Companies’ solid liquidity positions will protect ratings in event of another credit crisis.
Due to their running lean operations, US companies are well positioned to withstand any new “trough in demand conditions” and thus can expect to keep their ratings, according to a report from Fitch Ratings. Fitch said keeping headcount, wages and benefits low and other cost reductions have helped them through the last several years – despite a big rise in commodity prices.
This is both good and bad news for corporate treasuries. On the one hand, good cash management and low interest rates have allowed them to bolster their cash positions; this is doubly important as new bank capital requirement could make bank borrowing all the more costly (see related story here); that is, any reengineering of bank balance sheets could create credit scarcity, thus corporates might have to pay more for bank credit. Yet on the other, this lean-operation mentality means having to continue the practice of doing more with less. Twas ever thus.
Surviving the negatives.
According to Fitch, in its “U.S. Corporate Credit: Outlook for Second Half of 2011” report, there are a number of negatives on the horizon, including slowing demand in emerging markets. But even that doesn’t pose a threat – at least in the short term – aside from driving “incremental earning impacts.” But for now this is a bigger threat to shareholders and not company balance sheets. Still a longer term slowdown and any resulting pullbacks in equity markets could have an impact, Fitch said, particularly as it relates to pensions.
Other long-term threats include a continuation of European sovereign debt crises, a weak dollar, and creeping inflation. Also, Fitch said, “growth in emerging market wages and longer term currency volatility can clearly impact supply chains, production costs, and cost competitiveness.” And of course regulatory uncertainty cannot be ruled out. Nonetheless, companies are good shape and can manage through any potential flare-ups.
In terms of ratings, B-rated companies continue to improve their balance sheets and credit metrics. And while many of the A-rated and above companies have suffered downgrades – due to competitive issues or problems with their business models, many have “the luxury of not having to worry about liquidity,” thus managements “have the flexibility to address these issues, often in a manner unfavorable to bondholders.”