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Trade credit arrears may impact European firms' COVID-19 bank loan repayments

European companies' ability to repay their COVID-19 loans is at risk as they face delayed payments on invoices, according to market participants.

Companies across Europe saw a sharp increase in the number of suppliers delaying payments over the course of the pandemic, according to trade credit balance data from S&P Global Market Intelligence and CreditSafe. As of April, these delayed payments were still far more commonplace than they were before the COVID-19 crisis.

"Depending on the size of the amount owed by the customer, and the scale of the delay in paying the invoice, late payment could well affect a company's ability to pay their COVID-19 loans back — or pay in full without having to defer payment of another debt," said Colin Haig, president of U.K. insolvency and restructuring industry body R3.

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In the U.K., for instance, before the COVID-19 crisis took hold in January 2020, 28% of firms faced delays on payments from customers of between 1 and 30 days. But that figure had soared to 46% by April 2021.

The picture is similar across Europe. In Germany, the number increased to 30% in April from 14% in January 2020. In France, it jumped to 45% from 4%, in Italy to 49% from 21% and in the Netherlands to 60% from 29%.

Inflation fears

Andrew Gray, a partner at consultancy PwC who specializes in financial services, said the present benign interest rate environment could change, putting immediate pressure on companies across Europe when COVID-19 loans need to be repaid.

"For the short term the current level of interest rates remains very low, so the cost of servicing those loans is relatively low. But, the timing's delicate — if inflation starts to tick up, interest rates go up [and] that could be quite a significant problem across Europe," Gray said in an interview.

The sectors the pandemic hit the hardest, such as hospitality, lodging, transportation, entertainment and retail, may struggle the most when it comes to repaying loans, said Osman Sattar, analyst at S&P Global Ratings, via email.

"We expect a manageable, rather than overwhelming, rise in problem loans as liquidity support measures are withdrawn," Sattar said.

S&P Global Ratings predicts that credit loss provisions at European banks will remain elevated for some time. Among the continent's 50 largest banks, provisions are set to fall to approximately $123 billion in 2021, after a peak of about $135 billion in 2020, and to about $88 billion in 2022, it said. But this remains far above the $54 billion booked in 2019.

Germany's largest lender, Deutsche Bank AG, made provisions equating to 16 basis points of loans in the first quarter. This was better than expectations but Deutsche said credit losses continue to be impacted by COVID-19. Lloyds Banking Group PLC, a major lender to the domestic U.K. economy, said first-quarter expected provisions of £6.2 billion were around £2 billion higher than at the end of 2019.

COVID-19 loans

Companies across Europe have benefited from state-backed loan schemes during the pandemic, although the take-up has varied from country to country. The proportion of COVID-19-related state-guaranteed business loans to total new lending totaled 37% in Spain between March and December 2020, compared with 6% in Germany, according to S&P Global Ratings.

Bigger companies have reduced their rate of borrowing in recent months, said Sattar, after exceptionally high demand for credit at the start of the pandemic.

"That additional lending has been kept as a cash buffer on corporate balance sheets, which may start to get increasingly used for investment into the recovery," Sattar said.

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In France, small and medium-sized enterprises have taken 47% of guaranteed loans, while in Germany they have taken 15%.

In the U.K. the bulk of state-backed loans have gone to smaller firms via the so-called Bounce Back Loan Scheme, which has seen more than £47 billion of loans approved backed by a 100% guarantee from the state. Parliamentarians have warned, though, that between 35% and 60% of these loans may never be repaid due to fraud or credit risks.

Deferred payments

A majority of companies in the U.K. reported a rise in late payments or a complete freezing of payments in the months after the start of the lockdown in March 2020, according to the Federation of Small Businesses, a U.K. association.

"Repayments on emergency loans are now kicking in," FSB Vice Chair Martin McTague said in an interview. "If small businesses are to recover and be able to service the huge amounts of debt many have accumulated during the pandemic, freeing up their cashflow will be key."

The U.K.'s furlough job-support scheme starts to wind down in July, and employers must contribute to the wages of staff who have been paid by the state during the pandemic. Business rates must also be paid again this month, after the government's relief period tapers off.

Recovery loans

Earlier this year the U.K. government introduced Pay as You Grow, which allowed recipients of Bounce Back loans to delay repayments until 18 months after they originally took out the loan, and to extend the length of the loan.

In April, NatWest Group PLC said it had received around 14,000 applications for the Pay as You Grow loans, most of which were to extend the term of the loan. The bank has lent around £14 billion in Bounce Back loans, with up to 30% of the cash remaining in current accounts.

Barclays PLC reported a significant year-over-year increase in business banking lending, principally relating to Bounce Back loans and the loan scheme for larger firms. In total, its U.K. loan balances grew by £10 billion year-over-year to £206 billion.

A bank that is a leading provider of Bounce Back loans told S&P Global Market Intelligence that 10% of its customers for these loans have taken on the Pay as You Grow option, with most of these extending their term from six to 10 years.

The borrowing situation at smaller firms is different to that of larger firms, said Shore Capital analyst Gary Greenwood.

"Since the main COVID-19 borrowing schemes came to end in March, smaller company borrowing has dropped off a cliff. That's a sign they don't want to borrow more or they can't borrow because a lot of smaller businesses that took out loans are now overindebted," Greenwood said.