Fiscal Cliff Poses Biggest Risks to Auto, Newspaper, Gaming and Lodging Businesses

From Moody’s Investors Service:

Unless the White House and Congress reach an agreement in the next two weeks, the tax increases and expenditure cuts mandated by the “fiscal cliff” agreement will undercut US economic growth in 2013. The combination of fiscal effects and an uncertain environment for business investment might even tip the nation back into recession.

A new recession would have at least some negative consequences for virtually every US non-financial corporate sector, and certain industries would bear the brunt of this risk, while defaults would inevitably rise among corporate issuers at the low end of the rating spectrum.

While the effect of higher taxes and government spending cuts is difficult to forecast, certain US industries would bear the brunt of the risk. The Automobile, Gaming, and Lodging and Cruise sectors could suffer if consumers pull back their spending, while the already struggling newspaper industry would come under increased pressure. Paper producers would also come under far more stress.

A contraction in the US economy would also lead oil prices to drop below Moody’s current assumptions for 2013, though oil prices would still probably remain strong by historical standards. The effect on upstream segments of the oil and gas industry would depend on how quickly companies adjust their cost structures, while the Refining and Marketing sector could face additional margin pressure amid an ebb in demand from the US and China.

Some sectors would avoid the worst effects of the fiscal cliff, despite ostensible risks, Moody’s says. Airline companies can cut capacity if bookings moderate, while the Building Materials sector has at least a low level of guaranteed government spending in place through the end of 2014.

And the rating agency assumes that the Aerospace and Defense, For-Profit Hospitals and Medical Products and Device sectors, which all at least partly depend on government spending, will see sharp cuts in that spending regardless of the outcome of negotiations in Washington.

See the full report US Non-Financial Corporate Industries: Fiscal Cliff Poses Biggest Risks to Auto, Newspaper, Gaming and Lodging Sectors

Technorati Tags: automotive, gaming, lodging, newspapers, paper industry

European Leveraged Loan Market Faces €260 billion Refinancing Wall from 2014

From Fitch Ratings

The European leveraged loan market faces over €260 billion of non-investment grade corporate loan maturities from 2014 according to new analysis based on Fitch’s rated portfolio of approximately 270 leveraged credits.

The deleveraging of the European banking system is the fundamental factor raising doubt over the ability of many legacy leveraged borrowers to meet their refinancing requirements as principal maturity payment dates approach.

Fitch’s portfolio includes many domestic incumbents and international leaders (in what are often niche industries). Despite high initial leverage and the 2009 recession, these credits – typically rated in the ‘B*’ category – continue to generate cash and deleverage. Consequently, these borrowers are stronger candidates for secondary buyout, strategic sale, IPOs as well as a high-yield refinancing.

However, 50% of the issuers in Fitch’s portfolio are rated ‘B-*’ and below and have median total leverage higher than 6.5x, which is off-market compared with recent primary loan and high yield transactions. Looming debt maturities, high leverage and weak cash-flow generation are compounded by high business risks, excess capacity, technological substitution or regulatory change which means that material deleveraging is unlikely by the time maturities come due.

Consequently, Fitch expects issuers in this category to attempt to reduce leverage with more A&E negotiations, debt buybacks, equity cures and, potentially, partial debt write-downs. Additionally, approximately half of these ‘B-*’ and below rated issuers tend to be in highly cyclical industries like chemicals, broadcasting and media. It is unlikely that the refinancing of these companies will be supported by mid-high EV multiples.

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Technorati Tags: European corporates, leveraged-loans