The credit rating outlook for European companies is deteriorating amid a gloomier economic environment, Fitch Ratings reports.
The combination of weaker demand, higher costs, lingering supply chain issues, and rising economic uncertainty are increasingly weighing on the credit outlook, the rating agency said.
In particular, energy-intensive sectors and industries that are reliant on discretionary spending “are most vulnerable to these factors,” the report said.
Conversely, certain sectors — including travel-related industries — are still enjoying strong demand, but “the post-pandemic pent-up demand is gradually fading for most sectors,” Fitch said.
Alongside the fall off in demand, elevated inflation is continuing to pressure corporate profitability, and higher interest rates are starting to bite too, the report said.
“Rising interest rates will be an additional burden on corporate issuers’ earnings and cash flows in 2023 as they gradually refinance maturing debt,” it said. This issue is most important to lower-rated companies, which are generally more vulnerable to weaker financing conditions.
Despite the accumulating headwinds, Fitch also said that corporate issuers “are in a better position to face these challenges in 2023,” thanks to increased financial buffers that many companies built up during the pandemic.