Bangkok--16 Mar--Standard & Poor's
In 2008, Europe woke up to a harsh new reality following years of benign trends, reflecting the financial crisis and the deteriorating economic climate, said an article published today by Standard & Poor's. The article, which is titled "2008 Annual European Corporate Default Study And Rating Transitions," said that downgrades--including defaults--picked up sharply during the year, with the downgrade-to-upgrade ratio more than quadrupling to 2.87% in 2008 from a 20-year low of 0.60% in 2007.
The deterioration was evident in both corporate ratings, which Standard & Poor's Ratings Services assigns and surveils with the benefit of regular interactions with the management of firms, and in credit estimates, which Standard & Poor's typically establishes on the basis of private information provided by investors. In particular, credit estimates, which are mostly made up of leveraged buyouts originated between 2005-2007 and made up a considerable portion of the speculative-grade market, are far less stable, as one would expect for highly leveraged credits.
Seven companies defaulted in Europe in 2008, the most since 2003 but still lower than the counts observed in the last major. Globally, the count of defaulters rose significantly in 2008, to 125 from 24 a year earlier. The default flow remains below the levels seen in 2001 and 2002, when 12 and 19 entities, respectively, defaulted.
Together, the 2008 European defaults accounted for $80 billion in debt, which is a little less than 20% of the total affected debt amount of $429.6 billion globally. By comparison, the U.S. accounted for 95 defaulters, affecting debt of $337 billion.
All of the European defaults were in the second half of the year, and seven of eight default occurrences (one issuer defaulted twice) were in the final quarter. Of the 2008 defaults, three companies had investment-grade ratings at inception. A year prior to default, of the publicly rated issuers, one issuer was rated investment grade (Iceland-based Glitnir Bank), and six were rated speculative grade.
"In 2008, the consumer/service sector was the hardest hit in Europe, with a 4.48% default rate," noted Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. "This is significantly higher than the long-term sector average." Other sectors exceeding their long-term averages were financial institutions, health care/chemicals, and transportation. However, the small sample size and the limited history of defaults in Europe lead to data limitations in the 1980s through the mid 1990s. If long-term averages are recalibrated to the 1999-2008 period, three sectors (consumer/service, financial institutions, health care/chemicals) continue to display above-average default rates, with only transportation disqualified from the list.
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Media Contact:
Mimi Barker, New York (1) 212-438-5054, [email protected]
Analyst Contacts:
Diane Vazza, New York (1) 212-438-2760