European credit quality falls steeply in 2001, says Moody's

Credit rating downgrades outnumbered upgrades by more than two-to-one for corporations and governments outside the US during 2001, according to international rating agency Moody's – a complete reversal on 2000, when upgrades exceeded downgrades by a more than two-to-one.

In the US, meanwhile, the ratio of downgrades to upgrades on corporate bonds was close to three to one.

Hardest hit this year were borrowers in Western Europe, Japan, Canada and Argentina. Credit rating downgrades in western Europe outnumbered upgrades by a margin of 2.7-to-1, the most severe deterioration in seven years.

But Moody’s said markets in eastern Europe, Asia, Mexico and Russia benefited from more credit rating upgrades than downgrades.

Based on a preliminary count of rating changes through to December 21, Moody's said the ratings of 510 issuers outside the US were downgraded, affecting $3.8 trillion of debt, while 222 issuers were upgraded, affecting $738 billion of debt.

The September 11 terrorists attacks had a negative impact on ratings in the travel and tourism industries in particular, and Argentina’s fiscal crisis also led to an increase in downgrades.

Looking ahead, the rating agency predicted that weak capital spending, a modest rebound in global trade and sluggish developed economies will continue to sustain pressure on credit quality in 2002 outside the US. “While an improvement in corporate earnings over the year ahead may alleviate some pressure on western European credit ratings, a reduction in excess capacity, and more conservative capital structures are essential for firming credit worth,” said Kerryn Fowlie, Moody's European economist.

More optimistically, Moody’s said in another research report today that the European asset-backed securities market will continue to grow in 2002, following 2001’s record-breaking year for ABS - with a dramatic year-on-year growth of 126% in total issuance compared to 2000. Issuance volume increased to €42.1 billion in 2001 from €18.6 billion the previous year, while the number of transactions also rose by more than 50% to 67. The average deal size increased to €628 million from €422 million in 2000, largely due to a five-fold rise in the number of 'jumbo' transactions - those in excess of €1 billion.

George Skelton, author of the ABS report and senior associate at Moody’s, said esoteric transactions with unusual or innovative structures, or which are backed by non-standard assets, returned the strongest growth statistics. Skelton also expects a significant volume of issuance of esoteric deals and those backed by new types of future receivables in 2002, which could extend the breadth of the ABS market as European issuers and investorsbecome more familiar with the new structures.

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