SME loans show resilience in Europe despite challenges
European business loans are demonstrating resilience, but defaults and delinquencies are likely to rise as the economic environment becomes more challenging.
A new report from DBRS Morningstar has found that portfolios of collateralised loan obligations for small- and medium-sized enterprises (SMEs) across Europe have been “relatively stable”.
However, the report warned that lending conditions across the continent are continuing to tighten, while higher inflation and higher base rates have raised uncertainty in financial markets and increased stress on SMEs.
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DBRS Morningstar has warned that these economic headwinds require SMEs to navigate a “very uncertain economic environment”, with these headwinds set to remain in the short and medium term. As a result, delinquency and default levels are expected to further rise if decisive support cannot be disbursed swiftly.
“Overall, persisting geopolitical uncertainties, market dislocations, and a dramatically changed interest rate environment require SMEs to continue to navigate a very uncertain economic environment”, said Stephan Rompf, vice president of European structured credit at DBRS Morningstar.
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“But SME collateralised loan obligations typically are well diversified and exhibit low levels of borrower or industry concentration. They also tend to deleverage quickly, which is beneficial to the build-up of additional credit enhancement.
“Overall, we currently see limited risk to the rated notes because of high diversification and ample cushions of credit enhancement to absorb losses.”
The report also found that EU-wide sustainability policies can also have a negative impact on SME finance, as all business owners must work towards a goal of reducing greenhouse gas emissions by 55 per cent by 2030. This will require additional investment in business operations.
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