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European Structured Credit: SMEs Between a Rock and a Hard Place

This commentary provides an overview of the recent economic trends in the small and medium-size enterprises (SMEs) sector across different European countries and recent SME collateralised loan obligation performance trends.

Summary highlights include:
-- European SMEs are benefitting from the reopening of the economies after a period of stringent lockdowns during the first phase of the Coronavirus Disease (COVID-19) pandemic.
-- While default rates have remained low during the pandemic due to the extensive government support measures, the current macroeconomic conditions pose challenges to continued performance and recovery.
-- These challenges include (1) persisting inflationary pressures and the spike in energy prices, fuelled by the Russia-Ukraine conflict, (2) a rising interest rate environment and central banks´ turn towards a policy of monetary tightening, and (3) ongoing global supply chain disruptions.
-- The first signs of deteriorating asset performance can be seen in southern European SME portfolios, where delinquencies have been steadily climbing since mid-2021.

“While 2021 showed a solid rebound in economic activity across Europe after the onset of the pandemic and the lockdowns that followed, the current outlook for SMEs has worsened due to changing macroeconomic environment and geopolitical conditions. All in all, the timing of the current economic and political headwinds is unfavourable given the structural lag in defaults and an incomplete recovery from the pandemic, which has left SMEs across Europe in a tight spot,” said Stephan Rompf, Vice President of European Structured Credit at DBRS Morningstar.