Fitch Ratings said that the events surrounding
Cyprus’s current crisis
have not led to any rating actions on Europe, Middle East and Africa (EMEA) corporates. However, the credit ratings agency (CRA) added that it is alert to the precedent that terms of the island’s bailout deal may set for further forms of capital controls within the eurozone, and will be reviewing its approach to corporate/sovereign linkage in that light.
According to Fitch, its current approach reserves the strongest insulation for multinational corporates (MNCs) with well-diversified operational cash flows and treasury management, a position which should remain robust in a single country stress of this nature.
Cyprus itself does not host any Fitch-rated corporates with material local operations. Cyprus-registered companies relevant to the CRA’s rated corporate portfolio are limited to holding companies for Ukranian and Russian groups benefiting from the European country’s tax haven status. Often a dividend-receiving holding company higher up the group structure, these entities are less relevant to Fitch’s analysis, unless it is the main issuer or guarantor of the group’s rated debt.
Based on company feedback to Fitch, virtually all issuers with Cyprus-linked entities relevant to the CRA’s EMEA corporate portfolio have minimal amounts of cash located with Cypriot banks and will not be detrimentally affected by a ‘full contribution’ or bail-in from large cash deposits. Perhaps surprisingly, some of these holding companies do not even have a Cypriot bank account, but transact money using international banks in their respective offshore financial centres. Even where the issuer does maintain a Cypriot-based account, in many cases, as normal treasury policy, the tax haven holding company does not route cash through Cyprus’s borders.
For international companies, not routing cash through Cyprus alleviates pressure on ratings should a further adverse scenario evolve of the country introducing a new currency with accompanying draconian foreign currency capital controls. Whilst this is not Fitch’s base case, under this scenario companies with substantial cash deposits in Cyprus would clearly be further affected, beyond the currently projected deposit losses, depending on the scope and effectiveness of the currency capital controls. Practically, at the outset, companies’ euro deposits would also most likely suffer significant losses from the redenomination into a new and devalued domestic currency.
In addition to lower cash resources locally and withdrawal restrictions, if maintained for a period of time, currency capital controls might require Cypriot companies to seek central bank permission to make euro-denominated payments sourced from Cyprus’s domain. For those cases with the majority of their cash resources located in Cyprus – again, none of which would be among Fitch’s current rated portfolio – this would seriously disrupt payment schedules on a company’s overseas debt.
Worse still, if the currency capital controls replicated Russia’s in 1998 when domestic companies were told to repatriate their foreign currency deposits, this would be adverse for local companies’ foreign creditors.
Fitch said that it does not currently see similar pressure affecting the Cypriot holding companies which already transact money through offshore accounts and jurisdictions, and, for Fitch-rated entities, whose cash-generating operations are not on Cypriot soil.
Under Fitch’s criteria, a Cypriot-domiciled holding company which transmits cash offshore from its Russian or Ukrainian cash-generating assets, are factors that would typically enable it to be rated above a distressed Country Ceiling.
Again, while not Fitch’s base case, for a Cypriot-registered company subject to new national laws including a new currency, opportunistic management could theoretically question if bond documentation required the company to repay its euro-denominated debt and whether international law (if applicable) would support foreign bondholders in enforcing such repayment. Documentary obstacles aside, Fitch does not believe that any of its rated corporates would regard such an opportunity as representing any form of realistic incentive for sustainable, non-Cypriot going concern entities to evade debt obligations in the current climate.
The Next Chapter
Fitch’s corporate eurozone analytical tool kit has included a number of eurozone shock cases, peripheral liquidity analyses, rating reactions to the CRA’s six eurozone alternative sovereign scenarios, how far corporate ratings are detached from their downgraded eurozone sovereigns, redenomination risk, a single country exit scenario, and now cash deposit bail-ins in tax havens.
The greatest threat to emerge from the Cyprus crisis for rated EMEA corporates is the precedent of deposit withdrawal controls, which have thus far exceeded the disruption previously seen in Greece.
Fitch said that it will be monitoring the context in which these controls are ultimately positioned by eurozone policymakers over the coming weeks to see whether any tightening of our current guidance on corporate and sovereign delinkage may be required.
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