In the last 12 months the number of risky credits has trended down.   Risky credits reached 45 issuers at the end of third-quarter 2024 compared to 46 as of June 30, 2024, and 50 a year earlier (see chart 1). This number is below the five-year average of 50 and is the lowest in the last two years. In addition, the percentage of risky credits declined as a proportion of speculative grade issuers to 8.1% as of Sept. 30, 2024, compared to 8.9% a year earlier and the peak of 11.9% as of April 2021. This decline has been primarily due to a drop in the number of risky credits rather than a material change in the number of speculative-grade issuers.

Chart 1

More than 80% of additions to the risky credits cohort in the third quarter continue to result from heightened refinancing risk.   This has been the main driver over the last 12 months (see chart 2). Even though financing conditions have eased in the first nine months of 2024, with the European Central Bank cutting rates on three occasions so far this year, many lower-rated borrowers are still dealing with higher financing costs. Other additions to risky credits included one issuer that was previously rated 'SD' (selective default) being upgraded to 'CCC+' after completing its debt restructuring.

Additions to risky credits represent a range of sectors.  These include consumer products, media and entertainment, financial institutions, and real estate--all with one entity each--and forest products and building materials with two issuers. Most transitions to risky credits were from highly leveraged entities that had weak free operating cash flows. Their ability to refinance upcoming debt maturities in a timely manner depends on favorable business and economic conditions given the high current yield on 'CCC' rated bonds.

Chart 2

Downward ratings pressure on risky credits continues.  In third-quarter 2024, there were more negative rating actions for existing risky credits compared with the previous quarter. Five companies remained as risky credits but were downgraded: four were downgraded to 'CCC-' from 'CCC+' and one was downgraded to 'CC' from 'CCC'. These rating actions reflected heightened refinancing, liquidity, and/or potential default risks. This is higher than a quarter earlier when only one entity was downgraded within the risky credits category in the second quarter.

Defaults and rating withdrawals saw entities leave the risky credits group in the third quarter.  These reasons accounted for about 86% of removals compared to 44% one quarter earlier (see chart 2). Europe is the only region globally where year-to-date defaults exceed 2023 levels--at 30 currently, the highest since 2008. However, in the third quarter we saw a decline in the number of defaults in Europe and we expect the default rate will continue to decline, but slower than it rose given residual strains on the lowest-rated borrowers. Many lower-speculative-grade issuers have experienced extended periods of negative cash flows, unsustainable capital structures, and restrictive access to markets due to still higher borrowing costs, all of which makes them more prone to default. We forecast a 12-month trailing speculative-grade corporate default rate of 4.25% for Europe by June 2025, down from 4.40% as of Aug. 31, 2024.

Issuers are still struggling with high leverage and lower interest coverage ratios (see charts 3 and 4).  The combined negative effects of weaker operating performance and higher interest rates continue to impair risky credits. Still-high interest rates have encouraged some to try to reduce debt amid unsustainable capital structures, refinancing risks, and liquidity pressure. However, under current conditions, the leeway to reduce debt remains limited. Restructuring has therefore reduced debt only slightly for some issuers, leaving adjusted leverage elevated and even very high in some cases. For some sectors--chemicals and packaging, health care, high technology, and oil and gas--EBITDA and credit metrics showed modest improvements that allowed issuers to decrease leverage ratios. The outliers with increasing debt to EBITDA are mostly forest and packaging where issuers still face headwinds from a sluggish recovery, continued demand weakness and pricing pressures, and still-elevated interest rates. In other sectors median debt to EBITDA ratios are broadly unchanged.

Chart 3

Chart 4

Risky credits remain concentrated in terms of sector and geography.   Five sectors accounted for more than 50% of issuers rated 'CCC+' and lower and close to 70% of total debt in the risky credits cohort (see chart 5). These sectors comprise consumer products (six issuers), media and entertainment (five), financial institutions (five), chemicals (four), and telecommunications (three). These sectors have led the tally over the last few quarters. Close to 35% of the risky credits cohort's total debt comes from telecommunications.

Risky credits remain geographically concentrated with the top-three countries accounting for 58% (the U.K., The Netherlands, and Germany) and 67% of debt of risky credits by volume (France, the U.K., and The Netherlands).

However, the total debt volume decreased by €12.4 billion in the third quarter primarily due to the default of two risky credits in chemicals and real estate, which accounted for 65% of debt (€8.1 billion).

Chart 5

Table 1

Our Approach

• Charts and tables include issuers rated 'CCC' and 'CC' with an outlook/CreditWatch status of negative, stable, positive, or developing.
• Data represents rating actions on financial and nonfinancial corporate issuers in Europe.
• We base our calculations on the country of incorporation and the ratings on the parent, and we use only public ratings unless stated otherwise.
• Risky credits are corporate issuers rated 'CCC+' and below.
• Speculative grade issuers are issuers rated 'BB+' and below.
• Negative bias is the share of issuers with ratings that either have negative outlooks or are on CreditWatch with negative implications.

Related Research

• Credit Trends: Risky Credits: Positive Ratings Momentum In Europe Continues, July 26, 2024
• Garfunkelux Holdco 2 (Lowell) Downgraded To 'CCC+' On Growing Refinancing Risks; Outlook Negative, July 9, 2024
• Pfleiderer Group B.V. & Co. KG Upgraded To 'CCC+' From 'SD' On Debt Restructuring Completion; Outlook Stable Aug. 21, 2024
• Serbia-Based Marera Investment Group Ltd. Downgraded To 'CCC+' From 'B-'; Outlook Negative, Aug. 12, 2024
• PizzaExpress Downgraded To 'CCC+' On Persistently Weak Cash Flow; Outlook Stable, Sept. 16, 2024
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• TalkTalk Telecom Group Ltd. Downgraded To 'D' On Receiving Consent From Lenders To Implement Proposed Debt Restructuring, Sept. 19, 2024
• Global Financing Conditions: First-Quarter Issuance Surge Will Taper Off Amid Increasing Risks, April 25, 2024
• Credit Conditions Europe Q4 2024 Turn In Credit Cycle Won't Be Plain Sailing Sept. 25, 2024
• Consumer Product Companies: The Road To Volume Growth Remains Elusive, Oct 15, 2024
• S&P Global Ratings EMEA Chemicals Sector Update, Oct 16. 2024
• The European Speculative-Grade Default Rate Will Level Out At 4.25% By June 2025, Aug. 22, 2024