(Editor's note: Our "Risky Credits" series focuses on European corporate issuers rated 'CCC+' and lower. Because many defaults are of companies in those categories, ratings with negative outlooks or on CreditWatch negative are even more important to monitor.)

The number of European risky credits normalizes just above long-term averages.   Issuers rated 'CCC+' or below accounted for 9% of speculative-grade issuers as of Dec. 31, 2023, similar to third-quarter 2023 and year-end 2022.

Chart 1

However, the situation for risky credits ('CCC+' and below) is still precarious, because the negative bias of risky credits remains elevated at 59% as of Dec. 31, 2023. In 2023, there was more downward migration within 'CCC+' and lower ratings compared with 2022 figures. Most downward transitions were highly leveraged and had negative free operating cash flow (FOCF) because of lower demand or low-capacity utilization. Weaker consumer sentiment and still-high inflation continue to weigh on operating conditions, which is likely to mean further downward transition risk for risky credits.

Although we see an increased dispersion of risky credits ratings across different sectors, the severity is concentrated in a few sectors. 

Chart 2

Chemicals, packaging, and environmental services, oil and gas, consumer products, homebuilders and real estate companies, and media and entertainment accounted for 63% of debt exposure and 43% by number. These are mostly consumer-sensitive sectors that have been affected by weaker consumer sentiment across Europe. Their performance is also dependent on economic rebound and higher demand.

Risky credits remain geographically concentrated. U.K. and Dutch corporates continue to hold the largest portion of European debt rated 'CCC+' and lower, with 44.3% or €24.4 billion. These corporates continue to face risks arising from declining consumer confidence and household spending, higher inflation, and less favorable financing conditions.

Defaults and rating withdrawals led removals from risky credits in 2023, accounting for about 70% of quarterly removals.   The number of defaults in Europe was elevated in 2023 to nearly double that of 2022. We think slower economic growth and higher financing costs will contribute to increasing default rates.

Chart 3

The largest default by debt in fourth-quarter 2023 was attributed to Signa Group, one of the largest private real estate investment companies in Austria. Our rating on Signa Development Selection fast transitioned from 'CCC/Negative' to 'D' within fourth-quarter 2023, and it filed for insolvency in December 2023 because it faced a liquidity crunch.

The number of risky credit downgrades outpaced the number of upgrades in 2023, as upgrades from risky credits remained very limited.   As of Dec. 31, 2023, we revised our ratings from 'CCC' to 'B-' on only one consumer products issuer and one media and entertainment issuer, because of improved operating performance and completed refinancing alleviating liquidity concerns.

Chart 4

In fourth-quarter 2023, refinancing risk and deteriorating operating performance led additions to risky credits. Because of the high interest rate environment, most of these entities faced issues with stabilizing capital structures, which increased the risk of considerable liquidity shortages.

Adaptability helped some companies to withstand external challenges in 2023.  About 40% of issuers that were rated 'CCC+' or below at the end of 2022 were still risky credits at the end of 2023. While we expect about two-thirds of the total risky credits population (that is, rated 'CCC+') may not face a credit or payment crisis within 12 months, their financial commitments may be unsustainable in the long term. These entities hold 74% of European risky credits rated debt, or €41 billion in absolute terms. For about 10% of lower-rated risky credits (rated 'CCC-' and 'CC') that hold 9% of rated debt (about €5 billion), a default, distressed exchange, or redemption may be more likely within six months, absent unanticipated significantly favorable changes in the company's circumstances.

Despite some easing in financing conditions, debt issuance remained constrained for risky credits in 2023. 

Chart 5

While speculative-grade issuance in Europe totaled €83.9 billion for the full year 2023--up by 47% a year earlier--there was no new debt issuance among risky credits all through 2023. This is because the lower end of rated issuers still sees relatively restricted access to financing and elevated costs of debt servicing, which could trigger further liquidity squeezes and ultimately heighten default numbers.

