Bangkok--8 Feb--Moody's Investors Service
Moody's Investors Service says that the negative credit trend that emerged last year for non-financial corporates in Asia Pacific (ex-Japan) will continue throughout 2007.
"Looking ahead, even though the situation is broadly stable - some 76% of issuers show stable outlooks - the trend is mildly negative, and will stay negative for 2007," says Clara Lau, Chief Credit Officer for corporates in the region and author of a new report on corporate credit in Asia Pacific.
"Moody's data shows that ratings with negative outlooks outstrip those with positive outlooks. As of the start of 2007, 11% of issuers had negative outlooks against 8% with positive," says Lau.
"Despite the low risk of ongoing interest rate hikes and continued strong liquidity, Moody's expectation of a continuation of the mildly negative trend is predicated on the fact that 4% of rated issuers are on review for downgrade, compared to 1% on review for upgrade" adds Lau.
Australian corprates account for an overwhelming majority of the region's credits now on review for downgrade, primarily because of strong M&A activities. If these Australian corporates are excluded, then the number of Asian credits on review for downgrade slightly exceeds those on review for upgrade at about 3% to 1%.
Lau's new report reviews the trends of 2006 and examines Moody's outlook for 2007. It excludes Japanese non-financial corporates, but includes Australian entities.
In 2006, within Moody's rated corporates in Asia Pacific, downgrades totaled 17 and upgrades 10, once sovereign-related upgrades are excluded. Significantly, it was the first time since 2003 that downgrades outpaced upgrades.
"Asian corporates accounted for about 90% of the downgrades, representing about 10% of the Asian rated credit universe," comments Lau.
Moody's caution over 2007 is driven by concerns over a continuation of the M&A activity and ambitious investments which were the major triggers for last year's downgrades.
"The region's generally strong economic performance and ample liquidity have prompted a surge in large-scale investments, M&A activities -- due primarily to private equity and hedge fund interest, particularly in Australia -- and share buybacks," says Lau.
"Companies have become more active in their quest for investment opportunities to enhance shareholder returns, and were more willing to re-leverage balance sheets to fund these initiatives," says Lau, adding, "These features will continue into 2007."
Another cause for the concern throughout this year is the heavy reliance on short-term financing among high-yield credits, particularly Chinese and Indonesian corporates.
"As a benign credit environment has prevailed since 2004, corporates have taken for granted easy access to funding or refinancing. As such, their exposure to refinancing risks and liquidity crises is high, should a liquidity crunch emerge due to market volatility or regulatory change," Lau says.
Ongoing regulatory risk in certain sectors, such as with Chinese property developers, is a potential cause for material rating transitions as a policy misstep could easily pose significant challenges for access to liquidity and exacerbate credit risks.