Moody's: Canadian Firms' Credit Quality Unchanged Despite Increased Cash

"Given that cash holdings have increased in proportion with expenses and debt levels, and that the most significant changes are concentrated in specific sectors, we think the increased cash holdings reflect companies' operational needs rather than pervasive caution amid geopolitical and macroeconomic uncertainty," says Bill Wolfe, Senior Vice President and author of "Overall Canadian Credit Quality Unchanged Despite Increased Cash Holdings." "They therefore likely reflect normal operating and investment activities."

"Natural resource companies hold the most cash due to the long commodity price boom and a need to fund ever-larger capital projects, often with limited use of debt financing," Wolfe says. Companies such as Teck Resources and Suncor Energy have significant cash positions, but they also had the largest cash holdings in 2006.

Cash is a component of credit quality and liquidity but, by itself, increased cash does not improve credit quality, liquidity or default prospects. "Sound liability management minimizes the risk of default better than holding cash," Wolfe says. "Since defaults tend to rise during periods of financial market disruption, it is one thing to have debt due in six years and another if it comes due next month, when the financial markets may be dislocated."

Nevertheless, Moody's research shows little near-term pressure on Canadian corporates from maturing debt. "While increased cash holdings have not improved the credit quality of the companies we studied, most are effectively managing their debt maturities and access to credit," Wolfe notes. "Moody's Liquidity Stress Index and Covenant Stress Index are both presently at low levels," he adds, "so that even if market conditions were to deteriorate, we would not expect a spike in defaults."

The recent behavior of key credit metrics also causes Moody's to conclude that Canadian companies' credit quality will not improve during 2013. Since the recession, dividends and capital expenditures have increased, suggesting that companies have chosen not to further strengthen their credit quality. Moody's also sees limited capacity for further improvement, as tepid macroeconomic growth will continue to constrain potential cash flow expansion.

Moody's research subscribers can access this report at http://www.moodys.com/research/Canadian-Non-Financial-Corporates-Overall-Canadian-Credit-Quality-Unchanged-Despite--PBC_145761.

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Bill Wolfe Senior Vice President Corporate Finance Group Moody'sCanada Inc.70 York Street Suite 1400 Toronto, ON M5J 1S9 Canada(416) 214-1635Donald S. Carter, CFA MD - Corporate Finance Corporate Finance Group(416) 214-1635 Releasing Office: Moody's Canada Inc.70 York Street Suite 1400 Toronto, ON M5J 1S9 Canada(416) 214-1635(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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