Europe Oil Firms, U.K. Retailers May See 2017 Restructuringby
Restructuring activity to remain low in Europe amid stimulus
Leveraged U.K. retailers in focus as import costs hit margins
Oil companies and U.K. retailers are the sectors most likely to come under financial stress in Europe this year, even as central bank stimulus keeps borrowing costs near historic lows, according to S&P Global Ratings and Fitch Ratings.
With the European Central Bank committing to an asset-purchase program until at least December, leveraged companies can refinance their debt cheaply and avoid restructuring. In this environment, the default rate for non-financial companies in Europe will not rise past 2 percent, both ratings firms said in interviews.
“With short term rates so low, the ability of companies to service their debt remains good,” said Paul Watters, head of corporate credit research at S&P Global in London. “Default rates will remain low over the next year. That doesn’t mean that there aren’t sectors showing greatest stress or vulnerability.”
One of these is the oil and gas sector where defaults rose to 7.7 percent last year from 3.6 percent in 2015 and conditions remain challenging even after a doubling in energy prices since last January, according to Watters.
“A lot of the pricing pressures which the oil majors have experienced are pushed onto oil field services companies,” he said. “Spare capacity is also increasing and that has a significant impact on the pricing that those companies can achieve.” Around 40 percent of oil and gas companies are rated B- or below by S&P.
In the U.K., the pound’s 17 percent decline against the dollar since it voted to leave the European Union is pushing up import costs and inflation. That means consumer related sectors, including clothing, home goods and niche food retailers will “potentially be quite exposed,” as buyers spend less in response to price increases, according to S&P.
“Some sectors will have higher import costs which will hurt their margins,” and this could mean more stress if combined with pressure from higher wages, said Edward Eyerman, Fitch’s head of European leveraged finance. “In the retail sector, you have the disruptive technological factors in there as well, so that’s a challenge.”
Eyerman also said higher oil prices will probably burden transport and auto companies, providing further restructuring opportunities.
While both companies expect headline defaults to remain at about 2 percent this year, the rate is creeping higher, from around 1.2 percent in September, according to Fitch.
"Restructuring activity should remain subdued in Europe given the ECB commitment to low interest rates and stimulus through the year," Eyerman said.