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Default Threat For European Companies Fading
Source: Dow Jones International News
Date: July 29, 2003
Author: Henry J. Pulizzi
LONDON -(Dow Jones)- While investors debate improvements in credit quality, one measure suggests the threat of default has diminished significantly for European companies.
Data provided by Moody's KMV, a San Francisco-based risk assessment company and independently run unit of ratings agency Moody's Investors Service, show the median default probability for Western European corporate debt has fallen to 1.45%. If the current figure is accurate, less than two companies in 100 will default in the next 12 months.
The figure is a substantial improvement from mid-March, when the firm's expected default frequency measure, or EDF, for European companies stood at a five-year high of 2.3%. At the start of the year the rate was about 2.02%.
Since that time, cash-rich investors have rushed into corporate bonds, searching for better returns than government bonds and risky equities. Credit spreads over risk-free sovereign debt have tightened dramatically as a result.
But some analysts question whether the rally truly reflects a decline in fundamental corporate risk, or whether it merely reflects a desire for higher-yielding assets. Indeed, ratings downgrades of European companies still outnumber upgrades, though the margin is narrowing.
Moody's KMV tracks default probabilities for a wider range of credits than those rated by its parent company, following nearly 4,700 rated, unrated, public and private European corporates. It compares equity prices with a company's financial statements to arrive at its EDF.
Banks, insurance companies and money managers use the Moody's KMV data to adjust their risk-management strategies. Data provided by Moody's KMV show the Western European cable television sector has the highest median EDF in the region at 10.69%. The median EDF for the Western European telephone sector is 2.13%, while the region's tobacco companies have an EDF of 0.23%. The EDFs for the consumer products industry and the automotive sector are 0.6% and 0.66%, respectively.
The EDF for German companies stood at 2.62% at the end of June, the first time it has been higher than the default probability for U.S. corporates, which was 2.56%.
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