European Corporate Defaults to Stay Low Next Year But Rise Again from 2012
European corporate default rates are expected to fall modestly during 2011, but may rise again from 2012 in the face of economic headwinds and refinancing challenges, according to Standard & Poor’s (S&P) Annual European Corporate Credit Outlook.
The trailing 12-month European speculative-grade default rate – derived from S&P’s universe of 726 private credit estimates and publicly rated corporate entities – was 5.9% at the end of September 2010, down from a peak of 14.8% at the end of 3Q09. The default rate is expected to fall to about 4% by the end of 2010, taking it to below its long term 4.3% average for the first time since the 4Q08, and to fall slightly further to 3.8% by the end of 2011. This would equate to 27 European companies with speculative-grade credit ratings or private credit estimates defaulting during 2011.
“Corporate default rates in Europe should remain relatively low in 2011, but we think this will mark only a temporary respite,” said Blaise Ganguin, S&P chief credit officer for Europe.
Likely more restrictive monetary policy and growing refinancing risks could precipitate a resurgence of defaults in 2012 and 2013, mainly among leveraged buyouts (LBOs) that were launched between 2006 and 2008, driving the default rate to 6.5% or even slightly higher in 2012. These companies face major challenges refinancing about €230bn of debt maturing before 2016. They will be competing with about €16 trillion of debt issuance expected from corporate and sovereign borrowers over the same period, at a time when the economy may be feeling the effects of tighter monetary and fiscal policy, anaemic consumption and limited lending capacity by banks.
The report, titled ‘Credit Quality Among European Corporates Is On A Positive Track For 2011, Less So For Banks’, outlines S&P’s predictions for credit quality in the European banking, corporate, insurance and leveraged finance sectors in 2011. It notes that while most sectors will benefit from stabilising and even improving business outlooks next year, sovereigns, banks and to a lesser degree insurance companies could see their credit quality erode further.
Key expectations include: