JP Morgan names most vulnerable European corporates

JP Morgan’s team of about 25 European credit analysts ranked companies by seven key investor risk concerns following WorldCom’s disclosure of accounting fraud. Companies were given a score of one to three in these areas – extent of corporate leverage; complex and rapid M&A activity; poor disclosure, governance and management credibility; pension liabilities; debt-funding needs; equity/asset sales; and market sentiment – with a score of one representing minimal worry and a three meaning great concern. These figures were then aggregated to show which credits were most exposed.

“There are a lot of risks that are not covered in this report that we analyse on a day-to-day basis,” said Emmanuel Weyd, co-author of the report, ‘Crisis of corporate confidence: where is the risk of contagion?’. “But what we have done here is provided a road map to investors on some of the key issues currently being focussed on by the market.”

Weyd, who co-heads JP Morgan’s European credit research team, added that while the overall score was important, a score of three in a specific category meant a company was significantly exposed to any negative market sentiment in that area. For example, if market sentiment switched to a company’s exposure to pension liabilities, credits like BT Group, Electricite de France, General Motors and ThyssenKrupp would probably see a sharp widening of their credit default swap spreads. All four companies scored a ‘three’ in the pensions liability category in JP Morgan’s research.

ABB, Alstom, British Airways, British Energy, Deutsche Telekom, Fiat, France Telecom, Invensys, Repsol-YPF, Rhodia and Vivendi Universal would all be exposed were a company to hit trouble due to its financial leverage. Cable & Wireless, Deutsche Telekom, France Telecom, General Electric, RWE, Telefonica, Tyco, Vivendi Universal and Vodafone are most exposed to sentiment on fast-growth M&A.

Those most likely to be hit by further disclosure scandals included: ABB, Alstom, Fiat, France Telecom, Rhodia, Rolls-Royce, Stagecoach, Tyco, Vivendi Universal and Volkswagen. Meanwhile, Deutsche Telekom, Fiat, France Telecom, General Electric, Tyco and Vivendi Universal have the most acute exposure due to debt funding levels; while those at greatest risk due to asset disposals were ABB, Alcatel, Deutsche Telekom, Ericsson, Fiat, France Telecom, Invensys, Rhodia, Tyco, Vivendi Environnement and Vivendi Universal.

Those exposed to negative market sentiment due to similarities in structure to WorldCom were: ABB, Alcatel, Cable & Wireless, Deutsche Telekom, Ericsson, France Telecom, mmO2, Tyco and Vivendi Universal.

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