Real estate and technology firms in Asia were the worst hit by credit rating downgrades and downward outlook revisions in the third quarter, according to a report released over the weekend.
The report by Moody's Investor Services says negative rating actions continued to outnumber positive actions by 17 to 2 in the third quarter this year, compared with 18 to none in the second quarter of 2008. And real estate and technology were ahead of all other sectors in terms of the number of negative actions taken against them.
"During 3Q 2008, the real estate and technology sectors accounted for most of the negative actions and, in the months ahead, technology, shipping and property firms are the most vulnerable to the global economic slowdown and continued credit crunch, while the position of retailers is also weakening," says Clare Lau, chief credit officer at Moody's and the author of the report.
"Behind many of the negative rating actions in 3Q 2008 were weakening financial profiles and liquidity, due to tougher operating conditions," says Lau. "Rising costs and a fall in consumer and industry demand—regionally and globally—undermined the operating performances and credit metrics of these issuers."
A Singapore-based bond analyst says that a number of firms in China and Indonesia have been downgraded by ratings agencies including Moody's, Standard & Poor's and Fitch, mainly because financing has dried up in their sectors in Asia. He points to sectors like financial services, real estate and technology as the ones suffering the most from the credit crunch.
As the credit crunch deepens and spreads to Asian economies, low investment grade and speculative-grade firms may find access to liquidity much tougher at least until early next year, according to the report. It notes that as a result of the virtual shut-down of the credit market and the refusal by banks to lend to each other in the wake of the financial turmoil in the United States, lowly rated firms (even low investment grade) and speculative-grade firms will find it tough to raise capital in the coming quarters.
The report comes at a time when new issuance of both high-yield bonds and sovereigns has dried up in the region, and even high-grade companies are unable to find underwriters for potential debt issues.
The Moody's report also says that the credit quality of rated non-financial corporates in Asia-Pacific (ex-Japan) has trended downwards, evident by the downward rating migration of the portfolio since the third quarter of 2007.
Other significant points in the report are:
* Default risk of non-financial corporates in Asia-Pacific (ex-Japan) may rise if the credit crunch is protracted, because of increased refunding needs in 2009;
* The operating performances, and thus financial profiles, of the region's companies are expected to decline due to weakness in industrialised markets for exports and slowing domestic consumer spending.
The Singapore-based analyst also points out that many Asian corporates with below investment-grade ratings may ultimately have to pay a high coupon to come to the debt market, especially those companies whose financing needs are urgent.
"To this urgent list I would add companies from Indonesia, Thailand and even China," he says. However, companies in Korea may be in a worse situation than their counterparts in the region, he adds, as they are heavily leveraged and the Korean won has weakened considerably.