(The following statement was released by the rating agency)
Sept 26 - Economic and political uncertainty in Europe, a deteriorating growth outlook that has now spread to core EU countries, and a raft of highly vulnerable LBOs approaching debt maturity are combining to push up corporate defaults in Europe, says Standard & Poor's Ratings Services in a new report: "European Corporate Defaults Are On The Rise As Eurozone Stresses Continue".
The default rate among our portfolio of the EU-30 speculative-grade companies (rated 'BB+' or below) rose to 5.3% at the end of the second quarter, from 4.7% at the end of March 2012. In this adverse environment, we envisage that the trailing 12-month default rate will edge up further over the next 12 months to reach 6.3% by the end of June 2013.
"The latest announcement by the European Central Bank establishing its new outright monetary transactions program, designed primarily to guarantee eurozone sovereigns access to short-dated liquidity at an acceptable cost, will likely support market liquidity and limit the extent of the rise in defaults," said Standard & Poor's credit analyst Paul Watters. "Nevertheless, a substantial number of catalysts remain that, should they materialize, could result in a more severe and protracted recession in the eurozone and, consequently, a much higher default rate of more than 8%."
Over the three months to June 30, we saw nine defaults among our portfolio of EU-30 speculative-grade companies to which we assign either public credit ratings or private credit estimates (mainly leveraged buyouts). Four of the six private credit estimate defaults were serial offenders, having defaulted previously between fourth-quarter 2008 and fourth-quarter 2009. This rise in the default rate is in line with our view that defaults would begin to rise again this year after hitting an interim low of 3.6% at the end of September 2011.
In our view, recent policy actions by the ECB on Sept. 6 will likely help to stabilize peripheral sovereign bond markets and improve funding conditions for corporates, thus reducing the risks of a more severe pick-up in defaults.
"However, it's unlikely to improve the default picture materially because refinancing, including "amend-and-extend" transactions on commercial terms, are largely restricted to borrowers rated 'B' or higher or larger deals where collateralized loan obligation (CLO) investors still have the flexibility to provide consent in return for upfront fees and higher spread margins," said Mr. Watters.
"We still see a large portion of credits in our portfolio, mainly private credit estimates, struggling to generate meaningful free operating cash flow relative to outstanding debt and with few options to refinance debt maturities coming due in 2013-2015. This affects 36.3% of the overall portfolio that are at 'B-' or below, although we note that this has eased gradually from its recent high of 38.2% at the end of 2011.
The report also states that although many borrowers have been able to refinance existing loan debt, the absolute amount of debt coming due in 2014 and 2015 for refinancing is still material.