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Fitch: Stable 2009 Outlook on EMEA Capital Goods Sector
added: 2009-02-12

Fitch Ratings says in a special report that the Outlook for the EMEA capital goods sector in 2009 remains Stable, despite challenges posed by the global economic slowdown. The outlook, barring company-specific events, anticipates stable credit profiles for most companies in the sector.

Fitch forecasts global GDP growth to contract to 1%. As a consequence, the agency does not expect companies to engage in the creation of new capacity, and capital expenditure will most likely be reduced so as to cover maintenance requirements only. In 2009, the order books of capital goods companies will become thinner as business conditions in their core and export markets will be affected by slowing demand for their products.

However, many companies in the capital goods sector have taken full advantage of the previous sustained period of strong global GDP growth. As a consequence, Fitch believes most issuers are now well positioned to withstand weaker economic conditions and continued volatility in the capital markets. This is especially the case for investment-grade capital goods companies. Nevertheless, the effect of a prolonged downturn on companies' credit profiles will be assessed on a case-by-case basis.

Despite the overall Stable Outlook, companies that increased leverage to finance aggressive growth will find themselves in a more challenging environment. Their ability to stabilise sales and operating margins will be critical from a credit perspective. In this respect, the risks remain significant. Concerns are particularly focused on sub-investment-grade companies and highly speculative credits in the leveraged finance portfolio.

The impact of the present economic slowdown on capital goods companies will also depend on the actions taken to protect their balance sheets, maintain competitiveness, strengthen liquidity and support margins. Initial hopes that end-market demand would not be affected have given way to the recognition that companies need to be prepared for sales to remain weak or even decline for a prolonged period.


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