Europe Company Default Rate to Rise on Asia Slowdown, S&P Says

Europe’s corporate-default rate will increase next year as slower growth in Asia hits commodity-related companies, according to Standard & Poor’s.

The ratings provider expects 2.4 percent of sub-investment grade issuers in Europe to default next year, up from a 1.5 percent rate currently, it said in a 2016 forecast. Technological and regulatory changes may also dent credit quality in industries including hospitality and utilities, it said.

Debt-to-earnings levels at European companies have surpassed the 2009 peak, as slower Chinese demand and excess supply have hurt profits at miners, shippers and oil companies, S&P said. Weaker emerging-market growth may also weigh on sales for consumer-good companies, potentially offsetting a rebound in retail spending in Europe.

“There is a big supply-demand imbalance in certain commodity and trade-related industries caused in large parts by Asia-Pacific growth being lower than expected,” said Paul Watters, a London-based credit analyst. “This is exposing some companies to greater credit risk and potential rising default rates.”

Still, the forecast default rate remains below the 3.3 percent expected in the U.S., which has a greater proportion of oil and gas-related issuers. It’s also less than Europe’s long-term average of 3.2 percent, S&P said.

A further credit risk in Europe may be companies stepping up acquisitions, and using debt to fund deals rather than equity, it said.

Aggregated debt at European companies tracked by S&P has risen to 3.3 times earnings, driven by lower earnings at commodity-related companies and higher borrowing by investment-grade issuers, the ratings provider said.

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