More NewsStrong Q112 EMEA Corporate Bond Issuance Bucks Negative Rating Drift

Strong Q112 EMEA Corporate Bond Issuance Bucks Negative Rating Drift

Fitch Ratings says that Europe, Middle East and Africa (EMEA) corporate issuers capitalised on the Long-term Refinancing Operation (LTRO)-induced recovery in market sentiment and tighter pricing at the start of Q112 to issue €245bn in bonds (€355bn including covered bonds), an 8% improvement on Q111. However, the proportion of eurozone corporate issuers fell to 66% from 76% over the same period. April new issuance declined in volume by 41% compared to the prior month, as the eurozone conundrum continued to stoke market volatility.

The positive market dynamic in Q112 was in contrast to a negative rating trend. Downgraded bonds were largely limited to issuers from eurozone nations that were subjected to credit downgrades earlier in the year, a theme that threatens to persist for the rest of 2012. The volume of upgraded corporate bonds fell sharply compared to Q411, although credit downgrades were also considerably lower, affecting 0.2% and 3.9% of the market, respectively, compared to 1.0% and 16.9% in the prior quarter.

Downgrades affected 4.1% (€103bn) by par value of financial bonds outstanding, a notable improvement on Q411, when downgrades affected 25.3% (€627bn) of the market. Nevertheless, the downgrade rate in Q112 remained elevated compared to the average rate of 2.5% recorded in H111. The proportion of outstanding bonds rated AAA-A was driven lower to 77% from 79% in Q411, due to a combination of the negative ratings actions and lower issuance by the sector.

For industrial corporates, a higher downgrade rate and a relative absence of upgraded bonds extended the negative ratings drift to a level worse than in any quarter in 2011. Industrials had €50bn of bonds downgraded in Q112, led by the utilities sector, for which 63% of the move was due to bonds from a single issuer.

The European Central Banks’ (ECB) three-year LTROs reduced pressure on banks to refinance public market debt, although many have been keen to prove market access against a backdrop of tighter spreads. Financial issuers raised €140bn in bonds (excluding covered bonds) for Q112, 16% lower than the rate of new issuance in Q111 but twice the amount of the troubled Q411. Banks more than doubled their issuance of covered bonds to €96bn (43% of total bank new issuance) compared to the prior quarter.

Despite the negative ratings trend, industrial borrowers responded to tighter spreads and strong demand in Q112 by raising €105bn in bonds, more than in any quarter since Q109, when €119bn was issued. The total amount raised represents 80% of the industrial universe bond maturities in 2012, indicating a level of pre-financing designed to relieve potential future funding pressures for some issuers in the event that market conditions become less amenable.

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