Rating trends for non-financial corporate issuers in EMEA have started to move toward stabilization in Q3 2009, with a decrease in the number of downgrades and fewer outlooks with a negative bias than in Q2 2009. However, further moderate deterioration of issuers' overall credit quality is still possible given the uncertainty and timing of economic recovery as well as issuer-specific factors driving rating actions, said Moody's Investors Service in a new special comment titled “EMEA Corporates: An Uncertain Road to Recovery.” “Following a sustained downgrade trend during Q4 2008 and Q1 and Q2 2009, the erosion of credit quality slowed during the third quarter of this year, with only 51 downgrades in Q3 2009 as versus 79 in Q2 2009,” said Jean-Michel Carayon, group credit officer for Moody's Corporate Finance Group in EMEA and author of the report. “Moreover, the Q3 downgrades were driven by an increasing number of corporates facing specific pressures, rather than by overall deterioration in industry trends.” In 2009, the number of fallen angels has increased, with 20 in the first nine months of 2009 versus 10 in all of 2008. “The number of fallen angels could increase this year as 15 ratings carried a Baa3 with negative outlook as per end of September” noted Carayon, “although the negative pressure may be easing for a number of these issuers.” Moody's also said that the trend towards a higher proportion of outlooks with a negative bias began to reverse in Q3 2009: “the number of Moody's-rated non-financial corporate issuers with negative outlooks or under review for downgrade is currently 37.6 percent, down from 40.4 percent as at 30 June 2009, but up from 19.3 percent as at 30 September 2008” Carayon added. Moody's recognizes that liquidity assessments in the past few months have generally proved to be solid for investment-grade issuers on the back of favorable conditions in the bond markets, which has enabled many issuers to increase their proportion of long-term bond debt, diminish reliance on bank credit facilities and exposure to near-term debt maturities. However, Moody's expects downgrade pressure to continue throughout the remainder of the year, albeit at a slower pace than in Q3 2009. This continued pressure will be due to (i) deviations from Moody's established parameters, where corporates may under-perform their peers; (ii) liquidity pressure on corporates at the low end of the rating scales (B3 and below), for which refinancing may be challenging and financial covenants might become tighter or even breached while cash flows remain under pressure; and/or (iii) specific pressure factors in emerging markets, like Eastern Europe or Dubai, where a number of ratings are under review for possible downgrade. Moody's believes the stabilizing trend of EMEA corporates is unlikely to translate into a large number of positive rating actions in the near term. Indeed, some corporates in industries poised for stabilization might still be affected by specific negative rating pressure and EMEA's recovery might take longer than anticipated. Moody's also cautions that a number of industries will have a delayed recovery due to their “late cycle” characteristics, either because they rely on order books or are in the later part of the production cycles.
