S&P’s mixed review

In Standard & Poor’s annual review of European credit trends, the rating agency has highlighted the lack of upside in improvements in the creditworthiness of corporates in 2004, even though the low point for corporate credit quality has passed.

The overall distribution of outlooks and CreditWatch listings, a good lead indicator of credit quality, is slightly worse than at the same point in 2002, states Barbara Ridpath, Standard & Poor’s chief credit officer for Europe. And although the number of rating downgrades has fallen in 2003 compared with 2002, and is likely to decline again in 2004, S&P believes that the economic and business environment in Europe at present provides limited scope for rating upgrades.

“Without any real growth in consumption and investment, we see little reason to expect a dramatic upturn in credit quality among European issuers in 2004,” says Ridpath. “Creditworthiness is certainly deteriorating less rapidly than a year ago thanks to remedial actions taken by issuers, but companies are reaching the limits of what they can do internally without help from the economy.”

For S&P, the utilities and insurance sectors are most at risk. Utilities have been burdened by debt from acquisitions, volatility of power prices and regulatory pressures. The insurance sector has seen 207 downgrades in the 11 months to November 2003 on account of reduced financial flexibility and challenging earnings outlooks.

The rating agency also views cautiously the sharp increase in high-yield bond issuance in the past year, which has rocketed up by 170% from 2002 to reach $13 billion.

“It remains to be seen whether the increase we have seen in speculative-grade issuance in Europe is a healthy sign of market maturity or the harbinger of the next credit crisis,” says Ridpath.