Bloomberg News

Debt Downgrades to Rise ‘Substantially’ in 2012, Moody’s Says

January 13, 2012

Jan. 12 (Bloomberg) -- Corporate ratings downgrades in Europe, the Middle East and Africa will “substantially” exceed upgrades this year as the sovereign debt crisis hampers economic growth, according to Moody’s Investors Service.

The ratio of downgrades to upgrades soared to nine in the last three months of 2011 from less than two in the previous three quarters, Moody’s analysts including Jean-Michel Carayon in Paris wrote in a report published today.

“The current trend for corporate rating actions is strongly negative,” the analysts wrote. “We expect that downgrades will continue to substantially exceed upgrades in the coming year for both investment-grade and speculative-grade corporates.”

European leaders’ inability to find a solution to the crisis that started in Greece more than two years ago increases the threat of a double-dip recession, while banks are restricting lending to shore up balance sheets, Moody’s said. Junk-rated debt default rates in 2012 will rise from less than 3 percent last year, reaching the “high single digits” if the euro area is hit by recession, the analysts wrote.

The European Central Bank cut its forecast for euro-area economic growth in 2012 to 0.3 percent on Dec. 8 from a September prediction of 1.3 percent. Germany, Europe’s largest economy, shrank about 0.25 percent in the fourth quarter from the third, the country’s Federal Statistics Office said yesterday in an unofficial estimate.

Spreads Widen

The extra yield investors demand to buy investment-grade company bonds instead of government debt has surged 107 basis points since Aug. 1 to 293, according to Bank of America Merrill Lynch index data. Junk-rated yield spreads have jumped 414 basis points in the past five months to 1,017 basis points.

“It will be harder for speculative-grade issuers to refinance if European high-yield bond markets continue to be dislocated and banks continue tightening credit,” the analysts wrote. “Investment-grade issuers also could have a harder time maintaining liquidity at attractive terms as banks’ willingness to lend declines. Investors may demand higher spreads when issuers are perceived as being exposed to sovereign woes in the euro area.”

High-yield, or junk, debt is graded below Baa3 by Moody’s and less than BBB- by Standard & Poor’s and Fitch Ratings.

--With assistance by Ben Martin in London. Editors: Andrew Reierson, Paul Armstrong

To contact the reporter on this story: Louise Meeson in London on lmeeson@bloomberg.net.

To contact the editor responsible for this story: Faris Khan at Fkhan33@bloomberg.net.


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