EMEA corporates’ cautious financial strategies are of less and less help in avoiding downgrades, Fitch Ratings says. Downgrades are likely to outnumber upgrades among Fitch-rated EMEA corporates in 2013.
The trailing three-month aggregate of revisions to Outlooks and Rating Watches, which has been a fairly good predictor of future rating changes, dropped towards the end of 2012. This suggests that rating actions will remain net negative in 2013. What’s more, the trend has been towards rating actions driven by weaker fundamental performance, rather than more aggressive financial policies, M&A activity or capex.
This limits event risk – financial policy has been a much bigger downgrade driver in the US, for example – but gives issuers less flexibility to avoid rating action, as 2012’s downgrade numbers (double those for 2011) illustrated.
Utilities and telecom companies accounted for 61% of downgrades in 2012 and our outlook for both sectors remains negative this year. For utilities this is due to weak fundamentals and regulatory pressure across most of the EU. Telecoms face a difficult mix of weaker consumer confidence and strong competitive pressure across the continent.
Other sectors with a negative rating outlook include European food retailers, where the region’s biggest operators face the biggest challenge to their business models from changing consumption patterns. Steel producers in Western Europe also have a negative outlook due to low demand from the key construction and automotive markets.