Non-financial corporates in Asia Pac safe from ‘systemic shocks’

"The number of rated issuers with stable outlooks increased by 3 percentage points to 83% as of end-June 2011 compared to 80% at end-2010 and, accordingly, the share of ratings with negative implications dropped to 12% from 16%," says Clara Lau, a Moody's Group Credit Officer.

"During 1H2011, the exceptions were Chinese property developers, which accounted for about 38% of the negative rating actions, reflecting their aggressive debt-funded expansion with a background of tightening loan growth in China and slowing markets," says Lau.

Lau was speaking on the release of Moody's review of rating trends for Asia Pacific (ex-Japan) during 1H2011, and which she authored.

"In addition, there were no defaults during 1H 2011. The Asia Pacific (ex-Japan) trailing 12-month speculative default rate has remained at 1.7% since the beginning of 2011," says Lau.

"The liquidity of Asian corporate remains good as Moody's latest Asian Liquidity Stress Index has kept low at 12.3%. This situation, coupled with manageable refinancing needs, means that we expect the default rate to stay low for the rest of the year, save any systemic shocks arising from the European debt crisis," adds Lau.

"At the same time, we need to be aware that various developments and challenges that Asian firms are facing, if not managed properly, could lead to negative pressure on the stable rating trend," says Lau. These include the following:

1. Event risk as appetite among corporates to expand organically or by acquisitions continues to be high, and aggressive debt-funded acquisitions could offset the strength of their balance sheets.

2. Tight monetary measures in the region are expected to persevere as inflation persists. Chinese corporates will continue to face tight domestic funding availability and some marginal borrowers may suffer. In other countries, interest rates are expected to continue to rise, and which will increase interest burdens for the more highly leveraged companies.

3. Sound liquidity of the region has been in part supported by strong capital inflows. Changes in capital flows could destabilize credit markets and pose liquidity challenges for weaker firms.

4. Commodity-linked inflation will pressure operating margins, in particular for manufacturers, airlines, petrochemical and refining firms, retailers and utilities without automatic cost pass-through mechanisms.
However, natural resource producers -- such as oil and gas, resource mining companies -- would benefit.