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How Liquidity and Shifts due to Coronavirus maneuvering APAC Corp Downgrades?

How Liquidity and Shifts due to Coronavirus maneuvering APAC Corp Downgrades

Published on : Mar-2022

How Liquidity and Shifts due to Coronavirus maneuvering APAC Corp Downgrades?

The recovery for APAC GDP growth and earnings is anticipated to stretch to 2023. The COVID 19 Pandemic can knock Asia Pacific incomes losing USD 250 Billion and the slowdown of GDP growth to 3.5-4% in 2020 The top risks during this recovery include leverage build-up, COVID-19 economic disruption, U.S.-China tactical confrontation economic spillover, and irregular access to US dollar funding. COVID-19 and a fall in oil prices triggered negative rating actions on a third of the regional APAC pool. Even with signals of the regional recovery, the rating downgrades and defaults continue.

How great is the impact of the factors affecting downgrade?

The two leading factors that drove downgrades were liquidity issues and sector-wide market changes. 60 declines over the 12 months to June 2020, 20 were due to weakened liquidity, for example, Chinese homebuilder Tahoe Group was downgraded from B-/RWN to CC, and Indonesia's Geo Energy Resources was lowered from CC after initially downgraded from B-/Negative in March – both mirroring deteriorating financial liquidity. Factors related to liquidity were a particular driver of downgrades in the homebuilding and basic materials industries. Meanwhile, sector-wide market changes have been a particularly significant driver of downgrades in the Retail, Leisure & Consumer Products sector, corporations began to feel the effects of the pandemic. Moderately exposed companies operate in sectors closely related to consumer and industrial activities such as real estate, mining, steel, chemicals, refining, and marketing. High exposure means those companies are likely to see their credit quality weaken or be affected by ratings, given their large debt maturities and the tightening capital markets and high refinancing risks.

What are the sectors/corps most affected and least affected by the coronavirus inflicted downgrades?

As many as 44% of companies have low exposure as they operate in industries that provide necessary goods and services or have diversified business models such as telecoms and media, as well as IT services and engineering and building. Half-conductor companies such as SMIC, Taiwan Manufacturing Semiconductor Co. Samsung Electronics Co., Ltd. (TSMC) Ltd., and SK Hynix Inc. may be less constrained as their advanced semiconductor manufacturing plants rely little on migrant workers from outside provinces, and maintain a high inventory of raw materials.

Fatpos Global outlined six sectors as the most impacted by the pandemic of coronavirus, namely airlines, automobile OEMs and automotive parts supply, oil & gas producers, gaming, global shipping, discretionary retail, and hospitality. The pandemic stalled manufacture and distribution of consumer products with laborers only slowly returning to work, and impeded supply chains by disrupting logistics. Manufacturers of discretionary goods with a weak balance sheet or impending need for refinancing are most vulnerable. The rating was reduced on Shandong Sanxing Group Co. Ltd. given its slow and unsure progress in refinancing. Consumer demand for essentials, such as instant noodles and dairy products, should remain steadily growing in this pandemic situation. This supports stable rating prospects for most of the region's rated consumer staple manufacturing companies. COVID-19 will demand a heavy toll on the Chinese automotive sector, the world's largest market for vehicles. Demand will sink and further near closure of the Chinese market is anticipated to affect car manufacturers around the world, especially those reliant on Chinese sales and supply lines. The return of the economies to work takes longer than anticipated, with a considerable economic cost.

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