Fitch says EMEA, Asia-Pacific corporates well placed in face of liquidity crunch

By Angela McDaniels

Seattle, Sept. 19 - The risk of extensive corporate defaults occurring in Europe, the Middle East, Africa and Asia Pacific as a direct consequence of a liquidity crunch over the next two years appears relatively low, according to a report published by Fitch Ratings on Wednesday.

The agency attributed the low risk to recent broad improvement in liquidity profiles and expectations for debt maturities to recede in 2008.

Generally speaking, the prospects for free cash flow generation remain healthy while past cutbacks in investment and receding leveraged buyout risk owing to the recent market turmoil have left most corporates with fairly good liquidity positions, Fitch said.

The risk remains, however, that investment profiles could be altered as economic growth changes and leveraged buyout risk could return, according to the agency.

"Whilst exposure to [commercial paper] is relatively modest among the Fitch-rated corporates in the BBB category, recent market dislocation in the CP market - particularly for asset-backed CP - has forced issuers to access other liquidity sources, which has contributed to a dearth of primary leveraged loan deals," Trevor Pitman, group managing director and head of Fitch's corporate ratings in EMEA and Asia-Pacific, said in an agency news release.

"Despite the events in the CP market during August, Fitch has seen few signs of non-financial corporates failing to refinance or raise further debt since relationship financiers appear to have a capacity and willingness to lend to issuers who, in recent years, might have tapped the capital markets. Now, this funding has started to reflect a re-pricing of risk and has coincided with a tightening of covenants."

According to Fitch's projections for liquidity over 2007 to 2009, the more notable funding gaps exist among constituents in the energy and utilities sectors, in telecoms, transport and in the property sector.

"However, there can be significant mitigating factors in most of these cases," Jonathan Cornish, senior director of corporate and public finance, credit policy croup, said in the release.

"For instance, the business models and funding profiles of regulated utilities and property companies do not fit traditional industrial structures and therefore, on paper, may look inadequate from time to time. Furthermore, many utilities and energy companies have sizeable acquisition plans, which are not necessarily funded as yet, but are discretionary in nature."

Many of those companies identified by Fitch as potentially facing a liquidity shortfall at the beginning of the year have now addressed this either by refinancing, securing access to additional funding or by alternative means of capital raising, such as through the selling of equity or asset disposals.

Many of those who have not yet completed their financing plans in 2007 are state owned and expected by the agency to access funding from state-owned or government-controlled banks or rely on continuing financial support from domestic or foreign relationship banks.

Fitch noted that this is quite common in countries such as Turkey and China, where the short-term nature of bank lending often results in perceived funding gaps that tend to be addressed closer to maturity. Russia is another country that shows a higher prevalence of issuers with funding gaps, but again for mitigating reasons noted earlier, the agency said it has few concerns at this stage over systemic risk.

Unsurprisingly, liquidity broadly appears weakest among emerging market issuers and among the lower-rated issuers, such as in the B category, according the report.

The study considered 282 issuers rated BBB+ or below from 23 developed markets and 21 emerging markets. Fitch said that as with any previous liquidity crisis, there tends to be a flight to quality, so the agency focused its review on those issuers rated at the low end of investment grade or speculative grade to determine to what extent they had the capacity to meet their obligations from organic sources or required support from contingent credit providers.

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