Moody's: 2017 outlook for EMEA non-financial companies stable despite new challenges

While fresh clouds are gathering on the horizon with Brexit, uncertainty over trade agreements with the US under a future Trump administration and higher pension deficit liabilities, the outlook for EMEA non-financial corporates remains stable for 2017, says Moody's Investors Service in a report published today. Strong liquidity, good market access and cautious financial policies underpin most companies' creditworthiness, supported by a broad picture of real GDP growth, albeit at low levels, across most of the EMEA region in the year ahead.

Moody's report, titled "Non-Financial Corporates -- EMEA: 2017 Outlook -- Stable on Continuing Resilience even as New Challenges Emerge", is available on www.moodys.com at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1049944.

"Our outlook for EMEA non-financial companies remains stable for 2017 as strong liquidity, low rates and manageable short-term maturities leave most companies well placed to weather a degree of stress," says William Coley, a Moody's Senior Vice President -- Group Credit Officer and author of the report. Many companies have already adopted financial policies to match the muted outlook of recent years, having addressed near-term maturities, locked-in low interest rates, and phased or fully-funded investment plans making it easier to scale back quickly if prospects weaken in the year ahead.

The broad picture of GDP growth across the EMEA region looks superficially rosy, with positive growth forecast for all countries but two (Syria and Belarus). However, Moody's expects that growth will be weak for many of the most significant countries, particularly Italy, UK and Russia at 1% or less; and France, Spain, Switzerland and Germany all at 2% or less.

New challenges for 2017 include Brexit and heightened political risk in Europe, with a number of key elections due over the coming year; uncertainty over the impact of the new Trump administration, especially in relation to trade agreements such as the Transatlantic Trade and Investment Partnership (TTIP); foreign exchange rate volatility; and higher pension liability deficits in a low interest rate environment. These factors compound headline issues still unresolved from the current year, such as sluggish European growth, low/volatile oil and commodity prices, and China growth remaining low relative to recent years.

At the level of industry outlooks, the picture is mixed with no strong positive or negative trend. In the last six months, Moody's outlook has improved for six sectors (consumer products, metals, chemicals, exploration and production, integrated oil and manufacturing), while the rating agency has taken a weaker view on four sectors (refining, airlines, auto manufacturers and auto parts suppliers).

Default rates among EMEA non-financial corporates are likely to go up over the next 12 months, but this increase is from historically low levels and is in line with the average level for recent years. Defaulters will largely comprise companies with specific weaknesses and those in commodities-related sectors. Twelve rated companies are currently actively negotiating a restructuring.

Historically, pensions have rarely been the primary driver for negative rating actions, but this will be more likely for some companies in 2017 if low interest rates and large deficits persist. Higher deficits are already weighing against better operating performance at Tesco Plc (Ba1 stable) and British Telecommunications Plc (Baa1 stable), and the higher deficit was also a credit negative for Deutsche Lufthansa Aktiengesellschaft (Ba1 stable) though not a major factor in the recent change of outlook to stable from positive.

M&A will be a continuing theme in 2017, with a number of major deals currently in the pipeline that will test investor appetite and debt capacity. These include the $66 billion Bayer AG (A3 downgrade review)/Monsanto Company (A3 downgrade review) merger; and the $43 billion ChemChina (unrated)/Syngenta AG (A2 downgrade review) deal.

Moody's expects stability in the leveraged finance market in 2017, with normalised issuance levels over the next 12 months broadly in line with 2016, supported by refinancing of upcoming debt maturities and ongoing banking disintermediation, though at a slower rate than the high-yield boom years of 2013-14. Refinancing needs over the next few years should be manageable as many issuers have already addressed maturities and locked in lower rates, though as usual a small number of lower-rated companies may struggle if their debt maturity coincides with a period of business weakness.