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Pressure points—restructurings are rising as inflation bites

Having weathered the worst of the pandemic and with restructurings bottoming out late last year, companies are facing a perfect storm of rising inflation and renewed supply shocks stemming from the war in Ukraine.

Globally, restructurings have been on the rise in Q1 2022, reaching 81 new cases, up from 70 in Q4 and 76 in Q3 2021. In Europe, restructurings climbed to 29 in Q1, having ebbed to a low of 14 in Q3.

What does this mean for companies at the heart of this storm?

1/ When the music stops, get off the dance floor

Many companies were spared bankruptcy in the past two years thanks to unprecedented quantitative easing and government stimulus. This allowed them to load up on cheap debt and prevented them from toppling.

But the easy money period is coming to an end.

Policymakers at the European Central Bank (ECB) have intimated that a rate rise back to zero could happen this year in a bid to curb rampant inflation. The ECB is already scaling back its bond buying programme.

The monetary tightening environment is making debt financing more expensive and comes at a less than ideal time. Supply chains are under stress once again owing to Russia’s invasion of Ukraine, inhibiting companies’ ability to manufacture and distribute goods across Europe.

2/ Some sectors are weaker than others

Automotive firms are feeling the heat given the high number of car assembly and component manufacturing firms located in Ukraine, as are companies in the agricultural sector’s value chain due to the country’s extensive farming industry. But any business operating on thin margins and unable to pass along rising costs finds itself in a predicament.

Notably, the length between successive peaks and troughs of restructuring case numbers appears to have been increasing over the past five years. It could be some time before case numbers fall back to levels seen in recent quarters. And we may not have begun to see the latest peak just yet.