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Over a quarter of rated Asia-Pacific (APAC) companies will be at risk under a downside scenario of a global recession and a more severe liquidity squeeze if the Russia-Ukraine military conflict escalates, according to Moody’s Investors Service in a new report.
- Study analyzes impact of Russia-Ukraine crisis on APAC nonfinancial companies under updated baseline and downside scenarios
- More than a quarter of APAC companies face material risks under downside scenario
“A small number of rated companies face material credit pressure under our baseline scenario because of refinancing risks amid current market volatility. However, under a more severe downside scenario, more than 27% are vulnerable, particularly speculative-grade companies and those with limited balance-sheet buffers or exposed to a supply chain shock,” says Chris Park, a Moody’s Associate Managing Director.
Three channels of risk transmission
The sensitivity of APAC corporate sectors to the fallout reflects three channels of risk transmission:
1) a commodity price shock and supply disruptions;
2) economic and financial disruption with the tightening of funding conditions; and
3) security risks. The credit implications for companies depend on their direct exposure to each channel, and their capacity to mitigate shocks.
Homebuilding sector remains vulnerale
The homebuilding sector, in particular Chinese developers, remains vulnerable because of a prolonged liquidity squeeze. Many companies in the automotive, agriculture and retail sectors, too, will face material risk under Moody’s downside scenario. Meanwhile, basic commodity industries would stand to benefit from a supply shock.
On a country basis, over 30% of companies in China, Korea, Indonesia and India have significant risk exposures in the downside scenario. Refinancing risks, supply chain disruptions and high commodity prices are the main factors threatening these companies. On the other hand, most companies in Australia, New Zealand, Japan, Hong Kong and Singapore have a low risk exposure because a high percentage of them are investment-grade companies, which tend to be better equipped to absorb the fallout.
In contrast, most speculative-grade companies with weak liquidity face high risks. About 62% of the 45 high-yield companies with the weakest speculative grade liquidity score (SGL-4) have a high risk exposure in the baseline scenario, primarily because they face elevated refinancing risks over the next 12-18 months. Only four companies can manage their weak liquidity profiles without much difficulty under the downside scenario.