Moody’s: Most Russian Companies can Avoid 2015 Credit Crunch

Despite expanded Western sanctions, the solid liquidity of most rated Russian non-financial corporates will enable them to meet the total US$100bn of debt maturities due by end-2015, according to Moody’s Investors Service.

However, the credit ratings agency (CRA) adds that tighter restrictions might exacerbate short-term liquidity needs for certain companies, with Moody’s analysis indicating that 7% of rated issuers have refinancing to execute in the near term to maintain adequate liquidity.

“We do not foresee any liquidity pressure developing until 2016 and beyond for a large proportion of rated Russian companies thanks to their meaningful cash balances and their fairly well balanced debt maturity profiles,” said David Staples, Moody’s managing director.

“Possible reductions in capital expenditure, increased reliance on alternative sources of funding, including contract prepayments, and funding provided by Russian state-owned banks should mitigate near-term liquidity challenges.”

Moody’s notes that the Russian state has expressed willingness and has the capacity to support the corporate sector in meeting funding short-falls through state-owned banks, if required. China could also provide a replacement source of financing amid western sanctions, as evidenced by recent oil and gas deals.

However, reliance on state-owned banks will limit competition among financial institutions (FIs) and, taking into consideration rising funding costs for the banks, is expected to translate into higher interest rates for corporate borrowers in all sectors. Moreover, European Union (EU) and US restrictions and investor uncertainty over possible broader future sanctions are translating into higher yields for Russian corporates that aren’t directly targeted by the measures.

A prolonged crisis would pose bigger risks for the refinancing of foreign debt maturities. Beyond 2015, a larger proportion of rated Russian corporates might face funding shortfalls while their business profiles could suffer from underinvestment and weaker macroeconomic trends. If sanctions are sustained, the companies’ reliance on access to funding from domestic banks, in particular state-owned banks, and support from the Russian state would increase.

Moody’s recently downgraded Russia’s government debt rating to Baa2 from Baa1, driven by the country’s increasingly subdued medium-term growth prospects, exacerbated by the prolonged Ukraine crisis, and the recent marked deterioration in financial conditions owing to capital flight. A weaker macroeconomic environment on corporate operating cash flows and continued weak access to capital markets could further reinforce the possibility that some corporates begin to experience liquidity and refinancing stress beyond 2016, if their current liquidity buffers begin to dissipate.

The report, entitled
‘Solid Liquidity Enables Most Russian Corporates to Meet 2015 Debt Maturities’
, is available on www.moodys.com.

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