Outside of the mining and energy sectors, Canadian companies are largely expected to maintain their credit quality in 2016, according to a report from Moody’s Investors Service.
“Slightly better economic growth in 2016, stable unemployment and prudent decision-making including cost controls will help Canadian non-financial corporates maintain credit metrics and liquidity”, the Moody’s report says, which will support their current credit ratings for 2016.
Overall, the credit rating agency is maintaining its stable outlook on the Canadian corporate sector. At the same time, Canadian corporates “remain vulnerable to slowing global growth, which will negatively affect investment and weigh on household consumption, key drivers of the economy,” the Moody’s report cautions.
Moody’s also expects speculative-grade liquidity will continue to remain strong, supporting stable credit profiles, in the year ahead. “Even though debt-financed mergers and acquisitions will cause leverage to rise slightly for Canadian companies, earnings growth and slightly lower interest expense will improve coverage ratios and help them maintain stable credit profiles,” the Moody’s report says.
However, the mining and energy sectors continue to face negative outlooks, amid continued weakness in commodities. Indeed, the global commodity downturn “is expected to be a substantial factor driving the number of defaults higher on a global basis in 2016,” Moody’s says in a separate global report.
Collapsing commodity prices have placed a significant strain on credit quality in the oil and gas and mining sectors, the Moody’s global report says, and the credit rating agency expects to see continued credit deterioration and a spike in defaults in these sectors in 2016.
Moody’s expects the commodity downturn to be both longer lasting and more severe than average. “Many companies were temporarily cushioned by hedging programs and fixed-price contracts in the early stages of the downturn,” says Daniel Gates, managing director at Moody’s, in a statement. “Others have been sustained by cash balances that are eroding. Diminishing liquidity and restricted access to capital markets are now pushing more firms closer to default.”
In addotion, the Moody’s global report notes that companies in the resource sectors have sold nearly US$2 trillion in bonds globally since 2010, which will likely start to impact investors as defaults rise.
“The sheer volume of commodity related debt poses challenges because it means that credit losses from commodity investments will be substantial for many investors,” says Mariarosa Verde, group credit officer at Moody’s. “Considering the maturing stage of the current credit cycle, mounting losses on commodity company debt seem likely to intensify the capital markets’ swing to greater risk aversion.”