Monday, December 5, 2011

>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