Liquidity for non-financial corporates in the Europe, Middle East and Africa (EMEA) region remains fairly solid overall but gradual deterioration is likely over the year ahead as a result of sovereign and banking pressures, said Moody’s Investors Service in a special comment, entitled ‘Liquidity of EMEA Corporates will be Diminished by Sovereign and Banking Pressures’.
“The current stability of EMEA corporates’ liquidity reflects their broadly cautious reaction to the ongoing global financial and economic crisis, whereby they conserved cash,” said Jean-Michel Carayon, a Moody’s senior vice president and author of the report. “At the same time, corporates are finding it more challenging to access capital markets amid ongoing sovereign debt stresses.”
Bank lending trends show a decline and Moody’s believes there is a risk that lending to EMEA corporates will be further curtailed as banks seek to restrain the size of their balance sheets, address asset quality challenges and raise capital ratios. Banks have not lent the substantial amounts of cash that have been injected by the European Central Bank (ECB) since December. The ECB’s March monthly bulletin reported that banks expect to further tighten credit standards over the next few months.
The combination of investors being risk-averse and bank lending trends has contributed to volatile capital markets. This, in Moody’s view, might increase execution risk for corporates attempting to refinance at a time when sizeable amounts of debt are maturing.
Moody’s considers that it will be significantly more challenging for speculative-grade corporates to maintain sound liquidity in the face of these tighter financing conditions and the weak business environment.
Over the coming quarters, weakening liquidity may result in more rating downgrades for EMEA corporates currently rated single B and below, as a number of borrowers will seek to refinance their debt. There is increasing potential for liquidity events to trigger defaults for weak-performing companies that are unable to obtain affordable refinancing. However, Moody’s would expect any increase in the default rate to be moderate in the year ahead.
While corporates are paying more to renew these facilities and, in some cases, are accepting their downsizing, most companies have been able to maintain the same level of facilities, albeit at higher cost. However, Moody’s has seen some instances of sudden elimination of uncommitted bank facilities and anticipate a degree of contraction of credit facilities due to banks exercising caution about lending to riskier companies and bank considerations about return on capital for loans to stronger companies.
In this environment, Moody’s considers it likely that banks will use maturity dates and breaches of financial covenants as a basis to reduce their exposure to some borrowers. This could contribute to the gradual erosion of the still-strong average liquidity profile of EMEA non-financial corporates and may lead to a liquidity crisis for some weaker-performing companies.
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