Introduction
Traditionally viewed as some of the most resilient businesses, fine & specialty chemical manufacturers in Europe are facing an unprecedented financial squeeze. Recent geopolitical turmoil and inflation (both structural and policy-driven) have led to some of the highest EU energy prices on record. In addition to this, supply-chain disruptions have further delayed critical raw materials, lengthening cash-conversion cycles and increasing working capital demands.
This “perfect storm” of increased costs has pushed more SMEs towards financial distress and catalyzed a growth in demand for insolvency risk-management services. To illustrate this phenomenon, Figure 1 shows how governmental support decreased German SME insolvencies in 2021 prior to a steady increase in bankruptcies over subsequent years (1).
Contrary to their larger counterparts, distressed SMEs are more restricted in their access to liquidity and debt-instruments. With less available options and a decreased capacity to carry existing debt in this high-interest environment, identifying the right type of financial sponsor may be the only solution for some owners to stabilize operations and start down a path to recovery.
In this article, we’ll explore the benefits that an M&A advisor provides in identifying possible solutions, providing access to specialized financial sponsors and optimally positioning companies to attract them.
An Industry Under Siege
The EU’s meteoric rise in energy prices has quickly pushed energy-intensive manufacturing processes towards becoming prohibitively expensive. At the same time, supply-chain bottlenecks have delayed the receipt of essential inputs, stalling production lines and increasing the capital intensiveness required to operate. Since 2018, industry operating profits have grown by an average of 2.6% while working capital requirements have increased by 26% (2). Companies are holding increased amounts of liquidity to weather economic uncertainty and stay flexible.
Inflation further complicated this picture, with raw material and transportation costs that grew across the board.
While some companies were able to pass these costs on to customers, many could not, leading to severe margin erosion. Central banks also continued to raise interest rates to control inflation, making it more difficult for companies to service their existing debt and increasing their risk of default. This multi-varied cost increase has spurred industry-wide initiatives for cost-reduction and asset rationalization programs in an attempt to remain solvent.
Given the challenges of the past few years, a larger proportion of chemical manufacturers have found themselves in distress and in need of prompt action to stabilize their financial position. But identifying the correct move during a period of distress does not come easily—it requires strategic thought, guided preparation and decisive action to execute effectively.
The Knights in Shining Armor
There are a number of inorganic avenues for SMEs to consider when they find themselves in a distressed position. With that being said, many of the standard alternatives often come with significant downsides, particularly when time is of the essence.
For companies that have evaluated and opted against any of the previously mentioned alternatives, Distressed Special Operations Funds (DSOP) and Distressed Debt Funds (DDF) provide a critical service to companies in financial distress with their own differing approaches:
Distressed Debt Funds: These funds specialize in acquiring the steeply-discounted debt of distressed companies from their current lenders. DDFs have a short investment horizon and typically aim to engineer value through restructuring the distressed company’s debt. They may also opt for a “loan-to-own” scenario where their debt can be converted into equity for partners in which they see long-term potential. DDF’s are passive investors in the debt-restructuring context but will take a more hands-on approach if their debt is converted into equity. These are the lenders of last resort, providing liquidity in scenarios that no one else will touch.
Distressed Special Operations Funds: Unlike DDFs, DSOPs are hands-on investors that like to take an active role in the operational and strategic turnaround of a distressed company. They also have longer investment horizons and are willing to take on operational challenges that extend beyond debt-restructuring. For example, a DSOP could help a chemical company reduce costs by renegotiating or offloading long-term energy contracts through contract swaps. Think of DSOPs as a standard private equity fund with an exclusive focus on identifying and ameliorating distressed companies.
Both DDFs and DSOPs are able to move quickly, oftentimes making them the necessary option for companies that don’t have the luxury of time. They are also amenable to preferential equity dilution negotiations when compared with an equity issuance amidst financial distress.
As demonstrated, each of these alternatives has its own benefits and limitations. Divestitures are time-consuming, and raising new debt or issuing equity may not be attractive to the investors, lenders or existing shareholders of a distressed company. By contrast, DDFs and DSOPs provide both the speed and expertise required, oftentimes making them the best-suited partner for companies grappling with insolvency.
M&A Advisory and Investment Bankers Can Help
Hiring an M&A advisor is crucial in helping distressed businesses develop a plan for recovery and connect with the right type of fund.
Here’s how they can assist:
Crafting a Clear Business Case: A strong narrative is essential. M&A advisors help build a compelling business case that highlights the company’s potential for recovery despite current financial struggles. This includes highlighting strong customer relationships, specialized knowledge, or key assets that have long-term value.
Debt Restructuring: A key part of attracting distressed asset funds is restructuring the company’s debt to make it more appealing to investors. M&A advisors can negotiate with creditors to reduce the debt burden or extend payment terms. For turnaround funds, they can also help renegotiate operational contracts, such as switching out of long-term energy contracts through contract swaps.
Connecting with the Right Investors: M&A advisors have networks of distressed asset and turnaround funds that are actively looking for companies to invest in. Their knowledge of the market ensures that the business is presented to the right people at the right time, increasing the chances of securing the best possible deal.
Navigating Complex Negotiations: The terms of investment deals can be intricate and often involve giving up equity or control. M&A advisors help business owners navigate these negotiations, ensuring the best possible result relative to the shareholder priorities while securing the capital necessary to preserve operations.
Conclusion: Time to Take Action
For SMEs in Europe’s fine and specialty chemicals industry, the challenges of rising energy prices, inflation, and supply chain disruptions are severe. Many SMEs have found themselves in financial distress, with financing options proving elusive and sometimes non-existent.
Distressed asset and turnaround funds offer a lifeline, but attracting these investors requires a deliberately crafted course-of-action. Engaging an M&A advisory or investment banker can help build this compelling case, restructure debt, and secure the right type of capital—before it’s too late.
References and notes
- Welt. “Insolvenzen: Zahl Der Firmenpleiten Erneut Deutlich Angestiegen – Welt.” DIE WELT, WELT, 17 June 2024,
2. “2025 Chemical Industry Outlook.” Deloitte Insights, Deloitte, 4 Nov. 2024.
