Insolvencies Outlook: The tip of the iceberg (EH)
Without any doubt, 2016 has been a highly happening and exciting year (some may say annus horribilis), especially from the perspective of insolvencies and protracted defaults. Companies and buyers struggled to stay resilient despite robust support from policymakers. Strong deflationary pressure and subdued global demand made life harder for businesses.
In the recent paper published by Euler Hermes, Ludovic Subran and his ERD team are explaining the anatomy of business insolvencies worldwide.
Asia Pacific and US in particular were impacted by defaults, deferred bond payments, major restructurings or Chapter 11 filings. Most of you will remember the headlines related to Hanjin Shipping, Swiber Holdings, ASL Marine, Dick Smith, Paragon Offshore and Arrium - just to name a few....
What to expect in 2017?
Of course, no one holds a crystal ball, but the trend is clear - bankruptcies are on the rise in APAC and in the Americas, Europe’s improvement is fading. Euler Hermes expects insolvencies to rise further in 2017 above the pre-crisis level and forecasts an increase of insolvencies in China by +10% and +15% for Singapore.
At a global level, the contained return of inflation should provide only limited relief to corporate turnovers, while companies will face higher input costs and upward wage pressures, in addition to tighter financing conditions.
The +45% surge in the number of major bankruptcies registered in the first three quarters of 2016 is a source of second-round turbulences. Top bankruptcies will have a domino effect, with adverse implications for fragile suppliers.
Zombie state-owned enterprises (SOEs) - what are the risks?
More than 160 out of the 2,000 biggest companies in the world can technically be defined as state-owned enterprises (SOEs). SOEs may strongly impact the national economy or be confined to a few strategic sectors.
Euler Hermes analysed four risk dimensions for SOEs across the world - size, debt, efficiency and handover strateg and distinguished these SOEs that can be a source of systemic risk (such as Chinese SOEs in metals and chemicals), and those which can be an engine for industrial development and prosperity (such as petrochemical SOEs in Gulf Cooperation Council countries). Since SOE debt is not consolidated into official public debt, debt of individual SOEs (such as Petrobras in Brazil and Pemex in Mexico) may add 7-8pps to the public debt-to-GDP ratio. This is why the lack of an exit strategy for restructuring and privatizing SOEs contributes to uncertainty.
On a general note, identifying “bankruptcy corners” will be key in 2017. Sectors to be focused on will remain Steel, Coal, Shipping, Construction, Machinery & Equipment and Building Materials.
For more details check out the attached Economic Insight published by Ludovic Subran's team: