Allianz Trade Insolvency Report
Allianz Trade released today its latest Global Insolvency Report which unveils updated forecasts for 2023 and 2024. According to the world's leading trade credit insurer, after a small rebound in 2022 (+1%), global insolvencies are set to jump by +6% in 2023 and +10% in 2024.
Waning cash buffers and worsening profitability are putting many sectors at risk
What's behind this acceleration? 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). This combined with continued high costs is squeezing profitability. As a result, liquidity positions are worsening fast and not likely to improve before 2025.
"Companies still have a sizable amount of excess cash, EUR3.4tn in the Eurozone and USD2.5tn in the U.S. But these cash buffers remain highly concentrated in the hands of large firms and in specific sectors such as tech and consumer discretionary. And in general, most companies are unable to increase their cash positions through operations in the context of lower-for-longer economic growth. All in all, we expect two accelerations in global business insolvencies, with +6% in 2023 and +10% in 2024, after +1% in 2022," states Aylin Somersan Coqui, CEO of Allianz Trade.
The most vulnerable corporates and sectors are caught between a rock and hard place in 2023, with hospitality, transportation and wholesale/retail on the front line. Other sectors are catching up fast, in particular construction, where backlogs of work have been almost completed ? especially in the residential segment.
"At the same time, higher-for-longer interest rates are reducing demand in sectors such as real estate and durable goods, and will start pressuring solvency in highly indebted sectors, such as utilities and telecom, in addition to real estate, on both sides of the Atlantic. Moreover, global working capital requirements (WCR) currently stand at a record high of 86 days, more than +2 days above pre-pandemic levels. Higher interest rates also make it even more expensive for companies to finance structurally higher WCR, which poses risks for sectors such as construction and machinery and transport equipment," explains Maxime Lemerle, Lead Analyst for Insolvency Research.
3 out of 5 countries will reach pre-pandemic business insolvency levels by the end of 2024
At the end of 2023, the normalization in business insolvencies will be complete in most advanced economies, and 55% of countries are likely to see large double-digit increases. This includes the U.S. (+47%), France (+36%), the Netherlands (+59%), Japan (+35%) and South Korea (+41%). Globally, 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. On both sides of the Atlantic, GDP growth would need to double to stabilize insolvency figures, which will not occur before 2025.
"Moreover, in a context of slowing global economic growth, payment terms are likely to lengthen, adding to the rise in insolvencies in the coming quarters: Global Days Sales Outstanding already stand above 60 days for 47% of firms. One additional day of payment delay is equivalent to a financing gap of USD100bn in the U.S., USD90bn in the EU and USD140bn in China. With bank loans already drying up for SMEs, closing this financing gap could be a significant challenge," explains Aylin Somersan Coqui, CEO of Allianz Trade.
The US Outlook
In the US, the upside trend reversal from the ?historical' low (less than 13,500 cases in 2022), legacy of the strong post-covid recovery combined with the massive supports from Paycheck Protection Program (PPP), which saw government guaranteed loans, massively transformed into subsidies, which started in 2023 with large firms showing the way. We expect the combination of tightening of longer credit conditions and sharp economic slowdown to lead to another significant increase in 2024 (by +22% y/y from +47% in 2023). SMEs, which often have smaller cash reserves, thinner margins and fewer options for raising capital, should contribute more noticeably as they have access, since February 2020, to Chapter V which makes their restructuring easier (less expensive and less restrictive) than the standard Chapter 11. The rebound should remain contained in 2025, with a quasi-stabilization at around 23,900 cases, i.e. slightly above pre-pandemic levels (5%).
About Allianz Trade
Allianz Trade is the global leader in trade credit insurance and a recognized specialist in the areas of surety, collections, structured trade credit and political risk. Our proprietary intelligence network analyses daily changes in +80 million corporates solvency. We give companies the confidence to trade by securing their payments. We compensate your company in the event of a bad debt, but more importantly, we help you avoid bad debt in the first place. Whenever we provide trade credit insurance or other finance solutions, our priority is predictive protection. But, when the unexpected arrives, our AA credit rating means we have the resources, backed by Allianz to provide compensation to maintain your business. Headquartered in Paris, Allianz Trade is present in 52 countries with 5,500 employees. In 2022, our consolidated turnover was ? 3.3 billion and insured global business transactions represented ? 1,057 billion in exposure. For more information, please visit allianz-trade.com
Cautionary note regarding forward-looking statements
The statements contained herein may include prospects, statements of future expectations and other forward-looking statements that are based on management's current views and assumptions and involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such forward-looking statements. Such deviations may arise due to, without limitation, (I) changes of the general economic conditions and competitive situation, particularly in the Allianz Group's core business and core markets, (II) performance of financial markets (particularly market volatility, liquidity and credit events), (III) frequency and severity of insured loss events, including from natural catastrophes, and the development of loss expenses, (IV) mortality and morbidity levels and trends, (V) persistency levels, (VI) particularly in the banking business, the extent of credit defaults, (VII) interest rate levels, (VIII) currency exchange rates including the euro/US-dollar exchange rate, (IX) changes in laws and regulations, including tax regulations, (X) the impact of acquisitions, including related integration issues, and reorganization measures, and (XI) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences.
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