European credit quality trends worsen, S&P says

New York, April 28 - Credit quality in Europe headed downwards in the first quarter with a record number of fallen angels and a deterioration in the downgrade to upgrade ratio, according to Standard & Poor's Ratings Services.

The eight fallen angels in the first three months of the year was the highest total for any quarter over the 13 years S&P has been collecting data for Europe.

S&P predicted 2003 will set a new annual record for fallen angels.

The eight companies downgraded to junk from investment grade accounted for $16.1 billion of debt (€15.0 billion).

Although there were fewer downgrades and fewer upgrades than the fourth quarter of 2002, the ratio worsened. For the first quarter of 2003 there were 20.5 downgrades per upgrade compared to 16.3 in the last quarter of 2002 and 8.2 for all of 2002.

The three months saw 41 downgrades affecting $86.4 billion (€80.5 billion) of debt compared to $1.4 billion (€1.3 billion) of upgrades.

Most of the actions - 29 of the downgrades and one of the upgrades - affected investment-grade companies, S&P said.

The outlook suggests continued deterioration, S&P added.

Of 545 corporations rated at the parent level by S&P, 29% have a negative outlook or are on negative CreditWatch, 65% are stable and just 6% have a positive outlook or are on positive Watch.

By comparison, a year earlier the figures were 24% negative, 69% stable and 7% positive.

The negative prospects are worse among junk-rated issuers. Among speculative-grade companies, 34% have a negative outlook or watch compared with 38% for investment grade; 61% have a stable outlook compared to 66% for investment grade; and 5% have positive outlooks or watches compared to 6% for investment grade.

S&P attributed the negative trends in European credit quality to a poor earnings environment, uncertainty about Iraq, and tepid economic performance. In addition, issuers have been unable to reduce the leverage overhang from a previous frenzy of mergers and acquisitions either by raising equity or by making asset sales.

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