European Covid-19 Rescue Plans Prompt Slump in Firms Going Bust

European companies are fending off insolvency as massive support from central banks and governments softens damage from coronavirus lockdowns, raising the prospect of a coming shock when that stimulus ends.

The number of firms seeking court protection from creditors in major European economies such as Britain, Germany and France has slumped since the pandemic hit the region this year, even as growth took a battering.

U.K. insolvencies fell about 30% between April and June from a year earlier while in Spain, the rate was almost 60% lower, according to data from the U.K. Insolvency Service and Spain’s Public Corporation of Property Rights and Commerce Registrars.

The picture is similar in Germany, where the number of insolvency filings fell 13% in April alone, and France where it’s down 19% from 2019 during the same month, according to official statistics. Second quarter data is not yet available for either country.

Much of this resilience can be attributed to special measures brought in by European authorities in response to the pandemic, loosening insolvency rules to give companies more flexibility when they come under stress, according to Juan Verdugo, Madrid-based partner at law firm Garrigues.

“Germany, the U.K. and Spain have all applied moratoriums in the requirement to file for insolvency,” he said. “That, together with new insolvency rules in these countries has led companies to test the new tools before taking more dramatic measures.”

Companies have also benefited from massive monetary support, including around 70 billion euros ($82 billion) of asset purchases since March in response to the pandemic. And governments have also turned on the spending taps, unleashing furlough programs for employees of businesses shuttered in national lockdowns.

They’ve also provided almost $40 billion in state-backed loans to firms, with the auto industry, energy companies and the companies in the aerospace and defense sector the biggest recipients, according to data compiled by Bloomberg.

Read more: Where Europe’s Virus Relief Funding is Going Depicted in Charts

There’s a similar trend in the U.S., where the Federal Reserve has also unleashed emergency stimulus.

U.S. bankruptcy filings fell 11% in the first half from a year earlier, even as those mostly lodged by big companies under the so-called Chapter 11 mechanism rose, according to the American Bankruptcy Institute.

Even so, both regions have seen some high profile names starting insolvency proceedings. In Europe the list includes mall owner Intu Properties and digital media company Technicolor. The roll call of corporate distress in the U.S. includes some even more iconic names, such as car rental giant Hertz Global Holdings Inc. and retailer J.C. Penney Co.

European Insolvency Proceedings (2020)

NameSectorProceedings countryDateDebt $ million*
NMC HealthHealthcareU.K.April 96,600
Intu PropertiesReal estateU.K.June 265,700
WirecardTechnologyGermanyJune 253,700
Galeria Karstadt KaufhofRetailGermanyJuly 11,400
TechnicolorMediaFrance/U.S.June 231,400
DebenhamsRetailU.K.April 9400
VapianoRestaurantsGermanyApril 1200
Azzurri GroupRestaurantsU.K.July 17<100
Carluccio’sRestaurantsU.K.April 6<100
FlybeAirlinesU.K.March 5<100
Source: Bloomberg, Companies House, Bundesanzeiger *Latest available data

Special Measures

A survey published Friday by insolvency specialist Begbies Traynor found the number of U.K. companies defined as under significant financial distress rose 7% in the first half of the year, to a record 527,000.

Read more: One Fifth of U.K. Small Firms Cut Staff Amid Rising Distress

Some experts warn special measures are merely delaying, rather than preventing a shakeout of stressed corporations, by keeping them on artificial life support.

“Companies should use the temporary suspension of insolvency filing duties to do their homework and strengthen their balance sheets,” said Leo Plank, a Munich-based partner at law firm Kirkland & Ellis. “Otherwise, there will be a wave of new insolvencies as soon as the filing duties go back to normal.”

But others argue the support measures and economic stimulus are beneficial in the long term to European economies and investors by keeping good companies afloat during extraordinary circumstances.

“If interest rates are so low that private owners or public owners of companies are comfortable to deploy more cash, or banks are comfortable to rollover financing facilities to these credits, fine, let them fight another day,” Jens Vanbrabant, head of high-yield for Wells Fargo Asset Management’s European credit team said in an interview earlier this month.

“It keeps owners and managing teams incentivized, and it gives us investors another chance to recover the investment.”

©2020 Bloomberg L.P.

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