EMEA corporate credit ratings buck downward cycle
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EMEA corporate credit ratings buck downward cycle

More non-financial companies in Europe, the Middle East and Africa (EMEA) have had their credit ratings upgraded than downgraded by Moody’s Investors Service in the first quarter of the year – the first time this has happened since 2008.

In a report from the rating agency, it states EMEA-based companies “appear resilient” and “better positioned” to weather a credit shock, and that low interest rates and relatively benign markets have enabled corporate treasurers to strengthen liquidity and “push out debt maturities” despite banks cutting back on corporate lending.

In total, Moody’s upgraded 13 EMEA-based companies across industry sectors and countries, including Denmark’s cleaning group ISS, the United Arab Emirates’ EMAAR Properties and Ireland’s Eircom, the telecoms group.

It downgraded 10 companies, including Italy’s Fiat and the UK supermarket chain Morrisons.

“There has been sustained negative pressure on EMEA non-financial corporates over recent years with negative actions consistently outweighing positive,” says Moody’s William Coley, group credit officer, EMEA corporates. “Against this backdrop, Q1 2014 is therefore remarkable in being the first quarter since 2008 to show more upgrades than downgrades.

“We expect this trend to continue, although in some cases it may take another year or more for credit strength to become unambiguously evident in stronger metrics, especially where capital expenditure projects were delayed, are now under way and will bear fruit in the coming years, or where emerging headroom has been used for opportunistic acquisitions.”

While broadly positive, Moody’s does warn it is too soon to call a “step-change improvement” for all EMEA-based companies and points out there are still almost twice as many companies with negative credit-rating outlooks as positive.

According to analysis from Standard & Poor’s (S&P), caution is called for. The agency states in its 2013 European corporate default study that of the 704 non-financial European companies it rates, more companies were downgraded than upgraded last year.

In total, 13% of European non-financial companies were downgraded, marginally outstripping the 12% that were upgraded. There was a starker difference among the 537 European financial companies S&P rates, with about 16% being downgraded and only 4% being upgraded.

“The weaker credit profiles of some sovereigns, as well as the economic and financial challenges that Europe continues to face, contributed to the elevated downgrade activity in the financial sector last year,” says Diane Vazza, managing director, global fixed-income research at S&P.

She added that 2013 was the sixth consecutive year the downgrade ratio for financial companies exceeded the downgrade ratio for non-financial companies.

In the full-year 2013, 16 companies in total that S&P rates in Europe defaulted on their debt – up from nine in 2012 and the highest since 2009.

Of those companies that did default, S&P says only one was a financial company – Irish Bank Resolution Corporation (IBRC). S&P downgraded IBRC in February last year after the Irish government’s announcement that it had passed legislation to liquidate the organization it had set up in 2011 to manage down the remains of Anglo Irish Bank, whose collapse nearly bankrupted Ireland.

The 15 non-financial European companies that defaulted last year include pulp- and paper-maker Norske Skog, Yioula Glassworks, advertising group Seat Pagine Gialle, the UK directory service firm Hibu, gaming company Codere, Magyar Telekom, and freight and logistics company CEVA Group.

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