Standard & Poor’s has released its latest Annual European Corporate Default Study and Rating Transitions study, demonstrating that the agency’s ratings continue to serve as effective indicators of relative credit risk. Indeed, 2013 showed a clear negative correspondence between its ratings and defaults in Europe.
The report showed that 16 corporates defaulted in 2013, up from 9 in 2012 and the highest since 2009. All but two of these defaulters were initially rated ‘BB+’ or lower – Norske Skogindustrier ASA was initially rated BBB in 2001 and downgraded to B+ over three years prior to default, while Irish Bank Resolution Corp was initially rated A in 2007 and downgraded to CCC+ over a year prior to default.
Across European corporates, downgrades were more common than upgrades – but this varied widely between nonfinancial and financial sectors. While 13% of the nonfinancial companies were downgraded at the end of the year, 12% had higher ratings. On the other hand, 16% of financial companies were downgraded in 2013, while only 4% were upgraded.
“The weaker credit profiles of some sovereigns, as well as the economic and financial challenges that Europe continues to face, contributed to the elevated downgrade activity in the financial sector last year,” says Diane Vazza, managing director, global fixed-income research at S&P.
That said, the report also found that European credit stability improved in 2013. The percentage of unchanged ratings increased to 72.04% from 62.08% in 2012 and 64.46% in 2011. The downgrade-to-upgrade ratio for all European companies in 2013 was 1.47%, markedly lower than the 3.25% ratio in 2012.
And higher-rated companies generally take a longer time to default than their lower-rated counterparts, according to S&P. For example, ‘B’ rated European entities took an average of about three years to default – less than the average of 5.7 years to default for ‘A’ rated entities.
Overall, the volume of debt affected by European defaults in 2013 was $17.8 billion, compared with $19.7 billion in 2012, $5.0 billion in 2011, $9.3 billion in 2010, and $38.7 billion in 2009.