In its 2008 liquidity study (covering around 220 corporates that are rated ?BBB? and below), Fitch says the study?s results are similar to last year?s, with company-specific liquidity-related adverse risks rather than any sector-wide liquidity issues. ?Companies in developed markets successfully planned ahead by locking in cheap three-to-five-year committed bank funding,? says John Hatton, credit officer in Fitch?s corporate team.
?However, we believe liquidity risk will become more of an issue in 2010 as 2006 and 2007 bank lines face refinancing and the extent of the weakened economic environment becomes more visible in corporates? results.? ?Furthermore, corporates which did not access the bond market in the hope that pricing will return to 2007 levels may be forced to accept potentially higher pricing from bonds and/or bank lines,? adds Hatton.
If certain bond markets remain intermittently open, this provides little visibility for entities that have undertaken recent M&A-related deals with debt refinancing issues concentrated around 2010 but which wish to term-out their debt.
Fitch believes that, from the perspective of a debt maturity profile, prudent companies are likely to favour bonds in order to term-out debt rather than draw down existing cheap bank lines in full. This is because bank lines may be more expensive when they are renewed, reflecting banks? requirements to conserve capital and a worsening credit environment.
To date, financial institutions in developed markets have honoured existing committed funding lines although any corporate seeking a waiver of any sort may find negotiations hard work, expensive, or existing covenants subsequently tightened and undrawn headroom reduced.
In markets such as China, Japan, Russia, South Korea and Turkey, the corporate sector?s liquidity (particularly where internal cash flow generation is limited) depends on the health of their banks and, hopefully, a continuation of ?relationship? banking. But recent events have proved that when confidence evaporates in the banking sector, practices are quickly reassessed.