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Weaker companies 'not saving' for rainy days ahead despite strong earnings

Publication Date: 26 Sep 2018 - By Gaurav Sharma (Editor ReachX) By Gaurav Sharma (Editor ReachX)
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Macro Equity Fundamental Equity MENA EU ex-UK UK

While most EMEA (Europe, Middle East and Africa) non-financial companies are now more comfortably positioned, many have used good 2017 results to support dividend recapitalisations or debt-funded acquisitions, rather than saving for rainy days ahead, according to new research.

In a report for its clients, rating agency Moody’s said the median leverage of rated EMEA non-financial companies fell in 2017, but weaker companies “failed to retain the financial flexibility” from stronger results. 

William Coley, Senior Vice President at Moody's, said: "The higher proportion of vulnerable leveraged companies is sowing the seeds for a spike in the default rate when the next credit downturn strikes."

For companies rated in the B category and below, positive performance has, in many cases, been outweighed by the effects of dividend recapitalisations and debt-funded acquisitions, leaving them more vulnerable when credit conditions eventually become more difficult, the rating agency said.

"Even in the broadly benign credit environment of the last two years, we have seen the highest volume of defaulters since 2009 across EMEA non-financial companies, driven by the higher absolute volume of weaker companies that are now rated," Coley added.

Moody's notes, however, that across its A, Baa and Ba rating categories, median leverage - measured as Moody's-adjusted debt to EBITDA - fell consistently in 2017, and earnings have strengthened amid flat debt levels.

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Gaurav Sharma Editor ReachX

 

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