Moody's warns of less stable ratings in Asia

The number of Asian corporate ratings with a negative outlook has increased sharply in the fourth quarter, the ratings agency says.
Strong economic growth and the large liquidity pool have so far been able to uphold the generally positive credit fundamentals in Asia, even as the subprime-triggered credit turmoil has wreaked havoc in the rest of the world. But in a new report, MoodyÆs Investors Service warns that signs of a possible disruption to the relative stability of Asian corporates have started to emerge in the fourth quarter.

ôHeading into 2008, the positive effects of the regionÆs robust economic performance could be dampened if tight liquidity drives interest costs higher, or if rising raw material costs continue to squeeze margins,ö the ratings agency says.

The warning signs include a sharp increase in the number of Asian corporate ratings with a negative outlook to 14 in the fourth quarter from eight at the end of the second quarter and nine at the end of the third quarter. MoodyÆs also lowered its ratings for several Asian corporates during the quarter, including Singapore-listed Allco Commercial Real Estate Investment Trust and Mapletree Logistics Trust.

ôWhile no liquidity concerns have yet appeared, the disruption of the cross-border debt markets and the contagion effect on the rest of the capital markets, including equity markets, will remain a major concern. As such, liquidity management remains a key credit risk and will need to be monitored closely,ö MoodyÆs say in the report.

If the credit crunch spreads to Asia, the companies to be affected first are those with weak credit profiles or those that are highly leveraged. Issuers who operate within cyclical industries or who have large refinancing risks in the next six to nine months will face the greatest challenges, it says.

A recent example that suggests lenders are becoming more risk-averse is AustraliaÆs Centro Properties which earlier this week said it was having trouble refinancing its outstanding loans. The owner of close to 700 shopping malls in the US added that it may have to sell assets to cover its obligations. The news caused its shares to fall 86% over two days before edging up 15% yesterday.

Overall, Australian companies are more exposed to a widening credit tightening than their Asian counterparts as they rely more on capital market funding. Asian companies rely to a greater extent on bank loans and within the region banks continue to have the capacity and the appetite to lend.

Most of the Asian companies with ôspeculative-gradeö ratings and weaker liquidity metrics - due to large capital expenditures and expansion plans û can be found in the technology sector, or among Indonesian corporates or Chinese property developers.

Overall though, the credit quality among Asian companies remained stable for most of 2007, according to the report. Positive ratings actions were primarily driven by improved credit fundamentals, while negative actions were driven by company-specific issues such as aggressive expansion and imprudent financial management that led to liquidity or refinancing concerns.

Aside from subprime-related issues, MoodyÆs say another two factors that are likely to determine the direction and volatility of Asian credit ratings in 2008 are a potential slowdown of economic growth in the US and regulatory risks.
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