Corporate bonds in 2012: Challenging for banks, industrials better off – Fitch

In its new quarterly report on rating and issuance trends in the EMEA corporate bond market, Fitch Ratings says that many banks continue to face rating and refinancing pressure in 2012 while prospects for industrial companies are better.

“European financial institutions, notably in the region’s periphery, face continued negative rating and refinancing pressure in 2012 after a challenging 2011,” said Monica Insoll, Managing Director in Fitch’s Credit Market Research group. “Refinancing risks remain a key rating concern for these banks, although the very accommodative stance of the ECB has crucially bought time for further balance sheet rebalancing this year.”

In contrast, Fitch expects that as industrial corporates are less intertwined with the eurozone sovereign debt crisis, they will experience fewer downgrades and face fewer challenges in successfully completing their refinancing programmes in 2012.

Financial firms face EUR431bn of maturing bonds this year, or 107% of their entire 2011 new issuance, with an additional EUR391bn due to mature in 2013. For industrials, maturing debt in 2012 amounts to a relatively modest EUR126bn, equivalent to only 66% of their issuance in the previous year. High-yield accounts for 21% of bonds maturing in 2012.

“Financial institutions accounted for 95% of downgrades in Q411, driven in part by rising exposure to European sovereign credit risk - a key factor impairing their access to the bond markets,” said Michael Larsson, Associate Director in the Credit Market Research group.

The financial sector also dominates the overall EMEA corporate market, with 64% of outstanding bonds as at end-2011. The par value of financial institution bonds affected by downgrades jumped to 25% in Q411, representing EUR627bn of bonds; up from 2%-5% in the three earlier quarters. In contrast to financials, downgrade volumes for industrials remained at fairly similar levels throughout 2011, hovering around the 2%-4% mark. Upgrade activity was similarly stable but affected a lesser volume of bonds, averaging 1.4% each quarter. Nevertheless, the three largest issuing sectors displayed strongly divergent trends, as telecoms firms dominated downgrades (32%) followed by energy and utilities (23%), while automotives experienced the highest upgrade rate (27%).

In terms of issuance trends, corporate bond issuance shrunk for the second year in a row to EUR597bn, down 7% on 2010 and 71% of the record EUR846bn volume of 2009 - the year when bonds outperformed most other asset classes. Financial firms accounted for 68% of 2011 issuance with EUR404bn, an 8% decline on the prior year. Industrial companies’ bond issuance fell by 4% to EUR193bn. Fitch notes that early 2012 issuance has been strong, boosted by positive sentiment following the ECB bank liquidity actions, with EUR153bn (EUR75bn of which by industrials) of new bonds to end-February.

Fitch’s new quarterly EMEA corporate bond market report provides detailed analysis and data on rating and issuance trends as well as commentary on the outlook for refinancing for financial and industrial corporates. The full report, entitled “EMEA Corporate Bonds: Rating and Issuance Trends” is available at www.fitchratings.com.