S&P Predicts Record Junk Bond Defaults in Europe
Standard & Poor’s predicts that at least 60 European firms will default within the next 12 months, affecting up to €25 billion of outstanding speculative grade debt, with a similar amount impacted in 2010, making it the worst period on record for defaults by rated firms in Europe.
The cumulative default rate on speculative grade issuers could exceed 20% by the end of 2010, according to the report published today by Standard & Poor’s Rating Services.
Based on Standard & Poor’s worst-case scenario, up to 75 companies rated in the speculative grade rating category could default in 2009, representing a sharp increase in the speculative grade default rate in Western Europe to 11%.
At December 15, 2008, the speculative grade default rate was 3.0% in Europe, slightly below the 15-year historical average of 3.2%.
Key expectations for 2009 include:
- A tenfold increase in the number of defaults among European speculative grade rated issuers, to between 60–75 companies.
- Among European nonfinancial corporates, credit rating downgrades are expected to continue to outnumber upgrades by a wide margin. We expect the downgrade-to-upgrade ratio to rise well above the 2.1:1 recorded in 2008. The ratio was 3.5:1 during the second half of 2008, and is likely to end at close to 10:1 during the fourth quarter.
- While most LBOs do not face refinancing pressure until 2013, managing liquidity and working capital will be absolutely critical to survival for more highly leveraged entities. We anticipate credit quality will continue to deteriorate through the whole of 2009 as covenant breaches increase.
- In the European banking sector, ratings will remain under strong pressure over the coming quarters as profitability deteriorates, loans losses increase, and funding remains scarce and expensive, even after the recently announced government-sponsored bank rescue plans.
- Given the high proportion of negative Outlooks in the sector, downgrades are likely to continue to accelerate. The median rating for the top-50 Western European banks slipped to ‘A+’ from ‘AA-’ in October 2008, and the proportion of the top-50 with stable Outlooks has slipped back since the end of 2007 (when it was 72%) and is now only 34%.
For details see Weakening Performance And Liquidity Drive European Credit Trends From Bad To Worse.
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