Borrowing pressures to push European default rates to 3.75%-5.5% - S&P Global

BY Reuters | CORPORATE | 09/26/23 07:30 AM EDT

By Marc Jones

LONDON, Sept 26 (Reuters) - Higher interest rates and a near stalling of Europe's economy will put pressure on the credit ratings of the region's companies, property firms and banks and drive up default rates, S&P Global said on Tuesday.

"The trend in credit quality is turning negative for corporates, especially for speculative-grade issuers, as financing conditions tighten," the rating firm said in a new report.

"Real estate remains one of the most exposed sectors. For European banks, while asset quality deterioration will emerge, credit losses are expected to only normalize," the report added.

S&P said it expected the ratio of "speculative-grade" or junk-rated firms to gradually increase to 3.75% by June 2024 from 3.4% in August.

It could be as high as 5.5% if the region suffers a painful recession, its head of European corporate research, Paul Watters, told reporters.

The rapid rise in global interest rates over the last 18 months means companies and households are now having to refinance at much higher costs than they have been used to over the last decade.

S&P estimates that junk-rated European companies have to refinance $68 billion worth of debt in 2024, $152.7 billion in 2025 and $232 billion in 2026, while investment grade-rated firms have $316 billion, $313.5 billion and $284 billion to refinance in those years respectively.

Nearly half of the 60 European property companies and Real Estate Investment Trusts that S&P rates currently have "negative outlooks" - effectively downgrade warnings - on their ratings.

"The risk here is that you get into a situation where you see more distressed sales (by property firms and REITs) and you see more cracks in that market," Watters said. (Reporting by Marc Jones, editing by Dhara Ranasinghe, Ros Russell and Deepa Babington)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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