The recent market turmoil may depress business and consumer confidence and slow global economic growth, exacerbating the existing trends that have been causing corporate credit quality to deteriorate for more than a year.
Business and consumer confidence appear to have been shaken by recent events and might not recover for several quarters. A number of companies are trimming their expenditure due to increasing apprehension about the economic outlook and their future access to debt and equity capital.
A substantial pullback 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.
Consumer spending is expected to be pressured by tighter lending standards as well as by fragile confidence, says Moody’s. The outlook for consumer spending is particularly weak in the US, Europe, and Japan, which collectively account for more than half of the world’s economic output. Consumer spending trends also appear to be slowing in other countries, including Australia, Singapore and South Korea.
While no region is immune to a global slowdown, concerns are greater for companies whose business is heavily dependent on 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 companies in countries with high growth rates, such as China and India.
Companies whose business is dependent on discretionary consumer spending are particularly likely to be hurt, according to the report. The damage may be most severe for already seriously-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.
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.
Lenders will further tighten credit standards for corporate borrowers, severely limiting access to new financing that could stave off bankruptcy for troubled companies. 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.
Excerpts from Moody’s report: “Credit turmoil may hit consumer-focused companies the hardest”
