A positive global trend to strengthen corporate balance sheets and reduce gearing is masking a rise in leverage in vulnerable sectors and regions, creating hotspots of increased risk for cross-border trade, according to the world’s leading trade credit insurer Euler Hermes.
The findings come as Euler Hermes publishes its latest research on global corporate debt, which examines the net gearing ratio (or ‘leverage’) of non-financial, listed companies. The research covers only those businesses with net debt on their balance sheet and excludes those with net cash, giving a precise view of change amongst indebted companies.
Despite a general rise in global debt, the average net gearing ratio for businesses fell to 53% in 2017, down 3.2pp year-on-year. The trade credit insurer says the positive picture has been supported by strengthening balance sheet structures supported by sustained earnings growth.
The research highlights areas of significant risk and divergence from the global average of 53%. Euler Hermes found that risk is concentrated in sectors that face structural change, notably disruption from climate change, digitalization, changing customer needs or challenging economic performance. The sectors most at risk include paper, transportation and textile, and businesses are increasing leverage to see themselves through challenging conditions and respond to these changes. Medium risk sectors include energy and metals.
From a regional perspective, the research found that Southern Europe was particularly vulnerable to over-leveraged corporates. Portugal (96%), Turkey (72%), Spain (68%) and Greece (69%) all recorded the highest net gearing ratios. This is compared to the lowest average levels found in South Africa (38%), Australia (41%), Hong Kong (42%), Poland (43%) and the UK (43%).
Catharina Hillenbrand-Saponar, Sector Advisor, Euler Hermes, added: “When pressures mount companies can allow leverage to creep up to help manage the problems. If this can’t be matched by earnings growth it may make them more vulnerable to the very issues they are trying to contain or other, unexpected shocks.”
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