Sovereign debt crisis continue to impact European corporates – S&P’s Vazza

The number of European corporates defaulting on their debt hit a four year high in 2013, despite the overall stability returning to the international economy, says Diane Vazza, head of global fixed income research at Standard and Poor’s.

The European economy showed welcoming signs of returning stability in 2013. The continent finally made an exit from its long recession in the second half of the year, with 0.3% increase in GDP. And the number of sovereign downgrades more than halved, decreasing from nine in 2012 to just four in 2013: France, Italy, Slovenia and the Netherlands.

Nonetheless, it is clear that the sovereign debt crisis continued to impact the region throughout the previous year. Certainly, the weaker credit profiles of some sovereigns – as well as the economic and financial challenges that Europe continues to face – contributed to the elevated downgrade activity in the financial sector last year.

What’s more, 16 defaults were recorded by S&P in 2013, affecting $17.8bn in debt. This is up from the nine defaults in 2012, and is the highest number since 2009. The elevated number of defaults is indicative of the continued impact of the eurozone’s sovereign debt crisis on European corporates, despite the overall increase in economic stability in the European economy.

The vulnerability of the financial sector
Of the sectors impacted by the on-going sovereign debt crisis in 2013, the financial sector was the biggest under performer – continuing to display a downward trend with 16% of European financial institutions being downgraded, compared to just 4% receiving upgrades.

For the total year, we saw eight fallen angels – which are entities downgraded to speculative grade – four of which were financial institutions. Generally speaking, financial institutions rely on stable economic environments and are sensitive to sudden declines in investor confidence, which can result in a rapid deterioration of creditworthiness and elevate downgrades.

As such, the weakening credit profiles of some of Europe’s largest economies – including Italy and France – partly contributed to the downward trend of the financial sector.

Prosperity among non-financial corporates
Conversely, Europe’s nonfinancial sector revealed increasing signs of stability, even increasing prosperity in 2013. The sector experienced impressive momentum with respect to upgrades – some 12% of European non-financial companies were upgraded, only marginally outstripped by the 13% that were downgraded in 2013.

Certainly, the number of upgrades in the non-financial sector outstripped those in the financial sector.
What’s more, Europe’s rising stars of the year – corporate entities that were upgraded to investment grade from speculative grade – belonged wholeheartedly to non-financial companies.

Signs that Europe is stabilising
Despite a sharp hike in default activity, overall stability among European corporates became more apparent in 2013. The percentage of unchanged ratings, which is indicative of ratings stability, increased to 72.04% in 2013, a notable improvement from 62.08% in 2012. And Europe’s overall issuer-weighted default rate compares reasonably well to other regions, with 1.05% in Europe, 1.04% globally, 1.13% in the US and 1.08% in emerging markets.

What’s more, the total volume of debt affected by defaults in Europe has decreased. In 2013 it totalled $17.8bn, down from $19.7bn in 2012, and is a considerable improvement from the $38.7bn in 2009.

Corporate reliance on sovereign debt recovery
In the view of S&P, we believe that the prevailing sovereign debt crisis contributed to the high number of corporate defaults in Europe. And although there were clear signs of stability returning throughout the region, the relatively high number of defaults demonstrates that some European corporates are still struggling to meet their obligations.

Indeed, the increased volatility in the European financial sector since 2008 has been exacerbated by the weakening of certain sovereigns’ credit profiles. Certainly, such a close relationship between financial institutions and their sovereign bodies has become a hindrance to the financial sector’s ability to stabilize its creditworthiness.

 

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