20 Dec, 2022
Short-term borrowing trumps investment for Italy's private firms
By Sophia Furber and Marissa Ramos
Italian companies remain reluctant to borrow from banks to fund investment ahead of an expected recession, having deleveraged since the onset of the COVID-19 pandemic.
Bank lending in Italy is forecast to fall by 1.8% in 2023, the sharpest decline in the eurozone, according to EY's "European Bank Lending Economic Forecast," published Dec. 5. Import-dependent, indebted Italy is at higher risk from gas supply disruption and rising interest rates than its eurozone peers, EY said.
It is hard for Italian companies to plan ahead, which may explain why many continue to deleverage, according to Angela Gallo, senior lecturer in finance at Bayes Business School, City, University of London. Even before the coronavirus pandemic, Italian companies appeared to be adapting to a perceived lower level of demand, Gallo said.
"Italian companies are still postponing investment initiatives," Gallo told S&P Global Market Intelligence. "Any investment plans will have to cost in supply chain disruption, and this is difficult to predict in the current environment."
The share of highly indebted private companies in Italy — defined as those with a liability-to-asset ratio of between 81% and 100% — dropped to 32% at the end of 2021, down from 56% in 2005. Deleveraging has been particularly acute among real estate and industrials companies, Market Intelligence data shows. The sample includes hundreds of thousands of Italian private companies.
Short-term borrowing
Loan demand from Italian companies ticked up in the third quarter of 2022, driven by demand for short-term loans, according to the ECB's latest bank lending survey. Nine percent of the country's banks reported an increase, up from zero in the prior quarter. Just over one-third of banks, 36%, tightened credit standards, up from 18%.
Italian companies are borrowing to meet immediate needs rather than to invest, Nicola de Caro, senior vice president for global financial institutions at rating agency DBRS Morningstar, told Market Intelligence.
In the first nine months of 2022, demand for short-term loans to cover working capital, higher production costs and higher energy bills increased, De Caro said.
"Loans for fixed investments are decreasing presumably in the expectation of weaker economic prospects and higher financing costs," De Caro said. "On the supply side, banks are tightening their lending standards to reduce future risks."
Enrico Fagioli, head of growth credit division at illimity Bank SpA, an Italian digital bank that specializes in the small and medium-sized enterprise segment, said credit demand is rising, but primarily for short-term loans.
"Italian SMEs are requesting more support to finance working capital needs, while they are ... requesting less financing support for investment," he told Market Intelligence.
Illimity, founded in 2018, saw its loan book grow by 54% year on year to €1.8 billion in the third quarter of 2022. This was driven largely by funding working capital needs through factoring, or providing crossover or turnaround financing to companies with more complicated needs, Fagioli said.
Of the banks surveyed by the ECB, 18% saw lower demand for loans for fixed investment from enterprises in the third quarter, but 36% said they saw an increase in demand for loans for inventories and working capital.
Veerraju Nalluri contributed to this report.
