European companies’ relative cost of borrowing has risen above that of US groups for the first time since the financial crisis as the worries about sovereign debt in the eurozone hit businesses.
Debt issued by European companies has historically traded lower compared with government benchmark rates than that of their US rivals. But since the end of November, European companies have started paying a higher premium, according to Bank of America Merrill Lynch corporate debt indices.
The data suggest European companies are starting to pay the price for the sovereign debt crisis that has hit countries such as Greece, Ireland and Spain. It comes at a time when growth prospects in the US have improved.
“European credit will continue to struggle versus the US market in the coming months, in our view. Problems in the periphery will not go away in the new year,” said Teo Lasarte, European credit strategist at BofA Merrill Lynch.
European companies on December 21 paid an average premium of 1.89 percentage points over benchmark government rates, compared with 1.69 percentage points for US groups. That 0.20 percentage points differential was the largest on record. European groups have historically paid lower premiums because of differences in their debt structure.
The differences are even more pronounced in credit default swaps, used by investors to protect themselves against the risk of bankruptcy at a company. US and European CDS indices were roughly the same at the start of September but have diverged wildly since then.
The US investment-grade five-year CDS index has fallen from about 105 to 85 during the period, while the iTraxx Europe five-year index has stayed flat at 105.
The differences suggest investors are pricing in higher default risk and are less willing to lend to European companies than US rivals. “Looking at the CDS indices, there has been a sharp underperformance of European credit versus the US recently,” said Mr Lasarte.
The situation is even worse at companies and banks located in peripheral eurozone countries, many of which have, in effect, been shut out of the market. One of the worst performers in recent weeks has been Enel, the Italian utility that has a large debt burden following the purchase three years ago of Endesa, the Spanish electricity group.
Spain’s soaring financing costs have caused it to postpone plans to repay utilities billions of euros it owes them, sparking Moody’s, the rating agency, to place Enel on review for a possible downgrade.
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