British companies see fall in distress, but face uncertain future

The number of distressed companies around the world fell in 2024, according to a new report from Alvarez & Marsal. In the UK in particular, the number of companies in financial difficulty seems to have fallen – with rival markets of Germany and France seeing higher rates of distress than Britain.

When a company faces severe financial difficulties, struggles to meet its debt obligations, and insolvency becomes a prospect, that firm is defined as being in ‘distress’. Each year, global professional services firm Alvarez & Marsal (A&M) publishes its Distress Alert report, which assesses the financial performance and balance sheet robustness of 7,900 companies across Europe and the Middle East. In recent years, stagnant growth, political uncertainty, and spiralling costs have seen the UK become one of the leading markets for distressed businesses. But the latest update of Distress Alert suggests that is no longer the case.

While in the grand scheme, UK businesses are still more likely to be distressed than a number of other countries (the largely state-subsidised economies of the Middle East, for example, only have 6% of businesses in distress), British firms took a decided step toward normality last year. Corporate distress have fallen to 8.9% from 9.8% the year before, equating to around 250 companies.

UK confidence

This actually puts the UK ahead of a wider trend, which saw global business distress only decline from 9% to 8.8%. Reflecting this, other leading economies did not experience such an improvement. Germany in particular remains the most distressed market, rising to 11.5% - its highest level since the pandemic. Similarly, France saw the sharpest increase in 2024, from 8.1% to 10.5% in 2024. According to A&M, both markets were exposed to political and fiscal uncertainty, as well as struggling with crumbling infrastructure.

Despite the UK’s more positive outlook, however, the future may hold challenges for businesses there too. In line with the wider European trend, A&M found the proportion of UK companies lacking balance sheet robustness has been steadily growing over the last four years, now reaching nearly one in three, or around 870 of companies analysed. At the same time, the impact of higher interest rates and slower economic growth on companies may harm their ability to service their debt in the future – leading to a rise in business distress.

Chris Johnston, managing director for European restructuring at A&M, commented “Corporate financial health has deteriorated in two of Europe’s three largest economies, indicating significant challenges for some of the bloc’s most prominent industries and companies. In nearly all countries analysed, over 30% of companies have weak balances sheets, an early warning sign that distress is likely to rise.”

Trouble ahead

Looking to the future, A&M examined the sectors already finding life hard in 2025. Despite recent interest rate cuts, the researchers note that borrowing costs remain high – and while inflationary pressures have slowed, that does not mean prices have returned to their previous levels. As these factors continue to restrict corporate cash flows, particularly for highly leveraged businesses, more firms are coming into distress.

Sub-sectors reliant on discretionary spending are particularly hard hit, as consumers hold back on fashion and ‘luxury’ items in an uncertain macro environment. With consumer-facing sectors under strain as households face higher utility bills and reduced confidence, they are also contending with tariff changes in the US and Europe. So 20.8% of fashion retailers are already distressed, followed by 19.6% of media and entertainment services, and 14.3% in the chemicals sector.

Johnston added, “The state of many balance sheets and performance levels suggests that it would not take much by way of external shock to generate a spike in distress. The first and second order impacts of trade tariffs could tip many companies over the edge, especially those that need to refinance in the next 12 months. Companies looking to protect earnings and balance sheets against these market challenges must act proactively, including planning for volatility and assessing their liquidity positions before it’s too late.”