Complex Made Simple

Middle East companies’ liquidity to remain robust- Moody’s

Liquidity will remain strong overall for non-financial companies in Europe, the Middle East and Africa (EMEA) into 2018, with higher commodity prices likely to add an extra liquidity boost
to energy, metals and mining sectors, says Moody’s Investors Service in a report published recently.

In its report, Moody’s assesses the liquidity positions of 914 non-financial and infrastructure companies, (367 investment grade and 547 high yield), with total reported outstanding debt of about $4 trillion.

“Even without access to new funding, 94 per cent of EMEA companies have enough liquidity to meet cash demands over the next 12 months, slightly up from 93 per cent in 2016,” says Richard Morawetz, a Moody’s Group Credit Officer for the Corporate Finance Group.

“However, liquidity issues become more pronounced among companies rated Caa and under, with around half viewed as having some liquidity weakness.”

In the high-yield universe, the broad energy sector (which includes oil and gas and oilfield services) has a higher share of weak liquidity scores, whereas the metals and mining sector has strengthened versus last year as it benefits from rising commodity prices.

In principal, the liquidity profiles of these sectors should improve on the back of an upturn in commodity prices if sustained.

While many sectors will see positive free cash flow generation over the next 12 months, the technology and pharmaceutical sectors will have the strongest free cash flow relative to reported debt.

The global integrated oil and gas sector should see free cash flow turn positive in 2017, depending on the level of capital spending and scrip dividends.

Country risk is not currently a significant driver of liquidity strength. While Russia is only now emerging from a nearly two-year recession, Russian companies’ earnings and liquidity have benefited from rouble weakness as many are major commodities exporters.

In Turkey, political events have hit business confidence but Turkish companies’ liquidity has generally remained sufficient, if not strong.

Receivables factoring programmes, whereby a company sells its outstanding debts to a securitisation trust or a bank in exchange for an upfront payment, are a potential source of liquidity for about 14 per cent of companies in this study, mostly in the high-yield space.

The automotive and metals and mining sectors account for nearly half of the estimated $28 billion factoring outstanding. Loan covenant headroom is generally strong, but with a trend towards weaker protection.

Moody’s data on covenant headroom is very stable this year versus 2016. However, there has been a perceptible shift towards covenant-lite loan agreements that have no maintenance covenants.

This trend has been facilitated, in the rating agency’s view, by investors’ search for yield.

Moody’s expects the global default rate to continue its downward path to December 2017.