German firms pay price for Russian fuel reliance as distress soars

GERMAN businesses are set to pay the price for years of reliance on Russian gas, with a new study saying the corporates in the country face soaring bills as Moscow throttles energy supplies.

Companies in Germany are at the greatest risk of default compared with their European counterparts, according to the Weil European Distress Index, which looked at data from more than 3,750 listed companies across Europe.

Levels of corporate distress in Germany

are at their highest point since July 2020, when the world was amid the global pandemic.

While countries across Europe are facing a cost of living crisis caused by supply chain issues and Russia’s invasion of Ukraine, Germany has been hit particularly hard.

Weil, Gotshal & Manges, the US law firm that compiled the index, cited Germany’s dependence on Russian natural gas as “particularly problematic” for its economy. On Sunday, the German government announced it would restart mothballed coal power plants to preserve energy supplies through next winter in response to Russia cutting natural gas exports, a move that raised the spectre of severe energy shortages.

Gazprom, Moscow’s state-backed energy giant, told European capitals last week that gas deliveries through a key pipeline would be slashed by 40pc in response to international sanctions. Gazprom claims that pumping equipment, necessary for the pipeline, is stranded in Canada.

Over the weekend Berlin announced new emergency energy laws that will allow Germany to increase its use of coal to generate up to 10 gigawatts of electricity for up to two years.

The shift toward using the more carbon intensive fuel comes despite the Bundestag’s pledge to phase out coal entirely by 2030.

Robert Habeck, Germany’s economic minister and a member of the Green Party, said the decision to fire up coal power plants was “painful, but a sheer necessity”.

In February, Mr Habeck said

Gazprom, which operates midstream energy infrastructure in Germany, had “systematically emptied” the country’s gas storage facilities in the run up to the war in Ukraine.

Weil, Gotshal & Manges said the sharp rise in corporate distress across Germany was driven by a deterioration across investment metrics, weaker valuations, and an ongoing squeeze on profitability – all exasperated by higher energy costs.

“If this upward trajectory continues, we would expect to see increased pressure on liquidity and further tightening across the credit markets with some businesses struggling to access finance and ultimately facing defaults,” said Neil Devaney, a partner in the firm’s London-based restructuring practice.

In both the global financial crisis and Covid pandemic the Weil European Distress Index has been a reliable early warning indicator of future defaults.

A separate study from German insurer Allianz predicts that the number of German insolvencies will climb by 10pc to 16,130 cases next year.