Fitch: Reduced liquidity continues to affect emerging market EMEA corporates
LONDON. Sept 16 (Interfax) - Fitch Ratings says in its annual EMEA and Asia-Pacific corporate liquidity study that EMEA emerging market corporates continue to have low levels of liquidity compared to their developed market peers, due to low or negative levels of free cash flow (FCF), short-term uncommitted bank lines, together with local loan and bond market dynamics, which also tend to be shorter-dated and shallower than that in developed markets.
Furthermore, with a greater weighting in bank compared with bond debt, these corporates' debt maturity profiles are becoming shorter-dated, the ratings agency said.
"The study shows that 35% to 40% of EMEA emerging market corporates have liquidity scores below 1.0x in 2010 and 2011, indicating a tight liquidity profile. Fitch forecasts that these companies' operational cashflows and external cash resources are insufficient to cover their annual debt maturities in 2010 and 2011 without renewal of existing uncommitted lines or further debt raising," says John Hatton, Fitch's Group Credit Officer for European and Asia-Pacific corporates.
However, mitigants do exist for a number of the EMEA emerging market entities with the lowest liquidity scores in 2010 and 2011. In Russia and Turkey, where the study's forecasts are negatively affected by Fitch's working assumption that existing short-term uncommitted lines of credit will not be renewed upon expiry, Fitch notes that larger-rated entities may enjoy at least some preference in the allocation of bank lending capacity. Ratings of issuers with low liquidity scores may also be supported where there is a strong expectation of state financial support from states with investment-grade sovereign ratings, or where issuers with large discretionary or deferrable capex, such as utilities, can revise spending plans in the face of a liquidity crunch.
More generally, in some emerging market countries such as Russia, state-directed banks have had to step in to support domestic companies due, in many cases, to a combination of weakening profitability and the reduction in lending from international banking groups. Domestic funding, typically tied to higher domestic interest rates, can be expensive, and is often extended on a short-term basis.
According to Fitch's most recent "Bank Systemic Risk Report", published 11 May 2009, the majority of the CIS countries have banking systems with "weak" aggregated financial strength scores. Emerging market corporates in the region are exposed to the overall quality of the local banking system which, if in distress itself, will constrain capacity. Liquidity risks are lower for corporate entities with global market profiles (such as the Russian oil majors), who have continued to access long-term foreign currency funding.
In its updated forecasts of corporates' profitability, Fitch assumes the use of only existing short-dated bank lines and cash, but no new debt issuance in the study. Fitch's liquidity scores are broadly defined as free cash flow (FCF) before dividends, plus cash-in-bank, plus existing RCF headroom, less future committed capex divided by short-term debt maturities for the relevant period.