Bank loan

Trade credit arrears may impact European businesses’ COVID-19 bank loan repayments

The ability of European businesses to repay their COVID-19 loans is at risk as they face late payments on invoices, according to market participants.

Businesses across Europe have seen a surge in the number of vendors delaying payments during the pandemic, according to trade credit balance data from S&P Global Market Intelligence and CreditSafe. In April, these late payments were still much more common than before the COVID-19 crisis.

“Depending on the amount of the amount owed by the customer and the extent of the late payment of the invoice, a late payment could well affect a business’s ability to repay its COVID-19 loans – or to pay in full without having to. defer payment of another debt, ”said Colin Haig, president of the UK organization R3.

In the UK, for example, before the COVID-19 crisis set in in January 2020, 28% of businesses faced customer payment delays of between 1 and 30 days. But that figure had climbed to 46% by April 2021.

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

Inflation sucks

Andrew Gray, partner at financial services consulting firm PwC, said the current favorable interest rate environment could change, putting immediate pressure on businesses across Europe when COVID-19 loans are due. be reimbursed.

“In the short term, the current level of interest rates remains very low, so the cost of servicing these loans is relatively low. But timing is tricky – if inflation starts to rise, interest rates rise [and] this could be a pretty big problem across Europe “, Grey said in an interview.

Sectors hardest hit by the pandemic, such as hospitality, accommodation, transportation, entertainment and retail, may have the most difficulty repaying loans, Osman Sattar said by email. , analyst at S&P Global Ratings.

“We expect a manageable, rather than overwhelming, increase in problem loans as liquidity support measures are removed,” Sattar noted.

S&P Global Ratings expects credit loss provisions at European banks to remain high for some time. Among the continents 50 largest banks, provisions are expected to fall to around $ 123 billion in 2021, after a peak of around $ 135 billion in 2020, and around $ 88 billion in 2022, he said. But it remains well above the $ 54 billion set aside in 2019.

Germany’s largest lender, Deutsche Bank AG, made provisions equivalent to 16 basis points of loans in the first quarter. It was better than expected, but Deutsche said credit losses continued to be affected by COVID-19[FEMALE[FEMININELloyds Banking Group PLC, a leading lender to the UK economy, said expected first quarter provisions of £ 6.2bn were around £ 2bn higher than at the end of 2019.

COVID-19 loans

Businesses across Europe have benefited from state-guaranteed loan programs during the pandemic, though recourse varied from country to country. The proportion of state-guaranteed business loans linked to COVID-19 in total new loans totaled 37% in Spain between March and December 2020, compared to 6% in Germany, according to S&P Global Ratings.

Large companies have cut their borrowing rates in recent months, Sattar said, after unusually high demand for credit at the start of the pandemic.

“These additional loans have been kept as a cash buffer on corporate balance sheets, which could start to be increasingly used to invest in the recovery,” Sattar noted.

SNL Image

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

In the UK, the bulk of state-guaranteed loans have gone to smaller businesses through the Bounce Back loan program, which has seen over £ 47 billion in loans approved, backed by a 100% guarantee. % of State. Parliamentarians warned, however, that bBetween 35% and 60% of these loans may never be repaid due to fraud or credit risks.

Deferred payments

A majority of businesses in the UK have reported an increase in late payments or a complete payment freeze in the months following the start of the lockdown in March 2020, aAccording to the Federation of Small Businesses, a British association.

“Emergency loan repayments are starting now,” FSB vice president Martin McTague said in an interview. “If small businesses are to recover and be able to repay the huge debts that many have racked up during the pandemic, freeing up their cash flow will be essential. “

The UK’s leave employment support program begins to end in July and employers are to contribute to staff salaries that were paid by the state during the pandemic. Business tariffs are also due to be paid again this month, after the government’s relief period ends.

Recovery loans

Earlier this year, the UK government introduced Pay as You Grow, which allowed recipients of Bounce Back loans to delay repayments for up to 18 months after initially taking out the loan, and to extend the loan term.

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

Barclays PLC reported a significant year-over-year increase in corporate bank lending, primarily related to Bounce Back loans and the Large Business Loan program. In total, its UK loan balances increased by £ 10bn year-on-year to £ 206bn.

A bank that is a major provider of Bounce Back loans told S&P Global Market Intelligence that 10% of its clients for these loans have gone for the Pay as You Grow option, with most of them extending their terms. from six to 10 years old.

The borrowing situation for small firms is different from that for large firms, said Gary Greenwood, analyst at Shore Capital.

“Since major COVID-19 borrowing programs ended in March, small business borrowing has fallen. This is a sign that they either don’t want to borrow more or can’t borrow because so many small businesses that have taken out the loans are now over-indebted “, Green wood noted.