Middle East War to Intensify Soaring European Corporate Distress

The outbreak of hostilities in the Middle East and surging energy costs are expected to exacerbate soaring levels of financial distress among European corporates, according to Alvarez & Marsal Inc.

Even before the US and Israel began their attacks on Iran on Feb. 28, financial strain among the continent’s businesses was at a four-year high, a new report from the consultancy firm released on Tuesday said.

“The escalating conflict in the Middle East is likely acting as a multiplier for the distress we are already tracking across the European landscape,” Chris Johnston, a managing director in Alvarez & Marsal’s European restructuring team, told Bloomberg News.

Prior to the war’s onset, the number of companies suffering from some combination of insufficient liquidity, an unsustainable capital structure and weak profitability had jumped 57% year-on-year, according to Alvarez & Marsal. The consultancy estimated that about 13.5% of European businesses were experiencing distress — the highest proportion since 2022.

The firm’s biannual report looks at the financial performance and balance sheets of more than 60,000 companies in the region.

Rising costs, weaker consumer demand and instability in global trading relations had already undermined the standing of many European businesses. The stress will only intensify as the war in the Middle East drags on, the report noted.

Distress has been concentrated in sectors most exposed to consumer sentiment and global supply chain disruption. Topping the list is fashion and retail, manufacturing and chemicals — although automotive, business services and construction are also well represented.

Energy Consumption

Industries with high energy consumption such as chemicals and manufacturing are now particularly at risk given how many companies were already operating on “razor thin” margins, Johnston said. Meanwhile, the larger increase in expenses, also stemming from a rise in the cost of logistics, will fuel inflationary pressures.

Oil and gas prices have surged since the beginning of the war as markets closely monitor the disruption of vital commodity flows through the Strait of Hormuz.

“This directly erodes the purchasing power of the European consumer, further destabilizing retail and other consumer focused sectors that are already struggling with market share erosion and high debt-servicing costs,” Johnston said.

Read More: World Faces Largest-Ever Oil Supply Disruption on Middle East War, IEA Says

When combined with the already high levels of indebtedness among European firms, the geopolitical shock of the Middle East war will accelerate the need for both financial and operational restructurings, according to Johnston.

“The continuing geopolitical uncertainty is narrowing the path to recovery across the sectors we have already identified, and will undoubtedly be putting further pressure across markets more generally,” he added.

Photograph: Paris skyline. Photo credit: Nathan Laine/Bloomberg