In advance of its forthcoming mid-year EMEA Industrials sector outlook update, Fitch Ratings says the credit outlook for the European building materials, construction and property sectors remains negative, as companies continue to be challenged by the ongoing impact of the global economic downturn and constrained credit markets.
Whilst the majority of European building materials companies announced in Q109 measures to preserve cash flow and strengthen their balance sheets, as reflected in rating actions during H109, these have been insufficient to defend credit profiles. Rating actions have included the downgrade in March of HeidelbergCement AG (HC) (’B’/’B’/Negative) and Lafarge SA (’BBB-’/’F3’/ Negative); and the downgrade in April of Holcim Ltd (’BBB’/’F2’/Negative).
"Fitch believes the deeper-than-anticipated global recession will translate into persistent challenging trading conditions in the building materials industry in mature markets whilst, simultaneously, the industry faces diminished prospects in emerging markets as economic growth also declines," says Elisabetta Zorzi, Senior Director in Fitch’s Industrials group. "Furthermore, issuers’ cash flows from operations will likely be lower in the next 24 months than previously forecast by Fitch, resulting in a slower pace of deleveraging that will mean more limited headroom under current credit profiles, particularly for leveraged credits," she added.
Prospects for a meaningful and sustained recovery for western European construction and homebuilding companies remain uncertain, and Fitch continues to forecast a peak-to-trough fall in house prices of approximately 30%. The agency’s greatest concern remains cash generation, given that debt levels in the sector remain high and many companies are highly leveraged.
"While homebuilders have generally solved their most pressing short-term problems by amending covenants and extending debt maturities, such as Taylor Wimpey plc (rated ’B-’/RWP), there is a risk that the sector’s problems have merely been postponed, if companies are not sufficiently cash generative in the next two to four years to repay or refinance extended debt maturities", says Ewan Macaulay, Associate Director in Fitch Industrials group.