Fitch tells Northern European corporates not to worry for now. 

Fitch Ratings gave European corporates a bit of comfort last week when it announced that it does not expect their ratings to suffer unless the Eurozone collapses in a disorderly way.

While Fitch has warned that European sovereigns could see multi-notch downgrades, it says the sovereign ratings of nations that do not have the ability to impose currency controls does not affect the ratings of the corporates domiciled there, except through a second-order effect as the country’s economy deteriorates.

In a special report dated 16 May, The Future of the Eurozone – The Impact on Corporates, Fitch analysts write: “The majority of sovereign-driven foreign currency defaults by corporates over time have been driven by the direct or indirect impact of currency controls or a currency collapse.”

The rater also notes that the weakening European economies are already baked into its current corporate ratings, and that many multinationals’ globally diversified cash flows and assets are helping to soften the blow. Also the less-urgent refinancing needs of Eurozone investment-grade corporates makes a “sudden stop” scenario, in which credit suddenly evaporates, less of a danger.

Those companies most at risk of a downgrade are utilities and junk-rated corporates. Fifty percent of Eurozone utilities are already on watch for downgrades, and their lack of diversified cash flows exposes them to regional economic performance.

Fitch’s upbeat report acknowledges that if things don’t work out as it expects, many more corporates could be downgraded. Here’s how it ties the ratings impact to the level of crisis: 

• Orderly Greek Withdrawal: Limited impact in Northern Europe; downgrades of companies in peripheral Europe whose ratings are tied to the sovereigns’ in some way. This is Fitch’s base case.
• Disorderly Greek Withdrawal: One to two-notch downgrades for some companies in Northern Europe, but most will remain stable. In the periphery, there would be up to three-notch downgrades, with utilities worst off.
• Full Break-Up: Downgrades of more than one rating category (i.e., A to B), with default rates depending on the approach to redenomination. In the periphery, only broadly diversified international corporates would escape default.