Moody's: Asia Corporate Credit Trends Stabilise, But Risks Remain

Moody's Investors Service says that uncertain investor confidence, inconsistencies in exit strategies and increasing M&A activity are key challenges to the improving credit trend among Asia Pacific corporates in 2010.


"We expect the corporate ratings trend will continue to improve this year," says Clara Lau, a Moody's Group Credit Officer. "But we also believe that 2010 will be a year of uncertainty and volatility."


Lau was speaking on the release of a new report -- which she authored -- recapping credit trends for Asia Pacific corporates in 2009 and outlining major factors that may disrupt trends towards stability in 2010.


"Potential conflicts over policy objectives, driven by different rates of recovery within the region -- compared with Western countries -- have kept market confidence in a delicate state. Any development not in line with expectations, and which results in arbitrage opportunities, could trigger swift changes in capital flows, causing volatility in liquidity and a constriction in credit availability," says Lau.


Lau adds that risks of renewed financial sector distress among advanced economies and another sovereign debt crisis are also potential destabilising factors. Nevertheless, credit trends continue to improve. For example, in 1H2009, there were 83 negative rating actions versus only 6 positive actions. "However, the situation began stabilising in 2H2009 when the rate of negative rating actions fell dramatically to 25 and we had 18 positive rating actions. This came on the back of softening liquidity and refinancing concerns with the faster-than-expected recovery of the region's economies led by China," says Lau.


Within the region, Australia's corporate rating trend is enjoying the strongest recovery; a number of the country's corporates managed to raise capital to strengthen their balance sheets and financial flexibility in 2H2009. A total 27% of Moody's-rated Australian corporate portfolio have ratings with negative implications, the lowest in the region, and the proportion of stable outlooks rebounded very strongly at the end of 2009 to 71% -- close to its pre-crisis level -- from 66% in 3Q2009.


By contrast, Moody's negative rating trend for Japanese corporates, although moderating, has yet to reverse completely. An earlier improvement in credit conditions stalled in 4Q2009 as negative rating actions rose to 11, after having declined to 8 in 3Q2009 from 12 in 2Q2009. In total in 2009, there were no positive actions in Japan versus 58 negative. Furthermore, 36% of Moody's-rated Japan corporate portfolio have ratings with negative implications, while the 64% with stable outlooks is a total significantly below the pre-crisis level of over 80%.


"M&A activity is expected to accelerate as companies attempt to enhance cost competitiveness and/or position themselves to capture new growth. This could prompt unexpected rating changes, depending on the cost-versussynergy benefits arising from transactions and funding arrangements," says Lau.