Moody's: German corporate credit quality to remain stable in 2017

Steady economic growth and high levels of geographic diversification will underpin the stable credit quality of German non-financial corporates in 2017, says Moody's Investors Service in a new report. At the same time, the sector will likely enjoy strong bond issuance with a significant rise in volumes fuelled by repeat issuance and refinancing.

Moody's report, titled "Corporate Credit Quality in Germany: Economic Growth and Diversification Support Stable Credit Quality", is available on www.moodys.com and is one of a series of four (including Sweden, Spain and the UK) tackling the main issues that Moody's expects to affect corporate credit quality in European countries in the next 12 months.

"German companies' stable credit quality in 2017 is supported by steady GDP growth of around 1.5% on the back of continued strong household consumption and net exports, as well as their geographic diversity with only one-quarter of revenues earned from domestic customers," says Scott Phillips, a Moody's Vice President -- Senior Analyst and author of the report.

Bond issuance volumes by German companies will hit new highs in 2017 driven by the hefty refinancing requirements and regular issuance from large repeat issuers, such as Bayer AG (A3 review for downgrade); the return to market of Volkswagen Aktiengesellschaft's (VW, A3 negative); and stable overall funding conditions for the sector.

Lower sales growth in 2017 will weigh on the German automotive manufacturing sector where pricing pressure could dent profitability. VW's rating will continue to reflect the sizeable costs associated with its ongoing emissions case. The positive outlooks for Daimler AG (A3 positive) and Bayerische Motoren Werke Aktiengesellschaft (BMW, A2 positive) reflect Moody's view that their credit metrics remain strong for their ratings.

German chemical companies' profitability should improve in 2017 with 2%-3% EBITDA growth forecast, but mergers and acquisition event risk is rising for some of the largest issuers. While Evonik Industries AG (Evonik, Baa1 stable) and Lanxess AG (Baa3 stable) had significantly deleveraged prior to their most recent acquisitions, this was not the case for BASF (SE) (A1 stable), whose credit metrics position it weakly relative to guidance following the acquisition of Chemetall.

Deutsche Telekom AG's (DT, Baa1 stable) strong market position in Germany and robust performance in the US support its rating, but DT's ability to sustain its net debt/EBITDA ratio (Moody's-adjusted figures) below the 2.8x guidance for the current rating could be hampered by the cost of buying low band 600 MHz at auction in the US.

Germany's three largest utilities RWE AG (Baa3 negative(m)), EnBW Energie Baden-Wuerttemberg AG (EnBW, A3 negative) and E.ON SE (E.ON, (P)Baa1 negative) remain exposed to a still challenging environment for unregulated power generation.

Credit conditions will be stable for German-domiciled regulated energy networks Amprion GmbH (A3 stable), 50Hertz, owned by Eurogrid GmbH (Baa1 stable) and ENTEGA Netz AG (Baa3 stable) -- reflecting the overall supportive regulatory and political environment.