Company Distress Levels in Europe Rise for First Time Since 2016

(Bloomberg) -- The number of distressed companies in Europe, the Middle East and Africa rose in the first half for the first time in more than two years, according to a report by Moody’s Investors Service.

Moody’s list of distressed companies rose to 47 from 39 in the first half of the year, according to the report published on Thursday. It’s the first time the list increased since the end of 2016.

The total count of EMEA businesses with a high probability of default is also expected to expand in the next 12 months, particularly in the event of a recession, as the number of companies close to joining the list outnumbers those that could leave it due to an upgrade, said Moody’s senior analyst Kristin Yeatman.

The report is unlikely to deter the ongoing rally in riskier corporate bonds, however. Buyers are rushing to higher-yielding debt at a time when the total stock of investment grade bonds yielding less than 0% reached $14 trillion, and as the number of European companies defaulting rose to the highest level since 2010, according to analysts at JPMorgan Chase & Co.

Weak Manufacturing

Downgrades on German wind turbine maker Senvion GmbH, security equipment manufacturers IDEMIA Group and Praesidiad Group contributed to the rise in the Moody’s list. Manufacturing firms are now among the most likely to default in Europe, along with businesses in the services, retail and consumer products sectors, according to the report.

“We are suffering from a manufacturing recession,” said Olivier Monnoyeur, a high-yield portfolio manager at BNP Paribas Asset Management. “Anything industrial we are very, very underweight. We have very low exposure to those sectors.”

Businesses are added to Moody’s list of distressed companies when they are downgraded to a rating at least six levels below investment grade and have a “negative outlook”. They are removed from the list when they are upgraded, have their ratings withdrawn, or default.

British travel agency Thomas Cook Group Plc, which is currently in rescue talks, was also among the 13 companies downgraded to the rating agency’s list of distressed companies in the first half. Swedish chemicals company Perstorp Holding AB was upgraded from the list while ratings for four distressed businesses were withdrawn, which can happen due to insolvency or other bankruptcy proceedings.

--With assistance from Katie Linsell.

To contact the reporter on this story: Oliver Telling in London at otelling1@bloomberg.net

To contact the editors responsible for this story: Tom Contiliano at tcontiliano@bloomberg.net, Vivianne Rodrigues, Abigail Moses

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