In a new report from Standard & Poor’s, entitled “How New Speculative Grade Issuers Are Helping To Transform Europe’s Credit Markets”, the rating agency reflects on the rising number of speculative-grade rated credits, explains how the eurozone crisis has created a new dynamic for downgrades, how fallen angels retain good access to the capital markets, and that an accommodating high-yield market is making the ‘BB’ rating class more acceptable to companies.
S&P comments that the proportion of corporate credit ratings (excluding financials) with speculative-grade ratings has risen to 49%, from 27% in 2000. While this figure is still below that of the U.S., where 64% of ratings are speculative grade, the gap is narrowing.
In the past 12 years, 133 European corporate issuers rated by S&P have been downgraded to speculative grade. In 2012, there were 12, representing €76 billion in reported debt, with a further 10 potential fallen angels (see below for a list of these companies).
The eurozone crisis and subsequent downgrades to sovereigns is having a knock-on effect, and has added a new dimension to the evolution of the credit story in Europe, S&P comments. As rating agency notes, the downgrade of Portugal to ‘BB’ with a negative outlook on Jan. 13, 2012 resulted in four Portuguese companies joining the ranks of fallen angels. These actions, triggered by rising country risk, accounted for 33% of the downgrades to speculative grade in European corporates this year. This is a new development, as key factors behind most corporate rating actions have typically been specific to the company or sector, S&P adds.
Indeed, S&P notes that up until recently, fallen angels have typically been very sizable companies that have experienced significant challenges to their business models – either specific to the company or due to more general sector issues. A good example is British Airways, which was downgraded to BB in May 2009 due to the agency’s view of the sharp deterioration in the operating environment for airlines.
Now, however, S&P is seeing a high percentage of companies crossing the threshold to speculative grade, driven by its assessment of rising country risks, rather than company-specific credit factors. S&P notes however that the situation is not always so clear cut, as sovereign risk also affects its view of companies’ business prospects – an example being OTE, which was downgraded to B- in March 2011. The main driver for this was the deterioration of OTE’s results and stresses within the telecom industry, but another factor was the mix of economic and financial pressures on Greece that also negatively affected consumer spending in that country and resulted in high levels of tax and pension burdens for the company, S&P states.
While the number of fallen angels is on the rise, S&P comments that an important feature of the current credit story is that such companies have managed to maintain very good access to capital market funding in 2012. At the start of the year, European companies looked to the U.S market for funding as European markets were harder to access because of the crisis, but the second half of the year has seen them return to home turf. S&P notes that according to LCD Research, yankee trades comprised only 29% of total high-yield issuance in the second half of the year (to the end of October) compared with 45% in the first half.
S&P warns that it will be some time yet before more non-private-equity-owned European corporates are comfortable operating on a longer-term basis within the speculative-grade category. However thanks to greater investor liquidity and the cost of funds at low levels in the high-yield space, S&P feels the ‘BB’ broad crossover rating category may represent a more sustainable rating level for corporates in Europe than it has before – a shift that may align the distribution of ratings in Europe more closely with that of the U.S.
Nonetheless, while the economic environment in Europe remains moribund – and the number of downgrades is likely to increase in the immediate future – S&P thinks that the increase in diversity and liquidity in credit markets as more debt outstanding is added to the pool of speculative-grade credit could, over time, encourage more private companies to feel more comfortable being rated in the crossover ‘BB’ categories.
This year’s fallen angels are: Portugal Telecom, EDP, REN, Edison, Nokia, Italcementi, Ciments Francasi, Cimpor Cimenots de Portugal, A O Sovcomflot, Freight One, ArcelorMittal, and Co-operative Group. In total this represents €76.4 billion of debt.
Potential fallen angels (issuers rated BBB- and on creditwatch negative or negative outlook) are: Acquedotto Pugliese, AngloGold Ashanti, Clariant, Copenhagen Airports Denmark, Finmeccanica, FirstGroup, Gold Fields, Invensys, OJSC MegaFon, and OJSC NLMK. In total this represents €19.4 billion of debt.
The full report is titled “How New Speculative Grade Issuers Are Helping To Transform Europe’s Credit Markets”. Subscribers to RatingsDirect can access the research piece at www.globalcreditportal.com. Alternatively, to purchase/access the report, please contact Client Support Europe: +44 20 7176 7176 or [email protected]. – Luke Millar