LONDON (Reuters) – U.S. and European small and medium-sized (SME) firms may be next to feel the pain of rapid interest rate rises, with analysts and investors warily watching for the impact of tighter credit conditions exacerbated by recent banking turmoil.
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Unlike large companies that typically issue fixed-rate debt and have little exposure to short-term rate fluctuations, SMEs rely on direct bank funding, so the effect is felt in real time.
And while the exposure of SMEs to higher rates and the potential for default may have so far gone largely under the investor radar, especially since bigger companies have held up fairly well, some are on the lookout for any signs of strain.
“As liquidity drains, what seems like idiosyncratic little issues start to pop up,” said Brett Lewthwaite, global head of fixed income at Macquarie Asset Management.
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Ratings agency S&P expects U.S. and European default rates to reach 3.75% and 3.25% respectively by September, more than double the 1.6% and 1.4% the same month last year.
SMEs are critical to economies on both sides of the Atlantic, with the European Commission estimating they employ around 100 million people in the EU and account for more than half of the bloc’s economic output.
The European Central Bank’s latest Bank Lending Survey shows euro area banks reported a substantial tightening of credit standards for loans or credit lines to businesses in the fourth quarter of 2022, before the impact of this month’s bank stress.
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That was the largest change registered by the survey since the bloc’s 2011 debt crisis.
The European Banking Authority (EBA) was not immediately available for comment.
In the U.S. the average rate that small businesses pay on bank loans rose from around 5% to 7.6% in 2022, and is likely to hit about 9.5% by mid-year, Jefferies analysts estimate.
Analysts note the latest U.S. Senior Loan Officer survey pointed to “significantly tighter” credit conditions for SMEs.
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“In the current deteriorating environment, big is beautiful and smaller companies are going to feel the most pressure from interest and energy costs, broken supply chains and a lower real disposable income from households,” said Generali Investments’ senior credit strategist Elisa Belgacem.
