EMEA corporate issuance to remain flat, says Moody’s

Boom volumes of 2014 unlikely to return amid China slowdown, Middle East instability and political risks, says ratings agency

Issuance from non-financial corporates in Europe, the Middle East and Africa (EMEA) will stay at its current level all the way into 2018, with the boom volumes of 2014 unlikely to return any time soon, according to Moody’s.

In a new report, the ratings agency says that an ongoing disintermediation trend in banking – albeit at a slower pace – will combine with a refinancing of upcoming debt maturities to support issuance levels in 2017.

However, the pipeline of M&As in the region will be insufficient to boost volumes to the record levels seen two years ago.

That is largely because of two trends:

1. competition that private-equity sponsors are continuing to face from cash-rich trade buyers; and
2. an increased preference among non-financial firms for smaller, ‘bolt-on’ deals, rather than large-scale buyouts.

Meanwhile, the economic slowdown in China, the pace of US interest rate rises and deterioration in credit quality within the steel, oilfield and shipping industries could also hold issuance back in 2017.

Further dampening factors include:

• political and geopolitical risks stemming from a rise in protectionist pressures;
• elections in several EU countries;
• continued Middle East instability; and
• a tapering of quantitative easing at the European Central Bank (ECB).

According to the report, the default rate among European speculative-grade corporates will remain stable in 2017, at between 2% and 3%.

That will be supported by generally stable credit quality trends that have played out during this year, a large number of stable industry outlooks and moderate refinancing risk over the next two years.

Investors’ appetite for riskier assets could potentially increase in 2017, the ratings agency says, if the corporate bonds purchasing scheme at the ECB continues, thereby reducing already low investment-grade spreads.

Moody’s expects that the ECB will continue to pursue an accommodative policy stance through 2017 and that there is little risk of a rate hike in the euro area next year.

Meanwhile, demand for leveraged loans will be supported by healthy issuance of collateralised loan obligations.

Leveraged loans, the report adds, will shift to a ‘covenant-lite’ trend next year, as bond and loan covenants continue to converge.

High-yield bond covenants, it notes, have strengthened in recent months on reduced volumes – particularly of sponsor-led transactions – rather than a fundamental market change.

Moody’s vice president and senior analyst Tim Snow said: “The market exuberance of 2014 is unlikely to return next year because investors remain concerned about the fragility of the global economy and evidence that credit quality trends remain broadly unchanged.”

Moody’s subscribers can access the full report here.