Credit Trends: European Corporate Credit Quality Continues To Improve In Third Quarter (2024)

S&P Global Ratings upgraded 28 European corporate issuers in third-quarter 2021 while 13 issuers were downgraded. Upgrades among speculative-grade issuers once again led rating actions in the third quarter (see chart 1). In turn, the downgrade rate fell to 32% in the quarter, the lowest since the 99% reported in second-quarter 2020.

Further, in September 2021, the 12-month trailing speculative-grade default rate fell to 3.4%, and we expect it to fall to at least 3.25% by June 2022.

Globally, rating actions so far in 2021 have been largely positive, supported by economic recoveries, less-stringent mobility restrictions, and accommodative financing conditions (see table 1). In Europe particularly, vaccination progress has enabled governments to ease mobility restrictions. While consumer demand has picked up, the economic rebound has contributed to shortages of raw materials and heightened energy prices. We expect supply bottlenecks and the accompanying rise in costs to be transitory. Tapering has been announced in principal by Bank of England (BOE) and the European Central Bank (ECB), with precise details expected in the coming weeks.

Table 1

Reflecting the recovery, the negative bias for the region dropped to 17.1% in September 2021 from 38.8% in September 2020. The negative bias represents the proportion of companies that either had a negative outlook or were placed on CreditWatch negative during the quarter. All sectors except for health care and high technology reported a decline in the negative bias in the third quarter.

The negative bias among the 'CCC+' or below rated European issuers was higher than 45% (see chart 2). Over the past year, most rating categories saw a decline in the negative bias. The largest decline was seen in the 'B+' rating category, where the bias declined to 15% in September 2021 from 55% in September 2020. Similarly, over the past quarter, the largest decline in the negative bias was among the 'B+' and 'CCC+' rating categories.

Of the 13 downgrades recorded as of third-quarter 2021, 12 stem from nonfinancial corporates. Downgrades have been contracting each quarter since peaking at 149 in second-quarter 2020 and now represent the lowest figure since third-quarter 2010.

The number of upgrades also declined--to 28 in third-quarter 2021 from 33 in the second quarter. Upgrades were led by speculative-grade and nonfinancial issuers. Despite a slight decline in upgrades over the quarter, upgrades have almost returned to prepandemic levels, albeit from lower ratings than before the pandemic.

With upgrades surpassing downgrades in the third quarter, the downgrade ratio declined to 32%, significantly lower than its historical average of 65% (see table 1).

Rating Actions

Majority (24) of the upgrades in the third quarter were from the nonfinancial sector (see chart 3). The Chemicals, packaging, and environmental services sector led upgrades, with four, followed by health care, oil and gas and the transportation sector with three upgrades each.

Correspondingly, downgrades were led by the health care sector, with three, followed by the utilities and consumer products sector with two each.

Negative Bias Continued To Decline

The negative bias among European financial and nonfinancial corporates narrowed to 17.1% in the third quarter of 2021 from 21.2% in the second quarter (see chart 4). This compares significantly lower against the negative bias of 38.8% recorded in the third quarter of 2020. The positive bias expanded to 6.8% in the third quarter of 2021 from 6.5% in the second quarter. By contrast, the third quarter of 2020, recorded a significantly lower positive bias of 3.3%.

The negative bias among European financial companies contracted to 14.5% in the third quarter, down from 15.5% in the second quarter and less than half of the negative bias recorded in third-quarter 2020 (see chart 5). The positive bias remained pegged at 5.8% in the third quarter. The positive bias seen in the second and third quarters of 2021 is the highest recorded positive bias financial corporates have seen since March 2020. The financial companies' net overall bias (i.e., the difference between positive bias and negative bias) narrowed to 8.7% in September 2021 from 9.7% in June 2021 and 30.4% in September 2020.

For European nonfinancial corporates, the negative bias contracted to 17.8% as of September 2021 from 22.6% as of June (see chart 6). During the same period, the positive bias marginally increased to 7% from 6.7% and the net overall bias declined to 10.7% in September 2021 from 15.9% in June.

bias declined across all countries with five or more rated issuers (see chart 7). Austria recorded the highest negative bias, with 31.6% as of March 31, 2021, while Cyprus had the highest positive bias in the region, with 21.4%. Poland had a positive bias of March 31, 2021, while Cyprus had the highest positive bias in the region, with 21.4%. Poland had a positive bias of 20% and reported the highest net overall bias of 20% as of the third quarter. Negative bias in the U.K., which comprises about 20% of all European issuers, declined to 20.4% in the period, from 26.3% in the second quarter--in line with the country's well-paced recovery.

Transportation showed the highest downgrade potential for the second consecutive quarter, although the automotive sector shows improvement (see chart 8). As of third-quarter 2021, the transportation sector reported downgrade potential of 45%, down from 50% in the second quarter. While global container and dry bulk shipping are supporting recovery in the sector, the growth of air travel remains sluggish. Despite domestic and short-haul leisure travel powering the air travel segment, growth of the sector remains contingent on corporate traffic, which we think will see a lag in recovery. The industry is also prone to varying risks, such as vaccine hesitancy and the persistence of fuel price pressures.

The automotive sector reported a positive bias of 14.3% as of Sept. 30, 2021--the highest positive bias among all sectors in the region. Since the beginning of the year, the downgrade potential in the sector has fallen, declining to 18% as of September 2021 from 43% as of March 2021 and 72% as of September 2020. Globally, recovery in the auto sector is helmed by conducive demand, favorable pricing, fiscal stimulus in primary auto markets, and greater reliance on private mobility.

The downgrade potential declined among all sectors except insurance from Sept. 30, 2020, to Sept. 30, 2021 (see chart 9).

Appendix

Table 2

Table 3

Related Research

• European Economic Snapshots, Sept. 29, 2021
• Credit Conditions Europe Q4 2021: Rampant Recovery, New Risks, Sept. 28, 2021
• Default, Transition, and Recovery: Array Canada Becomes The First Default In September, Sept. 24, 2021
• Global Actions On Corporations, Sovereigns, International Public Finance, And Project Finance To Date In 2021, Sept. 22, 2021
• Default, Transition, and Recovery: The European Speculative-Grade Corporate Default Rate Could Fall To 3.25% By June 2022, Aug. 25, 2021
• Industry Top Trends Update: Automotive, July 15, 2021
• Industry Top Trends Update: Transportation, July 15, 2021

This report does not constitute a rating action.