There is a notable development in the European corporate bond market that may cause concern or relief depending on perspective: an increasing number of companies are receiving higher credit ratings from rating agencies than major states such as France, Finland, Austria, Belgium, Ireland, Slovenia, or Spain. These countries, after all, have powerful tax authorities, police, and military forces. They can, if necessary, raise enough taxes to cover interest and principal payments.

„The gap between the creditworthiness of issuers of senior industrial bonds and safe government bonds has narrowed from six notches to two notches since 2008, primarily due to a decline in sovereign rating levels“, says Christian Kopf, Head of Fixed Income at Union Investment. „Since the Euro crisis, there has been practically no recovery in the credit ratings of Eurozone countries.“ Currently, many industrial bonds are rated at A3 or A-, while Eurozone sovereign bonds stand at A1 or A+.

France, the Eurozone’s second-largest economy, is rated by several agencies. Standard & Poor’s (S&P) recently maintained France’s rating at „AA-“. Fitch also assigned an „AA-“ rating but with a negative outlook. Moody’s downgraded France from „Aa2“ to „Aa3.“

Meanwhile, many companies issuing euro-denominated bonds hold better credit ratings than France. These include TotalEnergies, AstraZeneca, Unilever, Richemont, SAP, Banque de Luxembourg, Allianz Finance, Deutsche Bank, Euroclear, Macquarie, L’Oréal, Roche, Svenska Handelsbanken, Zürcher Kantonalbank, and Abbott Laboratories.

The topic gained additional attention when Moody’s recently downgraded the US rating. Fitch had already lowered the US rating from „AAA“ to „AA+“ in 2023. S&P took this step even earlier, in 2011.

Microsoft and Johnson & Johnson now hold better ratings than the world’s largest economy. That is not surprising, considering the US is expected to accumulate 2.4 trillion dollars in additional debt over the next decade on top of an existing 36 trillion dollars total debt. Interest payments consume about 20% of tax revenues.

Microsoft, like Germany, holds the highest credit rating from Moody’s and S&P. The company’s outstanding bonds total 45 billion dollars. Analysts forecast that Microsoft will generate nearly 48 billion dollars in cash flow in 2025, with profits about 50 times greater than interest expenses, according to asset manager DoubleLine Capital.

The situation in Europe is similar but with different nuances. Christian Kopf explains two main reasons why rating agencies trust a dozen European corporations more than the French state to meet debt payments: „First, the level of government debt relative to economic output. Second, control over their own currency.“

Countries such as Sweden and the UK can influence their central banks to purchase government bonds if needed. Although this may lead to inflation and currency depreciation, it effectively eliminates credit risk for these bonds. Eurozone countries, however, have ceded control of their currency to the European Central Bank (ECB), which partly explains their lower ratings.

Germany is an exception to the downgrade trend. The country’s credit rating has not been downgraded by S&P, Moody’s, or Fitch. There are currently no companies with better ratings than Germany. „The infrastructure package has positively influenced investor perception. Only the growing multi-billion euro subsidy from the tax system to the pension fund is considered a blemish on creditworthiness“, says Kopf.

Looking ahead, he expects more companies to outrate Eurozone countries. „After-tax corporate profits are very strong“, says Kopf. „Companies could increase their leverage given their strong credit ratings, but they are not doing so.“

For example, the German pharmaceutical company Boehringer Ingelheim is financially robust and could take on more debt without difficulty. If it issued bonds, the interest rates would likely be lower than those of the German government.

Union Investment recommends corporate bonds to investors due to rising sovereign debt. The growing supply of government bonds puts pressure on prices. In contrast, there is less supply of high-yield corporate bonds, which meets strong demand. „Since 2022, corporate bonds have outperformed government bonds“, notes Kopf.

Due to changes in US policy, the dollar’s status as a reserve currency has been somewhat weakened. „Meanwhile, Europe is setting the course for more growth through increased public investment and can afford the resulting rise in government debt“, believes Kopf. „The outlook for European bond markets remains positive.“ For eurozone investors, bonds from the Euro area – especially high-quality corporate bonds (investment grade) with medium maturities – remain attractive.