Italian companies at risk of default, but positive prospects for 2024

It still remains high default risk for Italian non-financial companies. The probability of default in December 2023 rose to 6.22% against 5.68% a year earlier, a value well above the levels pre-Covid (at the end of 2019 it was 4.45%). A trend which could, however, stabilize in 2024: in a more favorable scenario, the probability of default would drop to 6.13%, remaining in any case above 6%, a level never reached before December 2023. In a scenario with some worsening elements compared to the current economic situation, the probability of default is expected to rise further to 6.39%.

The increase in portfolio risk

This is noted by the Credit Outlook 2024 of Cerved Rating Agency, the Italian rating agency specialized in assessing the creditworthiness of Italian non-financial companies and debt securities issues. “The negative trend seen starting from the pandemic period has not yet been reabsorbed and the sequential macroeconomic stresses, caused by geopolitical tensions, tightening of financing conditions and inflationary dynamics – comments Fabrizio Negri, CEO of Cerved Rating Agency – continue to influence the risk of credit for Italian companies. In particular, rising rates started in summer 2022 contributed to the worsening of the PD and we expect that the prolonged persistence at high levels may still weigh on creditworthiness. This element, together with other factors, continues to influence the credit risk of Italian companies, which however we see as slightly decreasing in the more positive scenario expected at the end of 2024″.

In the last three years there was an obvious increased risk dthe portfolio as indicated by the change in the percentage of entities rated with a positive rating (Investment Grade) in the sample of over 15,000 joint-stock companies to which Cerved Rating Agency has assigned a credit rating: in fact, the decrease has fallen from 56.7% in December 2019 to 40.8% in December 2023, substantially reversing the proportions between companies that prove to be financially solid and those that are more fragile.

Insolvency scenarios

Objective of Credit Outlook is to provide an estimate of the probability of default in 2024 for Italian non-financial companies, in 2024. According to the latest update presented by Cerved Rating Agency, this probability varies from 6.13% in the most favorable and probable case, to 6 .82% in the worst one.
In fact, to better represent the potential evolution of credit risk, Cerved has hypothesized three different scenarios. In the base scenario, it is assumed that geopolitical tensions persist, but with limited repercussions: economic activity would consolidate in the second half of 2024 – supported by the decrease in inflation, the cut in interest rates and greater solidity of the work – and this would lower the risk of default from the current 6.22% to 6.13%.
In the scenario intermediate, instead, ithe rate would rise to 6.39% due to a worsening of current economic conditions, due to a possible exacerbation of ongoing conflicts, a postponement of the rate cut by the ECB and delays in the implementation of the PNRR.
Finally, in the case of an extremely severe scenario, characterized by an extension of conflicts, the concrete risk of stagflation both in the United States and in the EU, higher interest rates and the suspension of the PNRR plans, the probability of default could even reach 6.82%, with a strong deterioration in credit quality and a significant migration of rated companies towards worsening rating classes.

Insolvency analysis of production sectors

If you examine ithe panorama of the production sectors, esignificant differences emerge due to variations in the market. On the one hand, sectors such as tourism and catering, pharmaceuticals and ICT show high chances of seeing a significant reduction in default risk. On the other hand, manufacturing sectors such as textiles and the rubber and plastics industry, along with agriculture, would show a further increase in credit risk. This pattern is also reflected in the size of companies: large companies would see a decrease in default risk of 4%, while small companies only 1%, due to their greater financial fragility.