A report by Fitch Ratings says that while non-cash write-downs often grab attention, they have a far lower impact on companies’ credit profiles and are largely factored into existing ratings. They can, however, signal a trend. According to the credit ratings agency (CRA), significant impairment levels seen across Europe are likely to increase over the next two years as challenging market conditions persist.
Fitch’s report, titled
‘Corporate Impairments and Write-Downs’
, suggests that there are limited circumstances where non-cash write-downs can have a real effect on creditworthiness: if the trend the impairment signals is a surprise; if the write down causes an adverse reaction in the debt markets; or, in rare cases, where bond or loan agreements have equity-based covenants.
Over recent years, write-downs were largely driven by aggressive acquisitions – often at inflated prices/multiples – money ill-spent on large asset investments, or weaker cash flow expectations (leading to lower sale values) for specific assets where market conditions weakened rapidly since the onset of the financial crisis at end-2008. This is set to continue until the global economy recovers to a sustainable growth path.
The likelihood of further write-downs is supported by current market valuations. Market capitalisation to book value (MC/BE) is low for over 50% of corporate issuers, at below 1x, indicating that over half of issuers’ valuations of their net assets may be too aggressive and that increased impairments may be imminent.
In recent years, the telecom and natural resources industries have had the highest level of impaired assets. Fitch believes that further write downs are likely in the mining, media, utility, automotive, technology and Latin American homebuilding sectors, although this will vary on an issuer and regional basis.
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