Fitch: Turkish Corporates Would Be Most At Risk İn An Fx Stress Scenario

Turkish corporates would be most at risk in an forex stress scenario in 2015, due to their high FX borrowing, according to a report released by the rating company Fitch on Wednesday.

The main macro risks for 2015 included slower growth and foreign exchange volatility in emerging markets, and the potential for prolonged eurozone deflation, Fitch said in the report with headline "Brighter Outlook for EMEA Corporate Cash Generation."

Turkish corporates would be most at risk in an FX stress scenario because of their relatively high FX borrowing and lack of hedging, said Fitch in the report. "But overall we believe widespread financial distress in emerging markets remains unlikely thanks to an improvement in credit fundamentals over the last decade."

Quantitative easing had reduced the risk of prolonged deflation, but were this to occur corporates would face a combination of weaker demand, higher real interest rates and rising real debt burdens, it added.

Gradually improving economic conditions across much of Europe should help strengthen cash flows and modestly reduce leverage among the region's corporate issuers in 2015, Fitch said, adding that macro risks remained significant and any delay in economic recovery could hit lower-rated corporates hard, especially as many companies had already "cut costs to the bone."

"We expect the diversified manufacturing and automotive sectors to experience the strongest improvement in cash generation in 2015, while oil and gas and utility companies will face pressure from weak oil and energy prices" Fitch added.

Fitch said expected higher funds from operations to lead to slight deleveraging across EMEA corporates and help strengthen interest and fixed-charge cover in conjunction with falling debt funding costs.

"But the extent of the impact on credit profiles will depend on how companies decide to use their cash" it said, expecting capex to remain "fairly stable" in 2015, while strategic merger and acquisitions could increase further, especially as corporate funding costs remain historically low.

The telecom, media and technology, capital goods, building materials and pharmaceutical sectors could all undergo further significant M&A, the rating company stated.

The rating impact could be greater in some sectors than others, it said, giving its negative rating outlook on the pharma sector as an example, which reflected a trend for strategically riskier deals and pressure for higher shareholder returns.

"But recent deals in technology, media and telecom have used equity and equity-linked instruments to minimise the impact on balance sheets, or have included a pledge to reduce dividends to increase the pace of deleveraging" Fitch added. - Istanbul