* Firms at low end of investment grade seek to avoid junk
* Could issue new shares, bonds which convert to equity
* Companies in utilities, telecoms sectors in focus
By Kylie MacLellan
LONDON, Jan 17 European companies with big debts
could take advantage of a surge in equities to two-year highs to
raise money by selling shares or bonds that convert to shares to
protect them from costly credit rating downgrades.
The buoyant equity market, which started its climb in the
second half of 2012, gives companies under pressure from the
weak economic climate an opportunity to bolster their balance
Telecoms firms, utility companies and builders in southern
Europe are the most likely candidates, bankers say. They would
follow steelmaker ArcelorMittal, which raised $4
billion selling shares and convertible bonds this month to help
avoid slipping further into junk territory.
Analysts have said Telecom Italia and Telefonica
, which have so far been selling off assets with mixed
success, could or should look to raise money from new shares.
"You could see rights issues (share issues) from those
non-financial companies which are at risk of a ratings downgrade
or are under some sort of balance sheet pressure and need to
have more equity for strategic flexibility," said Craig Coben,
head of equity capital markets for Europe, Middle East and
Africa (EMEA) at Bank of America Merrill Lynch.
As well as issuing shares, bankers said mandatory
convertible bonds, like those sold by Arcelor, could be more in
vogue. These bonds, where bondholders are repaid in shares
rather than cash at maturity, tend to be treated as equity by
ratings agencies, so can help protect credit ratings.
"The rating agency outlook continues to be quite negative
and you have a number of names that have been downgraded, or are
about to be, simply for performance reasons," said a senior debt
capital markets banker.
"They would love to defend their rating and that is where
you could see some additional equity issuance, such as mandatory
Companies don't like credit rating downgrades because they
increase borrowing costs. Corporates that have crossed over into
a junk or non-investment grade rating pay around 2.3 percent
more than companies on the bottom rung of investment grade,
according to Bank of America Merrill Lynch data.
Some corporates have previously favoured hybrid bonds, a
blend of debt and equity, as a cheaper way of raising money to
protect their credit rating without diluting shareholders. But
some have found they were not enough. Arcelor last year issued a
hybrid, only to be subsequently downgraded anyway.
Bankers and advisors said companies in countries such as the
UK and Germany were less likely to come to market for credit
rating reasons, having spent the last few years shoring up their
But in Spain and Italy, where corporate ratings have been
under pressure due to downgrades to the countries' credit
ratings, there could be more activity.
There are 40 listed companies in EMEA which are rated as
being on the bottom two rungs of investment grade by at least
one of the three main credit ratings agencies, Moody's, Standard
& Poor's (S&P) and Fitch. They are also labelled as "negative
outlook" or "negative credit watch," a signal they could be
considered for a downgrade.
Italy and Spain are the countries which feature most
frequently, with seven and six companies respectively, while
utilities and telecoms are the most represented sectors.
S&P has the utilities and steel sectors as a whole on a
negative outlook. Moody's, in November, warned the outlook for
telecoms service provides in Europe remained negative, with
revenues under threat due to economic weakness, aggressive price
cuts and tough regulation.
Companies do not tend to flag publicly any equity raising
plans ahead of launching a deal because it risks putting
downward pressure on their share price.
But advisors and analysts expect new shares could ultimately
be needed by some companies to avoid their access to debt
financing becoming more difficult and costly.
Many of the companies on the list told Reuters they had no
need to refinance this year, or were focusing on repairing their
balance sheet through other methods such as asset sales.
"Potentially where there have been declines in consumer
spending, or aggressive acquisitions in the past which led to a
high leverage. These guys might need to do something," said one
equity capital markets banker.
"Also those impacted by global declines in economic
activity," he added, highlighting construction firms.
Industrials companies could also be in need of balance sheet
repair, other bankers said.
(Additional reporting by Clare Kane, Tracy Rucinski and Andres
Gonzalez Estebaran in Madrid, Danio Masoni, Stephen Jewkes and
Lisa Jucca in Milan and Natalie Harrison at IFR. Editing by
Carmel Crimmins and Jane Merriman)