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One-fifth of European speculative grade companies could default by 2010, says S&P

The deteriorating global economic outlook, difficult funding conditions in the bank markets and ongoing volatility in financial markets will strain the credit quality of European compan

The deteriorating global economic outlook, difficult funding conditions in the bank markets and ongoing volatility in financial markets will strain the credit quality of European companies next year, according to a report by Standard & Poor’s Rating Services.

The report also says the economic situation could send the cumulative default rate on speculative grade issuers above 20 per cent by the end of 2010.

The estimate implies that at least 60 European firms will default within the next 12 months, affecting up to EUR25bn of outstanding debt, with a similar amount impacted in 2010, making it the worst period on record for defaults by rated firms in Europe.

Based on Standard & Poor’s worst-case scenario, up to 75 companies rated in the speculative grade rating category could default in 2009, representing a sharp increase in the speculative grade default rate in Western Europe to 11 per cent.

The default rate for speculative grade companies, which includes Standard & Poor’s universe of corporate ratings and credit estimates, is likely to remain in a similar range in 2010.

At 15 December 2008, the speculative grade default rate was three per cent in Europe, slightly below the 15-year historical average of 3.2 per cent.

Blaise Ganguin, Standard & Poor’s chief credit officer for Europe, says: ‘In Europe, looking back at the most recent spike in defaults in 2001-2002, we learned that defaults can rise rather quickly. Investors should be braced for a record number of defaults among European companies. The seismic shocks to the financial system caused by plummeting confidence in the banking sector, the virtual closure of the corporate bond market in September, and the non-existent high yield market throughout the year, all contribute to extremely difficult funding and operating conditions for European companies next year. In this environment, it is important for investors to focus not only the probability of default, but also what they might recover in the event of default.’

Standard & Poor’s report, titled "Weakening Performance And Liquidity Drive European Credit Trends From Bad To Worse," covers predictions for credit quality next year in the European banking, corporate, insurance and leveraged finance sectors.

It warns that the negative trend of rating downgrades, negative outlook changes and defaults witnessed in 2008 will continue and intensify in 2009, with funding to remain tight, expensive, and largely inaccessible for speculative grade entities.

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