European Structured Credit 2023 Outlook

This commentary highlights our views on the key factors and risks likely to affect the performance of portfolios of broadly syndicated loans (BSLs) and loans to small and medium-size enterprise (SME) collateralised loan obligations (CLOs) in Europe in 2023. We also highlight the impact of these trends on our ratings in the BSL CLOs and SME CLO sectors for 2023.

Significant inflation, monetary tightening, a looming recession, and geopolitical concerns will likely lead to credit deterioration for the underlying corporate and SME borrowers in structured credit transactions.

In the BSL CLO sector, we will likely see borrower downgrades and defaults accelerating in 2023. If a downturn materialises, we will see the impact of distinct CLO managerial styles leading to higher performance differentiation.

European SMEs will likely be the most affected by the economic squeeze caused by inflation, rising borrowing costs, and dwindling consumer demand. As such, we expect SME defaults to rise in 2023, although from relatively low levels.