LONDON (Reuters) - A shift in investor risk perception has given Europe’s high-grade corporate borrowers a unique, albeit limited, chance to borrow more cheaply than banks and governments in the bond market, Moody’s said on Friday.
The “natural credit order” -- whereby sovereign credit is deemed less risky than bank and corporate debt -- inverted at the end of last year as governments around the world saw a huge increase in their debt burdens due to the credit crisis.
Early in 2009, for example, the UK government’s credit spreads widened beyond that of some of the country’s most creditworthy companies, and has only partially recovered since then. A similar pattern emerged in countries such as Spain.
That has given many investment-grade companies a rare chance to get cheap funding in the bond market, the rating agency said, but warned the opportunity may be short-lived.
“At the moment, high-grade European corporate issuers benefit from the heightened concerns over public finances,” Moody’s said in a report.
Investors are expressing a preference for the strong fundamental credit characteristics of high-grade corporates, particularly those with diverse geographical revenues and those that managed balance sheets well throughout the crisis.
“Given the magnitude of the ongoing adjustments, high-grade corporate issuers may continue to enjoy a lower cost of funding than sovereigns for some time, but ... this trend could be quickly reversed,” Moody’s added.
The competition for funds -- from sovereigns, banks and companies -- will ultimately drive up the cost of corporate credit later this year, Moody’s said.
The credit rating agency estimates that European corporate issuers will need to refinance around $283 billion from maturing bonds, bank facilities and commercial paper programmes in 2010. Though only around half of the total $557 billion of debt issued in 2009, refinancing needs could rise if corporates have to continue substituting bank lending with bonds.
In addition, sovereign issuance is expected to surge in 2010 and 2011 to fund costly bank bailouts and to finance gaping fiscal deficits.
In the UK, the government is expected to issue 220 billion pounds ($328 billion) of debt this year, while Germany and France will be raising in excess of 300 billion euros ($400 billion), Moody’s said.
European financial institutions in Europe and the UK also have considerable financing and refinancing needs in 2010. Moody’s estimates this at $900 million in 2010 and $1 trillion in 2011.
“While we recognise that banks are in the process of deleveraging, bank managers will be inclined to pre-fund bonds maturing post-2010 due to expectations of rising interest rates,” said Moody’s.
Editing by Sharon Lindores
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