The key challenge facing the majority of industries within the non-financial corporate sector in Europe, the Middle East and Africa (Emea) in 2009 will be the acute weakening of fundamentals and the continued scarcity and high cost of liquidity and funding, says Moody's Investors Service in its annual special comment on the sector "Corporates in Emea: Review 2008 & Outlook 2009".
This is in line with Moody's central macro-economic risk scenario for 2009, which predicts a period of global stagnation and de-leveraging, heralding a process of painful economic convalescence. "The deterioration in the credit environments in 2008, which culminated in the near-closure of capital markets after the default of Lehman Brothers in September, weakened consumer and corporate demand an exerted severe negative pressure on corporate ratings. As a result, Moody's implemented four times as many downgrades as upgrades in the Emea corporate sector in 2008," says Michael West, Group Managing Director of Moody's Emea Corporate Finance Group.
"However, Moody's expects a gradual improvement towards the beginning of 2010, by which time some corporate issuers are likely to have adopted a more cautious stance to debt and, in some cases, a lower-leverage policy," says Jean-Michel Carayon, Regional Credit Officer in Moody's Emea Corporate Finance Group.
Moody's special comment comprises two sections: the first part reviews rating trends in the corporate sector across Emea overall, focusing on the speculative-grade segment as well as emerging markets in Emea.
The second part provides a review of 2008 and outlook for 2009 for nine corporate sectors in Emea – automotive, retail, telecoms, paper and forest products, utilities, oil and gas, media, chemicals and pharmaceuticals.
In its review of the corporate speculative-grade segment, Moody's says that the dramatic contraction in high-yield issuance recorded in 2008 is likely to be followed by a strong rise in defaults in 2009. The rating agency does not expect a return to material volumes of issuance in this segment until secondary market prices begin to tighten and until there is greater clarity on the path and likely end of the downturn.
The central theme among corporates in Emea emerging markets– the Middle East, Central & Eastern Europe (CEE) and the Commonwealth of Independent States (CIS) – is that the end of easy access to credit has prompted the scaling back of ambitions, particularly in the Middle East, with capex plans deferred or cancelled.
In CEE, corporate ratings have additionally been and will continue to be influenced by moves in sovereign ratings. In all three regions, corporate ratings will be driven by issuers' ability to manage liquidity and refinance debt, and their flexibility with regard to capital expenditure programmes.
Moody's outlooks for the nine sectors analysed in the report are as follows:
- Auto manufacturers have a negative outlook as deep cuts in car production will be required to offset the marked reduction in demand. The ratings of auto suppliers will be tested to an unprecedented degree, with expected falls in revenues of 15 per cent or more.
- In the absence of a pick-up in consumer spending, the retail sector is likely to see a further deterioration in credit metrics and ratings in 2009.
- Contrary to the general negative trend, investment-grade telecoms operators benefit from a stable outlook driven by strong balance sheets and good demand.
- Weakening demand for paper and forest products will burden this sector's already depressed profitability and exert downward pressure on ratings in 2009.
- Unlike most sectors, utilities have a stable outlook based on their strong fundamentals and their ability to delay capex without affecting near-term profits.
- The stable outlook for major integrated oil and gas companies reflects their ability to withstand 12-24 months of oil price weakness without undermining ratings.
- The outlook for the media sector is negative in light of global declines in advertising expenditure and consumer spending.
- The negative outlook for the chemicals sector – especially for commodity chemicals – is based on modest growth prospects, given the sustained raw material price volatility and difficulties in implementing price increases.
- While not as vulnerable as other sectors, the pharmaceutical industry's negative outlook is based on industry-specific challenges that companies will face in 2009, including patent expiries of big revenue-generating drugs.
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