(The following statement was released by the rating agency)
Oct 03 - (Fitch) Investor interest in recent months has focused on the possibility of peripheral eurozone (PEZ) corporate issuers moving out of investment grade bond indices, potentially constraining their access to capital and increasing funding costs. Fitch Ratings notes that this threat is not a broad concern for its own ratings of the majority of currently investment-grade corporates for two reasons.
Firstly, Fitch's own ratings of PEZ corporates remain, in most cases, unconstrained by current sovereign ratings, and remain focused on fundamentals for each domestic issuer. Multi-notch sovereign downgrades would be required to see the corporates' ratings lowered through methodological linkage, in the absence of effects that touched on the credit fundamentals of each issuer. More specifically, eurozone sovereigns could be lowered to speculative grade without the same action occurring for corporates' ratings domiciled in that country.
Secondly, should the actions of other rating agencies nonetheless see PEZ corporates move out of investment grade indices (as has been the case in Portugal), Fitch would expect these issuers to "bring with them" a substantial portion of their existing investors, as has happened with "falling angels" in the past. While loss of investment grade index status can bring about forced selling, the absorption of such large debt volumes would likely not be possible by a European high-yield market currently totalling slightly over EUR200bn in outstandings, without the market of buyers itself expanding. To give a flavour of the potentially seismic nature of such an eventual transition, the aggregated gross debt issued or borrowed by just the top five (non-financial) corporate debt issuers in Spain and in Italy is approximately EUR80bn and EUR97bn respectively.
To the extent that access to debt markets continued (as challenged but resilient Portuguese corporate issuers have thus far demonstrated), but at a higher price, Fitch's base case forecasting process, which adds 2% to funding costs upon refinancing, would already incorporate much of the likely additional stress for individual names.
An update of Fitch's view on corporate linkage to sovereigns - "Eurozone Sovereign and Corporate Links" - including a discussion of headroom for existing corporates has been published at . Additionally, Fitch has published a Q&A summarising the "toolkit" of measures PEZ corporate issuers may reach for in addressing the current crisis, which includes a video analysis of lessons learnt from Fitch's recent internal "war game" exercise on the topic.
Link to Fitch Ratings' Report: Eurozone Sovereign and Corporate Links Ã¢ÂÂ October 2012