Moody's Investors Service says ratings stability will continue throughout 2011 for Australian corporates, although the potential relaxation of the conservative financial policies that were followed during the financial crisis and the implementation of shareholder-friendly initiatives could have some constraining implications.
"We expect the hallmark of 2011 to be continued ratings stability as macro-economic conditions consolidate on 2010, and despite extensive flood damage in Queensland, which will likely lead to a low-level impact on GDP," says Ian Lewis, a Moody's Vice President and Senior Credit Officer.
Lewis says that austerity measures put in place during the last three years are likely to gradually recede at a slightly faster pace than in 2010 as corporate confidence is regained and growth initiatives gather pace. He adds that major initiatives could have credit implications for some ratings, particularly those that are weakly positioned within their ratings.
"At the same time, there are some risks to this largely stable picture with some sectors facing more weighty challenges and pressures than others. Of more concern to corporates at this juncture are, for example, the potential effects of cost inflation and subdued consumer spending. High employment and competition for labour could also see potential for a knock-on effect to profitability," says Lewis.
Liquidity profiles are manageable at current ratings as many corporates have been and remain active in pre-funding their maturities some 12-18 months in advance as well as in diversifying their funding sources, the report says. These initiatives are supportive of ratings. Moody's will be observing debt issuance in 2011 and into 2012 to gain further insight into the sustainability of corporate treasury practices to diversify the sources of debt funding and lengthen debt maturity profiles.
"Strong growth in the region will in our view, continue to outweigh any major concerns that corporates have over residual instability in the global economy. Consequently we expect rated Australian issuers to look more intensively at potential combinations in 2011, assisted by a conducive AUD, strong balance sheets and improved debt market conditions", says Lewis, adding "On the other hand Moody's would be concerned should such acquisitions be disproportionately debt funded."
Moody's expects corporates to increasingly look for ways to keep shareholders on board through higher dividends and share buybacks, and such initiatives could adversely impact some ratings, particularly those that are weakly positioned within their ratings.
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