The Hindu Business Line : Credit turmoil may hit consumer-focused cos: Moody’s

Mumbai, Oct. 3 The crisis in the financial markets may depress business and consumer confidence besides slowing down global economic growth and exacerbating existing trends that have been causing corporate credit quality to deteriorate for more than a year, said Moody’s Investors Service in its Global Credit Outlook report.

Mr Daniel Gates, Moody’s Chief Credit Officer for Corporate Finance, said “Business and consumer confidence appear to have been shaken by recent events and might not recover for several quarters.”

Moody’s observes that a number of companies are trimming their spending plans due to increasing apprehension about the economic outlook and their future access to debt and equity capital. A substantial pull back in business investment at a time when consumer spending is flagging could further slow the global economy, which would precipitate a surge in bankruptcy filings by companies over the next year, the report said.

India not immune

While no region is immune from a global slowdown, concerns are greatest for companies whose business is heavily reliant upon the EU countries, Japan and North America, where the pace of economic activity is visibly slowing. Weak growth in these mature markets may also be a drag on countries with high growth rates, such as China and India, affecting companies in those markets as well.

Companies whose business is dependent upon discretionary consumer spending are particularly likely to be hurt. The damage may be most severe for already ailing companies in consumer-oriented sectors such as housing, autos, consumer durables, restaurants, retail, apparel, gaming, and airlines.

“These companies are struggling with high leverage, disappointing cash flow, and weak customer demand, which is already proving to be a lethal combination for many firms,” said Mr Gates.

Lenders to tighten belt

“Recent events may make a bad situation worse by undercutting consumer spending and economic growth in the months ahead, which would push many more weak companies over the edge of the cliff,” he added.

Moody’s also predicts that lenders will further tighten credit standards for corporate borrowers, limiting access to new financing that could stave off bankruptcy for troubled companies. It expects that credit conditions will become tighter over the near term because capital-constrained financial institutions will be more reluctant to make loans, especially at a time when the number of defaulting companies is rising rapidly.

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