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Fitch Ratings says net rating migrations for financial and non-financial corporates in H113 showed a considerable improvement on H112 with downgrades affecting 3.4% of outstanding rated bond volume, down from 12% a year earlier.
This improvement was led by the financials, who experienced fewer negative rating actions as reflected in an almost halving in the ratio of downgrades to upgrades to 4.6:1 since last year.
"While the overall rating bias for corporates remains negative, it is continuing to contract as the volume of downgraded bonds diminishes. This signals a turning point in the corporate rating trend as periphery markets continue to heal," said Monica Insoll, Managing Director in Fitch's Credit Market Research team.
H113 financial sector issuance fell 24%, compared to H112, as bank deleveraging led to a 39% decline in financials' bond issuance, while non-financials harnessed market momentum to expand new volume by 14%.
The main reason for the issuance decline by the financial sector was bank deleveraging. New covered bond volume declined 61% in H113, compared to the equivalent year-earlier period, notably due to lower issuance by Spanish and Italian banks, while senior unsecured issuance marked a new post-crisis low after falling 19%. Subordinated issuance bucked the trend, growing 74%, to partly boost the capital buffer for senior debt holders against the backdrop of EU bank recovery and resolution directive proposals.
Eurozone corporates accounted for a considerably lower share of downgrade volume in Q213, falling to two-thirds from 75% in the prior quarter. Furthermore, non-financials accounted for the majority (76%) of the negative rating action. Negative Outlooks on Spain and Italy also indicate the possibility of further corporate downgrades if the sovereigns were to be downgraded.
Since June 2012, high-yield issuance rose 54% to benefit from record low yields and strong investor preference for the asset class. European high yield has outperformed other fixed-income asset classes in the year to date, including emerging-market (EM) corporates, returning 5% compared to 3.1% for US high yield.
Historically low coupons on new bond issuance provided a supportive backdrop for issuers during the June-July market sell-off. Issuance in June declined to the lowest monthly level since December 2011, driven by financials. Continued loose monetary policy is likely to support European bond markets for the rest of the year as the prospect of rising rates remains more distant than in the US. Fitch Ratings
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