Moody's: Outlook for Asian (ex-Japan) corporates clouded by subdued growth, high leverage

Moody's Investors Service says that slower economic growth in Asia and high leverage will present key challenges for Asian (ex-Japan) non-financial corporates in 2016, although domestic monetary easing, adequate liquidity and manageable bond refinancing requirements should prevent a major uptick in defaults for rated issuers in the region.

"Continued slower growth across the region, along with external risks -- including uncertainty over the US rate trajectory and capital flow volatility -- will put Asian corporate credit fundamentals to the test in 2016," says Brian Cahill, Managing Director, Asia Pacific Corporate and Financial Institutions.

"Given these challenging conditions, we view domestic factors as increasingly important to corporates' credit quality," adds Rahul Ghosh, a Moody's Vice President and Senior Research Analyst. "Whereas corporates in China (Aa3 stable) are under pressure from the country's sustained economic slowdown, India's (Baa3 positive) economic growth outperformance and monetary easing will support credit conditions."

Cahill and Ghosh were speaking on the release of Moody's 2016 outlook presentation for Asian (ex-Japan) companies.

While many corporates across the region have responded to weaker growth, demand and prices by lowering their capital spending, weaker earnings and margins have offset such cuts, leaving leverage elevated.

Leverage -- as measured by adjusted debt to EBITDA -- is forecast at an average 4.9x for the full year 2015, up from 4.7x in 2014 and 4.2x in 2013.

Reflecting weak financial flexibility particularly in the high yield space, the number of downgrades on high-yield ratings increased 60% in the first nine months of 2015 from the same period last year.

Over 30% of outlooks on high-yield ratings have a negative bias, pointing to further challenges in this space in 2016.

However, easing domestic market monetary conditions and strong liquidity in those markets should prevent a major increase in defaults in 2016. In addition, maturing rated foreign currency high yield bonds are modest compared to annual issuance volumes in recent years and so should be refinanced relatively comfortably for most.