Europe’s technology, media and telecom companies are set to struggle when it comes to refinancing after several years of heavy investment swelled debtloads in the sector.
(Bloomberg) — Europe’s technology, media and telecom companies are set to struggle when it comes to refinancing after several years of heavy investment swelled debtloads in the sector.
That’s the view of Boston Consulting Group, which highlighted the sector, along with leisure and tourism, as industries that will find it most difficult to refinance in an environment of higher interest rates. Both have a relatively low interest coverage ratio, which makes them more vulnerable to higher rates, the consultancy firm said in a report.
Technology, media and telecom — or TMT — faces fierce competition for consumers and some firms need to invest heavily to digitalize, BCG said. That’s hurting profitability, with the sector scoring poorly relative to others by that metric in an analysis of 1,373 publicly-listed European companies with revenues of at least €500 million ($548 million).
While large telecom incumbents have good financial stability, in sub-sectors such as fiber there is a need for a large amount of investment, said managing director Jochen Schönfelder, who leads BCG’s Cologne office, in an interview. “These companies especially will see a complicated refinancing environment,” he said.
Under Scrutiny
Firms are under increased investor scrutiny as they adapt to higher interest rates after years of easy money that allowed many to load up on debt to invest in expansion. Traders are wagering that the European Central Bank deposit rate will remain at around 3% in a year’s time.
The focus is on which companies and sectors may struggle. Among other problems for firms: market volatility that has made banks more cautious about lending, and stubbornly high inflation, which has also spurred a rise in costs for many.
Bonds in German fiber network operator Tele Colombus AG plunged on Friday after the company was said to report a 47% slump in earnings as it grapples with higher operating costs. And Altice France SA, which isn’t publicly listed, was downgraded by S&P Global Ratings last week on the back of negative free operating cash flow and deteriorating refinancing conditions.
Tele Columbus and Altice France didn’t respond to emailed requests for comment.
While some industries may be worse off than others, signs of strain are beginning to show across the economy. A quarter of European companies had negative free cash flow in the 12 months through the third quarter of 2022, increasing from 17% in 2021, the report said.
BCG also highlighted health care companies — typically seen as a defensive industry — as “surprisingly” not among the strongest sectors. Some firms still in the cash-heavy development phase are weighing on the overall sector’s average solvency, while health care companies across the board are struggling with workforce shortages and the need to pay higher wages, Schönfelder noted.
Among more resilient sectors in the report were metals and mining, chemicals and energy. Nevertheless, the new environment is an issue for all companies with refinancing to do.
“We urge companies to start the refinancing process early, and be extremely well prepared,” said Schönfelder. “Investors are not throwing away their money anymore.”
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