Jan 15 - Today's London date of Fitch's European Credit Outlook series features discussion
from our Sovereign, Bank, Covered Bonds, Structured Finance and Corporate groups on what they
expect to be the key credit trends in 2013.
Below follows some highlight quotes from today's presentations. The European Credit Outlook
is an annual series of events which will also visit the following cities by late March:
Amsterdam, Paris, Frankfurt, Stockholm, Oslo, Copenhagen, Helsinki, Geneva, Madrid, Munich,
Zurich and Vienna. See the Events pages at www.fitchratings.com for further details.
"The ECB's commitment to do whatever it takes to save the euro backed up by Outright
Monetary Transactions, along with the Greek deal and the creation of the European Stability
Mechanism, has provided breathing space for the imbalances across the Eurozone to correct and
necessary reform at the European level. Whether 2013 marks the beginning of the end of the
Eurozone crisis depends on governments delivering on deficit reduction and structural reform,
especially in the periphery, and on greater fiscal and financial risk sharing. With elections in
Italy and Germany and the region in recession, the challenge of maintaining the positive
momentum gained in the latter part of 2012 should not be under-estimated," says David Riley,
Fitch's Global Head of Sovereign Ratings.
"Seven of the ten largest economies in the world remain on negative rating outlook,
including the US, the UK and France, reflecting weak economies and large government deficits and
debt. With governments financially constrained, policy-makers and investors are increasingly
looking to central banks to use non-conventional and untested policy actions to unlock economic
recovery. The economic and financial outlook remains as uncertain as ever," Riley added.
"Progress towards regulatory certainty will heavily influence bank behaviour in the coming
year. Most Northern European banks will make steady progress towards more robust capital, as
they continue to delever and build equity reserves. We expect increased issuance of subordinated
debt and cautious issuance of cocos as banks build secondary buffers," says James Longsdon,
co-head of EMEA Financial Institutions at Fitch.
"On profitability, low interest rates and flat/slow economic growth are likely to keep the
focus on costs, while conduct fines hit the bottom lines of affected banks. Looking at funding,
bank debt issuance is likely to remain subdued until economies start to grow and loan demand
picks up.We may also see somewhat more aggressive liquidity management," adds Longsdon.
"Whilst European high-yield bond issuance volumes will continue to grow this year, driven by
continued bank deleveraging and the low interest rate environment, Fitch expects that returns
may not be as robust as in 2012, as secondary market yields will start 2013 at much lower levels
compared to 2012," says Edward Eyerman, Fitch's Head of European Leveraged Finance.
"Despite the weak economic backdrop, Fitch does not see the high-yield default rate rising
materially in the short-term. This is due to outstanding issuance reflecting a mix of fallen
angels with financial flexibility and higher quality leveraged buyouts seeking to refinance loan
debt and extend maturity profiles via the high yield market. However, given the absence of new
issue bank and CLO funding for these higher risk LBOs, the default rate in the leveraged loan
market could rise materially over the medium term," Eyerman added.
"It is too early to deem structured finance fully rehabilitated though we are seeing
positive signals from the market. The Basel LCR decision to accept highly rated RMBS is
indicative of a general desire to diversify products that can be defined as liquid," says Marjan
van der Weijden, Fitch's Head of European Structured Finance.
"We expect the covered bonds market to continue to expand in new jurisdictions, such as
Belgium and Asia, in 2013. However, we also expect a decrease in public sector covered bonds
programmes activity. Some programmes could become dormant, or be wound down, because of the
decreasing profitability of public sector lending compared to funding cost," says Helene
Heberlein, Managing Director, Covered Bonds at Fitch.
"Fitch's outlook for the covered bond sector globally is mostly stable, although there is
sharp contract between ratings in the peripheral eurozone, which are nearly all on negative
outlook or negative watch and the rest of Europe, North America and Asia Pacific, which are
mainly stable. In peripheral Europe, about 90% of covered bond ratings would be affected by a
one notch downgrade of their issuer's issuer default rating. Overall, we see less potential for
multi-notch downgrades this year,'' adds Heberlein.