Europe's credit outlook remains bleak, says S&P

The most severe stage of the credit cycle may be over, but the creditworthiness of European companies and institutional borrowers will remain weak in 2003, according to rating agency Standard & Poor’s.

At the end of November, S&P had assigned a “negative outlook” – its assessment of the potential direction of a company's long-term rating over the intermediate to long term – to 95 European corporate issuers of bonds, representing 17% of all rated companies in the region. Only 39 companies were assigned a positive outlook.

“Companies in many sectors, including banks, insurers and utilities, are facing a very tough market, and any external shock such as war with Iraq will only make it worse,” said Barbara Ridpath, S&P’s chief risk officer for Europe. “Although we may be past the most vicious stage of this cycle, we do not expect the gloom to lift much in 2003.”

S&P reported 27 defaults among rated corporate and financial institutions for the 11 months to the end of November, up from 14 for the whole of 2001. It represents the highest number of defaults in Europe since the agency started rating the region’s debt in the late 1970s.

S&P expects the creditworthiness of European banks to remain negative in 2003. It added, however, that although the ratio of downgrades to upgrades this year exceeded that for 2001, this outcome is relatively favourable given the poor credit environment for corporate lending. “This suggests that banks had successfully offloaded much of their risk via underwritings, collateralised loan obligations and credit default swaps. Nevertheless, many banks remain beset by deteriorating credit quality, weak investment banking fee income and excessive cost bases,” S&P added.