Corporate liquidity risk to rise in 2010 |
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Liquidity risk for corporates in the EMEA and Asia-Pacific regions will become more pronounced in 2010 as various factors come into play, says a new study. In its 2008 Corporate Liquidity Study-EMEA and Asia-Pacific, Fitch says that corporates with negative free cash flow may face liquidity challenges if their primary source of capital banks is capital-constrained.
"Companies in developed markets successfully planned ahead by locking in cheap three-to-five-year committed bank funding," said John Hatton, Credit Officer in Fitch's Corporate team. "However, we believe liquidity risk will become more of an issue in 2010 as 2006 and 2007 bank lines face refinancing and the extent of the weakened economic environment becomes more visible in corporates' results."
"Furthermore, corporates which did not access the bond market in the hope that pricing will return to 2007 levels may be forced to accept potentially higher pricing from bonds and/or bank lines," he added.
Moreover, although some of these countries' banking systems seem not to have been affected by the credit crunch to date, Fitch is concerned that corporates with negative free cash flow and reliance on short-term rollovers (at which point there is no commitment to refinance the loan with the same provider) may have an immediate liquidity problem if their relationship banks are capital-constrained.
"Indeed, it is likely that a bank's uncommitted funding will evaporate just at the time when a corporate's weakening operational performance prompts the need for liquidity," says the Fitch report, which covers 221 corporates, including the UAE's Gulf General Investment Company (GGICO)Gulf General Investment Company (GGICO)
, that are rated 'BBB' and below.In June 2008, Fitch Ratings' corporate analytical groups in Emea and Asia-Pacific reviewed internal base-case forecasts for every issuer rated 'BBB' and below. Data from this exercise has been used to assess the liquidity profile for companies over the period to end-2010; encompassing financial obligations falling due in each year during that period, and the means by which they will meet such obligations, including committed capital expenditure - whether from free cash flow, availability under committed bank lines, and/or accumulated cash and cash equivalents.
The global ratings agency believes that, from the perspective of a debt maturity profile, prudent companies are likely to favour bonds in order to term-out debt rather than draw down existing cheap bank lines in full. This is because bank lines may be more expensive when they are renewed, reflecting banks' requirements to conserve capital and a worsening credit environment.
Despite their own current problems, banks are honouring their contractual obligation to provide funding under committed credit facilities although any corporate seeking a waiver of any sort may find negotiations hard work, expensive, or existing covenants subsequently tightened and undrawn headroom reduced. As companies' profitability declines due to the economic environment, banks may be more discerning in advancing new money. Commercial pa-per issuance is still open to co-rporates, though this is mainly reserved for those with higher short-term ratings.
If certain bond markets remain intermittently open, this provides little visibility for entities that have undertaken recent M&A-related deals with debt refinancing issues concentrated around 2010 but which wish to term-out their debt. In other words, companies that have recently undertaken M&A activity and have not yet termed out near-term interim funding (typically with substantial facility maturities in 2010), will soon require active liability management.
Those companies whose management are able to revisit the topic of supporting share buyback programmes and conserve cash, can create additional liquidity headroom. As share prices continue to slide, and with trade buyers (with finance) looking at opportunities again, some share buyback programmes have been pared back or cancelled to create much-need financial headroom. Compared with 2007, when reducing a share buyback programme would have been unusual, today's market would view management's ability to conserve internally generated cash as prudent.
In less developed markets, corporate sector's liquidity (particularly where a corporate's internal cash-flow generation is limited) depends on the health of the banks and their detachment from the Western credit crunch - that is, hopefully, a blissfully unaware continuation of existing 'relationship' banking. But recent events have proved that when confidence evaporates in the banking sector, assumed practices are quickly reassessed. Within Fitch's portfolio of ratings, some companies' ratings have been adversely affected due to liquidity and/or actual or prospective refinance risks - and/or banks being less willing to provide funds.
At the time of last year's Liquidity Study published in September 2007, the conditions in financial markets were rapidly changing, but Fitch's survey of EMEA and Asia-Pacific corporates found they were well-prepared for a prospective credit crunch; with committed facilities (particularly in developed markets), minimal exposure to liquid cash instruments or vehicles, with the cause for concern being the idiosyncratic liquidity-related risks of individual credits.
Few corporates accessed funding using exotic debt vehicles or instruments which are now virtually extinct in today's capital markets. This year's study shows similar results, with idiosyncratic liquidity-related adverse risks for certain companies rather than any sector-specific liquidity issues.
Total Liquidity was negative for around 25 per cent of the 221 issuers for each of the three years covered in the study.
In the report, Fitch highlights companies whose ratings have been adversely affected by liquidity-related issues and sub-sectors where liquidity concerns remain.
The number
25%: The percentage of liquidity that was negative for the 221 issuers for each of the three years covered in the study.
By Staff Writer
© Emirates Business 24/7 2008
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