S&P's tips corporate defaults to rise in 'shallow recession'

Credit rating giant Standard & Poor's said on January 19 it expects an increase in the corporate debt default rate in 2012 as a result of a "shallow recession." Based on analysis of 676 "speculative-grade companies" rated BB+ or below across the 27 European Union states plus Iceland, Norway and Switzerland, S&P is forecasting a "base case" whereby 41 would default.
The ratings agency is predicting a 6.1-percent default rate for 2012, compared with 4.8 percent at the end of 2011. The S&P's report gave three reasons for its forecast, is said flowed from "renewed uncertainty regarding the solvency of certain eurozone sovereigns."
Specifically, there is "at least a shallow recession" in prospect for the first six months of the year, S&P said.
Secondly, it added that a "gradual normalisation" on loan and debt markets after the post-2008 financial crisis "came to an abrupt halt in the middle of last year." And in a third development related to the "renewed tightening of bank lending," it said governments' willingness to offer temporary relief for borrowers in distress "is reaching its limits" given a debt-maturity bottleneck in 2013-14 "and the pressure on banks to improve the quality of assets on their balance sheets."
S&P said country risks, rather than cyclical swings, would be the main driver of corporate defaults.
The agency stressed in its assessment that "companies with localised operations in countries hit hardest by weak consumer demand and austerity measures will be most exposed."
Lead report author Paul Watters cited Greece, Italy, Ireland, Portugal and Spain at the head of this group.
The good news, the report said, was that "corporates that trade goods and services globally should in our opinion be better insulated."
The sectors most at risk would be "utilities and incumbent telecoms, which by definition are highly local."
S&P's also predicted knock-on effects on some regional airport operators due to "consumer retrenchment" and higher passenger duties.
"European steel producers and oil refiners that are exposed to declining profitability could also feel the effects," with output prices falling but input costs still high owing to competing demand from China, it said.
The agency downgraded nine of the 17 eurozone states, following through with a downgrade of the eurozone rescue fund, the European Financial Stability Facility. Markets appear to have already factored in that prospect however, judging by the initial response at key sovereign debt auctions this week.