Credit ratings on European non-financial companies may turn out to be an unlikely source of stability in the market maelstrom, with firms appearing to be taking great care to preserve their credit quality. The trend is in sharp contrast to the corporate debt crisis of 2001-2002, when scores of companies fell to "junk" status and default rates spiked sharply higher.
Some borrowers then - particularly in the telecoms sector, weighed down by spending on third-generation mobile networks - seemed almost cavalier about their credit ratings, which plummeted by whole ratings categories. But with the current credit crisis meaning funding may be more difficult to find companies are taking a conservative line on ratings and capital - and making sure their bondholders know it.
France Telecom said it would try to retain its current credit ratings even if it made a major acquisition. Danish brewer Carlsberg last week issued a deeply discounted 30.5 billion crown ($6.44 billion) rights issue to pay off acquisition debt, allowing it to keep its investment-grade rating. And advertising group WPP rushed to reassure bond investors on May 8 that any acquisition of Taylor Nelson Sofres would be structured to avoid hurting its ratings. "European companies have been much more conservative in how much debt they put on their balance sheet and are in much better shape to weather any potential downturn or choppiness in the credit markets," said Joe Biernat, head of credit research at specialist asset manager European Credit Management.
He said the memories of steep downgrades and defaults five to six years ago could be behind that. "My guess is that companies are in better shape and more conservative because of that experience."
One sign of the cautious approach by borrowers is the increasing use of rights share issues to fund acquisitions and, in the financial sector, to shore up strained balance sheets. European companies including banks are already set to ask investors for $100 billion this year in rights issues, according to Thomson Reuters data. "It is true that non-financials are in much better shape than in the 2001/2002 crisis," said Jochen Felsenheimer, head of credit strategy at UniCredit. "Default rates will not climb to 2002 levels as balance sheet leverage of non-financials is not a major threat in this crisis."
DOWNGRADE RATE SLOW, FALLEN ANGELS RARE:
Data from Moody's Investors Service show that downgrades in the 12 months to March are running above the annual average for the past 23 years in only five of its 29 industrial sectors - with real estate and construction, finance and consumer products featuring. And at the crucial point on the ratings spectrum, the divide between investment-grade and "junk", there are few cuts.
Downgrades of companies rated Baa3 in the year to March 31 affected just 2.8 percent of issuers, Moody's data shows, which compares with an annual average of 11.3 percent and with 20.2 percent in the full year for 2002. By contrast, 7.1 percent of issuers rated Baa3 were upgraded in the year to March.
Data from Standard & Poor's shows that in 2002 there were 130 "fallen angels" - companies that were downgraded to "junk" from investment-grade. So far in 2008 there have been just 15, while in Europe there are only nine issuers rated at the lowest level of investment-grade with either a negative outlook or on negative watch.
ECM's Biernat said that some fallen angels are inevitable but not in the same numbers as six years ago. "We expect to see some, there's no doubt about it. I don't think it's going to be like the last crisis," he said.
Comments
Comments are closed.