Concerns over global economic growth and tariffs, as well as continuing weakness in some end-markets, including automotive and construction, will lead to lower order intakes for European non-investment-grade diversified industrial manufacturers in 1H25, Fitch Ratings says. However, good liquidity and solid financial metrics among most high-yield issuers should sustain ratings in our portfolio.
Book-to-bill ratios are likely to decline below 1.0x in 1H25 before gradually recovering in 2H25, according to our EMEA High-Yield Diversified Industrials and Capital Goods — Relative Credit Analysis. Weaker order flows will translate into slow revenue growth for the full year 2025.
Accelerated economic decoupling between the US and China is prompting companies to reconsider global supply chains, shifting towards ‘friend-shoring’ and ‘near-shoring’ strategies. This involves relocating production closer to home or to politically aligned countries to enhance supply chain resilience.
Relocating production capacity from Europe to the US to counteract tariffs is not a quick solution as it requires substantial investment in plant and personnel. Many European companies are exposed to new US tariffs under the Trump administration. Although a significant proportion of US sales by European industrial companies comes from local facilities, considerable exports still flow from Europe to the US.
However, there are also growth opportunities in some end-markets. The push for decarbonisation and stricter environmental regulations is boosting demand for innovative and energy-efficient solutions, such as renewable and hydrogen technologies. Automation and digitalisation are gaining momentum as companies seek efficiency and reduced reliance on labour-intensive processes. Integrating digital solutions offers a competitive edge and new revenue streams despite geopolitical and economic challenges.
We expect large-scale M&A to remain opportunistic, while bolt-on acquisitions, especially in segments that complement companies’ existing business profiles, are far more likely. Companies are likely to streamline operations by divesting non-core or underperforming divisions, though these deals are unlikely to be transformational.
We anticipate stable to slightly improving EBITDA margins in 2025, with a median margin of 14.8%, up from an estimated 14.2% in 2024. This improvement will come from effective cost pass-through and operational measures. Stabilising working-capital flows and solid profitability should lead to more predictable free cash flow (FCF) generation in 2025. We also expect capex policies to remain conservative. This should further strengthen FCF, underpinning the ratings of many companies.
Gross leverage, a key rating factor for high-yield companies, aligns with ‘B’ category expectations, with a median of about 5.0x at end-2024. We expect gradual improvement in gross leverage into 2026 as earnings rise and some debt is repaid. Companies prioritising deleveraging may see rating upgrades in 2025, particularly at the lower end of the ‘B’ category.
Cash-deployment strategies, especially related to M&A, are fundamental to most issuers’ ratings. M&A has not been a material factor in the last five years, largely due to the uncertainties caused by the pandemic, but it may become more prominent in 2025. Nevertheless, we do not expect changes in financial policies to be sufficiently significant to affect credit profiles, and we believe that companies are likely to maintain their conservative approaches.
Most issuers have adequate liquidity following recent refinancing, supported by improving FCF and backup credit lines. We expect slight improvements in interest coverage ratios in 2025 as companies repay debt and refinance at lower rates.
Source: Fitch Ratings
