Wednesday 17 January 2018

Corporations in Europe are at 'risk of running out of savings'

The rating would likely be cut to Aa1 from Aaa if an agreement was not reached, Moody's said in a statement.
The rating would likely be cut to Aa1 from Aaa if an agreement was not reached, Moody's said in a statement.
Donal O'Donovan

Donal O'Donovan

European corporations are at risk of running out of savings as they use up reserves to cope with the seemingly endless euro crisis, rating agency Moody's warned yesterday.

Irish and companies in the other "peripheral" euro countries face the biggest challenge.

"We think the broad trend for corporate liquidity in Europe, Middle East and Africa (EMEA) has now turned decidedly negative, particularly in the periphery countries of the euro area," the report said.

European corporations have so far avoided much of the devastation suffered by banks and even states since the start of the debt crisis.

Despite exceptions such as the property sector, most companies cut back on borrowing in the first half of the past decade, following the dot-com bust, leaving them better placed to weather the latest economic storm.

However, the length of the crisis means the sector is now coming under pressure.

"The robust liquidity position of EMEA corporates has begun to deteriorate as market conditions have become more challenging," says Moody's Investors Service in a 'special comment' report published yesterday. Moody's is not expecting a sudden surge in corporate defaults in the near term, however.

Its analysts think most corporate borrowers are well positioned, even for a period of more difficult conditions.

Companies have been conservatively hoarding cash and opportunistically pushing back debt repayment deadlines, analyst Jean-Michel Carayon said in his report.

However, a significant minority of companies are in more immediate danger, the report warns.

Some €437bn of corporate debt is due to be paid off between now and the end of March. Moody's estimates that as many as 9pc of all borrowers may not have sufficient liquidity to make their share of repayments.

In a finding that will be familiar to corporate borrowers in Ireland, Moody's says that in many cases, access to lending is restricted to banks rolling over short-term facilities from year to year.

Tighter banking rules will also have a negative effect, according to the report, as banks are forced to hold on to more of their cash to comply with capital rules.

Access to the debt markets is narrowing at the same time as income for most companies is under pressure, with cash flow hit by slower growth in the global economy and recession in parts of Europe.

Irish Independent

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