Risk of Default Haunts European Companies Going into 2020
Ratings firms forecast rise in missed payments next year

Junk yields near two-year low suggest investors are complacent
By Fabian Graber
European companies, from retailers to advertisers, face more ratings cuts and higher odds of default next year as the tide begins to turn for the lowest-ranked borrowers.
Moody’s Investors Service expects defaults to almost triple to 20 as a growing number of junk-rated companies grapple with weak demand. The firm also forecasts the rate of missed payments in the region to catch up with the U.S.
More firms are beginning to struggle with debts after years of easy access to credit thanks to European Central Bank stimulus. Weaker economic growth and changing consumer habits are just some of the factors causing borrowers to fall behind on their obligations.
“There are likely to be more rating downgrades than upgrades next year and some sectors have turned negative,” said Richard Morawetz, an analyst at Moody’s.
Other credit analysts agree. Fitch Ratings sees defaults rising to 15 for high-yield bonds and ten among leveraged loans next year. That’s more than double the number for leveraged loans in 2019.
S&P Global Ratings expects the default rate to tick up to 2.3% in September from 2.2% about a year earlier. In the worst-case scenario it sees as many as 21 missed payments next year among high-yield borrowers if international trade disputes escalate or Britain’s departure from the European Union leads to unexpected shocks.
Conditions are deteriorating especially fast for media companies as the industry continues to shift from print to online while metals and automotive suppliers are being squeezed by prolonged trade woes and weak car sales, according to Nick Kraemer, an analyst at S&P.
Even so, the rate is well below the peak of corporate failures seen during the financial crisis in 2009. At the end of that year the default rate was around 10% in Europe, according to S&P.
Investors also still have a lot of appetite for risky debt as securities paying big enough yields to match the liabilities of pension and insurance funds are hard to come by. That may help some struggling companies to refinance their debt.
“There will be opportunistic investors who want to buy paper even if it’s on the riskier side,” said Benjamin Sabahi, chief analyst at Spread Research in Lyon. “Some credits in danger of default could be saved by that.”
But companies are still going to face more difficulty than before, especially firms with exposure to Italy, France and Germany where growth is likely to be sluggish next year, according to Moody’s.
Market rates imply investors haven’t yet woken up to the threat of defaults. Average borrowing costs in Europe are holding at 3.5%, the lowest in almost two years, according to the Bloomberg Barclays Pan-European High Yield Index.
“The market is pricing in low default rates,” said David Forgash, head of European high-yield at Pacific Investment Management Co. “There is a concern that investors are complacent about risk.”