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Regulatory Change Presents Greatest Event Risk to U.S. Corporates, Report

November 18, 2019, 08:50 AM
Filed Under: Industry News
Related: Fitch Ratings

Regulatory change is the most likely near-term event risk for US corporate business models and financial profiles, particularly in the healthcare & pharmaceuticals; real estate; and gaming, lodging & leisure sectors, says Fitch Ratings.

Strategic M&A, monetization of assets and shareholder payments not contemplated under existing financial policies have a moderate possibility of occurrence across most sectors, while heightened contingent liability risk might be more idiosyncratic to healthcare due to the opioid epidemic. Financial sponsor LBOs are viewed as having a low possibility of occurrence in most sectors, given a weak investment case for deals involving investment-grade issuers.

Event risk is not prospectively incorporated into credit ratings but vulnerability to developments that could negatively affect an issuer's credit profile is assessed. Possible causes of event risk; including secularly challenged business models, shareholder activism, and weaknesses in corporate governance, and the potential for covenants to mitigate effects of event risk are also evaluated. For instance a strict limit on restricted payments might reduce risk of shareholder payments and strong limits on structural subordination could reduce LBO risk.

The risk of regulatory change due to governmental policy changes is rising in the healthcare & pharmaceuticals; natural resources; real estate; gaming, lodging & leisure (RE GLL); technology; media & telecom (TMT); and utility sectors with the possibility of occurrence in the near term being moderate to high, depending on the sector. Healthcare & pharmaceutical sector exposure is high due to ongoing debate around growth in healthcare spending. RE GLL exposure is high as gaming faces risks related to licensing access, homebuilders face government-sponsored enterprise reform and healthcare REITS confront policy reforms affecting tenants.

Large-scale strategic M&A event risk is moderate across most sectors with the exception of TMT due to heightened secular threats and opportunities. A focus on property development in RE GLL may also increase motivation for transactions. However, market skepticism resulting from examples of past integration difficulties in retail and consumer could reduce large-scale strategic M&A risk in that sector over time.

With the exception of utilities, event risk associated with the monetization of assets is moderate across most sectors and the trend is expected to remain stable. Companies continually reevaluate their portfolio of assets to maintain profitability and competitiveness. Many issuers have assets that are tangential to the core business and, if sold, proceeds might be reinvested in the core business to generate higher return.

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