EMEA 2023 Corporate Leverage to Rise as Revenue and EBITDA Margins Fall

EMEA corporates’ aggregate leverage will increase by 0.2x in 2023 year-on-year (yoy) as revenue and EBITDA margins will fall by 3.9% and 1.2pp, respectively, over the same period, Fitch Ratings says. Most corporate sectors have sufficient leverage headroom within their current rating sensitivities to avoid material rating pressure in 2023.

Persistently high inflation and slowing economic growth in many European countries will further affect demand in the corporate sector, particularly towards end-2023. We expect revenue and profitability to shrink yoy, based on our aggregate forecast for about 450 EMEA rated corporates, compiled in our Global Corporates Macro and Sector Forecasts data file.

Higher interest rates will also affect cashflow generation of companies that are starting to refinance in 2023, but we expect lower funds from operations to be compensated by working capital improvements, possible cuts in capex and a modest reduction in dividends.

We expect sectors focusing on commodity products, including chemicals, mining and oil and gas, to post the largest reduction in revenue and margins in 2023 as prices moderate in most areas, leading to some leverage increases. For most issuers, this will be cushioned by their existing leverage headroom under negative sensitivities for their current ratings.

Excluding the large oil and gas sector, which represents about one third and nearly one half of our EMEA portfolio’s revenue and EBITDA, respectively, our forecasts for leverage development are more positive. We expect revenue to increase by more than 3% and EBITDA margin to improve to 19.3% in 2023, from 19% in 2022, leading leverage to decline by 0.1x, to 2.9x.

We forecast that chemicals will post the largest aggregate leverage increase, of 0.5x, in 2023, exposing a sector among those with the lowest headroom to higher potential pressures. Our sector outlook for EMEA chemicals is Deteriorating, reflecting a combination of weakening demand due to inflation and rising production costs. As global competition resumes after the Covid-19 pandemic and supply increases, volumes and margins will be affected. Cost competitiveness is particularly poor in Europe due to high energy prices, although spot prices have dropped materially since their peak in 2022. We expect most pressure from increasing leverage to be on issuers with weaker business profiles.

Industrial sectors (whose output is mostly intended for industrial or business use) will be more exposed to revenue and earnings contraction. However, there are a few exceptions where we expect a solid rebound, including aerospace and defence, due to higher defence spending following the Russia-Ukraine War, and technology, particularly semiconductor manufacturers, supported by high demand as supply chains decouple from China.

Many consumer-focused sectors continue their post-pandemic recovery due to increasing volumes and selective price rises, but lower consumer confidence, as a result of the cost of living crisis, may soften demand in 2H23. Transportation, particularly airlines, will post the largest revenue increase in 2023, driven by pent-up demand, despite the higher ticket prices. The performance of companies in the consumer goods sector is diverging, as the cost of living crisis slowly spreads from low- to middle-income groups. Profits and operating cashflows of utilities are improving, supported by still healthy pricing, despite some demand destruction.

However, some sectors may not be able to fully pass through cost increases to their customers, which will reduce their margins despite the increasing volumes and revenue.
Source: Fitch Ratings