Revising the credit outlook for Europe’s capital goods sector


The evolution of the pandemic – in particular the duration of current lockdowns, delays in a vaccine rollout, and the potential for another outbreak – remains the principal risk for the European capital goods sector. Rating pressure on smaller non-investment grade capital goods companies remains high.

The crisis took its toll on engineering, equipment-making and industrial services companies that make up the sector. Revenue declined by an estimated 10% on average in 2020, while EBITDA fell by 18%.

The likely return to normal across industrial supply chains as health authorities worldwide roll out Covid-19 vaccines should underpin the capital goods sector’s at least partial recovery in 2021.

If we see the normalisation of industrial activity across supply chains as the rollout of Covid-19 vaccines gains momentum, the capital goods recovery may be similar in strength to that of 2010. European large-cap capital goods companies recorded revenue growth of about 10% that year, compared with an average decline in revenue of 13% in 2009, and, aided by aggressive cost cuts, succeeded in expanding profit margins by even more.

Recent purchasing manager surveys have shown some encouraging signs that companies’ order books are filling up again. Bonds worth around EUR 14 billion from capital-goods issuers mature this year. Rolling over debt should be manageable for investment-grade firms given investor appetite for yield amid prevailing low interest rates. Siemens AG, Airbus SE and Rolls-Royce PLC are among the companies with the most refinancing ahead of them.

However, the sector faces a bumpy road on the way to a full recovery to pre-crisis performance. The strength of the economic upswing is unclear. Another potential risk is the development of US-China trade relations under the new US government.

Given the capital goods sector’s diversity of business models and end-markets, the pace of recovery will vary widely among subsectors. Rating pressure for small, non-investment grade companies will continue in 2021.

Deal making could be credit negative. Unlike previous economic crises, valuations did not collapse in 2020. Potential deal multiples remain high. Ambitious, large-scale M&A could strain balance sheets. At the same time, European companies will continue to refocus their businesses through asset sales, with significant disposals or spin-offs possible by Philips NV, Sandvik AB, Siemens, Smiths Group PLC and Thyssenkrupp SE.

Scope Ratings GmbH is leading European credit rating agency, specialising in the analysis and ratings of financial institutions, corporates, structured finance, project finance and public finance. Scope Ratings offers a credit risk analysis that is opinion-driven, forward-looking and non-mechanistic

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