The default rate for European speculative-grade companies will rise to 6.8% by the end of 2013, according to Standard & Poor’s.
That’s up from 6.3%, which was the corporate default rate at the end of the third quarter of 2012.
The credit rating agency believes the increase will be driven by the deteriorating credit quality of companies assigned private credit estimates, the eurozone’s weak economy and looming debt maturities.
“While Europe’s corporate sector was able to weather existential pressure on the euro and a lurch back recession in 2012, we think 2013 will be a year when the corporate sector is not as readily able to detach itself from underlying economic realities,” said Paul Watters CFA, senior director, head of corporate research Europe, Standard and Poor’s Ratings Services.
“Although the intervention by the European Central Bank appears to have averted the crisis by reducing the risk of a disorderly break-up of the euro, the hard grind of adjustment and austerity will remain. As such, Europe’s economy is likely to remain weak and fragile – our baseline forecast is for zero real GDP growth for the eurozone in 2013. In such a difficult operating environment, we consequently expect corporate credit quality to weaken moderately in most sectors in 2013.”
But liquidity risks are expected to ease off due to improved corporate balance sheets and stronger conditions in the debt capital markets.
European corporate cash balances have increased by 30% in recent years, but comprise just 8-9% of companies’ total assets. Some of the rise reflects companies’ response to the deleveraging of banks and the consequent squeeze on loan growth. It also reflects a precautionary attitude.
Sally Percy is editor of The Treasurer