Strong Q112 EMEA Corporate Bond Issuance Bucks Negative Rating Drift

Fitch Ratings says that Europe, Middle East and Africa (EMEA) corporate issuers capitalised on the Long-term Refinancing Operation (LTRO)-induced recovery in market sentiment and tighter pricing at the start of Q112 to issue €245bn in bonds (€355bn including covered bonds), an 8% improvement on Q111. However, the proportion of eurozone corporate issuers fell to 66% from 76% over the same period. April new issuance declined in volume by 41% compared to the prior month, as the eurozone conundrum continued to stoke market volatility.

The positive market dynamic in Q112 was in contrast to a negative rating trend. Downgraded bonds were largely limited to issuers from eurozone nations that were subjected to credit downgrades earlier in the year, a theme that threatens to persist for the rest of 2012. The volume of upgraded corporate bonds fell sharply compared to Q411, although credit downgrades were also considerably lower, affecting 0.2% and 3.9% of the market, respectively, compared to 1.0% and 16.9% in the prior quarter.

Downgrades affected 4.1% (€103bn) by par value of financial bonds outstanding, a notable improvement on Q411, when downgrades affected 25.3% (€627bn) of the market. Nevertheless, the downgrade rate in Q112 remained elevated compared to the average rate of 2.5% recorded in H111. The proportion of outstanding bonds rated AAA-A was driven lower to 77% from 79% in Q411, due to a combination of the negative ratings actions and lower issuance by the sector.

For industrial corporates, a higher downgrade rate and a relative absence of upgraded bonds extended the negative ratings drift to a level worse than in any quarter in 2011. Industrials had €50bn of bonds downgraded in Q112, led by the utilities sector, for which 63% of the move was due to bonds from a single issuer.

The European Central Banks’ (ECB) three-year LTROs reduced pressure on banks to refinance public market debt, although many have been keen to prove market access against a backdrop of tighter spreads. Financial issuers raised €140bn in bonds (excluding covered bonds) for Q112, 16% lower than the rate of new issuance in Q111 but twice the amount of the troubled Q411. Banks more than doubled their issuance of covered bonds to €96bn (43% of total bank new issuance) compared to the prior quarter.

Despite the negative ratings trend, industrial borrowers responded to tighter spreads and strong demand in Q112 by raising €105bn in bonds, more than in any quarter since Q109, when €119bn was issued. The total amount raised represents 80% of the industrial universe bond maturities in 2012, indicating a level of pre-financing designed to relieve potential future funding pressures for some issuers in the event that market conditions become less amenable.


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