United Kingdom Corporate Credit Risk More ‘Balanced Together’
The UK has low corporate credit risk, but concerns remain elsewhere in Europe
New York and London – September 23, 2014 -- With the votes counted on the Scottish Independence referendum and a majority ‘No’ vote cast – one may ask whether there were potential signs of this outcome in the credit markets. S&P Capital IQ, a leading provider of market research, data and analytics, reviewed the median probability of default ratios of financial and non-financial corporations located both in Scotland and the rest of the United Kingdom outside Scotland.
In the latest issue of its bi-monthly report, Credit Market Pulse (CMP), S&P Capital IQ finds that Scotland’s mapped credit score and those of the UK both including and excluding Scotland are within one notch – a relatively small difference. However, the research suggests, that on a sector by sector basis, corporate credit risk is less balanced. PDs for publicly held energy and other large industrial companies in which the Scottish economy dominates are three notches better than their respective sectors in the rest of the UK. In contrast, the credit risk for Scottish companies in the financials and healthcare sectors is two notches worse than in the UK (when Scottish companies are excluded). Overall, PDs for companies in Scotland and the rest of Great Britain, both as a united and separate nation, remain among the lowest in Europe.
“As we peel back the layers of the credit story of the UK, the picture we find at a sector level is diverse,” says Thomas Yagel, Vice President at S&P Capital IQ. “Taken on average, had the Scottish electorate voted for independence, credit overall would not have changed much, but there would likely have been volatility at a sector level. The markets may not have wanted to contend with any resulting credit concerns in certain sectors on either side of the border.”
The current issue of Credit Market Pulse also finds a striking alignment between corporate credit risk levels and sovereign ratings for troubled Mediterranean European countries. The median credit risk scores of large financial and non-financial corporations either match or are just one notch off the sovereign rating of their domestic markets. Current research indicates some predictability in credit risk from the private sector for sovereign risk, with positive trends for Spain and Greece. According to CMP, Portuguese companies exhibit the greatest volatility as median PD levels more than doubled over the last 3 months, and credit risk in Greece remains very high.
Notably, when we look at the regional credit scores for developed economies, Western Europe now finds itself in third place behind APAC Mature and North America. Reinforcing this point, CMP shows that while risk on the S&P Europe 350® Index dropped modestly from June, its average risk level is still behind the S&P 500® by two notches.
Based on median corporate PD values for entities covered by S&P Capital IQ’s PD Market Signals Model, Credit Market Pulse provides a range of perspectives on credit market risk important to global investors. Each issue looks at the quarterly evolution of the regional median PDs, monthly evolution of the credit risk for constituents of a featured broad market equity index and its various industry sub-indices and PD tables for highest risk and biggest movers of entities. PD Market Signals is an equity-based model that produces daily, short-term credit indicators that may be a useful tool for sovereign, sector and company credit assessments, and is completely independent from Standard & Poor’s Ratings Services. Click here to read the current issue and to subscribe to Credit Market Pulse.
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