Chennai: At the end of the first quarter, there were 418 issuers in the European Union (EU) with either an Outlook or CreditWatch listing, says a Standard & Poors (S&P) study.

Of the 418 issuers, 296 (71 per cent) were stable, 79 (19 per cent) had Negative Outlooks, whereas 18 (4 per cent) had Positive Outlooks. Twenty issuers were listed on CreditWatch with negative implications, whereas only five (1 per cent) were listed on CreditWatch with positive implications.

EU industrial issuers were spread across both the positive and negative categories. Eleven of the 23 issuers (48 per cent) listed either on CreditWatch with positive implications or Positive Outlook belonged to the industrial category. At the same time, industrial issuers accounted for 54 of the 99 issuers (55 per cent) listed either on CreditWatch with negative implications or Negative Outlook.

This negative bias is justified by the difficult operating conditions for the EU industrial sector amid slow economic growth, weak capital spending, excess capacity and poor business confidence. Within the industrial category, the highest number of issuers listed either on CreditWatch with negative implications or Negative Outlook came from chemicals, packaging and environmental services (eight), and consumer products and capital goods (five each).

According to the study, the balance is similarly biased toward the negative in the financial institutions (FIs) and telecommunications sectors. FIs accounted for 11 (11 per cent) issuers listed either on Negative Outlook or CreditWatch with negative implications, but only two (9 per cent) issuers listed either on Positive Outlook or CreditWatch with positive implications.

The negative bias is attributable mainly to the insurance sector, with several insurers facing potential financial-strength dilution as a result of recent acquisitions, volatile capital markets, or losses in the aftermath of 11 September 2001. The corresponding shares for the telecommunications sectors are 11 (11 per cent) and one (4 per cent), respectively.

By contrast, the picture is more optimistic for the European banking sector, as well as for sovereigns. Seventy per cent of outlooks in the banking sector were stable. Banks accounted for 35 per cent of issuers listed either on CreditWatch with positive implications or Positive Outlook, and 23 per cent of issuers listed on CreditWatch with negative implications or Negative Outlook.

Even though provisioning for bad loans is expected to rise, factors that have benefited many European banks include low exposure to commercial real estate, an increased shift to higher-margin retail business, better credit risk management, and an environment of relatively low interest rates. It should be noted, however, that the discrepancy in performance across countries is significant. Germany remains the most troubled banking market in the EU, as a result of overcapacity and poor domestic market conditions.

Of the banks listed as either on Positive Outlook or CreditWatch with positive implications, five are Italian, two French, and one Spanish. Among EU sovereigns, the Hellenic Republic (Greece; A/A-1) was listed on Positive Outlook, whereas no sovereign appeared on the Negative Outlook or CreditWatch Negative listings. The preponderance of stable outlooks among sovereigns is largely attributable to the financial discipline engendered by the EU.

By country the S&P study finds Italy, France and Sweden had the most issuers listed on either CreditWatch with positive implications or Positive Outlook. Of the total number of issuers in this category, Italy accounted for 22 per cent, France 17 per cent, and Sweden 13 per cent. At the other end, the UK, Germany and the Netherlands had the most issuers represented either on the CreditWatch Negative or Negative Outlook listings. Their shares were 33 per cent, 13 per cent and 12 per cent, respectively.