Bangkok--18 Mar--Fitch Ratings
Fitch Ratings says in a special report published today that there are relatively few examples of Fitch-rated corporate issuers in the Asia-Pacific region with debt maturity and refinance risk in the immediate term. However, during 2010 around half of the 145 rated corporate issuers included in this study have refinancing requirements that are particularly reliant upon the strength of each country's banking system and continuing good banking relationships or other forms of support (for example, government support) to meet their near-term debt obligations.
Given Fitch's expectations of continued fragility in the region's capital markets, where bond markets are generally less developed, corporates will likely remain particularly reliant upon the strength of each country's banking system and continuing good banking relationships to support corporate liquidity. The agency's assessment of other potential forms of support, including a balanced consideration of both indirect and direct support by the state (sometimes through the banks) will continue to be a key rating factor.
Fitch has allocated the entities included in this study into three categories. Category 1 comprises companies with a good liquidity profile (measuring 2009 and 2010 debt maturities relative to internal liquidity and committed bank lines) - 60% of companies fall into this category for 2009 maturities, dropping to 50% for 2010. Category 2 comprises companies with a weaker self-sufficient liquidity profile and more pressing refinancing needs than those in Category 1 but with good banking relationships or other forms of external liquidity support. Category 3 includes companies without either a good liquidity profile or strong internal or external refinancing capacity, but comprises only three credits when considering the liquidity profiles for the year to December 2009, and eight for 2010. All but one of these Category 3 companies are appropriately rated in the single 'B' territory, with the one outlier - a Chinese entity with government support - rated low investment-grade.
The report also ranks corporate refinance risk by country of domicile of the corporate entities. Australia and Hong Kong are assessed as having the lowest vulnerability to systemic refinancing risks. China, South Korea and Japan appear to have higher vulnerability to such risks, reflecting the relative lack of organic cash flow generation/retention of rated corporates, the absence of long-term committed bank funding and a preponderance of short-dated debt relied on by companies in those countries. Some of the weaker rankings also recognise limitations in many of the region's domestic bond markets in the current economic climate.
That said, however, Fitch notes that - to date - the practice in the lower ranked countries has been for banks to renew existing uncommitted short debt facilities on an annual basis. Although those banking systems do not appear to be under significant stress at present, there remains the possibility that current lending practices could change in an environment of more constrained credit availability. In such a scenario, Fitch anticipates that banks in those countries would ration their available credit by continuing to provide facilities to larger, higher rated companies and selectively reducing their exposures to smaller, weaker corporates or those in distress.
Ultimately, the health and lending appetite of the domestic banking sectors remains key for those companies requiring external liquidity support. The overall Asia-Pacific corporate portfolio can be characterised as being reliant on short-dated debt maturity profiles combined with little committed bank funding of greater than one year. Corporates are also thus exposed to the overall credit quality of individual domestic bank systems which in turn, even before the current crisis, were in many cases supported implicitly or explicitly by the state. For corporates, this is particularly the case in China, Japan, South Korea and Taiwan.
This leads to two broad conclusions. Firstly, the region is more reliant than western markets on bank lending. As a result, the existing cash resources of certain companies could be rapidly depleted should the region's banks curtail lending, thereby substantially increasing the level of refinance risk. Of the rated portfolio's USD730bn of debt outstanding, 45% is sourced from banks and the remainder from bonds and commercial paper. Furthermore, 54% of the total debt is scheduled for repayment or refinance by end-December 2010.
The second broad conclusion, which is more generally applicable outside as well as inside the region, is the continuing relevance of indirect state support for the corporate sector through a state's ability and willingness to support the banking sector and broad credit availability. Fitch notes that any provision of direct support - via direct lending to corporates to meet near-term liquidity shortfalls - as opposed to indirect government support - via the banking system - for industrial companies will generally be supportive for near-term liquidity. However, the agency also notes that it has the potential in the medium-term - given its focus on a variety of stakeholders - to lead to conflict with existing senior creditors, particularly if supporting unsustainable business models, unprofitable manufacturing operations and/or politically charged employment considerations.
The special report "Refinance Risk: Asia-Pacific Corporates" is available on the agency's public website, www.fitchratings.com.
Contacts: John Hatton, London, Tel: +44 (0) 20 7417 4283; Tony Stringer, Hong Kong, Tel: +852 2263 9559.
Media Relations: Lisa Lim, Singapore, Tel: +65 6796 7214, Email: [email protected]; Shivani Sundralingam, Singapore, Tel: + 65 6796 7215, Email: [email protected].
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.