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S&P: European corporate downgrades likely to outpace upgrades over next year

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.