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Weaker Corporate Liquidity May Lead to Downgrades, Moody’s Says

Weaker liquidity caused by the deepening euro-region sovereign debt crisis could result in downgrades for lower-rated companies, according to Moody’s Investors Service.

The “robust liquidity position” of companies in Europe, the Middle East and Africa has begun to deteriorate amid a worsening of market conditions, Moody’s said in a report. While a jump in defaults is unlikely, companies rated B and below may face downgrades, Moody’s said.

“A deterioration in liquidity conditions will not trigger a significant surge in the default rate over the near term,” Jean-Michel Carayon, a Moody’s senior vice president, said in the report. “However, weaker liquidity profiles may lead to rating downgrades, particularly for speculative-grade companies with limited flexibility to conserve cash.”

Moody’s said the risk on financial covenants is “currently moderate,” though at the lower end of the rating scale, headroom has weakened. One in three junk corporates have “tight,” or restrictive, covenants, defined as less than 20 percent headroom, compared with a fifth of issuers in 2010.

The New York-based ratings firm said it anticipates further deterioration as revenues and cash flow are pressured by economic weakness and banks become more cautious in accepting covenant resetting.

A total of $582 billion of corporate debt will mature by March 2013 in the EMEA region, mostly concentrated in the utilities (15 percent), automotive (13 percent), telecommunications (11 percent) and energy (11 percent) sectors, Moody’s said.

In the firm’s study of 571 rated corporate borrowers, 91 percent of issuers “appear” to have sufficient liquidity to cover their debt maturities over the next 12 months, the same percentage as in 2011, Moody’s said.

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