Business

Thursday June 25, 2009

More rating downgrades of firms likely in second half-year

By LAALITHA HUNT


Corporate issuers remain vulnerable amidst global demand slump

PETALING JAYA: Rating agencies see more potential downgrades in the second half of this year although the global economy is showing some hints of recovery.

According to RAM Rating Services Bhd chief executive officer Liza Mohd Noor, the overall credit quality of its rated portfolio, though resilient in 2008, will trend downwards for the remainder of the year.

“While there are some hints of the global economy coming back to life, we believe the road to full recovery, defined as gross domestic product trend growth of 5% to 6%, will likely be gradual, possibly taking up to two years,” she told StarBiz.

Liza noted that corporate issuers, especially those with significant dependence on export earnings, would be the most vulnerable as the global demand slump had resulted in weaker internal cashflow generation.

“Even issuers with relatively healthy balance sheets may still face liquidity pressures as they rely on external avenues to meet maturing debt obligations and working capital requirements,” she added.

Liza said RAM had 18 issues involving eight issuers placed on rating watch with negative implications – a forward-looking indicator that looks at the potential for downgrades.

The affected ones were about 11% of its corporate issues reviewed year-to-date, while 6% were downgraded.

Meanwhile, Malaysia Rating Corp Bhd (MARC) had placed 10.2% and 8.4% of its corporate issues from January to May this year under negative watchlist and issues with negative outlook respectively while 7.2% were downgraded.

“We have a significant increase in the number of issues carrying a negative outlook or placed on negative watchlist. For instance, issues with negative outlook rose to 3.1% in April this year, the highest since February 2007.

“This could indicate the potential for additional corporate downgrades for the rest of 2009,” MARC chief rating officer Milly Leong said.

However, Leong noted that the negative rating momentum was related to a group of issuers in the speculative rating categories, some of which had already experienced downgrades in the first half of 2009.

She added that they had stepped up surveillance of corporates which appeared vulnerable to the effects of the global financial crisis and the current economic slowdown.

“MARC monitors the weaker listed corporates in its rating universe for signs of vulnerability at quarterly intervals. Of particular concern for us are steep declines in earnings and cash flow, tightening liquidity, rising receivables and inventories as well as reduced revenue visibility,” she said.

International rating agency Standard & Poor’s said it expected record levels of defaults by companies in the Asia-Pacific in the coming months as the global recession continued to take a heavy toll on these export-led economies and leveraged sectors.

“The number of downgrades to total rating actions in the Asia-Pacific had exceeded upgrades in 10 consecutive months as defaults risk rose, matching the peaks observed during the Asian financial crisis in 1998,” it said in a report.

Currently, slightly less than one-third of all entities in the region were placed on ratings watch with negative implications, mirroring global trends, the report said.

“This represents the highest rate in more than nine years. Still, Asia-Pacific trails other regions in terms of overall vulnerability.

“This is partly because regional issuers came into this period with less leverage than their Western counterparts,” it added.

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