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Credit Trends: Risky Credits: Europe's Q1 Fall Masks The Full Story

(Editor's Note: Our "Risky Credits" series focuses on European corporate issuers rated 'CCC+' and lower. Because many defaults are of companies in those categories, ratings with negative outlooks or on CreditWatch negative are even more important to monitor.)

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Chart 1

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No relief for issuers rated 'CCC+' and below.   As of March 31, 2023, 48 issuers were rated 'CCC+' and below, down from 54 on Dec. 31, 2022 (chart 1). Despite this seemingly positive trend, the reality is somewhat different with the reduction in numbers primarily due to defaults (five issuers) and withdrawals (five issuers).

From a positive standpoint, there were only five new additions to the risky credits cohort in first-quarter 2023 (chart 2) compared with 15 new additions in fourth-quarter 2022. Most of the downgrades to risky credit status in first-quarter 2023 were attributable to refinancing risk (three issuers), and weak operating performance (two issuers), in particular for lower-rated companies.

It is also notable that only one issuer was upgraded from 'CCC+' or below compared with three entities a quarter earlier. This issuer was upgraded to 'B-' due to stronger-than-expected performance in first-quarter 2023.

Chart 2

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Downward rating migration to 'CCC+' and below is spreading to more sectors.   Consistent with the theme of 2022, consumer products and media and entertainment continue to lead the tally of risky credits with 18 issuers in the first quarter. However, the rating migration to 'CCC+' and below has been gradually spreading to other sectors such as health care and telecommunications, each of which contributed one issuer to the total.

Chart 3

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Multinotch downgrades to 'B-' and below remain elevated.   In the first quarter of 2023, the share of multinotch downgrades (two notches or more) to 'B-' and below represented close to 36% of all downgrades to 'B-' and below. This is one of the highest ratios since the start of the pandemic although the absolute number of multinotch downgrades (five issuers) is still below figures in first-quarter 2022 (eight issuers) and in second-quarter 2020 (16 issuers).

Chart 4

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The default count is growing, primarily due to selective defaults, which accounted for six out of seven defaults in the first quarter of 2023.   Distressed exchanges (four defaults) and missed principal payments (three) were the reasons behind corporate defaults in first-quarter 2023.

We expect the European speculative-grade corporate default rate to rise to 3.25% by December 2023 from 2.2% in December 2022 as slowing economic growth and elevated interest rates and input costs weigh on profit margins (see "Default, Transition, and Recovery: The European Speculative-Grade Corporate Default Rate Could Rise To 3.25% By December 2023, Amid Uncertain Backdrop," published Feb. 16, 2023, on RatingsDirect).

Tightening financing conditions remain a risk for issuers rated 'CCC+' and below.   This will both affect new financing requirements and make it more challenging for issuers to refinance outstanding debt with an immediate focus on forthcoming 2023 and 2024 maturities. Floating-rate issuers will feel this pressure more acutely and these entities account for 67% of debt rated in the 'B' category and 43% of debt in the 'CCC' category. Telecommunications, media and entertainment, and CP&ES (chemicals, packaging, and environmental services) are the three sectors with the highest amount of speculative-grade nonfinancial corporate debt maturing in 2023 and 2024.

Chart 5

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Debt volume of risky credits remains broadly unchanged.   In first-quarter 2023, the volume of risky credit debt dropped by close to €10 billion due to rating withdrawals and defaults while new inflow added €9.5 billion to the total volume.

The oil and gas sector continues to have the highest debt volume among risky credits with debt rising to €10.8 billion as of March 31, 2023, from €9.4 billion as of Dec. 31, 2022 (chart 6). The increase was primarily due to new debt issuance by Transocean Inc. (CCC/Negative/--), Cayman Islands-based subsidiary of Transocean Ltd., in January 2023. Though it shows that debt markets started the year on a better footing, this momentum may be difficult to sustain in the future. The market turbulence has led to more deals being put on hold. So far in April there has been no issuance by 'CCC' rated companies, due to investors' risk aversion.

Chart 6

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Chart 7

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Chart 8

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Table 1

Current gross leverage comparison by type of owner (median)

Business risk profile Rating Number Debt to EBITDA Interest cover % of total #
Fair CCC+ 5 11.4x 1.9x 11%
CCC 1 7.0x 1.8x 2%
Weak CCC+ 31 10.9x 1.5x 66%
CCC 4 4.5x 0.2x 9%
CCC- 1 10.7x NM 2%
Vulnerable CCC+ 5 11.9x 1.4x 11%
47 11.3x 1.7x
N.M.--Not meaningful. Data as of April 15, 2023. Source: S&P Global Ratings Credit Research and Insights.

Table 2

'CCC' and below rated issuers in Europe as of March 31, 2023
Company Sector Debt amount, mil. € Rating Outlook/CreditWatch Outlook or CreditWatch Country

Transocean Ltd.

Oil & Gas 9,742 CCC Negative OL Switzerland

Casino Guichard - Perrachon S.A.

Retail/Restaurants 9,687 CCC+ Developing OL France

Mallinckrodt plc

Health Care 4,929 CCC Negative OL Ireland

Keter Group B.V.

