London: Weaker oil prices should drive worse-than-expected full-year results for major oil and gas producers, according to Fitch Ratings.
“How these companies choose to rethink capex, opex and shareholder remuneration plans in response to falling prices is likely to be the key rating consideration in 2015. In contrast, the operating environment for western European telecoms should improve in 2015 as consolidation reduces competitive pressures and demand for high-speed fixed and mobile broadband accelerates,” it added.”
“Gradually improving margins and cash generation should lead to greater ratings headroom for EMEA corporates in 2015, supporting a stable outlook for the region,” it added.
“But significant risks remain in geopolitical tension and the possibility of deflation. Strategic M&A activity is also likely to accelerate, which could increase leverage if debt funded.”
“We expect market conditions to improve further in 2015, continuing a gradual recovery that began in mid-2013. This should result in slightly stronger revenue growth and improving profitability, with cyclical industries such as capital goods, manufacturing, construction and automotive benefitting most. We expect peripheral eurozone corporates to have the greatest improvement in rating headroom in the near term, albeit from a low base, as GDP growth across the region becomes sustainably positive.”
“Deflation remains a meaningful risk, although not our base case, and would lead to subdued demand, falling asset values and increased real debt burdens, all of which would be negative. Adverse effects would be exacerbated for the growing number of highly leveraged issuers in the ‘B’ rating category,” it added.
“Flagging growth increases the likelihood of risk events, and the gap between investor expectations for fundamental credit and spreads reflects this dilemma. Many investors are holding positions for fear of losing out on a potential ECB QE rally, but may remain exposed to developing refinancing risks over the medium term. The turmoil in Ukraine has also added to geopolitical risks, while currency depreciation has reduced emerging-market growth expectations.”
“Expansion into higher-growth emerging markets was a focus for many EMEA corporates looking to boost anaemic revenue growth in recent years. With this option looking less attractive, we believe local bolt-on acquisitions may become more frequent, especially in telecoms, media and technology, pharmaceutical, oil and gas and capital goods. Wide-ranging cost-cutting since 2008 has left many corporates with higher cash stockpiles and therefore more financial flexibility, but any rise in M&A is likely to be gradual, accelerating over the medium term if the recovery is sustained.”