Supply Chain Woes, Tighter Financing Conditions to Pressure European Industrials but Most Companies in Better Shape than Pre-Pandemic

DBRS Morningstar published a commentary assessing which European industrial sub-sectors are at most risk in a scenario of prolonged supply-chain issues, exacerbated by current geopolitical instabilities. Difficulties to procure raw materials and equipment on time will make the reshoring of manufacturing capabilities more attractive in a push to transition supply chains from “just in time” to “just in case”. Shorter supply chains will also present opportunities for reducing the carbon footprint associated with manufacturing processes which, at the same time, will allow for compliance with ever more stringent environmental regulations in Europe. However, the associated need for capital investment will pressure companies’ liquidity, which is currently facing other headwinds, such as inflationary pressures fuelled by elevated energy prices, geopolitical uncertainties, and the widely anticipated prospects for rising interest rates. Most European industrial companies find themselves on better financial footing today than before the pandemic, which will help them tackle these risks.

Summary highlights include:
-- European industrial companies face risks related to prolonged supply-chain issues but these also present both challenges and opportunities and not all industrial sub-sectors are equally prepared.
-- Stricter carbon emission regulations over time and strained supply chains create an incentive to bring some manufacturing capacity closer to end markets, a process called reshoring.
-- A widely expected rise in interest rates and current geopolitical instability may heighten refinancing risks over the next two years, in particular for companies at the lower end of the credit spectrum.

“While most European industrial companies took advantage of pandemic-induced low interest rates to address maturities, some sub-sectors remain at risk. In particular, heavy manufacturing companies, which on average have the weakest credit metrics and one of the highest shares of maturities until the end of 2023, fall in this category. In addition, companies with energy-intensive production processes and those with a significant manufacturing footprint in Germany, Italy, and eastern Europe are the most at risk of a Russian energy export cut-off scenario” said Amaury Baudouin, Vice President, European Corporate Credits.