Sept. 26 (Bloomberg) -- Corporate defaults have risen in Europe and may climb further because of economic and political uncertainty, deteriorating growth and looming debt maturities, Standard & Poor’s said in a report.
S&P’s speculative-grade default rate rose to 5.3 percent at the end of the second quarter, from 4.7 percent at the end of March, the ratings company said. The trailing 12-month default rate will increase to 6.3 percent by the end of June 2013 and could surge to more than 8 percent if Europe’s recession is worse than expected, report author Paul Watters said.
“Our base-case view is that Europe will have a shallow recession till late-2013 with zero percent economic growth” that year, Watters said in a telephone interview today. S&P’s most pessimistic forecast for 2013 sees negative 1.9 percent gross domestic product growth in the euro area, a level that could tip defaults beyond 8 percent.
Nine companies rated BB+ or below have defaulted in the three months to June 30, S&P said, as economic growth in Europe remains sluggish. Investor optimism, spurred by European Central Bank President Mario Draghi’s decision this month to approve unlimited government bond purchases, is waning, with European governments slow to agree to measures to tackle the crisis.
The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings today rose as much as 31 basis points to 582, extending its climb from year-lows earlier this month. Credit default indexes typically rise as investor confidence deteriorates and fall as it improves. The swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point is 0.01 percentage point.
The ECB’s bond-buying program has helped stabilize peripheral countries’ sovereign markets, improving access to funding for corporates and reducing the risk of a larger increase in defaults, Watters said.
S&P forecasts the default rate to remain elevated with refinancings and so-called amend-and-extend requests limited to borrowers with a single-B credit grade or higher, according to the report.
“Investors aren’t going to buy everything -- they want to see that the company on a realistic budget is going to be able to generate positive free cash flow,” Watters said. “We don’t think investors are amenable to buying out the banks for these credits at this point.”
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