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Fitch: Downside Risks Remain to EMEA Emerging Market Corporate Ratings

January 19, 2010 | Fitch Ratings

Fitch Ratings-London-19 January 2010: Fitch Ratings says today that the downside risks which still exist in EMEA emerging markets should not be underestimated. While not Fitch's central case, a double-dip recession, or even stagnation in emerging markets, could have a negative impact on the ratings of emerging market corporate issuers.

Current base case forecasts reflect a muted, although real recovery for 2010, and an acceleration of this recovery into 2011. The fragility of this expected recovery is reflected in the fact that 43% of emerging market corporate issuers rated by Fitch either have a Negative Outlook or are on Rating Watch Negative as at 18 January 2010.

Fitch's special report, entitled "EMEA Emerging Markets Corporate Outlook 2010" and published on December 16, 2009, summarised the outlook for corporate ratings across the region based on Fitch's rating case expectations. The agency believes its corporate rating coverage is moving towards some stabilisation. However, in light of continuing uncertainties about the sustainability of the economic recovery amongst market commentators, the agency notes that a benign or anaemic recovery with little or no recovery in corporate cash flow generation would see the current negative bias of Fitch's ratings coverage maintained or expanded.

The current nascent corporate rating recovery might be threatened by weaker than expected macro-economic performance or a return to recession in the developed markets of Europe and the United States. This might manifest itself in a flat revenue outlook reflecting lower prices and volumes which might cap or squeeze EBITDA margins and the funds from operations (FFO) outlook.
The sensitivity of Fitch's expectations are such that were forecast revenues and EBITDA margins for 2010 and 2011 to be maintained at expected 2009 levels, then this would be likely to result in a 15% reduction in aggregate FFO generation. In addition, over the forecast period, after dividends and capital expenditures, forecast negative free cash flow (FCF) would almost double. This in turn would increase leverage and pressure liquidity profiles with a potential increase in total debt to EBITDA for the aggregated EMEA EM rated issuer corporate group to 2.2x compared with the 1.6x currently expected for 2011.

Fitch's central rating case forecasts continue to be based on a gradual recovery through 2010 with corporate earnings beginning to show meaningful recovery from 2011. The consequences of this for corporate ratings would be to delay outlook stabilisation centred on concerns about the operational outlook, as well as issuers' liquidity and deleveraging profiles. Through the crisis many corporate issuers across the region have reduced capital expenditure and shareholder distribution levels significantly and these measures will continue to afford issuers some financial flexibility.

Currently 43% of Fitch's corporate ratings in the EMEA Emerging Market region have a negative stance - either Negative Outlook or Rating Watch Negative - and 55% are considered stable - Stable Outlook, reflecting the conservative stance adopted by Fitch through the downturn, particularly for corporate issuers in Turkey, Russia and Ukraine.

The "EMEA Emerging Markets Corporate Outlook 2010" is available on A full listing of Fitch's sector outlooks can be found in the document, 'Multimedia: Compendium of Corporate Outlooks for EMEA and U.S. in 2010 (update)' which is also available on the agency's website.


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