LONDON, Aug 19 (Reuters) - The default rate among junk-rated European companies will more than double by June 2021 as the COVID-19 pandemic brings about “arguably the most pronounced deterioration in credit quality ever”, credit ratings firm S&P Global said on Tuesday.
Its warning comes amid a borrowing binge by companies raising money to ride out a massive slowdown in economic activity caused by lockdown measures to fight the spread of the coronavirus.
S&P’s baseline scenario is for a trailing 12-month speculative-grade default rate of 8.5% by June 2021, the equivalent of 62 companies defaulting. That compares with a rate of 3.35% in June 2020.
In a best-case scenario, the default rate could rise to 3.5% while S&P’s worst-case scenario would see it shoot up to 11.5%.
“The pace of credit deterioration in the first half of the year as a result of the COVID-19 pandemic and subsequent social-distancing measures was the most pronounced in the history of speculative-grade European corporates that we rate,” S&P analysts wrote in a report.
Sectors most likely to be hit by social distancing measures, such as retail, consumer products, transport and leisure, comprise 39% of total outstanding European speculative debt, they said. A further 6% are from the energy and natural resources sectors, which have been whacked by collapsing oil prices.
In the 12 months to June 2020 the credit quality of European companies deteriorated more than at any point since the peak of the 2008 financial crisis, S&P said, while there were a record number of downgrades to ratings.
A surge in corporate debt issuance will see companies around the world take on as much as $1 trillion of new debt in 2020, one study in July forecast.
The European Central Bank’s Pandemic Emergency Purchase Programme has encouraged companies to turn to bond markets, because the scheme includes the purchase of corporate bonds.
The iTraxx Europe crossover index of credit default swaps (CDS), a measure of the cost of insuring exposure to a basket of sub-investment-grade European companies, fell after central banks expanded their bond-buying schemes, but remains way above its levels of January, before the pandemic hit.
S&P said that although financial markets have recovered somewhat, companies will face risks so long as there is no vaccine for the disease. (Reporting by Elizabeth Howcroft; Editing by Tommy Wilkes and Catherine Evans)
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