European Corporate Defaults Are Almost As Low As They Can Go

Standard & Poor’s default forecasts in Europe remain very low. This reflects further incremental improvement in the European economy

Defaults in Europe are proving to be a rare occurrence in 2015, says Standard & Poor’s Ratings Services in a report published  titled “European Corporate Defaults Are Almost As Low As They Can Go.” There was only one default of a confidentially rated corporate entity in the second quarter after four rated defaults in the first quarter. So far this year, there have been no defaults in the ever-shrinking group of entities for which Standard & Poor’s provides private credit estimates, which largely comprise vintage leveraged buyouts (LBOs). The overall trailing 12-month corporate default rate declined to only 2.0% at the end of June 2015.

“We think there is little reason to expect that the low default rate will change much over the next year,” said Standard & Poor’s analyst Paul Watters. “The European economy should maintain some forward momentum and, from a financial risk perspective, credit conditions in Europe appear quite favorable.”

Some defaults are still likely to feed through, given the intrinsic credit vulnerability in certain sectors, particularly in some segments with private credit estimates such as business services and retail.

A more pessimistic downside default scenario could materialize if China’s economic slowdown becomes more severe. The knock-on impact on emerging markets, currencies, commodities, and world trade could depress growth in developing markets, with the risk that fears surrounding deflation and debt sustainability could return. Companies operating in the metals and mining and upstream oil and gas industries and capital goods exporters would be most directly exposed, while the accompanying slowdown in world trade would be challenging for logistics and other transportation providers.

Under Standard & Poor’s policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.