Big swings in commodity prices will make it harder for investors to assess how businesses are performing and risks linked to counterparties, according to a report by Moody’s Investors Service.
(Bloomberg) — Big swings in commodity prices will make it harder for investors to assess how businesses are performing and risks linked to counterparties, according to a report by Moody’s Investors Service.
That’s because the way companies report the impact of those prices varies widely, while they tend not to disclose who their counterparties are or what derivative contracts they have in place.
“Assessing counterparty risks becomes even more difficult in sectors where companies have important trading operations in addition to their core activities.
This would often be the case in industries such as oil & gas and utilities,” Moody’s analysts including Knut Slatten and Alastair Drake wrote in a note on Sept. 15.
Moody’s warning comes after energy prices in Europe hit record highs this year, leading to some countries to intervene to avoid the collapse of some companies.
Sweden, Finland and Germany are earmarking billions of euros in emergency liquidity loans to backstop utilities hit with sudden margin calls on their trading.
Read more: Why Europe Wants to Change the Way Power Gets Priced: QuickTake
Because of the general temporary nature of margin calls, current credit metrics may be “significantly under or overstated and not reflect the underlying economics,” the analysts wrote.
“Net debt can be distorted as companies have to fund margin payments. Specifically, funds from operations may be over/understated by the inclusion of non-cash mark-to-market gains/losses and margin receipts/payments,” they added.
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