Despite investor speculation, Fitch Ratings says that it does not believe that peripheral eurozone corporates are currently likely to actively pursue a change in domicile to bolster share prices or hedge against the tail risk of a full-blown sovereign crisis. A combination of time, expense and political pressure are likely to dissuade issuers from taking this major step until it would likely be too late to do so effectively.
The credit ratings agency (CRA) says that in a recent internal ‘war game’ scenario run by Fitch’s corporate group, the analysts focused, as corporates are currently doing, on more immediate and incremental creditor protection measures – reducing capital expenditure (capex )and dividends. By the time re-domiciling would have protected equity and debt stakeholders against the extreme tail risk of redenomination, the time pressures and logistics would likely have become too great.
More positively, most other types of pre-emptive action do not pose threats to bondholders. Fitch’s ‘war game’ was designed to look at what else corporates might do to evade possible tail risks further down the line – in other words, even where a tail risk does not crystallise, action taken by a corporate to avoid that risk may in itself change the risk position for creditors.
The vast majority of ‘evasive manoeuvres’ considered by Fitch, which included minority stake sales, changes in lending groups, liquidity drawdowns and debt buybacks – would most likely be neutral to mildly positive in the context of a stress scenario.
The most significant risks would come from the potential for dilution of group cash flow, either through structural subordination with some forms of funding, which may lower unsecured debt ratings, or the potential for loss of cash flows from crisis-driven disposals, which may lower both issuer and debt ratings.
While tensions in the eurozone have abated over the past month, Fitch says that it still believes the path to a lasting policy framework solution for the eurozone will be a complex one.
The corporate ‘war game’ scenarios used and a toolkit of corporate evasive manoeuvres are contained in the report entitled ‘Scenario: Eurozone Corporates ‘War Game’ Exercise’.
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