LAW & COMPLIANCE

As Global Cash Piles Hit New Records, Late Payments and Major Insolvencies Increase

Despite a new record being set for non-financial company cash hoarding, continued high payment delays and a sharp rise in major insolvencies (companies with more than 50mn EUR turnover) demonstrate that global economic momentum is not without its challenges, according Euler Hermes.

“Against the backdrop of overall global stability and with economic recovery finally beginning to gather steam, lurks a high degree of divergence and risk,” said Ludovic Subran, chief economist at Euler Hermes. “This becomes increasingly extreme as concentration of cash in some regions and industries sets new records, and the severity and frequency of major company failure rises.

“From major insolvencies in the retail and services sectors, particularly in the U.S., increasing bankruptcies in China and Brazil through to extended payment delays in China and the Aeronautics sector worldwide -- this adds up to bigger tail risks. The severity and frequency of extreme cases is on the rise and will need to be carefully monitored in the months ahead,” added Subran.

Insolvency levels are expected to decline

The research reveals that overall insolvency levels are expected to decline by -1% in 2017 and rise +1% in 2018. There is a persistent and broad-based rise in insolvencies in Latin America (+8% in 2017 and +11% in 2018) Africa (+10% and +6%) and Asia Pacific (+3% in both years). There will be a a plateau in North America in 2017 (0%) before pick-up in 2018 (+5%) after 7 years of steady fall.

Meanwhile, in Western Europe, a slowed pace of insolvency decline is expected: -5% in 2017 and -2% in 2018 from -7% in 2016. In Central and Eastern Europe (+1%, -6%) problems in Russia, Poland and Turkey will offset smaller country improvements in 2017.

While Euler Hermes forecasts that overall worldwide insolvencies will decline by -1% this year before increasing by +1% in 2018, 20 countries are expected to have more insolvencies in 2017 than the 2008 pre-crisis average. After three years of significant declines in insolvencies (-13.6% in 2014, -8.4% in 2015 and -4% in 2016), the global picture is being driven by uneven regional trends.

Sharp increase in major insolvencies

Also masked in the global figures is the sharp increase in major insolvencies in Q1 2017. Some 74 companies with a turnover of >50mn EUR became insolvent in the first three months of the year – 30 more than in Q1 2016.

The cumulative turnover of these insolvent companies totaled EUR19.1bn, up +34%. The top 20 largest insolvencies accounted for 70% of the global total, at 13.4bn EUR of cumulative turnover. While eight of these occurred in the U.S., Europe saw the largest increase in the number of major insolvencies. More than 1 in 3 (25 of 74) of the world’s major insolvencies in Q1 were in Europe

Under pressure from rapid digital disruption and continuing the trend of the past four quarters, the services and retail sectors recorded the highest number of major insolvencies in Q1 2017: 17 (up from 10 in Q1 2016) and 14 (up from 5), respectively.

The cumulative turnover of failed companies in these sectors in the first quarter was 6.2bn EUR (+579%) and 5.2bn EUR (+477%), respectively.

Pharmaceuticals and computer/telecom sectors remained sound, with no failures in Q1 2017 and just one major failure over the last four quarters.

Euler Hermes warns that companies should beware of the domino effect of these major insolvencies, as the overall severity of failures is worsening. This could have serious knock-on effects on providers along the supply chain. For example, retail bankruptcies in the U.S. and UK could impact electronics, manufacturing and textiles worldwide.

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