>EUROPEAN CREDIT OUTLOOK 2012: fasten your seatbelts

■ Slaves to the Euro crisis

We would expect a small rally at the start of 2012 as risk appetite rises, asset

allocation into credits occurs and the probability grows of a greater policymaker

response. We would start the year with an overweight-30% on high-grade credit,

but we would not be wedded to this view for long if the sovereign prognosis

remains bleak. We see a trading market rather than a directional market for 2012

as the sovereign crisis continues to determine much of the direction of credit.

■ Know your benchmark in 2012

“Rich” or “cheap” is more than just about spread to Bunds now. We urge investors

to keep an eye on credit spreads vs domestic government bond spreads next

year. French names have repriced significantly wider lately because of poor

relative value vs. French sovereigns. In our view, German credits look good value

versus their sovereigns, as do UK and Dutch credits. Spanish and Italian nonfinancials

look tight. French non-financials look fair rather than great value.

■ Non-financials fairly safe for another year

We still see “core” non-financials faring relatively well next year, even if recession

hits. Maturing corporate debt isn’t demanding, cash holdings are strong and

spreads already discount a further earnings drop of about 25%. Defensiveness

and capital preservation remain paramount for credit selection, in our view.

■ The great opportunities as well as risks

Loan refinancings are a lot more demanding next year (€500bn) and banks are

preoccupied with deleveraging. We don’t think this means the end of loan

financing for large-cap, “relationship” non-financials, but funding could become

trickier for mid-tier companies. We expect companies to term-out some of their

loan financing into bonds next year, even if for precautionary purposes.

■ More corps, less fins

We expect fixed-rate senior unsecured issuance to fall 35% in 2012 vs 2011.

Conversely, we think non-financial supply could rise 20%.

■ Sectors – go for global

We have made some changes at the sector level. We upgrade consumers to ow-

30% given their global sales profile. We still remain uw-30% on retail however

given austerity. Senior banks is still an ow-30% as the market shrinks, but sub

debt is now uw-30%. Insurance fundamentals still justify an ow-30%. We have

reduced steel to uw-30% given waning steel demand.

To read the full report: EUROPEAN CREDIT

RISH TRADER