LONDON (Bloomberg) -- Volkswagen AG and Daimler AG lead European companies that must repay more than $1 trillion of maturing debt in the next four years, raising the risk of borrowers struggling to refinance as interest rates rise, according to Moody's Investors Service.
Investment-grade companies in Europe, the Middle East and Africa have about $380 billion of bank debt and $650 billion of bonds maturing from 2011 to 2014, Moody's analysts led by Jean-Michel Carayon in Paris wrote in a report published Wednesday. VW, Europe's largest carmaker, and Daimler have the most debt coming due, with $46.2 billion and $39.9 billion, according to the New York-based ratings firm.
Non-financial borrowers sold 92.1 billion euros ($127.7 billion) of investment-grade debt in Europe this year following a record 279.3 billion euros of issuance in 2009, according to data compiled by Bloomberg. Borrowing costs at a five-year low helped stoke sales. A deterioration in Europe's economy combined with higher interest rates may challenge companies' ability to refinance debt, the Moody's analysts wrote.
“The risk arises because the refunding might affect the future cost of debt and might take place at a time when the borrowing needs of large sovereign issuers are still heightened,” they wrote. “While Moody's central economic scenario remains that of a ‘hook-shaped recovery,' downside risks to this central scenario include the failure of fiscal policy to restore business and consumer confidence.”
Telecommunications companies have the most debt maturing, accounting for 15 percent of the total, according to Moody's. Energy companies have 14 percent of the debt, while the automotive industry is third with 12 percent. German companies have the greatest share at 22 percent, the analysts wrote.
Even with this debt coming due, the region's corporate bond market continues to rally as the European Central Bank's record-low 1 percent main interest rate keeps down yields on many alternative investments.
European corporate bond yields fell to 3.2 percent on Oct. 12, the lowest since September 2005 and down from 3.82 percent in June, according to Barclays Capital's Euro Aggregate Corporate Index. Yields now average 3.39 percent, the data show.
VW's and Daimler's bonds have rallied in the past five months. Wolfsburg-based VW's 3.375 percent notes due 2014 yield 103 basis points more than benchmark government notes, down from as much as 187 basis points in May, according to pricing data compiled by Bloomberg.
Daimler's 2 billion euros of 4.625 percent notes due 2014 yield 121 basis points more than similar-maturity government bonds, the data show. The yield on the notes from the maker of Mercedes-Benz vehicles is down from 206 basis points in May. A basis point is 0.01 percentage point.
Borrowers are also turning to the bond market to meet their refinancing needs as banks focus on rebuilding their capital buffers, Moody's said.
“Investor demand for investment-grade corporate credit has been very robust,” the analysts wrote. “The main question is whether the debt markets will be able to sustain such demand. That depends both on the capacity of the markets to provide funding and on the ability of issuers to afford it.”