Challenges seen for ex-Japan corporations

However, domestic monetary easing, adequate liquidity and manageable bond refinancing requirements should prevent a major uptick in defaults for rated issuers in the region.

"Continued slower growth across the region, along with external risks – including uncertainty over the US rate trajectory and capital flow volatility – will put Asian corporate credit fundamentals to the test in 2016," Brian Cahill, managing director of Asia-Pacific corporate and financial institutions, said yesterday.

"Given these challenging conditions, we view domestic factors as increasingly important to corporates’ credit quality," said Rahul Ghosh, vice president and senior research analyst.

"Whereas corporates in China (Aa3 stable) are under pressure from the country’s sustained economic slowdown, India’s (Baa3 positive) economic growth outperformance and monetary easing will support credit conditions."

While many corporations across the region have responded to weaker growth, demand and prices by lowering their capital spending, weaker earnings and margins have offset such cuts, leaving leverage elevated.

Leverage – as measured by adjusted debt to Ebitda – is forecast at an average 4.9 times for full year 2015, up from 4.7 in 2014 and 4.2 in 2013.

Reflecting weak financial flexibility particularly in the high yield space, downgrades on high-yield ratings increased 60 per cent in the first nine months of this year from the same period last year.

Over 30 per cent of outlooks on high-yield ratings have a negative bias, pointing to further challenges in this space next year.

However, easing domestic market monetary conditions and strong liquidity in those markets should prevent a major increase in defaults next year.

Maturing rated foreign-currency high-yield bonds are also modest compared to annual issuance volumes in recent years and so should be refinanced relatively comfortably for most.