Uncertainties about sovereign debt as well as scarce and expensive debt financing could drive the European corporate default rate above 6% or even higher over the coming quarters, says Standard & Poor’s Ratings Services.
Standard & Poor’s base-case European speculative-grade default forecast of
6.1% for the full year would equate to 41 rated companies defaulting by the end of the year, up from 4.8% at the end of 2011.
However, in a downside scenario, the default rate may climb to 8.4% or even higher if the economic and financing environment deteriorates further due to a deeper or more protracted recession in Europe.
The base-case scenario represents a modest upward revision to S&P’s previous
forecast of 5.5%-7.5% at the start of 2010. However, prospective defaults
would remain well below the peaks reached in the third quarter of 2009, when
the trailing 12-month default rate hit 14.7% in Europe.
S&P says that publicly rated investment-grade and higher rated speculative-grade European corporates in most sectors are better positioned to cope with a technical recession than they were in the fourth quarter of 2009, having adopted more conservative financial policies to reduce leverage following the 2008/2009 financial crisis.
“We believe that companies that sell goods and services globally should be better insulated from the turbulence engulfing the eurozone, irrespective of industry-specific cycles that usually prevail over credit developments, because they’ll be able to rely on continued relatively strong growth in emerging markets and other commodity-producing countries.”
“Nonetheless, country risks will likely weigh on the credit fortunes of more
domestic-oriented European companies, especially those with significant exposure to economies that are hardest hit by the sovereign debt crisis, Greece, Italy, Ireland, Portugal, and Spain.”
For details, see the S&P reports Eurozone Risks Will Weigh On Corporates If They Can’t Find Growth Globally and European Corporate Defaults Likely To Rise In 2012 On Gloomy Business And Financing Prospects