European corporate default rate could spike to 11% in 'pessimistic' COVID-19 scenario - S&P

Analysts at S&P Global believe that the recession caused by the COVID-19 pandemic in Europe will lead to a sharp decline in economic activity and revenues in the first half of 2020.

S&P expects the European trailing-12-month speculative-grade corporate default rate to increase to 8 percent by December 2020, from 2.2 percent as of December 2019. In a "pessimistic" scenario, it forecast the default rate to rise to 11 percent.

"The recession that has taken hold in Europe comes at a time when the speculative-grade market is vulnerable to a liquidity freeze combined with an earnings drop," said Nick Kraemer, head of S&P Global Ratings Performance Analytics. "The percentage of speculative-grade issuers with very low ratings--'B-' and lower--is at an all-time high of more than 20%."

Europe is currently the epicenter of COVID-19, and its first-half GDP is expected to decline significantly because of the containment efforts, according to the analyst.

S&P expects the economic activity in the region to decline quickly in the first half of the year, with revenues for companies in many sectors following suit.

"We expect this to pressure funds from operations, working capital, and liquidity. While the substantial monetary and fiscal stimulus measures authorities are adopting to address short-term liquidity problems are important, they do not counter the weaker business environment many already vulnerable companies are exposed to. Moreover, the sudden 50% collapse in the oil price only adds to the credit stress in the leveraged finance market," it said.