Consumer Products 3,252 CCC Developing CW Netherlands

HNVR Midco Ltd.

Media & Entertainment 2,406 CCC+ Positive OL United Kingdom

Castle Intermediate Holding V Limited

Media & Entertainment 2,149 CCC+ Negative OL United Kingdom

Mitel Networks (International) Ltd

High Technology 2,058 CCC+ Negative OL United Kingdom

Venator Materials PLC

Chemicals, Packaging & Environmental Services 1,794 CCC- Negative OL United Kingdom

Richmond UK Holdco Ltd.

Media & Entertainment 1,529 CCC+ Negative OL United Kingdom

Aston Martin Lagonda Global Holdings PLC

Automotive 1,307 CCC+ Stable OL United Kingdom

Covis Finco S.a r.l

Health Care 1,142 CCC+ Stable OL Switzerland

Selecta Group B.V.

Consumer Products 1,083 CCC+ Stable OL Netherlands

CGG

Oil & Gas 1,043 CCC+ Positive OL France

F-Brasile S.p.A

Aerospace & Defense 929 CCC+ Negative OL Italy

Lernen Bondco PLC

Consumer Products 880 CCC+ Stable OL United Kingdom

Biscuit Holding S.A.S.

Consumer Products 802 CCC+ Negative OL France

Bock Capital Bidco B.V.

High Technology 772 CCC+ Stable OL Netherlands

Comet Bidco Limited

Media & Entertainment 743 CCC+ Negative OL United Kingdom

Vue Entertainment International Ltd

Media & Entertainment 740 CCC+ Stable OL United Kingdom

Amphora Intermediate II Limited

Consumer Products 682 CCC+ Negative OL United Kingdom

Wittur International Holding GmbH

Capital Goods 652 CCC+ Negative OL Germany

BVI Holdings Mayfair Limited

Health Care 603 CCC+ Negative OL United Kingdom

Journey Personal Care Holdings Ltd.

Consumer Products 598 CCC+ Negative OL United Kingdom

McLaren Group Ltd.

Automotive 570 CCC Negative CW United Kingdom

eDreams ODIGEO S.A.

Media & Entertainment 553 CCC+ Positive OL Spain

Mangrove Luxco III Sarl

Capital Goods 545 CCC+ Negative OL Luxembourg

Mavenir Private Holdings II Ltd.

Telecommunications 538 CCC+ Negative OL United Kingdom

Takko Fashion S.a.r.l.

Consumer Products 508 CCC- Negative OL Luxembourg

Pro.Gest SpA

Forest Products & Building Materials 498 CCC+ Stable OL Italy

Labeyrie Fine Foods SAS

Consumer Products 453 CCC+ Stable OL France

GHD Verwaltung GesundHeits GmbH Deutschland GmbH

Health Care 438 CCC+ Stable OL Germany

Haya Holdco 2 PLC

Consumer Products 367 CCC+ Stable OL Spain

Ideal Standard International S.A.

Forest Products & Building Materials 324 CCC+ Negative OL Luxembourg

Praesidiad Group Ltd.

Capital Goods 316 CCC+ Negative OL United Kingdom

adapa GmbH

Chemicals, Packaging & Environmental Services 305 CCC+ Stable OL Germany

MB Aerospace Holdings II Corp.

Aerospace & Defense 281 CCC+ Stable OL United Kingdom

Standard Profil Automotive GmbH

Automotive 274 CCC+ Negative OL Germany

Frigoglass SAIC

Consumer Products 259 CC Negative OL Greece

Lecta Ltd.

Forest Products & Building Materials 255 CCC+ Stable OL Luxembourg

Altisource Portfolio Solutions S.A.

Financial Institutions 209 CCC+ Stable OL Luxembourg

Odyssey Europe Holdco S.a r.l

Media & Entertainment 200 CCC+ Positive OL Luxembourg

Amigo Loans Ltd.

Financial Institutions 57 CCC Developing OL United Kingdom

PGS ASA

Oil & Gas - CCC+ Positive CW Norway

gategroup Holding AG

Transportation - CCC+ Stable OL Switzerland

Arvos LuxCo S.a.r.l.

Capital Goods - CCC Negative OL Luxembourg

Ignition Topco BV

Chemicals, Packaging & Environmental Services - CCC+ Stable OL Netherlands

Promotora de Informaciones S.A.

Media & Entertainment - CCC+ Stable OL Spain

DTEK Renewables B.V.

Oil & Gas - CCC- Negative CW Netherlands
OL--Outlook, CW--CreditWatch. Data as of March 31, 2023. Source: S&P Global Ratings Credit Research And Insights.

Related Research

Related Rating Actions

This report does not constitute a rating action.

Credit Markets Research:Ekaterina Tolstova, Dubai +971 (0) 547923598;
ekaterina.tolstova@spglobal.com
Patrick Drury Byrne, Dublin (00353) 1 568 0605;
patrick.drurybyrne@spglobal.com
Leveraged Finance Europe:Marta Stojanova, London + 44 20 7176 0476;
marta.stojanova@spglobal.com
Research Contributor:Yogesh Kumar, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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