Identify Sub-Tier Risks for European Bankruptcies

Sept 21, 2022

As European bankruptcies increase, risk is rising for European and U.S. operations that may have European suppliers in their sub-tier supply chain. Get the latest insolvency data by region and industry and learn how to identify the risks that your Tier-2 and Tier-3 suppliers may pose to your supply chain.  

Watch Mirko Woitzik, Everstream’s Director of Intelligence Solutions, and Senior Solutions Consultant Vin Ramundo present the latest insolvency research and demonstrate how to pinpoint your risk.


Lauren McKinley: 

Hello, everyone. Welcome to our session today, Identifying Your Sub-Tier Risks for European Bankruptcies. Before we get started, I have a few housekeeping notes. Everyone but our presenters are on mute, but please send questions at any time in the question toolbox in the upper right corner of the GoToWebinar window. You can close any extra windows to prevent buffering. We are also recording this webinar, and we’ll email it to everyone within 24 hours after the webinar is over. With that, let’s get started. 

My name is Lauren McKinley, and I’m joined today by Everstream’s director of intelligence solutions, Mirko Woitzik, and senior solutions consultant, Vin Ramundo, who’ll present today’s content. A quick hello from our speakers today. 

Lauren McKinley: 

For our agenda today, we are going to start with a brief introduction of Everstream Analytics, then Mirko will give an update on European insolvencies, and then we’ll discuss how to analyze sub-tier suppliers for insolvency risk. We will then take any questions, so please add your questions in the Q&A box during the session. 

And now a brief introduction to Everstream. Everstream sets the world’s supply chain standard, giving companies predictive insights and risk analytics for every shipment, supplier, and mile of the journey, so you can push your supply chain to be faster, smarter, leaner, and more sustainable. The world’s leading brands rely on our analytics to de-risk their global supply chains, ranging from pharma to automotive, food and beverage, medical device, and more. We aggregate millions of proprietary and open data streams covering every aspect of today’s complex supply chains, from the raw materials, all the way to a product’s final destination, providing full visibility of the risk and opportunity in every network, component, ingredient, and raw material in every country around the world, and then sharing those insights with your existing ERP, TMS, and SRM systems to automate action. With Everstream, you get a complete view of all the variables affecting all the parts of your sub-tier supply chain and the ability to spot potential disruption before it hurts your bottom line. 

Everstream Analytics has a dedicated team of intelligence analysts monitoring millions of sources of risk daily across the world in 25 languages. This team is led by our next speaker, Mirko Woitzik, who will now cover a key risk area companies should be aware of today, insolvencies. And now I will turn it over to Mirko. Take it away. 

Mirko Woitzik: 

Thank you, Lauren. Good morning, good afternoon, everyone, also from my side. Very excited to be here and share some of the latest insights on financial pressures and global supply chains that we are seeing. There really has been growing concern over the past few months with companies facing record high energy costs not only in Europe but around the world, really, that have already forced some manufacturers to either reduce or halt factory operations at some sites. At the same time, we are in a situation right now where, since the start of this quarter in July, almost all financial support by especially European governments to reduce the business impact of the COVID-19 pandemic has really come to an end. And it’s really that explosive mix of, on the one side, high energy costs, on the other side, the end of financial COVID-19 support programs that is fueling concerns by supply chain managers about a potential rise in financial distress among the sub-tier supplier bases. 

And that is really understandable. In the past few months across Europe, there have been more and more indicators pointing to the direction of such growing financial distress, with some reports claiming that potential new wave of corporate insolvency filings is around the corner. In Germany, for example, as we see on the left-hand side, the latest numbers for corporate insolvencies for August 22 actually indicates the first time that the monthly levels exceeded those of the previous years, in the last two years at least. While at the same time in the UK, the latest numbers show a rise of insolvencies in the manufacturing sector, that includes automotive, food and beverage, but also the chemical sector, by 63% in 2021 to 2022 compared to the previous year. While in France across all sectors, the number of also risen by about 26% in August compared to the same period 12 months ago. And the reasons that are of brought forward that are most cited are especially high energy costs, but also still very high material input costs, as well as ongoing logistics delays, as well as higher labor costs with the ongoing labor shortage. 

However, in this webinar today, we also want to dive a bit deeper into the insolvency numbers and trends that our data shows and has revealed, since most of the official statistics on insolvencies typically include all types of sectors, and most filings actually in 2022 have come in the retail sector, but also in the construction sector, as well as the hospitality sector. We took a look at our data that focuses more on manufacturing and logistics suppliers, and that overall paints a different picture to the overall situation. 

