Amid persistently challenging market conditions, corporate issuers from Europe, the Middle East and Africa would limit spending on expansionary capital expenditure (capex), dividends, as well as mergers and acquisitions in 2013, credit ratings agency Fitch said.
To further limit cash erosion and cope with weak demand, issuers were expected to turn their focus to cost and efficiency improvements.
Fitch stated that those companies that increased capex would mainly do so to protect market share or offset home-market weakness.
“A risk to this scenario, albeit in our view an overstated one, is that sentiment towards mergers and acquisitions and buybacks could flip relatively quickly, possibly threatening credit quality,” the firm noted.
It also expected dividend payments to remain moderate across EMEA corporates in 2013, after a reduction in 2012.
“Rebased dividends will be maintained in food retail, while M&A activity will mainly be limited to strategic assets across the EMEA corporate portfolio. However, this remains largely sentiment-driven, and large cash outlays may erode issuers' credit profiles in the current low-growth environment.”
Despite moderate expansionary investment over the last two years, compared with 2008 highs, Fitch-rated corporates have not significantly underinvested. Companies have the firepower, through high balance-sheet cash and strong borrowing capacity, to resume capex once market conditions improved.
“We expect nominal investment to slow slightly to $485.5-billion in 2013 [6.3% of revenue] from $503.6-billion in 2012 [6.7% of revenue]. This remains closely linked to annual depreciation and amortisation,” Fitch added.
Some industries were likely to increase investment. Growing emerging markets and a need to catch up on underinvestment in 2008 to 2010 would lead to most automotive manufacturers increasing capacity outside mature markets to weather a further drop in sales in Western Europe and lingering uncertainty about the future of the eurozone.
However, Italian car manufacturer Fiat was an exception and was expected to invest in its domestic Italian and European markets.
Meanwhile, higher telecoms capex would be driven by consumer demand and intense competition, forcing incumbent operators to increase spending on long-term evolution spectrum auctions and fibre upgrades, especially where cable competition was severe. Continued regulatory and competitive pressure means telcos would have to remain disciplined on shareholder remuneration to keep leverage under control.
There would also be capacity additions in the drinks sector, driven by continuing strong end-user demand, while Fitch expected integrated and network utilities in emerging markets to increase capex closer to normal levels following a decline in 2011.
“We estimate that nonfood retailers' total capex and capex as a percentage of sales in 2013 will be the highest since 2008. Investment in multichannel platforms, continued store refurbishment and improvement in service and offers will become the norm as these retailers attempt to defend their market share,” the agency said.
However, capex/revenue was anticipated to slightly decline across the pharmaceuticals, food retailing and industrial sectors in 2013.
Large diversified miners were likely to have marginally lower capex budgets than in 2013, while aggregate planned capex across the mining industry was forecast to be higher year-on-year. Fitch warned that the start of many projects could be delayed as the year progressed.