Retrofits & Upgrades

Western Europe’s pace of credit decline not likely to improve dramatically in 2003 after continued decline in 2002, Moody’s says

London, 23 December 2002 — The pace of credit deterioration in western Europe has been slightly faster during 2002 than in 2001 and is not likely to improve dramatically in 2003, predicts Moody’s Investors Service in a new Special Comment entitled “2002 Review & 2003 Outlook: European Credit Trends”.

These trends are reflected in the 184 downgrades vs. 50 upgrades recorded by Moody’s during the first 11 months of 2002, compared with 172 downgrades vs. 64 upgrades for the whole of 2001.

“The pace of credit deterioration in western Europe is not likely to slow down significantly during 2003 H1 at least as the outlook for the global economy continues to be plagued by considerable uncertainties, including geo-political tensions,” said Kerryn Fowlie, AVP-Economist at Moody’s in London and co-author of the report.

Although some businesses have managed to successfully cut costs and shore up profits, Moody’s notes that sales growth has remained lacklustre. In addition, cost rationalisation has also had a knock-on effect on product demand by putting pressure on labour markets as well as the profitability of some downstream industries.

In 2002, the non-financial sector accounted for over 70% of downgrades this year and just 30% of upgrades, with the telecoms and utilities sector responsible for around 45% of all ratings downgrades recorded by the end of November 2002. (Moody’s analysed the rating outlooks for seven non-financial sectors in a separate report, entitled “2002 Review and 2003 Outlook: Corporate Europe”.)

“Despite the accelerated credit deterioration in Europe’s financial sector over the past year, the pressure was mostly confined to German banks and the European insurance sector,” explains Fowlie. Indeed, insurance companies have accounted for around half of the 54 financial sector downgrades compared with the 27 upgrades for the sector.

Moreover, despite the 17 downgrades recorded among German banks, the total 27 downgrades recorded in 2002 in the banking sector across Europe only marginally exceeded the 25 upgrades. Excluding the more stressed German banking sector, however, banking sector upgrades in western Europe have outpaced downgrades at a rate of more than two to one.

Moody’s new report also notes that the ongoing deterioration in the creditworthiness of Europe’s issuer base has led to a widening of spreads on lower-rated bonds to historically high levels during 2002. The resulting plunge in euromarket issuance volumes hit Europe’s non-financial sector particularly hard.

“While 2002 has been dominated by postponed bond sales, the European Central Bank’s more relaxed stance on monetary policy has opened up a window of opportunity for some non-financial sector issuers,” reports Alice Keegan, a Moody’s economist and co-author of this report. Although market confidence remains fragile, a very modest rise in non-financial sector issuance volumes is expected during 2003, as previously postponed bond issues are re-scheduled, historically high levels of investor risk aversion subside and M&A activity gradually picks up from its presently depressed state.