A lot of supply chain analysts expect that there will be an increase in general corporate insolvency filings after especially the COVID-19 financial support programs would’ve ended and a lot of so-called zombie firms would go bankrupt from this quarter onwards and also into the next quarter. So that was the prediction at the start of the year. But what we’re seeing is that, despite mounting financial pressures, the overall number of insolvencies has not really increased for 2022 so far. We took a look at five of the world’s largest economies by GDP, as you can see here, Germany, the UK, France, Italy, and the US, and focus really only on manufacturing- and logistics-related solvency filings, and see that they’re coming in at a lower level so far this year, especially in Germany, Italy, and the United States. 

In Germany, there have so far been 388 manufacturing and logistics related insolvencies, compared to 538 last year, as of mid-September is when we had our cutoff date for this data. The data stands at 72% of last year’s total filings. So overall, we believe that this could come in on par with 2021 numbers by the end of the year, or even a bit higher, if the last quarter of Q4 continues that upward trend that we’ve been seeing in Q3. But really the numbers don’t indicate yet a wave of new filings that has been talked about. 

In Italy and the US, numbers are fairly low compared to 2021 data and only come in at roughly half the levels from last year’s filings, although we are already three quarters into the year. In the US and Italy both, most filings came actually in in Q1 but have dropped off significantly in Q2 and Q3. In France, however, the number of insolvency filings is on track to reach the same level as the entire year of 2021, but obviously we are still only at the end of Q3, so total ’22 numbers will likely come in higher by the end of the year. 

And the UK is really the most notable exception that we want to talk about a little bit more here. The insolvency levels have already surpassed 2021 filings, 2021 levels by almost 20%, especially among manufacturing and logistics suppliers. And that data was until mid-September, as I said. So here, again, the UK, similar to France and Germany, ended COVID-19 support programs earlier this year in late June, so that might have been a factor. But on top of that, these higher insolvency numbers in the UK are very likely due to a combination of different factors with higher energy bills, higher interest rates, but then also the UK government being very slow in laying out plans to adopt financial relief measures for businesses that are facing these high energy prices. And that was really unlike other countries in Europe that have acted much sooner. Energy bills in the UK are really expected to increase by three to 400% in October, when many fixed price agreements will be renegotiated. So again, the numbers are likely to increase further in the last quarter of the year and might even surpass the high numbers that we’ve seen in 2020. 

So apart from the UK and potentially France, why the decrease in insolvencies, you may ask, at a time when financial pressure seems to be increasing? In Europe, at least, this can be attributed to the almost seamless transition in a lot of countries between the end of COVID-19 support programs and, at the same time, the fact that most companies only have to pay back the full COVID-19 business loans until sometime in 2023, and then the start of the new energy cost support programs that we are seeing for energy-intensive industries because of those high energy prices. We see several European countries that have in the last few months created those programs, especially for their energy-intensive companies that have really seen their costs double or triple compared to 2021. Germany is one of them. Italy, France, they all have set up those support programs for the most energy-consuming companies. And the UK, as I said, is only catching up right now, and it’s announcing similar plans this week. But on top of that, the energy support programs, the governments in Europe have also been playing with the idea to discuss similar law, insolvency law, as during the COVID-19 pandemic, that would allow companies to not file for insolvency if their business model is sound but if they’re struggling with debts because of the high energy costs. So Germany has been pondering that idea in the last couple of weeks. 

So the question is really, should we expect a wave of insolvencies in Q4 or potentially in early 2023? And what we are seeing is that, across Europe, dozens of energy-intensive companies in the class, especially cement, ceramics, steel making, aluminum processing, and petrochemical sectors, have responded to the energy crisis by either reducing or stopping manufacturing operations. The number of factory shutdowns, as we see here in Europe for August 22, stood at the highest level so far this year and was only sort topped by the energy-related stoppages that we’ve seen after the invasion of Ukraine. That caused a brief spike in energy costs. So in the face of those high energy costs, profitability has become nearly impossible for certain sectors, and that obviously only increases the financial pressure, especially on small- and medium-sized suppliers that cannot easily shift production operations to other regions to make up for the sales losses. 

And if we look at the quarter over quarter numbers for specific European countries, you see here Germany, in Q3, there have actually been more filings, more insolvency filings per quarter, compared to Q1 and Q2 of this year, as we can see with these blue columns here. And that could be either because of the impact of energy costs but also the end of COVID 19 programs that ran out at the end of June as well. But if we look at the overall picture, as said, for the entire year of 2022, up to mid-September, the filings are still lower than last year and much lower than two years ago. 

