Corporate credit quality across Europe is expected to deteriorate over the coming months, with downgrades likely to exceed upgrades on the back of economic growth concerns and geopolitical uncertainties, S&P Global Ratings said Aug. 15.
"We expect overall corporate credit quality to decline slightly over the next year based on the current outlook and CreditWatch distribution, our expectation for a slowing economic backdrop, and the potential for multiple geopolitical stressors to have a negative impact on the region," the rating agency said.
The negative bias on S&P's ratings on European companies, or the percentage of ratings with negative outlooks or on CreditWatch with negative implications, rose to 14.2% in the second quarter from 13.1% in the first quarter.
Among sectors, aerospace and defense continued to record the highest negative bias at 33%, followed by automotive at 30% due to its vulnerability to potential global trade disruptions.
The positive rating bias, which represents the proportion of companies that either had a positive outlook or ratings on CreditWatch positive, fell to 7.9% from 9.5%.
This resulted in a net rating bias of negative 6.3% — the lowest measure since September 2016 — indicating that corporate downgrades could outpace upgrades in the coming quarters.
The rating agency upgraded 27 European companies in the second quarter, up from 16 upgrades in the prior three-month period. The number of downgrades dropped to 25 from 26, representing the fewest downgrades for any second quarter since 2014.