Moody’s warns European SMEs remain unstable

Despite inflation easing this year, European small- and medium-sized enterprises (SMEs) continue to be weakened by higher labour and production costs, alongside tightening credit conditions.

According to a Moody’s analysis of European SMEs, published today, profit margins among these companies have declined over the last two years and revenues have also fallen.

“Years of inflation have driven up EU companies’ production and labour costs – especially among small and medium-sized enterprises, and at the same time, lenders have tightened their underwriting standards. All of these factors are increasing risks for the securitisations backed by the debt of these companies,” associate vice president, analyst at Moody’s Ratings Angel Jimenez said.

“Although inflation has smoothened over the last year, and the performance of transactions we rate has remained relatively good and stable, it will likely deteriorate over time should high costs and tight credit persist.”

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Moody’s analysts found that the impact of high costs is uneven across jurisdictions, with smaller and less sophisticated SMEs that tend to be prevalent in southern Europe, for example in Spain and southern Italy, more vulnerable than their nimbler northern peers, which typically have better research and development capacity.

The largest industry exposure was found among the construction and building sector in France, Germany, Italy and Spain, which is highly sensitive to raw material and labour costs.

The ratings agency said the bankruptcy rate in that sector is slightly higher than the overall rate for each country.

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Government-guaranteed loans remain significant drivers of performance in Italy, France and Spain, according to the ratings agency, which together account for 90 per cent of all such loans granted in Europe since 2020, led by Italy.

“Remarkably in Italy and France, government-guaranteed loans have been significant drivers of performance for European small and medium-sized enterprise asset-backed securities. These public guarantees have helped stabilise the performance of European small and medium-sized enterprises throughout the pandemic,” said Monica Curti, vice president, senior credit officer at Moody’s Ratings.

“Notably, Italian transactions backed largely by guaranteed loans are still performing well, despite the end of the interest-only period for the vast majority of the underlying assets. The banks’ conservative risk management standards and the companies’ low leverage at the precipice of the pandemic are the main reasons for this lasting strong performance.”

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