private sector is deteriorating, and there’s enormous stress on the European economy.”
The pressure is mounting. Insolvency — when a company’s debts exceed its assets and cash flow — is expected to rise 12 percent this year in the euro zone. Countries including Greece, Spain and Italy are expected to record the highest annual increases.
In the United States, the number of insolvencies is falling.In January, Petroplus Holdings of Switzerland, the largest independent oil refiner in Europe, said it was filing for insolvency after lenders demanded repayment on $1.75 billion of outstanding debt.
The company, facing dwindling margins as a result of high oil prices and weak economic conditions, tried to negotiate with creditors. But BNP Paribas of France, Credit Suisse of Switzerland and other lenders already dealing with the fallout from the European sovereign debt crisis decided that Petroplus was not worth the risk.
“We were ultimately not able to come to an agreement with our lenders to resolve these issues given the very tight and difficult European credit and refining markets,” the company’s chief executive, Jean-Paul Vettier, said on Jan. 24.
Now other companies, including energy multinationals and private equity firms, are sifting through the pieces. Nearly 40 bidders are assessing the British operations of Petroplus, said PricewaterhouseCoopers, which is overseeing the sale of the assets in Britain.
It is a bad omen. Roughly two-thirds of European companies that become insolvent will eventually file for bankruptcy, said Ludovic Subran, chief economist of Euler Hermes, a credit insurance company in Paris.
“The business environment has become worse,” Mr. Subran said. “Many companies are losing their competitiveness and being hit by a reduction in consumer spending.”
This year is shaping up badly for the Continent. The International Monetary Fund said on Jan. 24 that the euro zone’s gross domestic product would fall an estimated 0.5 percent in 2012. The downturn is expected to be most severe in Southern Europe, where Italy’s economy is forecast to contract by 2.2 percent and Spain’s by 1.7 percent.
The economic headwinds are wreaking havoc on corporate profits. As Europe grapples with recession, unemployment is rising, consumer confidence is plunging and manufacturing orders are falling.
Consumer-focused companies have been hit especially hard. In January, the giant British retailer Tesco issued its first profit warning in more than 20 years, and said earnings for 2012 would be $709 million lower than analysts’ expectations.
Carrefour of France, the global grocery chain that recently replaced its chief executive, has estimated that operating income for last year would fall by 15 to 20 percent, with sales taking a hit in France and Southern Europe.
“Banks are being more conservative about who they lend to, and Europe’s economic problems are weighing on companies’ future prospects,” said Brian Lochead, a business recovery services partner at PricewaterhouseCoopers in London. “One problem is driving the other.”
Without the financial lifeline banks can offer, debt-laden businesses are selling assets and cutting investment to conserve cash.
To restructure its finances, Punch Taverns, a British pub chain that borrowed $7.4 billion to expand rapidly in the last decade, decided to split itself in two last year.
A smaller group, the Spirit Pub Company, was created with Punch’s most profitable locations. Punch, which was left holding 75 percent of its $4.8 billion in outstanding debt, is now trying to sell more pubs to reduce its burden. Roger Whiteside, the chief executive of Punch, said the plan would help return the company to growth in the next five years.
Some companies are running out of options.
In December, Seat Pagine Gialle, the Italian yellow-pages publisher, said it would not pay $72 million to creditors as the company looked to restructure its balance sheet.
It was the second time Seat Pagine Gialle had defaulted on its debt in less than a year, although creditors have yet to push the company into insolvency. Others may follow.
European companies with credit ratings below investment grade have a combined $72 billion of debt due this year, according to Standard & Poor’s. Defaults among this group are expected to rise by as much as 8.4 percent in 2012, S.& P. estimates.
The sovereign debt crisis is only making the problems worse. A recent survey released by the European Central Bank showed that institutions reduced the credit available to companies in the third quarter of 2011, the latest figures available.
More worrying for Europe’s corporate sector, banks also said they would pull back even further in the last three months of 2011.
“If companies aren’t viable and don’t have access to refinancing, banks don’t want to throw good money after bad,” said Ángel Martín Torres, head of restructuring for Spain at the accountancy firm KPMG.
Regulators’ efforts to spur lending have yet to pay off. In December, the European Central Bank moved to provide the financial sector with 489 billion euros ($639 billion) of low-interest loans. Authorities had hoped the money would ease the credit pressure on European banks so they would start lending again to the wider economy.
But instead of offering the money to credit-starved companies, institutions have preferred to deposit the cash with the central bank for safekeeping. On Jan. 18, officials said European banks had parked about $700 billion in overnight deposits with the central bank, the highest level since the euro was established in 1999.
The distress could open the doors for potential takeovers. Cash-rich multinationals, including Siemens of Germany and Philips of the Netherlands, have been hunting for attractive assets at troubled companies. Private equity firms that specialize in buying distressed assets also are on the lookout.
In January, Sun European Partners, the private equity firm, bought Bonmarché, a division of the insolvent British fashion chain Peacocks that caters to older women. Sun European already owns other retailers in the sector.
“Many companies have good assets but bad capital structures,” said Mark Sterling, managing partner of the law firm Allen & Overy’s restructuring and insolvency practice in London. “So if they are good underlying businesses and have no sources of refinancing, that creates opportunities.”
nytimes.com
As profits and sales slip, some European businesses are scrambling to pay their bills. Because banks are reluctant to lend, the fear is that companies will not be able to borrow the cash they need and will be forced to take drastic action, further weighing on the economy.
