*The following post is a guest contribution from our colleagues at Standard & Poor’s Ratings Services.
The year started out with a bang for capital markets in Europe aided by the European Central Bank’s quantitative easing program.
January saw €32.2 billion in corporate debt issuance, similar to the strong issuance of €31.6 billion in the same period last year. This amount includes funding for some big mergers and acquisitions (M&A), such as cable and telecom giant Altice S.A.'s purchase of Portugal Telecom.
Standard & Poor's Ratings Services is also seeing renewed hope for another strong year in the IPO market after a record year in 2014, with CVC Capital Partners' plans to list Sunrise Communications, Switzerland's second-largest telecom operator.
But Standard & Poor's also believes lower-rated oil and gas exploration and production (E&P) companies face funding and liquidity issues.
For highly-rated investment-grade oil majors, access to capital isn’t seen as an issue. Many of them raised debt during the second half of 2014 and even into January of this year. They also have a lot of cash on their balance sheets.
But on the other end of the scale, 'B' rated companies face more obstacles. Standard & Poor's recently took 23 rating actions across U.S. oil and gas E&P companies nearly all downgrades and negative outlook or CreditWatch revisions due to potential liquidity pressures in 2015, and further actions are possible if prices don't rebound in 2016.
Although there are fewer 'B' rated companies in Europe, we'll be closely watching liquidity for these firms. We've taken negative rating or outlook actions on seven speculative-grade companies in Europe in the past two months.
Although many of these oil producing companies have hedges in place that can secure a portion of their operating cash flows in the near term, we'll continue to check on their reserve-based lending (RBL) availability going into 2016, particularly if prices don't recover in line with our price assumptions.
In recent years, before oil prices started to fall, many of these firms had started to refinance RBL with longer-maturity bond funding, but we expect a hiatus in this diversification trend as companies focus on retaining access to liquidity from existing facilities. However, the move toward more bond funding in the capital structure will likely pick up again over time.
Read about this topic and more in the latest Standard & Poor’s Inside Credit report, a regular series which examines the fundamental factors behind European capital market trends.
Access more credit research and commentary from Standard & Poor’s Ratings Services, plus historical credit ratings, credit adjusted financial data and more, with RatingsDirect on the S&P Capital IQ platform. Learn more here.