The average opening leverage of newly-rated EMEA high-yield companies rose for the third consecutive year in 2013, increasing the expectation that the average rating assigned to high-yield companies rated for the first time in 2014, could decline further, says Moody’s Investors Service in its new publication “Newly-rated EMEA high-yield companies: Credit quality likely to weaken in 2014.”
“Higher business risk and slower deleveraging will likely further weaken the credit quality of high-yield companies rated for the first time in 2014, despite the improved European macro-economic environment,” says Tobias Wagner, an analyst in Moody’s European leveraged finance team. “However, newly-rated speculative-grade companies are showing more optimism about revenue growth in the first year after rating assignment.”
Moody’s analysis of the financial projections of 297 non-financial speculative-grade companies in the EMEA region, rated for the first-time, shows a steady increase in average leverage at rating assignment since 2010.
Newly-rated leveraged buyouts (LBOs) continue to dominate, making up around 70 percent of speculative-grade companies rated for the first time in recent years.
The LBOs’ average opening leverage reached 5.7xs compared to 5.3xs for the broader universe of newly-rated high-yield companies in 2013 and is up from 5.3 xs in 2011.
The continuing weakening credit quality resulted in 30 percent of newly-rated high-yield companies in 2013, to be rated B3 or below, up from 13 percent in 2012. The decline in average revenues for speculative-grade companies newly-rated in Q1 2014 points to reduced business diversification and higher average business risk.
Moody’s found that with the improving economic environment in Europe, first-time rated EMEA high-yield companies are becoming more optimistic, with an average 7.8 percent revenue growth expected in the first year after rating assignment, well above the 6.8 percent and 5.1 percent for newly-rated speculative-grade companies in 2013 and 2012.
Moody’s also notes that 21 companies, or 17 percent, of newly-rated speculative-grade companies in 2013 were from the euro area periphery, up from less than 10 percent in 2012, with many newly-rated companies expecting similar growth, on average of about 7.0 percent, when compared with other newly-rated EMEA companies for 2014.
