Fitch: Rating stability improving for EMEA emerging market corporates

By Angela McDaniels

Tacoma, Wash., April 23 - The first quarter of 2010 has seen greater rating stability for corporate issuers in the emerging markets of Europe, the Middle East and Africa, Fitch Ratings said in a special report.

Across the agency's EMEA emerging markets rated coverage of corporate issuers, 70% of ratings now have stable outlooks, up from 56% in December, while 17% have negative outlooks, down from 26% in December.

"This stabilization trend has been supported by an improving global economic outlook, higher commodity prices, and the stabilization of sovereign ratings, especially in the Commonwealth of Independent States," Raymond Hill, senior director, head of emerging markets in Fitch's corporate team in London, said in an agency statement.

Fitch's expectation is for emerging market corporate profitability to generally return to financial year-end 2007 levels by the end of 2011.

Sectors that are not expected by the agency to recover in this regard, based on revenue and EBITDA measures, include automotive, technology and building materials as well as natural resources.

Fitch said sectors that are expected to improve their financial performance include food, beverages and tobacco and health care.

In general, financial leverage for most industrials, as measured by net debt to EBITDA, is expected by the agency to be higher at the end of 2011 than the end of 2007, although generally down from 2009's estimated peaks.

Overall, Fitch has factored into its emerging market corporate issuer ratings and outlooks an expectation for anemic growth in 2010 after 2009's low point.

The agency said that as the recovery continues to take hold, the level of growth will be dependent on a recovery in private sector investment and consumer demand. In this regard, Fitch predicted that investment levels across emerging markets are likely to recover more quickly than in the developed markets, reflecting stronger growth expectations.

Fitch said emerging market corporate liquidity has improved as a result of 2009's exuberant bond market and banks - whose balance sheets had been weakened - having already rolled over their exposures, albeit at a higher cost for most emerging market names.

Companies also sought to conserve cash through the downturn, and issuers' cash/liquidity positions have benefited from equity issuance, canceled share buybacks, reduced capex, some reduction in dividend payments and more effective working capital management. The agency said the success of these measures is evident from profits falling by less than revenues.

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