Despite conditions set for heightened volatility in 2017, credit-rating agency Standard & Poor’s foresees relatively benign credit market conditions next year. However it may be wise for corporates planning to issue debt in Europe to do so sooner rather than later.
In its recent report, “Global Credit Market Outlook: The Conditions Are Set for Heightened Volatility In 2017,” S&P notes that 2016’s unexpected developments, including Brexit and election of Donald Trump, resulted in short-lived volatility. In addition, S&P’s economists had predicted at least three rate hikes in 2016 but only one occurred, in December, and while defaults increased as predicted, the rating agency underestimated the extent. The rating agency nevertheless anticipates credit markets holding up well.
“Still, we believe these factors are unlikely to have any major, negative impact on most of our core measures of credit markets—issuance trends, default rates, rating actions, and borrowing costs—for the coming year,” the rating agency says.
Volatility is likely to continue in 2017, and that may be part of the reason European debt issuance has continued unabated.
“Thus far, the reduced debt issuance that we expected as a result of the Brexit vote in June has largely not occurred,” S&P notes. The agency adds that while it may reflect market resilience against a backdrop of stimulus measures by the European Central Bank (ECB) and the Bank of England (BOE), it also may reflect issuers coming to market ahead of expected volatility and interest-rate increases once the formal process begins. In fact, S&P expects “heady issuance levels to continue into the first quarter of 2017, before the UK government’s planned triggering of formal Brexit proceedings by the end of March.
If the UK government sticks to its preferred time timetable, S&P says, volatility may result, “causing a summer swoon.” The agency anticipates the ECB extending its quantitative easing program beyond the currently scheduled March endpoint, to boost anemic inflation and counter any negative Brexit effects, thus benefiting investment-grade issuers.
Overall, S&P anticipates debt issuance globally by financial and nonfinancial companies to grow moderately, although much of it will be driven by Chinese domestic issuance, with nonfinancial issuance increasing between 4% and 8%. And despite calls for China to reign in lending, S&P sees no noticeable pullback on that front until 2018.
“There is a risk of the Chinese economy overheating, right as the currency begins the process of joining the few reserve currencies recognized by the International Monetary Fund,” the report says. However, given many of the companies are state-owned and investors are mostly domestic, “we don’t anticipate the government taking any noticeable action within the next 18-24 months.”
In the US, the rating agency expects higher interest rates—during its meeting ending December 14, the Fed projected as many as three rate hikes next year—to make US corporate bonds even more appealing to investors, as the differential between US and European rates widens further.
“Still, corporations may have some hesitation in issuing debt until the new presidential administration and its main policy goals become clearer,” the report says.
S&P anticipates the corporate trailing-12-month speculative-grade default rate to increase to 5.1% by September 2017, up from 5% a year earlier, a slight increase that nevertheless is a decline from the agency’s earlier forecast of 5.6% by June 2017.
“We expect the speculative-grade default rate to continue rising – with temporary fluctuations – through early 2017 and then to level off toward the end of the first half of the year, with declines afterward,” the report says.