Moody's: Several EMEA fallen angels flashing early warning signs of default

While early warning signs of default are most prevalent among B3-rated EMEA high-yield companies, a number of fallen angels in the Ba1 and Ba2 rating band are also showing warning signs, says Moody's Investors Service today in a new report. Fallen angels are companies that have lost their investment grade rating. 20% of Ba1-rated companies were riskier issuers, rising to 21.6% for Ba2s then falling to 13% for Ba3s and 7.1% for B1s.

This report assesses the entire Moody's rated universe of high-yield companies in EMEA using a set of 17 quantitative and qualitative early warning signs of default. It marks the first time that such an assessment of the more than 500 public and non-public high-yield entities has been aggregated into one report.

"While we might expect Ba-rated companies to show fewer early warning signs than B-rated companies, the frequency of these signs at the Ba1 and Ba2 level can be linked to the high concentration of fallen angels at this level," says Gianmarco Migliavacca, a Moody's Vice President -- Senior Credit Officer and author of the report.

Such companies are often positioned at the higher end of the speculative-grade spectrum because they still benefit from some of the characteristics reflected in their previous investment-grade status, such as large size or strong business profile. However often the factors behind their downgrade persist and now constitute early warning signs.

Moody's report shows that quantitative early warning signs, such as excessive leverage or weak liquidity, are clustered around the B3 rating band. On the other hand, most qualitative signs, such as exposure to a declining sector or high product concentration, tend to be spread more evenly along the rating scale.

Companies showing multiple warning signs are more common in sectors with a negative Moody's outlook or high intrinsic sector risk. These include mining, energy oilfield services, steel and manufacturing. However, many companies displaying warning signs are also present in sectors with a stable outlook but characterised by a higher concentration of LBOs, such as retail or consumer packaged goods.