European credit has not escaped the global waves of ‘fallen angels' in the investment-grade market and defaults in the high-yield market. The question now, for both high-grade and high-yield investors, is whether we are over the worst of it. In both cases, indications are that the story has further to run.
The outlook for fallen angels
Globally, by the end of September 2020, 56 bond issuers had dropped out of the investment-grade universe, totalling US$216 billion of debt. In Europe, fallen angels totalled about €69 billion by the end of August, according to data from Credit Suisse, with the pace of downgrades declining significantly since mid-year (Display 1).
In Europe, the auto sector has been the biggest casualty to date (Display 2) - notably Ford, Renault and Valeo. Other downgrades include Atlantia (the toll road operator associated with the Genoa bridge collapse) and travel and aerospace-related names such as Carnival, Rolls-Royce, IAG and Lufthansa.
Credit Suisse is forecasting roughly another €15 billion of fallen angels this year, which is largely in line with our view. Issuers that are currently on thin ice with the rating agencies include auto maker Nissan, as well as Spanish toll road operator Abertis. Italian sovereign-linked issuers such as banks and utilities saw their near-term risk of fallen angel status reduced when Standard & Poor's - somewhat surprisingly, in our view - moved Italy's credit rating to ‘stable' from ‘negative' at the end of last month.
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