Rating agencies see more gloom
By Aline van Duyn
Published: December 16 2002 21:34 | Last Updated: December 16 2002 21:34
Rating agencies are predicting a slowdown in the deterioration of credit quality next year but are stopping short of forecasting a recovery.
The sectors that are likely to be subject to the most downward pressure in ratings are banking, insurance, utilities and capital-intensive and cyclical industries, such as capital goods, chemicals, building materials and airlines, according to Standard & Poor's.
"A broad recovery in corporate creditworthiness remains some way off," said Barbara Ridpath, chief credit officer for Europe at S&P.
"Although we may be past the most vicious stage of this cycle, we do not expect the gloom to lift much in 2003. Companies in many sectors are facing a very tough market and any external shock such as a war with Iraq will only make it worse," she said.
This year has seen the highest ever level of defaults in Europe, up to nearly $15bn from just more than $4bn last year. The ratio of upgrades to downgrades in western Europe has been a record of 3.8, S&P said. In a stable credit environment, this ratio would have to drop to about one-to-one.
Richard Stephan, chief credit officer at Moody's Investors Service in Europe, said it was difficult to predict whether there would be a more balanced environment of upgrades and downgrades next year.
"We have yet to see whether customer orders or consumer spending are going to pull industrials to strong levels of operating cashflow performance that would enable them to reduce their debt," he said.
Mr Stephan also stressed that refinancing remained "a major issue" as banks have limited appetite for troubled credits that have large refinancing needs.
"Lower-rated companies that require refinancing to repay maturing bonds may see further downgrades, especially if economic conditions do not become more robust early in the year," he said.
As well as defaults by companies in the speculative-grade, or junk, category the markets have been hit by a record number of fallen angels - companies whose ratings have dropped from investment grade to junk. This year, 17 companies have experienced this, against three last year, S&P said. Ms Ridpath said there were three main uncertainties that could affect corporate ratings next year and their severity will determine the number of fallen angels.
"Companies may fail to disclose credit triggers until they are activated, creating potential serious and sudden credit problems," she said, pointing to the recent case of Cable and Wireless, which may face a £1.5bn ($2.4bn) tax liability following its downgrade to junk by Moody's. "There is also the growing hole in certain European corporates' pension plans, which we will monitor closely next year and there are issues about liquidity and the ability of companies to refinance debt," she said.
One of the sectors that faces the most refinancing risk is utilities.
A recent study by S&P found that US energy companies are facing more than $90bn of debt refinancing over the next four years, most of it from bank lending. In Europe, the figure is much smaller but still significant.
Both Moody's and S&P stressed that there were some bright spots. Sovereign ratings remain positive overall, for example, and certain sectors such as telecommunications operators appear to have turned the corner.
"There will always be room for positive rating actions for companies that outperform the general trends," said Mr Stephan.
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