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Firms with big inventory/working capital needs at risk

Weak growth and tightening financial conditions are pushing up the number of large companies becoming insolvent – and companies with high-fixed costs, larger inventories or working capital requirements will be more at risk, says a report from Euler Hermes.

The report written by the credit insurance company's head of sector and insolvency research, Maxime Lemerle, found that the upward trend in business insolvencies continued in 2018, mainly due to a surge in insolvencies among Chinese firms. It also found that business failures are set to rise for the third consecutive year in 2019.

Moreover, there were a high number of insolvencies among large businesses (those with more than EUR50 million in turnover), with 247 such major firms claiming insolvency, which was worth more than EUR100 billion in turnover in Q1-Q3 2018. The report noted that some of the 'hot spots' for businesses folding were retail in North America; construction in Asia; as well as retail, agrifood, services and construction in Western Europe.

Insolvencies in Western Europe are linked to the economic growth rate falling below the level that has historically been associated with a stable number of business failures (which is a growth rate of 1.7 per cent for that region). Lemerle says this will lead to an increase of insolvencies in most countries, notably in France, Italy, Spain (+2%) and the UK (+9%).

Notably, the US and Brazil are key exceptions to a trend that will see a rise in insolvencies in two-thirds of countries. Around 50 per cent of countries will even register more insolvencies than before the financial crisis.

Lemerle pinpoints a universal reason behind the rising number of insolvencies globally: “Most economies, notably the advanced ones, are expected to revert to and even cross their respective tempo of GDP growth which has historically proved to be necessary to stabilize the level of insolvencies (+1.7% for Western Europe). In other words, we expect economic growth to gradually become insufficient for a higher number of companies in a higher number of countries in regards to their production costs, (re)financing costs and structural challenges. De facto, the lowering demand is increasing the vulnerability of companies with high-fixed costs and firms with larger inventories or working capital requirements issues. At the same time, the end of easy financing is increasing the vulnerability of debt intensive sectors and more globally of most indebted companies.”


This item appears in the following sections:
Financing
Financing Short-Medium Term Deficits
Risk Management
ERM - Enterprise Risk Management
Financial Risk Management
Working Capital Management
Total Working Capital

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Comments

By Brian Shanahan on 23rd Jan 2019:

Great report from Maxime. This just reinforces the point that a slowdown is happening right now and firms need to understand and reduce their working capital exposures so that they can better weather the coming storm.

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