CHICAGO--(BUSINESS WIRE)-- Link to Fitch Ratings' Report: Capital Destruction
According to a new report by Fitch Ratings, a prolonged period of slow-growth (or a double-dip recession) poses risks to high fixed-cost global industries, such as steel, aluminum, and autos. Despite overcapacity across the globe in these sectors, new capacity continues to come online due to cost advantages, product differentiation, or government policy. Weak competitors have little option but destroy capital by reinvesting in uneconomic maintenance/replacement projects, as sitting on the sidelines is not an option.
A lack of adequate returns on investment and equity over time will result in credit degradation as capital is redirected away from the sector or company. As a result, industry competitors can experience an extended period of capital destruction in the hopes of longer-term sector improvement. This is to the detriment of all, but can be a solvency threat to certain players.
Currently, generous debt markets have allowed many companies to extend maturities and stockpile liquidity, extending the timeline in which uneconomic capacity can remain online. However, the cost of equity and debt capital will continue to rise for affected sectors, and access to capital will diminish, as companies destroy capital in a slow-growth scenario.
Additional information is available at 'www.fitchratings.com'
Mark Oline, +1 312-368-2073
Group Managing Director
70 W. Madison Street
Chicago, IL 60602
Brian Bertsch, +1 212-908-0549
Source: Fitch Ratings