But again, both the energy support programs and potential modifications to the insolvency laws, that could really, we believe, continue to distort the actual picture. We expect it to continue to keep insolvency numbers down. And also, any normalization that was expected actually for this year of insolvency data is very likely to be pushed into the second half of 2023 because of these modifications of insolvency law, but also new energy support programs. So, what we believe is the most likely scenario for a lot of European countries is not really a sharp increase in Q4 insolvency filings in the manufacturing and logistics sectors that would confirm the initial forecast for 2022, but rather a slow, rolling increase in bankruptcies and restructurings that will drag on for years as debts become due over the next 12 to 24 months. 

So with these insights, I’d like to hand it over to my colleague, Vin, who will take us through how we can visualize all of this in our solution. 

Vin Ramundo: 

Hello. So let’s go to the next slide. This is really showing you, in the application, the view that our customers can see within insolvency. So this gives us the ability for us to visualize that information within the system to see those trends. And again, like Mirko was saying, you can see that there was a huge spike in the beginning of 2020, and it’s leveled off, and we’ll see what happens in the future. But the real question is not only looking at this from your tier-one suppliers, but your sub-tier, and how do you understand the discrepancies and the issues within those insolvent suppliers in that sub-tier? 

So if we go to the next slide, we talk about our Discover solution. Our Discover solution is designed to map a customer’s sub-tier. So what this does is, we actually go through and take a customer’s supplier base, and take their products that they source from those suppliers, and actually build out a mapping of those sub-tier suppliers. So we look at import/export documents, shipment data, websites, news, and media, and basically crawl through billions of transactions and map the relationships of those suppliers. We also look at our master reference information to actually put physical locations on this. Taking customer data and normalizing that information, we build and derive that relationship map. So we look at the number of frequencies of trades and the products and materials, and that gives us what we call our Everstream knowledge graph. And that is basically a relationship of all those sub-tiers. And then we take that, and then we risk adjust that against the information that a customer is looking for. In this example, we’re talking about looking at insolvencies, but we can do this for any type of issues and any type of discrepancies within the supply chain. What that enables us to do is really look at that and visualize that information within the application. See the next slide. 

Here’s an example of our sub-tier mapping. So the customer in this example gave us this supplier here. We built out and risk-adjusted the scores of all these other sub-tier suppliers. And as you can see here, we have the supplier, Virat Exports, which is in an insolvency. So again, we’re able to see the insolvency within the solution, send the notification to you. And this is, again, at that sub-tier level. Insolvency is one of the issues, but we can look at many other things. 

Now, what’s good about this is we’re showing you the insolvency, but I think we’re going to talk about how we can take this to another level. We also have the ability through media monitoring to actually monitor companies’ issues before they go public. Companies don’t just go out of business. There are patterns that emerge before those companies go insolvent. We’re monitoring things like layoffs, profit warnings, management changes, stores, factory closings, lawsuits, et cetera. We’re monitoring that media information to see there’s potential issues before a supplier actually goes out of business, or even a sub-tier supplier goes out of business. 

Go to next slide. An example of being able to monitor this information, so you’re able to see the early warnings and notifications of that supplier base. We have the ability to track that information within the system and then be able to alert you to the types of notifications that are associated to this. And we monitor over 65,000 different global news feeds. We capture over a million news articles a day, and we actually categorize them with our data science team through specific types of categories. Is it corruption, financial, legal, regulatory misconduct information? We categorize the severity. We translate this information. And this gives us the ability for us to link this to a customer’s suppliers or even their sub-tier suppliers, for them to see a problem or a potential insolvency before it actually occurs. 

Got a great example on the next slide that talks about how we’ve done this in the past. So this is an example of one of our customer’s sub-tier suppliers, a company called Sterigenics. In 2018, there was news articles that we were monitoring about having high cancer risks linked to the plant. Then basically the plant was shut down in 2019, but our system detected these news articles, was capturing this information much earlier, before the insolvency actually occurred. So what this gives you the ability to do is to see the information, to see the risk before it potentially becomes delayed. And really, ultimately, the ultimate goal of our solution is to give you more time to make better decisions. And the earlier you know of either an insolvency or even the potential of an insolvency… And again, this could be not just for insolvency. This could be for if there’s a plant shutdown, if there’s just even lawsuits, being able to monitor and manage this information before it becomes an issue. Again, the earlier you know about it, the more options you have to manage within that process. 

Lauren McKinley: 

Thank you. I see we are almost at the end of our live session today. If anybody has any additional questions, feel free to reach out to the contact information [email protected]. We will make sure that we route your question appropriately. If you’re interested in learning more about addressing sub-tier insolvency risk in your supply chain, you can also reach out to us there as well. Thank you to our presenters and attendees today. Keep an eye out for the recording and enjoy the rest of your day. 

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