European companies must refinance a $3.9 trillion debt mountain over the next three years, casting a dark cloud over the tentative signs of economic recovery in the region, Standard & Poor's said on Thursday.
Some of that refinancing risk in Europe may be mitigated by the fact that the bulk of debt due is rated investment grade, but in the United States around 55 percent of the $2.8 trillion of debt maturing is high yield, said S&P.
So far this year, investors appetite for high-grade credit has been insatiable, with around $228 billion raised by investment-grade European non-financial companies in the first five months of the year alone. That is a 129 percent increase on the same period a year ago, S&P said.
Nonetheless, borrowing remains expensive and there is a "crowding out" risk due to an anticipated rise in sovereign issuance, S&P said. Financials account for 71 percent of total maturities coming due in Europe. The balance sheets of banks remain under pressure as securitisation markets still remain dormant, S&P said, and capital is expensive, especially for lower rated entities.
Those pressures are unlikely to ease in the short term.
"As long as economic recovery is tepid, an incipient economic turnaround may not sufficiently offset losses anticipated from the cyclical deterioration, and in turn could keep refinancing costs higher than normal," S&P said.
2010 PEAK
In 2009, there is $660 billion of debt falling due in Europe, followed by $1.3 trillion in 2010, $1 trillion in 2011 and $943 billion in 2012, S&P said.
The bulk of that is made up of financials, but maturity exposure is also high in capital-intensive sectors such as utilities and telecommunications, metals, mining and steel. The biggest pipeline is among companies rated A and triple-B.
Of the maturing debt due this year, $482 billion, or around 73 percent, of that is made up of financials, said S&P.
In 2010, there is $931 billion worth of financial debt due to mature, $755 billion in 2011 and $612 billion in 2012.
S&P said it was difficult to predict how this huge debt pile will be ultimately refinanced, with banks still reluctant to lend and many companies being forced into the bond market.
This will be influenced by a number of factors in the coming months, such as government programmes, evolution in asset structure and potentially a greater focus on traditional lending, said S&P.
Investor risk appetite may also evolve. There are tentative signs that it is starting to pick up with new subordinated bank bonds sold in the past week and even a commercial mortgage-backed security by Tesco — the first such deal for two years.
"Currently, investors are still reeling from financial losses and appear focused on consolidating their weakened positions rather than on funding new opportunities," said S&P.
"Looking ahead, it is entirely feasible to see greater overlap in investor pools resulting in increased competition to place securities," added the rating agency, saying that some of that competition may come from sovereign funding.
