2019 Is Not Looking Good For European Corporate Borrowers

(Bloomberg) -- Europe’s non-financial companies may find it costlier to borrow next year as the end of European Central Bank bond-buying and Brexit combine to drive up risk, S&P Global Ratings said in a report.

Borrowers are set to endure a “more difficult year” as investors seek higher premiums to “compensate for the deterioration in conditions and intensifying risks,” S&P said in its 2019 European Corporate Credit Outlook. It added that ratings trends “already point to a deterioration in credit quality.”

Euro interest rates may go up in September, the first increase since 2011, S&P said, as years of easy money comes to end and the ECB instead starts tightening policy. The central bank will cap stimulus programs at year-end, including the Corporate Sector Purchase Program through which it has amassed 177 billion euros ($202 billion) of corporate bonds

“While a gradual return to normal financial policy ought to be something to celebrate, markets are likely to struggle with the removal of a source of regular demand for assets,” S&P said.

The ratings provider added that a no-deal Brexit would prompt "significant market volatility" as well as adverse economic reactions in the U.K. and closely linked economies such as Ireland, Denmark and the Netherlands.

Meanwhile, merger and acquisition activity is likely to stay subdued, with motivation for deals “often as much to do with coping with cost pressures and weak growth as positive expansion.”

©2018 Bloomberg L.P.