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S&P: BBB downgrade risks in Europe look manageable

S&P Global Ratings today published "When The Cycle Turns: 'BBB' Downgrade Risks In EMEA Nonfinancial Corporates Appear Manageable," which dives deeper into its data and credit metrics for BBB rated nonfinancial corporates in EMEA. The report sizes the potential downside risks, identifies the key drivers of the growth of debt, assesses leverage trends, splits out key industry sectors, identifies the largest BBB category borrowers, and explains historical downgrade levels.

Key takeaways from the analysis include:

  • Gross reported debt of nonfinancial corporates rated in the BBB category based in Europe, the Middle East, and Africa has surged by 80%, or roughly $1 trillion since 2007, to about $2.2 trillion at year-end 2018.
  • The largest single driver was about $1.5 trillion of debt downgraded from higher ratings, and S&P believes the most common reason is companies' increasing risk tolerance.
  • S&P estimates up to about $250 billion of debt could fall to speculative grade per year in a severe downturn, although this is not S&P's forecast for the next one-to-two years. This is about 10% of the outstanding amount, which S&P considers manageable for the market to absorb.

The article is part of a series addressing credit fundamentals and the potential downgrade risks in the 'BBB' rating category.—Luke Millar

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