Fitch EMEA & Apac Study: Liquidity Risk Rise for 2010

/Fitch Ratings, Tokyo/London/Singapore, August 18, 08/ - Fitch Ratings says EMEA corporates generally have comfortable liquidity profiles, aided by undrawn committed bank funding, compared with some Asia-Pacific corporates that rely on short-dated uncommitted bank funding. In its 2008 Liquidity Study (covering around 220 corporates that are rated BBB' and below), Fitch says the study's results are similar to last year's, with company-specific liquidity-related adverse risks rather than any sector-wide liquidity issues. "Companies in developed markets successfully planned ahead by locking in cheap three-to-five-year committed bank funding," says John Hatton, Credit Officer in Fitch's Corporate team. "However, we believe liquidity risk will become more of an issue in 2010 as 2006 and 2007 bank lines face refinancing and the extent of the weakened economic environment becomes more visible in corporates' results." "Furthermore, corporates which did not access the bond market in the hope that pricing will return to 2007 levels may be forced to accept potentially higher pricing from bonds and/or bank lines," adds Mr Hatton. If certain bond markets remain intermittently open, this provides little visibility for entities that have undertaken recent M&A-related deals with debt refinancing issues concentrated around 2010 but which wish to term-out their debt. Fitch believes that, from the perspective of a debt maturity profile, prudent companies are likely to favour bonds in order to term-out debt rather than draw down existing cheap bank lines in full. This is because bank lines may be more expensive when they are renewed, reflecting banks' requirements to conserve capital and a worsening credit environment. To date, financial institutions in developed markets have honoured existing committed funding lines although any corporate seeking a waiver of any sort may find negotiations hard work, expensive, or existing covenants subsequently tightened and undrawn headroom reduced. In markets such as China, Japan, Russia, South Korea and Turkey, the corporate sector's liquidity (particularly where internal cash flow generation is limited) depends on the health of their banks and, hopefully, a continuation of relationship' banking. But recent events have proved that when confidence evaporates in the banking sector, practices are quickly reassessed. As share prices continue to slide, and with trade buyers (with finance) looking at opportunities again, some share buyback programmes have been pared back or cancelled to create much-need financial headroom. Compared with 2007, when reducing a share buyback programme would have been unusual, today's market would view management's ability to conserve internally generated cash as prudent. In the report, Fitch highlights companies whose ratings have been adversely affected by liquidity-related issues, and sub-sectors (particularly Russian telcos and housebuilders) where liquidity concerns remain. Where certain countries' corporates are over-reliant on weak banks, their ratings are constrained by those of their capital providers. The report also lists those companies with the most negative liquidity score (usually companies in China and India, and Russia - which hold strategic assets, with some benefiting from implied parent/state support). The study assesses companies' liquidity profiles up to end-2010, covering financial obligations falling due in each year during this period, and the means by which they will meet such obligations, including committed capital expenditure. The "Corporate Liquidity Study - EMEA and Asia Pacific" is available on the agency's public website, fitchratings.com. Contact: John Hatton, London, Tel.: +44 20 7417 4283; Jonathan Cornish, London, Tel.: +44 207 070 5831; Frederic Gits, Tokyo, Tel.: +81 3 3288 2992; Kalai Pilay, Singapore, Tel.: +65 6796 7221. Media contact: Alla Izmailova, Moscow, Tel.: + 7 495 956 9901/03, alla.izmailova@fitchratings.com [2008-08-20]