European Structured Credit: SME CLO Performance Review

Morningstar DBRS published a commentary providing an update on the recent developments in the European Small and Medium-Size Enterprises (SMEs) sector and the performance of SME collateralised loan obligation transactions (SME CLOs) rated by Morningstar DBRS across different European countries.

-- SME bankruptcies have been rising on a broad basis in 2024 in most EU countries and across key industries, owing to the overall difficult, low-growth economic conditions.

-- Unabating geopolitical tensions have added to uncertainty in financial markets and multiple sectors, including SMEs.

-- While recent data suggest the onset of pressure relief from the easing cycle in the form of lower cost of capital for SMEs, business sentiment remains negative, and economic outlook surveys show that companies are becoming more worried about future business prospects.

-- SME CLOs rated and monitored by Morningstar DBRS have remained resilient as they typically are well diversified and exhibit low levels of borrower or industry concentration.

"Overall, the uncertain economic conditions are visible in the collateral performance of SME CLO transactions, but we currently see limited risk of downgrades of rated notes because of high diversification, deleveraging of structures and sufficient cushions of credit enhancement to absorb losses", said Stephan Rompf, Vice President of European Structured Credit.