LONDON, July 15 (Xinhua) -- European companies will in aggregate generate negative free cash flow this year as persistent economic weakness across the region weighs on operations while the need to keep investing pushes up capex in some sectors, according to the latest forecasts released Monday by Fitch Ratings.
"We expect Fitch-rated European corporates to report negative free cash flow (FCF) of around 9 billion U.S. dollars in 2013, while this time last year we had expected positive aggregate 2013 FCF of nearly 27 billion dollars. The lowered forecast results from negative nominal flows for utilities and transport, which we no longer expect to be fully offset by other sectors," said the London-based credit rating company.
On a through-the-cycle basis, FCF is both a key indicator of financial strength and a measure of a company's ability to manage periods of volatility without eroding credit quality. Persistent negative flows significantly lessen flexibility, for example by preventing a company reducing its debt, said Fitch.
The change in Fitch's EBITDA (earnings before interest, taxes, depreciation and amortization) forecasts was spread more evenly across sectors, with improving prospects for natural resources and consumer and healthcare companies offsetting lower expectations for the industrial, telecoms and utilities sectors.
Meanwhile, capital expenditure, or capex, expectations have risen in most sectors.
"Our latest forecast indicates that some companies have reached the limit of their ability to minimize capex while remaining competitive or are facing significant investor opposition to dividend cuts. But in the medium term, we expect FCF to improve as the European economy slowly returns to sustainable growth, and we believe further cuts to capex and dividends could still be found if conditions rapidly deteriorated," highlighted Fitch.
Referring to different sectors, the rating agency said forecasts for telecom, media and technology companies had weakened due to the impact of rising competition and worse-than-expected austerity cuts on peripheral incumbents such as Portugal Telecom and Telecom Italia.
Fitch also have lowered its forecasts for utilities due to weaker gas and electricity demand combined with continued higher gas import prices, which are hurting earnings among generators.
Structural changes from the growth in renewables and higher taxes in some parts of the eurozone are also adding to the pressure, explained Fitch.
"But the prospects for the pharmaceuticals sector look better than they did a year ago, thanks to receding concerns about patent expiries and an improving drug pipeline," a company statement read.
(Source: Xinhua)
