Fitch Sees 2014 as Likely Turning Point for EMEA Corporates

Aggregate free cash flow among Europe, Middle East and Africa (EMEA) corporates should turn positive in 2014 as revenue and margin figures also show modest improvement, according to Fitch Ratings.

The credit ratings agency (CRA) says that total cash holdings will probably fall further from their 2012 post-global financial crisis high, but this will be due to companies using the cash for debt repayments, rather than a reversal of the conservative financial policies to combat weak market conditions since the onset of the crisis.

In its special report, entitled
‘EMEA Corporate Cash Generation: 2014 a Turning Point’,
Fitch forecasts that improving free cash flow (FCF) in the consumer and healthcare, telecom media and technology, and industrial sectors should drive the return to aggregate positive FCF after two years of negative figures. The turnaround will be driven by a combination of recent investment in faster-growing emerging markets and aggressive cost-cutting, also leading to stronger margins.

The Belgian-Brazilian multinational beverage group Anheuser Busch InBev, Swiss pharmaceuticals group Roche Holding and French healthcare group Sanofi will be among the biggest generators of FCF, helped by stable demand in the healthcare and food retail sectors. Conversely, significant capital expenditure by transport companies such as JSC Russian Railways and South Africa’s Transnet SOC will contribute to negative FCF in the utilities and transport sectors, which will be the main drag on the aggregate figures.

The CRA’s analysis, which discusses over 40 Fitch-rated EMEA corporates, forecasts total cash holdings to drop by over US$130bn over 2013 and 2014. This will help pay off around US$140bn of gross debt, leaving companies’ net debt position largely unchanged from 2012.

Fitch adds that this could change if companies were to implement less cautious financial policies and delay their debt repayment, for example in response to shareholder demands or to make the most of improving market conditions as the eurozone shows early signs of returning to growth. However, overall the CRA believes that a sustained euro area recovery remains fragile and that corporates will maintain their focus on conservative policies and balance-sheet strength in the short term.


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