The financial performance of newly rated, high-yield companies in Europe, the Middle East and Africa (EMEA) generally falls materially short of their projections, research from Moody’s reveals.
The rating agency’s analysis of 144 highly leveraged companies rated for the first time from 2010 reveals that they tend to borrow on the back of overoptimistic forecasts with respect to their growth and deleveraging.
According to Moody’s, this underperformance is concerning in light of the present low-interest-rate environment. It suggests that newly rated high-yield companies might come under increased credit stress as interest rates rise.
Missed forecasts haven’t yet translated into commensurate rating downgrades, the research found. “Our own base case projections used to rate companies were more accurate than company or bank forecasts, so we have downgraded fewer companies than might have been expected,” the report said. “This outcome is consistent with our goal that ratings should combine accuracy with stability. However, continued underperformance will result in further downgrades.”
The main driver of missed forecasts is weaker EBITDA growth since just 17% of companies achieved their EBITDA goals in the first year of being rated. First-year revenue growth of 4.6% and EBITDA margins of 16.8% are well below forecasts of 7.4% and 18.7% respectively, with the best performance by German and emerging market companies.
Sally Percy is editor of The Treasurer