Fitch Ratings says it expects ratings in the European consumer and retail sectors to be relatively stable this year despite ongoing pressures facing the consumer. This reflects Fitch's view that business conditions will not materially worsen and that companies will continue to manage their businesses and balance sheets in a conservative manner.
Given their prevailing cautious view toward consumer demand in the current environment, managements continue to focus on harnessing cash flow by limiting capex and share repurchases while seeking to reduce working capital further. This is particularly true for global brewers, which have been able to improve cash flow and de-leverage more quickly than anticipated following the industry's recent consolidation phase.
Also, while M&A activity may gather steam over the course of the year as free cash flow enhances financial flexibility, most transactions are expected to be of a manageable size. As a result, credit metrics should continue to improve for most companies in 2010. While larger M&A transactions are possible, these would be limited to higher-rated entities with strong cash flow and access to bank and capital market funding.
Over the past three months, eight consumer and retail companies have seen their Outlooks change to Stable from Negative, reflecting the expectation that operating performance has bottomed and that there is enough headroom in their ratings to avoid additional negative rating actions even in the event of a possible double-dip recession. Ratings may come under pressure if a more severe recession develops in H210, although this is not Fitch's central scenario.
Companies with Outlooks that were recently changed to Stable are Imperial Tobacco Group plc, retailers Kingfisher Plc, Next plc and DSG international plc, sugar producer Suedzucker AG, Turkish beverage companies Coca-Cola Icecek and Anadolu Efes, and hotel/services company Accor SA. The Outlooks of Cadbury plc and Philip Morris International, Inc were also changed to Stable following downgrades.
While rating trends have broadly stabilised, a total of six credits out of 34 in Fitch's consumer, leisure and retail coverage remain on Negative Outlook. These credits include Marks and Spencer Group plc, Ladbrokes plc and Whitbread PLC, highlighting the particular challenges facing non-food retailers and the lodging and gaming sectors.
In addition, emerging European companies Yasar Holding A.S. (Turkish packaged food and paint), OJSC United Confectioners (Russian confectionery) and MHP S.A. (Ukrainian poultry) are also on Negative Outlook due to difficult economic conditions and ongoing funding challenges.
