Big Europe firms can survive crunch for months: study

LONDON - Europe's big investment-grade corporate borrowers have enough cash and unused credit lines to survive the shutdown of the bond market for at least another year, UniCredit (HVB) analysts said on Monday.

By (Reuters)

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Published: Mon 13 Oct 2008, 8:45 PM

Last updated: Sun 5 Apr 2015, 2:18 PM

The bank reviewed figures for 126 companies -- the 100 non-financial corporate borrowers in the investment-grade Markit iTraxx Europe index and the top 40 bond issuers, minus some overlap.

‘If the bond market remains shut, there should not be one of these companies that goes bust because of it,’ over the 12 months following their latest financial statements, said Sven Kreitmair, UniCredit's co-head of corporate credit research.

There has not been a single new bond deal in Europe for more than four weeks, since the Lehman Brothers bankruptcy filing on Sept. 15.

Unlike US companies, which rely mostly on the bond and commercial paper markets for their financing, European companies refinance mostly through bank loans and currently have access to revolving credit facilities from their banks to fund capital spending and working capital needs, Kreitmair said.

‘Most of these facilities were signed in 2006 and 2007 for three to five years at very attractive investment-grade conditions at a time when the companies' credit profile development was stable to positive and credit market liquidity was abundant,’ the study said.

UniCredit rated the liquidity of 49 of the 126 companies as ‘excellent’, which means their available cash exceeds all maturing short-term debt; 41 as ‘strong’ when cash is more than short-term maturing bonds and commercial paper; 23 as ‘solid’ when cash and unused credit lines exceed maturing short-term debt of all kinds; and 13 as ‘sufficient’ when cash and unused credit lines exceed maturing bonds and commercial paper.

SUFFICIENT

The 13 names in the ‘sufficient’ category include BMW, Renault, Diageo, Henkel, Suedzucker, BP, Iberdrola, EDP, Eni, Repsol, Atlantia, Union Fenosa and HeidelbergCement.

‘One big assumption in the study is that banks will not reduce their unused credit lines,’ Kreitmair said.

Contracts typically include two clauses that allow banks to cut those lines unilaterally.

A bank could invoke a market disruption clause, but this is not likely to happen, because the bank would have to apply the move across all its corporate debtors, not to a sole borrower or country, without risking a major lawsuit, he said.

Another clause could be invoked in the event there is a material adverse change in the company, such as when its cash flow dries up and it can no longer meet interest payments and/or its rating is downgraded to ‘junk’ status.

If there is a serious weakening of the European economy in 2009, the risk of a material change for sectors such as cyclical, consumer and auto companies is higher, while non-cyclical sectors such as utilities, telecoms and health care companies are less vulnerable, Kreitmair said.

‘The main risks to our liquidity outlook assessments would be a meaningful reduction in unused credit facilities as well as much lower-than-expected negative free cash flows,’ the UniCredit note said.

As for high-yield borrowers, UniCredit's Kreitmair said that companies on the iTraxx Crossover index, made up of 50 mostly ‘junk’-rated credits, are a different story.

These companies typically have higher debt burdens relative to the size of their businesses.

If companies are sitting on high leverage, accumulated during the boom period when borrowing was easy, they may not be able to survive in an environment in which credit is hard to come by, he said.

‘Six out of the 50 names on the Crossover trade upfront, which shows that there are a number of companies with a high likelihood of default,’ he said.


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