“There’s a lack of business confidence across Europe” said Jonathan Loynes, chief European economist in London at the research organization Capital Economics. “Lending to the private sector is deteriorating, and there’s enormous stress on the European economy.”
The pressure is mounting. Insolvency — when a company’s debts exceed its assets and cash flow — is expected to rise 12 percent this year in the euro zone. Countries including Greece, Spain and Italy are expected to record the highest annual increases.
In the United States, the number of insolvencies is falling.In January, Petroplus Holdings of Switzerland, the largest independent oil refiner in Europe, said it was filing for insolvency after lenders demanded repayment on $1.75 billion of outstanding debt.
The company, facing dwindling margins as a result of high oil prices and weak economic conditions, tried to negotiate with creditors. But BNP Paribas of France, Credit Suisse of Switzerland and other lenders already dealing with the fallout from the European sovereign debt crisis decided that Petroplus was not worth the risk.
“We were ultimately not able to come to an agreement with our lenders to resolve these issues given the very tight and difficult European credit and refining markets,” the company’s chief executive, Jean-Paul Vettier, said on Jan. 24.
Now other companies, including energy multinationals and private equity firms, are sifting through the pieces. Nearly 40 bidders are assessing the British operations of Petroplus, said PricewaterhouseCoopers, which is overseeing the sale of the assets in Britain.
It is a bad omen. Roughly two-thirds of European companies that become insolvent will eventually file for bankruptcy, said Ludovic Subran, chief economist of Euler Hermes, a credit insurance company in Paris.
“The business environment has become worse,” Mr. Subran said. “Many companies are losing their competitiveness and being hit by a reduction in consumer spending.”
This year is shaping up badly for the Continent. The International Monetary Fund said on Jan. 24 that the euro zone’s gross domestic product would fall an estimated 0.5 percent in 2012. The downturn is expected to be most severe in Southern Europe, where Italy’s economy is forecast to contract by 2.2 percent and Spain’s by 1.7 percent.
The economic headwinds are wreaking havoc on corporate profits. As Europe grapples with recession, unemployment is rising, consumer confidence is plunging and manufacturing orders are falling.
Consumer-focused companies have been hit especially hard. In January, the giant British retailer Tesco issued its first profit warning in more than 20 years, and said earnings for 2012 would be $709 million lower than analysts’ expectations.
Carrefour of France, the global grocery chain that recently replaced its chief executive, has estimated that operating income for last year would fall by 15 to 20 percent, with sales taking a hit in France and Southern Europe.
“Banks are being more conservative about who they lend to, and Europe’s economic problems are weighing on companies’ future prospects,” said Brian Lochead, a business recovery services partner at PricewaterhouseCoopers in London. “One problem is driving the other.”
Without the financial lifeline banks can offer, debt-laden businesses are selling assets and cutting investment to conserve cash.
To restructure its finances, Punch Taverns, a British pub chain that borrowed $7.4 billion to expand rapidly in the last decade, decided to split itself in two last year.
A smaller group, the Spirit Pub Company, was created with Punch’s most profitable locations. Punch, which was left holding 75 percent of its $4.8 billion in outstanding debt, is now trying to sell more pubs to reduce its burden. Roger Whiteside, the chief executive of Punch, said the plan would help return the company to growth in the next five years.
Some companies are running out of options.
In December, Seat Pagine Gialle, the Italian yellow-pages publisher, said it would not pay $72 million to creditors as the company looked to restructure its balance sheet.
It was the second time Seat Pagine Gialle had defaulted on its debt in less than a year, although creditors have yet to push the company into insolvency. Others may follow.
European companies with credit ratings below investment grade have a combined $72 billion of debt due this year, according to Standard & Poor’s. Defaults among this group are expected to rise by as much as 8.4 percent in 2012, S.& P. estimates.
The sovereign debt crisis is only making the problems worse. A recent survey released by the European Central Bank showed that institutions reduced the credit available to companies in the third quarter of 2011, the latest figures available.
More worrying for Europe’s corporate sector, banks also said they would pull back even further in the last three months of 2011.
“If companies aren’t viable and don’t have access to refinancing, banks don’t want to throw good money after bad,” said Ángel Martín Torres, head of restructuring for Spain at the accountancy firm KPMG.
Regulators’ efforts to spur lending have yet to pay off. In December, the European Central Bank moved to provide the financial sector with 489 billion euros ($639 billion) of low-interest loans. Authorities had hoped the money would ease the credit pressure on European banks so they would start lending again to the wider economy.
But instead of offering the money to credit-starved companies, institutions have preferred to deposit the cash with the central bank for safekeeping. On Jan. 18, officials said European banks had parked about $700 billion in overnight deposits with the central bank, the highest level since the euro was established in 1999.
The distress could open the doors for potential takeovers. Cash-rich multinationals, including Siemens of Germany and Philips of the Netherlands, have been hunting for attractive assets at troubled companies. Private equity firms that specialize in buying distressed assets also are on the lookout.
In January, Sun European Partners, the private equity firm, bought Bonmarché, a division of the insolvent British fashion chain Peacocks that caters to older women. Sun European already owns other retailers in the sector.
“Many companies have good assets but bad capital structures,” said Mark Sterling, managing partner of the law firm Allen & Overy’s restructuring and insolvency practice in London. “So if they are good underlying businesses and have no sources of refinancing, that creates opportunities.”
nytimes.com
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