ABN Amro upbeat on European corporates
Dutch bank ABN Amro has bucked the bearish predictions for European corporate credit next year, predicting that despite unattractive economic prospects, excess liquidity and scarcity of corporate issuance will keep market risk low.
European spreads seem unattractive because corporate credit is at an inflexion point, according to head of credit strategy Alison Miller. Default rates have been falling consistently since January 2002, but have now reached a stabilisation point where they cannot fall much further. The bank agrees with rating agency Moody's prediction that the default rate will remain around 2% during 2005.
At this inflexion point companies move from debt reduction to debt management ? the share buybacks and cautious refinancings in evidence in the second half of this year. As a result, corporate issuance is scarce and institutional liquidity is high, two more factors that will stabilise the corporate bond market next year.
Miller emphasised at ABN Amro's annual global markets research briefing yesterday that this stabilisation frees individual companies from sectoral risk. While the market as a whole improved in previous years, problems with some companies, particularly in telecommunications, tended to bring down the credit ratings of the whole sector.