By Diane Vazza
The presence of weak sovereign credit quality continued to dampen European corporate creditworthiness in 2013. While Italy, the Netherlands, Slovenia and France were all downgraded, corporate defaults hit a four year high in 2013, with Europe accounting for around 20% of the global total.
In fact, Europe was the only region to see an increase in speculative-grade defaults, with the rate dropping to 2.12% in the U.S, and 1.96% in the emerging markets from 2.58% – against 3.33% in Europe, up from 2.2% a year earlier. So, whilst the other major regions’ speculative-grade default rates were more stable, Europe’s increased notably.
What’s more, the financial sector continued to face particularly strong headwinds – again, as ripples from the sovereign debt crisis continued to be felt. We saw eight fallen angels, which are entities downgraded to speculative grade, four of which were financial institutions. In our view, the sovereign debt crisis – starting in 2009 – substantially contributed to the weakened creditworthiness of European companies, especially those in the financial sector, and continues to have an impact.
Indeed, the 2008 global financial crisis and the subsequent eurozone sovereign debt crisis have demonstrated the close relationship between the creditworthiness of financial institutions and sovereigns. For instance, if the creditworthiness of a sovereign deteriorates, and its domestic financial sector is in distress, any potential support from the government may be less certain.
What’s more, the depreciation of the euro had a direct influence on some corporates’ ability to pay their debts, supporting our view that the sovereign debt crisis contributed to the downward trend for corporate creditworthiness in recent years.
That said, 2013 was relatively calm in the European corporate credit arena compared to previous years. The first half of the year saw the eurozone remain in recession, although this was offset by a 0.3% increase in GDP in the second half. The volume of debt affected by defaults has also decreased. In 2013 it totalled $17.8bn, down from $19.7bn in 2012 – a considerable improvement from the $38.7bn in 2009. And the percentage of unchanged ratings – which can indicate ratings stability – increased to 72.04% in 2013, a significant improvement from 62.08% in 2012.
Furthermore, S&P saw eight rising stars in 2013, which are corporate entities that have been upgraded to investment grade from speculative grade, all of which were from the non-financial sector. Indeed, the signs of stability in 2013 are mainly attributed to the non-financial sector, which saw a growing proportion of rating upgrades – some 12% of European non-financial companies being upgraded last year, only marginally outstripped by the 13% that were downgraded.
While European companies are still struggling to escape the impact of the sovereign debt crisis, the growing number of upgrades of non-financial companies – and the decreased amount of defaulted debt in 2013 – demonstrates that parts of the European economy are stabilising.
However, the weaker credit performance of the financial sector remains a concern. Indeed, the downgrade of several sovereigns, the continuous downward trend in the ratings of financial institutions, and the elevated level of defaults are consistent with our belief that the sovereign debt crisis has strongly influenced, and will continue to influence, the credit rating performance of European corporates.
Diane Vazza is head of global fixed-income research at Standard & Poor’s Ratings Services
Comments