European credit deterioration slows but outlook uncertain, Moody's says

New York, Sept. 3 - The pace of corporate credit deterioration in Europe has continued to slow, according to Moody's Investors Service, but the rating agency cautioned that the future prospects are not necessarily bright.

During August there were eight downgrades in western Europe compared to four upgrades bringing the total for the third quarter so far to 22 downgrades and 11 upgrades.

Extrapolating those figures gives a forecast for 33 downgrades and 16 upgrades for the third quarter as a whole, better than the 54 downgrades and 16 upgrades seen in the second quarter.

But Moody's economist Kerryn Fowlie cautioned that the picture for rating revisions has deteriorated.

With two months of the quarter completed, there have been 22 reviews for possible downgrade compared to 15 in the entire second quarter. The third quarter figure includes two companies that were put on review early in the quarter, then downgraded and put on review for further downgrade.

"An increase in the number of reviews for possible downgrade announced during the quarter to date suggests that a slower pace of corporate sector credit deterioration should not be taken for granted just yet," Fowlie wrote in a new report.

She noted that ongoing weakness in the operating environment has contributed to at least a third of all non-financial reviews for possible downgrade in the third quarter.

Excess capacity and the resultant increase in competition has put downward pressure on prices in some industries, cutting profit margins, Fowlie said.

With cash flow generation weaker than had initially been expected, the pace of debt reduction for some companies has also been slower than anticipated, she added.

Unlike earlier in the year, utilities have made up the largest proportion of reviews for possible downgrade in western Europe during the third quarter, Moody's said.

This sector has made up 36% of all downgrade reviews compared to 18% for telecom and media. In the first half of the year telecom and media made up 42% of all downgrade reviews.

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