Liquidity quality will remain a source of credit strength for investment-grade (IG) and speculative-grade (SG) corporates in most sectors across Europe, Middle East and Africa (EMEA) provided current bond market access is sustained, says Moody's Investors Service in its latest EMEA liquidity report published yesterday. The liquidity of most EMEA corporates has remained healthy despite a moderate erosion of credit quality over the past 12 months, with some more marked areas of weakness in cyclical industries.
"Companies have continued to conservatively accumulate cash, refinance debt maturities in advance and take advantage of favourable conditions in terms of bond market access to extend debt maturities," states Jean-Michel Carayon, Moody's senior vice president and author of the report.
The report titled "Liquidity of EMEA Corporates Remains Solid" is now available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.
Moody's studied 628 rated non-financial corporate borrowers and found that 91 percent of issuers appear to have sufficient liquidity to cover their debt maturities over the next 12 months, the same percentage as in the rating agency's previous study. Also as with the previous year, most of the issuers displaying insufficient liquidity or liquidity presenting clear weaknesses are mostly positioned in the B rating category. While there are selected areas of weakness and broader vulnerability to a new macroeconomic shock, the healthy liquidity profile of the vast majority of corporates in EMEA is consistent with Moody's forecast that the default rate will remain below the long-term average through the end of the year.
Over a third more debt will mature within a period of 12 months by March 2014, which to a large extent reflects the growing rated EMEA high yield market. The increase in the magnitude of near-term maturities nevertheless elevates the risk associated with an extended period of market access.
The risk of breaches of financial covenants that could result in more defaults is currently moderate. Covenant headroom has stabilised or even increased slightly despite the sluggish macroeconomic environment for most corporates. However for those at the lower end of the rating scale, headroom is likely to weaken, which could well trigger an increase in defaults in the SG segment.
Moody's sees the main risk facing the quality of corporate liquidity in EMEA as a deepening of the euro area recession, accompanied by further credit contraction, potentially triggered by a further intensification of the sovereign debt crisis.
