Moody’s expects credit ratings for most Australian non-financial corporates to remain stable in the new year but will be keeping a close watch on a handful of firms for changes.
Senior analyst Maurice O’Connell today told investors that Moody’s expected Australian GDP to grow by 2.0% to 3.0% in 2014 and 3.5% in 2015 as monetary policy, a weaker currency and firmer housing demand offset lower mining investment.
But economic headwinds brought downside risks, with airlines, mining, mining services, and engineering & construction firms faced weakening business conditions.
From the report, here are the companies that Moody’s has its eye on in the coming year:
BHP Billiton (A1 stable)
Growing debt balances and lower earnings have increased leverage and reduced the previously large cushion in BHP’s rating.
Continued success at reducing operating and capital costs and raising production levels will preserve margins and cash flow, despite soft commodity prices.
Fortescue Metals (Ba2 positive)
Expansion progress and debt reduction strategies are driving continued improvements in credit metrics.
Production levels have increased substantially, while capital expenditures have declined, leading to free cash flow generation.
Qantas (Baa3 stable)
Intense competition from international and low-cost carriers is pressuring Qantas’ core domestic profitability, but the outlook for its international operations is improving due to its tie-up with Emirates.
Leverage is key to the national carrier maintaining its investment-grade rating.
Debt/EBITDA greater than 4.5x and depletion of its high cash balances could pressure the rating. Excess capacity lowering yields remains a challenge.
Westfield’s rating is under review due to its proposed demerger of its Australian and New Zealand properties which would result in lower asset quality, narrower asset base and less diversity.
Partly offsetting this is the expectation for improvement in financial metrics.
DEXUS Property Group (Baa1 RUR-UP), GPT Group (A3 stable)
Both bidding for Commonwealth Office Property Fund (A3 stable).
Telstra (A2 stable)
Change in government could impact National Broadband Network rollout. Key for the rating will be that Telstra remains no worse off in negotiations with the new government.
Leighton (Baa2 stable)
Multiple challenges including project execution, working capital and corporate governance.
Boral (Baa3 stable)
We expect Boral’s credit profile to improve in 2014 on the back of improving US earnings, a successful restructuring and its joint venture with USG Corp (Caa1/Pos).
Domestic trading conditions will, however, remain difficult.
Ausdrill (Ba2 negative)
Reducing operating and capital costs key to preserving margins and cash flow for debt reduction in the face of challenging operating conditions.
Ausdrill’s financial profile has been resilient to-date, but headwinds have eroded the buffer within its rating.
O’Connell said its outlook for Australian companies could go from stable to negative if Chinese growth softened to 5% to 6%, domestic growth weakened and the unemployment rate exceeded 7.0%.
Conversely, Moody’s outlook could turn positive should GDP grow more than 4.0% with the economy transitioning away from its reliance on mining.
Moody’s has downgraded far more Australian corporates than those it has upgraded in the past four years:
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