Recent market turmoil may depress business and consumer confidence and slow global economic growth, exacerbating existing trends that have been causing corporate credit quality to deteriorate for more than a year, says Moody's Investors Service in a new report on the global credit outlook for non-financial companies.
"Business and consumer confidence appear to have been shaken by recent events and might not recover for several quarters," says Daniel Gates, Moody's chief credit officer for corporate finance, and the lead author of the report.
Companies whose business is dependent upon discretionary consumer spending are particularly likely to be hurt, according to the report.
The rating agency says the damage may be most severe for already seriously ailing companies in consumer-oriented sectors such as airlines, housing, autos, consumer durables, restaurants, retail, apparel, and gaming.
"These companies are struggling with high leverage, disappointing cash flow, and weak customer demand, which is already proving to be a lethal combination for many firms," says Gates. "Recent events may make a bad situation worse by undercutting consumer spending and economic growth in the months ahead, which would push many more weak companies over the edge of the cliff," he says.
Consumer spending is expected to be pressured by tighter lending standards as well as by fragile confidence, Moody's says.
The outlook for consumer spending is particularly weak in the US, Europe, and Japan, which collectively account for more than half of the world's economic output. Consumer spending trends also appear to be slowing in other countries, including Australia, Singapore and South Korea.
While no region is immune from a global slowdown, concerns are greatest for companies whose business is heavily reliant upon the EU countries, Japan and North America, where the pace of economic activity is visibly slowing. Weak growth in these mature markets may also be a drag on countries with high growth rates, such as China and India, affecting companies in those markets as well.
Moody's also predicts that lenders will further tighten credit standards for corporate borrowers, severely limiting access to new financing that could stave off bankruptcy for troubled companies. Moody's expects that credit conditions will become tighter over the near term because capital-constrained financial institutions will be more reluctant to make loans, especially at a time when the number of defaulting companies is rising rapidly.