European corporates' mostly solid balance sheets should help them withstand the credit market turmoil, but "junk" bond defaults are set to rise owing to higher borrowing costs, Moody's Investors Service said.
"European issuers are still generally in solid financial shape, helping to tamp down fears of a repeat of the corporate credit quality crisis of the early 2000s," the ratings agency said in a report on Tuesday.
However, "the repricing of risk that has already occurred -- at least partially -- may also be costly, even possibly fatal for a few overextended issuers, which we would expect to be deep non-investment-grade issuers," the agency warned.
"At this juncture we are saying this is a liquidity crunch rather than a corporate credit issue," Eric de Bodard, team managing director for European corporates at Moody's, said in a telephone interview.
He said Moody's had looked at company liquidity management over the next 12 to 18 months and had also considered borrower's maturity profiles further in the future.
A continuation of the current market turmoil could pose threats, however. "One of the risks of the current situation, if it was to endure, is to potentially have an impact on economic growth and therefore on the companies themselves," de Bodard said.
However, the August 2007 crisis is very different from the last credit downturn in 2001-2003, the agency noted, with positive economic growth throughout Europe and significantly lower refinancing risk.
Maturing debt in the high-yield bond markets for the next few years is relatively low, at $748 million for the rest of 2007, $4.5 billion in 2008 and $4.2 billion in 2009, Moody's said. The investment-grade market has larger needs, at $15.9 billion for the rest of 2007, $34.6 billion in 2008 and $57 billion in 2009, it said.
It noted though that that relative lack of refinancing needs, particularly for high-yield borrowers, could help defer the impact of the repricing of risk.
And Moody's said that even some lower-rated corporate borrowers had maintained access to the commercial paper market despite the turmoil.
The picture is similar for Asia Pacific borrowers, the agency said, even if the international bond market remains largely closed.
"There is no indication of systemic problems in accessing lending, as there is so far no reduction in the ability or willingness of the banking sector in Asia to lend to corporates," Moody's said.
Most high-yield issuers, meanwhile, do not face liquidity challenges as they have benefited from recent easy lending conditions to pre-fund financing.
The one exception is Australia, Moody's said, where the subprime problem has had more of an impact on credit markets, given banks' higher degree of capital market funding and its active corporate commercial paper market.