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Fitch: Political Fallout Quelled in Europe Credit Markets as QE Masks Risks
March 14, 2017 / 11:07 AM / 9 months ago

Fitch: Political Fallout Quelled in Europe Credit Markets as QE Masks Risks

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: EMEA Corporates Bond Market Monitor here LONDON/FRANKFURT, March 14 (Fitch) European credit markets started the year positively as the ECB's various bond-buying programmes helped to shield corporate credit from potential political risk contagion, maintaining borrower-friendly conditions, says Fitch Ratings. Average yields and spreads on non-financial corporate bonds tightened year-on-year, and have been broadly flat in the year-to-date, despite sovereign yields widening as investors repriced the potential for gains by eurosceptic parties in upcoming elections. Corporate credit generated total returns of 0.6% in the year through end-February, compared with -0.97% for European government bonds. However, divergent credit market performance and fundamentals reflect the presence of distorting effects from QE and the crowding out of investors. Issuance in 2017 will find support from the strong technical environment that pervades European credit markets that favours borrowers, as well as anticipated strength in M&A activity. The Corporate Sector Purchase Programme (CSPP) was instrumental in compressing yields to all-time lows in 2016, which in turn was behind the 35% yoy rise in issuance to a record EUR478 billion last year. The early pace of issuance in 2017 has been in line with last year, with volume in 2M17 reaching EUR61 billion. Corporate M&A remains buoyant, with western European deal volume experiencing the best start to a year since at least 2005, rising 1.4x yoy in 2M17, which bodes well for deal-related issuance in the remainder of the year. QE-distorted credit market technicals mask a more mixed situation for corporate fundamentals, as reflected in the continued divergence between credit spreads and rising corporate leverage. However, a simultaneous improvement in debt service capacity - due to near record low yields - makes the leverage trend less acute. A similar dynamic arose in the US, before debt service ratios worsened as yields rose following the 2013 "taper tantrum", although leverage is still rising despite the economic recovery. The rise in leverage is a consequence of record low yields, booming debt issuance and declining profit margins as corporates grappled with low or anaemic growth. The latter also explains the jump in M&A-related bond issuance while proceeds allocated to more productive uses such as capex declined. <iframe src="//" title="FW: ECBM NRAC Chart 1 and 2" width="800" height="" scrolling="no" frameborder="0" > The narrowing in US-European corporate spreads since the US election, coupled with a costly euro/dollar cross-currency basis swap spread has reduced the appeal of reverse-yankee bonds for US issuers. So far this year, US corporate spreads have traded 10bp tighter than their European counterparts for the first time since 2013, while the cross-currency swap spread has become less negative, reflecting growing interest by European corporates to issue in US dollars, while US firms reduce their European credit market footprint. In the former, European issuers have increasingly turned to the Yankee market to borrow at longer maturities in order to counter waning domestic investor appetite for higher duration paper - Telefonica's recent printing of 10-year and 30-year US dollar bonds being a recent notable case in point. Commodity-related sectors remain a drag on the rating migrations and Outlooks. In 2016, net rating Outlooks on Fitch-rated, developed market EMEA corporates deteriorated to their most negative level since 2013, as food and commodities-related sectors drove the bulk of the deterioration. Downgrades in the same sectors were responsible for a marginal worsening in the composite ratings profile in 2016 when the upgrade-to-downgrade ratio declined to 0.28x in 2016 from 0.33x a year earlier. More information is available in 'EMEA Corporates Bond Market Monitor', available at or by clicking the link above. Contact: Michael Larsson Director +44 20 3530 1260 Fitch Ratings Limited 30 North Colonnade London E14 5GN Roelof Steenkamp Senior Director +49 69 768 076 113 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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