Wednesday, March 25, 2020 /05:14
PM / By Fitch Ratings/ Header Image Credit: FT
Almost 40% of APAC corporates operate in sectors that
have 'Moderate'-to-'High' levels of exposure to the effects of the coronavirus
outbreak, and have 'Low' or only 'Moderate' rating headroom at their current
ratings, based on a review of Fitch Rating's 316 publicly rated corporates in
the region. Specifically, 15 corporates (4.7%) are in the category with 'Low'
rating headroom and 'High' sectoral exposure to the effects of the pandemic,
most of which have speculative-grade ratings.

The full scale of the pandemic's effects will take
time to become clear, but some of the most exposed APAC sectors are already
seeing a significant impact, with airlines being one of the most obvious. In
the metals & mining sector, nine out of 12 corporates are assessed with
'High' exposure - essentially those that are thermal coal producers. Exposures
are also notable for corporates in the retail, leisure and consumer products
(RLCP) and automotive sectors, but vary according to circumstances. In retail,
for example, department store operators will be more affected than online
retailers. Hotel operators and those in gaming (casinos) are also in the most
affected category. In addition, the slump in oil prices will weaken the cash
generation of oil and gas producers, and we have assigned a COVID-19 exposure
level of 'High' to all 23 of our publicly rated energy (oil & gas)
corporates in APAC.

As well as assessing sector risk, we categorised
companies by examining how close they were to breaching their issuer-specific
negative rating sensitivities (typically leverage, but not always) prior to the
COVID-19 pandemic. If such parameters are breached for a sustained period, this
could increase the risk of negative rating action for an issuer compared with
its sector peers. Issuers with 'Low' headroom may not experience any rating
impact if our expectations for deleveraging are unaffected or only slightly
delayed by the effects of the coronavirus, provided these issuers can also
maintain sufficient financial liquidity. Conversely, if an issuer with 'High'
headroom is severely affected and unable to mitigate the risks, then its
headroom could be consumed fairly quickly.
Breaking the data down reveals that issuers in sectors
classified as having 'High' COVID-19 exposure do not necessarily have 'Low'
rating headroom. Notably, the majority of corporates in the energy sector, all
of which have 'High' exposure to COVID-19, have 'High' rating headroom.
Conversely, most corporates in the telecoms sector, which have predominantly
'Low' COVID-19 exposure, have either 'Low' or 'Moderate' rating headroom. In
terms of ratings headroom, the property sector dominates the riskier
categories, with 20 firms in the sector being assessed as with 'Low' headroom
and a further 38 only 'Moderate'.
Among the 36 issuers who are currently rated at 'BBB-'
, 13 are in sectors that have 'Moderate' to 'High' levels of exposure to the
effects of the COVID-19 outbreak and have 'Low' or only 'Moderate' rating
headroom at their current ratings.

The coronavirus outbreak poses a significant challenge
to rated corporates. The speed of recovery and companies' ability to recoup
lost revenue and manage liquidity will be critical in our assessment of the
need for rating action. In line with our "rating through the cycle"
approach, ratings will be driven by an issuer's expected profile by end-2021
rather than at the trough of the crisis, provided that liquidity is sufficient.
However, for the weaker issuers, shorter-term liquidity factors could also be a
driver of rating action.

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