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More of Europe’s riskiest corporate debt is on track to default in 2025 than in any year since the global financial crisis, as looming crises at Thames Water and Altice France skew a relatively healthy market.
The default rate in Europe’s €340bn high yield — or junk — bond market will climb to 5 per cent this year, according to a prediction from JPMorgan, the US bank. That is up from a rate of 3.3 per cent for 2024, when 14 companies defaulted on a collective €13.5bn of debt.
Troubles at Thames Water and Altice France, two of the market’s largest issuers, are driving expectations that billions will be added to last year’s figure.
The UK group has outstanding debt worth about £19bn — equivalent to more than €22bn — while French telecoms group Altice has a €24bn debt pile, with much of the sums raised in the European high-yield bond market.
Although Altice’s corporate bonds have always been rated at “junk” status, the downgrade in Thames’s credit rating in July means the two account for the bulk of the overall market.
JPMorgan analysts said their forecast was “heavily dependent on outcomes” of legal proceedings at court for Thames Water and restructuring talks with investors at Altice France.
“If we’re correct, default rates next year will reach levels not seen since the financial crisis in 2009-10,” analysts at JPM forecast. Even if their predictions for both companies are correct, this year’s default rate is expected to fall short of the 7.7 per cent level recorded in 2009.
Thames, the UK’s largest water utility, has been struggling to make payments on its debt for more than a year after its holding company was unable to pay the coupon on a £400mn bond.
It is now seeking court approval to secure an emergency £3bn loan from a group of investors in its most senior bonds, and would stave off the threat of temporary renationalisation.
Thames’s riskiest bonds have fallen to a value of below 20 pence on the pound as investors faith in getting their money back has rapidly diminished. About £600mn of its high yield debt is due for repayment this year, and the company is feeling the pressure of having to pay the interest on the rest of it.
Altice France, a key part of Franco-Israeli billionaire Patrick Drahi’s wider Altice group of telecoms business, is also approaching a complex restructuring with creditors, which is likely to take place this year. More than €600mn of its high yield debt is due in 2025, and the company is in discussions over restructuring its full debt with its creditors.
The company’s bond prices fell sharply to distressed levels at the beginning of last year after it told bondholders that it had set more aggressive debt reduction targets, raising the prospect of impairments to achieve them.
Investors are pricing a 61 per cent chance the company will default on its debt, according to credit default swaps data on Bloomberg. The swaps are a type of insurance that pays out if a company defaults.
Steven Logan, head of European high yield and global loans at Abrdn, said Thames and Altice would account for more than half of the year’s overall default rate.
About two-thirds of the European high yield market has a “BB” rating, according to Ice BofA data, which is considered at the safer end of the riskier, non-investment grade scale.
“The current market is about double the size and a lot healthier [compared to 2008], most credits are double B, but a subset of troubled names makes up a big part of the universe,” said one distressed debt investor.
https://www.ft.com/content/84be7389-cca7-4865-9f28-ee54edfbd28d
