Credit quality among financial and non-financial businesses remains under pressure in Europe, constr...
Credit quality among financial and non-financial businesses remains under pressure in Europe, constrained by a poor earnings environment and tepid economic performance. Moreover, the leverage overhang from a previous frenzy of mergers and acquisitions remains considerable since issuers are unable to lower debt levels either by raising equity or making asset sales.
The continued erosion in credit quality and poor economic fundamentals prevented the occurrence of any rising stars, issuers that are upgraded to investment grade from speculative grade, in the first quarter.
European credit quality, as measured by the ratio of downgrades to upgrades, got off to an unimpressive start in the first quarter of 2003 although the actual number of downgrades and upgrades declined relative to the previous quarter.
The distribution of European rating actions by sub-sector indicates that in terms of absolute count, insurance is the worst hit by downgrades this quarter, with eight downgrades on long-term debt worth $29.4bn.
The next worst affected is telecommunications and utility, with four downgrades each.
Telecommunications downgrades, which were ubiquitous a year ago, have declined in prominence.
The sector's share of total downgrades has dropped to 10% from 20% in the same quarter the year before. At the other end, the capital goods and high technology sub-sectors recorded one upgrade each.
Most of the rating changes were concentrated in the investment-grade category, BBB and above, rather than the speculative-grade category, BB+ and below. With 29 downgrades and one upgrade, the investment-grade spectrum accounted for 70% of all rating actions during the quarter. Looking forward, rating actions appear disproportionately biased towards the downside.
Of the 545 entities rated at the parent level in Europe, 29% have a negative bias, 65% are stable and only 6% have a positive bias. A year ago, the comparable figures were 24%, with either a negative outlook or a credit watch with negative implications, 69% stable and 7% with either a positive outlook or a credit watch with positive implications.
The negative bias was more pronounced in the speculative-grade spectrum. Some 34% of all speculative-grade issuers were listed with a negative bias, compared with 28% for investment-grade-rated issuers. Fewer speculative-grade issuers had a stable outlook, 61% against 66%, in the investment-grade spectrum.
The proportion of speculative-grade issuers with a positive outlook was 5%, marginally lower than the 6% among investment-grade issuers.
Within the investment-grade category, the potential for downgrades is highest within the AA+ and A- sectors.
More than a third of all rated issuers in both of these rating designations are listed as either on a negative outlook or a credit watch with negative implications.
Banks and non-bank financial institutions accounted for a sizeable chunk of the vulnerability in these rating designations, jointly responsible for four of the six entities in the AA+ designation and 13 out of 27 in the A- rating designation.
Few downgrades for speculative debt.
Downgrades down on last quarter.
Capital goods and tech have seen upgrades.
Sector is changing
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