S&P Global Ratings said last week that the 12-month default rate for speculative-grade European financial and non-financial corporate issuers could rise to 2.5% through 2018 (see “The European Speculative-Grade Default Rate Could Rise To 2.5% Through 2018”). This forecast remains below the average default rate of 3.2% from 2002 to 2017.
The report adds that certain aggregate measures of credit performance have recently been stable or improving. For example, the negative ratings bias for speculative-grade European corporates declined to 13.1% at the end of February 2018, from 17.4% a year earlier.
“However, the proportion of speculative-grade issuers that we rate ‘B–’ or lower remains high by recent standards, reading 16.6% at the end of February 2018, up from 13.5% at the end of 2015,” the report stated.
Eurozone GDP growth reached a 10-year high of 2.5% in 2017 and will likely continue at above 2% in 2018, according to the agency. Although the European Central Bank (ECB) has begun to ramp down its asset purchase program, monetary policy remains accommodative, with recent euro strength helping to keep inflation below the ECB’s target level. And debt issuance from speculative-grade European corporates has been increasing as lending standards continue to loosen and debt funding costs remain low, the reports noted.
S&P Global comments that some credit factors are more negative. The agency expects a more moderate trajectory for economic growth in the U.K., as Brexit uncertainties dampen investment and higher inflation due to currency weakness curbs household spending. In addition, S&P’s ratings-based indicators of European credit performance present a mixed picture. On the one hand, the negative ratings bias among speculative-grade corporates has been declining in recent months, S&P comments. However, the ratings distribution is becoming more concentrated on lower rating levels, suggesting rising aggregate credit risk, partly due to rising corporate leverage, S&P adds.
In the agency’s view, this combination of economic and credit performance indicators remains relatively benign in the short term, and S&P expects the aggregate speculative-grade default rate to remain low by historical standards over the next 12 months. However, the risk of a capital markets–led tightening in credit conditions may be building and the default rate has been edging higher, S&P comments. — Luke Millar
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