Exposure to Europe won't affect ratings of Asian corporates: Moody's
Prasad Koparkar, senior director at CRISIL Research, and Girish Pai, head of equities at Centrum Broking, discuss what can be expected from corporate earnings in the fourth quarter.
An exposure to Europe's economic slowdown is not expected to result in rating changes for the vast majority of rated corporates in Asia, says Moody's Investors Service. This assessment is based on a scenario in which European GDP declines by about 1 per cent in 2012. A more severe outcome in Europe would result in a reassessment of the impact on Asian companies.
"Although many Asian countries rely on Europe for exports, most of our Asian rated issuers are less exposed to conditions in the euro area due to the domestic or regional focus of their businesses," says Ping Luo, a Moody's Vice President and Senior Analyst.
"Under our base case scenario of a mild euro area contraction of up to 1 per cent in GDP for 2012, exposure won't impact the ratings and outlooks of most rated Asian firms, based on their European revenues and assets, as well as borrowing from European banks," Luo adds.
Out of 217 rated issuers in Asia, excluding Japan, only 13 (6 per cent of the total) report 15 per cent or more of their revenue as being derived from Europe. Eight of these issuers (4 per cent) report that over 25 per cent of their revenues are derived from the European market.
In the report, Moody's explains that reported revenues may understate the degree of exposure of revenues to Europe. For example, reported sales to Europe would not include sales of raw materials and intermediate goods to non-European companies that become components of finished goods sold to Europe.
Among the 13 issuers with reported revenues to Europe exceeding 15 per cent, a few are facing increased rating pressure. Although exposure to Europe is not the sole source of rating pressure, the slowdown in Europe has exacerbated concerns for these firms, particularly, BW Shipping and LG Electronics.
The sectors that are more likely to be adversely impacted by trends in Europe include consumer-electronics, semiconductors, shipping, port operators, palm oil producers, steelmakers, and chemical manufacturers, explains the report.
The more domestic or regionally focused sectors, with limited exposure to a euro area recession include utilities, property, telecommunications, consumer/retail, construction, building materials, and media.
In terms of funding, many Asian issuers have improved their liquidity since the last financial crisis of 2008-2009, and most of them are well positioned to manage potential disruptions from the deleveraging of European banks.
Moody's survey of rated issuers indicates that only 17 of them have more than 10 per cent of their outstanding debt with European banks, excluding Hong Kong Shanghai Bank Corp and Standard Chartered Bank. Of these, 10 have cash on balance sheet that is over 100 per cent of debt maturing in the next 12 months.