OREANDA-NEWS. December 15, 2015. Fitch Ratings says in a new report that EMEA corporate issuance is likely to rise in 2016, driven by low yields and a confluence of growth-supportive factors. Attractive borrowing costs, a weaker euro, lower energy prices and looser credit conditions support the growth outlook for the eurozone, while inflation expectations have stabilised following the implementation of quantitative easing (QE) by the ECB.

Additionally, conditions for further M&A-related issuance remain favourable in 2016 and the influx of international borrowers - particularly from the US - tapping the European credit market to benefit from low yields and a low euro is expected to persist, supporting volumes.

The credit metrics of Fitch-rated corporates point to a moderate improvement in 2016; however, the outlook for credit ratings is mixed. The negative bias in Fitch EMEA corporate rating Outlooks highlights pressure on ratings in emerging-markets, mainly in Russia, and for energy and utilities companies.

Issuance in 2015 is on course to match the level achieved in 2014 of EUR354bn, which is noteworthy in view of the various bouts of volatility through the year since April. Despite a record start to the year, European high-yield issuance waned due to the volatile conditions, falling 20% yoy in 10M15. Ongoing market volatility and issuers' reduced propensity to refinance callable debt could depress high-yield issuance by 10%-20% in 2016.

Credit-rating downgrades in the energy and utilities sectors - concentrated in 1H15 - was the main factor behind the overall negative rating migration bias in 9M15. The upgrade-to-downgrade ratio deteriorated to 0.4x in 1H15 from 0.9x in 2014, reversing the improving trajectory that began in 2013. Russian companies dominated downgrade activity at almost 40%. Of the Russian downgrades, 74% related to the energy sector, while German, French and UK utilities accounted for 24%.

M&A-related bond issuance has shown a strong, inverse correlation with economic growth since 2010, and this relationship is expected to persist in 2016, supporting issuance. The weak euro and cheap borrowing costs will continue to attract US corporate issuance in Europe.

Despite signs of a eurozone recovery, the low-growth outlook increases reliance on favourable market conditions, and last week's sell-off following disappointment at ECB's additional stimulus plans highlights growing sensitivity to deviations from expectations about QE. Investors will continue to test the assumption priced into the market that the ECB is capable of absorbing market shocks in 2016, which will be an ongoing source of volatility - particularly for higher-risk bonds.