Table 1

Our Methodology

• Charts and tables include issuers rated 'CCC', 'CC', and 'C' with an outlook/CreditWatch status of negative, stable, positive, or developing.
• Data represents rating actions on financial and nonfinancial corporate issuers in Europe.
• We base our calculations on the country of incorporation and the ratings on the parent, and we only use public ratings unless stated differently in the report.
• To ensure better regional alignment, we have incorporated minor adjustments to the country composition of Europe starting from Jan. 1, 2024.
• Risky credits are corporate issuers rated in the 'CCC+' and below rating category.
• Negative bias is the share of issuers with ratings that either have negative outlooks or are on CreditWatch with negative implications.

Related Research

• Credit Conditions Europe Q1 2024: Adapting To New Realities, Nov. 28, 2023
• Global Credit Markets Update Q1 2024: Competing Forces, Jan. 25, 2024
• Global Financing Conditions: Cautious Optimism After Peak Rates, Jan 25, 2024
• Ratings Performance Insights: 2023 In Review, Jan. 12, 2024
• Default, Transition, and Recovery: Corporate Defaults Jumped 80% In 2023 To 153, Jan. 16, 2024
• CreditWeek: What Do Last Year’s Credit Trends Mean For Ratings Performance In 2024?, Jan. 11, 2024
• Europe's Risky Credits: Liquidity And Refinancing Risks Start To Bite, Nov 01, 2023
• Signa Development Selection Downgraded To 'D' From 'CC' On Presumed Event Of Default On Its 2026 Senior Unsecured Bond, Dec.22, 2023
• Research Update: PHM Netherlands Midco B.V. Downgraded To 'CCC+' From 'B-' On Weak Performance; Outlook Negative, Oct. 27, 2023
• Research Update: Flint Topco Rated 'CCC+'; Outlook Stable; Super Senior Facility Rated 'B', Senior Facility 'B-', HoldCo Facility 'CCC-', Oct. 30, 2023
• Research Update: CD&R Vialto UK Intermediate 3 Ltd. Downgraded To 'CCC+' From 'B-' On Greater-Than-Expected Cash Burn; Outlook Negative, Dec 13, 2023
• Research Update: U.K. Software Provider Aston Midco (Advanced) Downgraded To 'CCC+' On Unsustainable Capital Structure; Outlook Stable, Nov. 17, 2023
• Research Update: Covis Pharma Downgraded To 'CCC-' On Weak Liquidity; Outlook Negative, Dec. 22, 2023
• Research Update: Sprint HoldCo B.V. (Accell Group) Downgraded To 'CCC+' On Persistent Working Capital Overhang; Outlook Negative, Dec. 21, 2023
• Research Update: Farfetch Ltd. Downgraded To 'CC'; Outlook Negative; Term Loan Rating Cut To 'CCC-'; CreditWatch Developing, Dec. 28, 2023
• Research Update: Ferrexpo Ratings Reinstated At 'CCC/C', Aligned With Ukraine Due To Country And Lingering Legal Risks; Outlook Negative, Dec. 19, 2023
• Research Update: Tullow Oil Upgraded To 'B-' On Completed Debt Repurchases; Outlook Negative, Dec. 21, 2023
• Research Update: Elevator Component Maker Wittur International Downgraded To 'D' (Default) On Unanimous Agreement To Restructure Debt, Dec. 21, 2023
• Research Update: German Cable Operator Tele Columbus AG Downgraded To 'D' From 'CCC' On Missed Coupon Payment And Debt Restructuring, Nov. 27, 2023
• Research Update: Praesidiad Group Ltd. Downgraded To 'D'; Rating On Senior Secured Notes Lowered To 'D', Nov.28, 2023
• Research Update: Bering III (Iberconsa) Upgraded To 'B-' After Resolving Near-Term Debt Refinancing Concerns; Outlook Stable, Dec. 22, 2023
• General Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings , Oct. 1, 2012