The low-yield environment that is projected to persist over the near term will likely exacerbate underfunded pension positions and expand the claim on issuer cash flows, according to this complimentary download from Fitch Ratings via the Alacra Store. This could force issuers to more aggressively manage these liabilities, Fitch says. The Special Report ranks the funding status of some 200 companies, including four with funding levels below 50%: Nalco (NLC), Omnicom Group (OMC), Delta Air Lines (DAL) and Moneygram International (MGI).
Selected excerpts:
These risks are heightened by a potentially deflationary environment through the effect on asset returns and valuation of liabilities, further stressing the importance of managing underfunded positions through enhanced contributions over the near term.
Recently enacted pension relief will defer payments to some extent, but as ample evidence has shown, allowing issuers to defer funding can lead companies to dig even deeper holes that can result in putting both pensioners and bondholders at greater risk.
Companies will be challenged to achieve the assumed return targets incorporated into their accounting statements given 2010 year-to-date equity returns and current fixed-income yields. This situation could encourage yield chasing and a shift in asset allocation to higher risk asset classes, including leveraged loans, real estate, private equity funds, and equities.
Although alternative asset classes are considered more volatile and higher risk, the current yield environment is likely to cause a reevaluation of the risks/rewards of various asset classes and could result in some migration away from fixed income assets. Companies most at risk from the current yield environment would be those with a materially underfunded position, a high fixed income allocation, and high current benefit payouts. The report ranks 220 companies based on these factors.
The potential for deterioration on both sides of the equation – lower returns plus a lower discount rate – presents the potential for further onerous jumps in liability measures. U.S. corporations in general have improved their liquidity positions and maintain cash balances well in excess of the recent practices, allowing for some flexibility in managing this issue. Pension funding requirements will lay increasing claims to corporate cash flows over the near term, which may require application of these cash holdings in the event of pressured or insufficient operating cash flows.
US Corporate Pension Plans: Deflationary Risk and Asset Allocation – Where’s the Yield?’ has been made available free of charge to Research Recap users for 30 days by special arrangement with Fitch Ratings, an Alacra content partner. After 30 days, the report will revert to its regular AlacraStore price of $275.
For additional free research reports from the Alacra Store click here.
Technorati Tags: (DAL), (MGI), (NLC), complimentary research, Delta Air Lines, Moneygram International, Nalco, OMC, Omnicom Group Inc., pensions
With regional banks such as Capital One Financial (COF) supposedly in play, we are pleased to offer a complimentary download of Standard & Poor’s latest Industry Report Card on the sector.
Selected excerpts:
Much like first-quarter 2010, the large U.S. regional banks in Standard & Poor’s Ratings Services’ rated universe reported improving, albeit still-weak results in the second quarter. Generally, net operating losses declined further and credit deterioration slowed or improved in most cases. Most of the large regional banks reported net losses, while the large trust banks remained firmly profitable. Unlike the large complex U.S. banks, the large regional banks typically have higher commercial real estate (CRE) exposures, which will likely continue to hurt loan performance and delay their recovery relative to peers.
In summary, we expect net losses to moderate further in the near term, which could ease pressure on our ratings of large regional banks.
Despite some stabilization, we expect credit costs to remain elevated in the second half of 2010. However, many banks are forecasting lower loan-loss provisioning needs, reflecting the generally reduced inflow of new problem credits and potentially lower levels of loan charge-offs. Furthermore, capital and liquidity measures have continued to improve, supported by recent common equity issuances, good deposit growth, and further balance-sheet contraction.
Industry Report Card: U.S. Large Regional Banks’ Second-Quarter Results Showed Further Improvement has been made available free of charge to Research Recap users for 30 days by special arrangement with Standard & Poor’s, an Alacra content partner. After 30 days, the report will revert to its regular Alacra Store price of $750.00.
For additional free research reports from the Alacra Store click here
Technorati Tags: (BBT), (BK), (COF), (STI), (STT), Bank of New York Mellon, BB&T-Corporation, Capital One Financial, Comerica, complimentary research, Fifth-Third-Bancorp, First Horizon, Huntington-Bancshares-Inc., KeyCorp, M&T Bank Corp, Marshall-&-Ilsley-Corporation, Northern Trust, Popular Inc, regional-banks, Regions-Financial-Corporation, State-Street, SunTrust, Synovus-Financial-Corporation, UnionBanCal-Corporation, Zions-Bancorporation
Fitch Ratings says global brewers should be able to manage the potential adverse effects of higher grain prices on their profits as the supply shortage is likely to be a temporary phenomenon. While possible risks are linked to the scarce availability of barley and higher costs, these are offset by cost hedging, ongoing cost-cutting programmes at major brewers and scope for moderate retail price increases.
Even if scarcity continues, leading to higher costs in the next season, brewers are protected in the medium term by hedging or long-term procurement agreements put in place after the sharp price surge of commodities in 2007-2008.
Also, global brewers are still reaping benefits from cost base rationalizations undertaken since 2008. Of the four global players, Anheuser Busch InBev (ABI) enjoys the widest scope for cost-cutting, due to $0.9bn (2.4% of 2009 sales) combined savings planned for 2010 and 2011.
Fitch notes that given that the scarcity of barley is most severe in Russia, where pricing power for beer is currently impaired by having passed through a sharp excise duty increase, Carlsberg Breweries (CARLA)may suffer some imminent pressure on profit margin. Russian operations accounted for approx 40% of Carlsberg’s 2009 profits but well under 5% for Heineken (HEIA), SABMiller (SAB) and ABI. However, this is unlikely to lead to any rating pressure given the ample headroom enjoyed by Carlsberg Breweries, with FYE09 net leverage of 2.7x, which is considered low for its ‘BBB-’ rating, and expected strong cash flow generation.
Excerpted from Fitch: Global Brewers Can Manage Impact of Grain Price Spike (Premium)
Technorati Tags: (ABI), (CARLA), (HEIA), (SAB), Anheuser Busch InBev, beverages, brewers, Carlsberg, grains, Heineken NV, SABMiller
Fitch Ratings suggests high-yield bonds of some food, beverage and restaurant companies may be worth a look as their risk of default is low. We are pleased to offer a complimentary download of Fitch’s full report, High Yield Food, Beverage, and Restaurants: Cross-Company Liquidity, Debt, and Covenant Analysis.
Selected highlights:
Fitch Ratings examines liquidity, debt structures and covenants for a subset of speculative grade food, beverage and restaurant companies. Fitch says liquidity is healthy, debt structures are fairly balanced between secured and unsecured obligations, and covenant restrictions provide adequate to good protection for bondholders.
Issuers reviewed and their IDRs include Tyson Foods, Inc. (Tyson; ‘BB’; Outlook Stable); Smithfield Foods, Inc. (Smithfield; ‘B-’; Outlook Stable); Dole Food Co. (Dole; ‘B’; Outlook Stable); Del Monte Foods Co. (Del Monte; ‘BB+’; Outlook Positive); ARAMARK Corporation (ARAMARK; ‘B’; Outlook Stable); Burger King Corporation (Burger King; ‘BB’; Outlook Stable); Constellation Brands, Inc. (Constellation; ‘BB’; Outlook Stable); and Dean Foods Co. (Dean; Not Rated). In aggregate, these firms have nearly $24 billion of debt.
Credit implications for these high yield food, beverage and restaurant companies are stable to positive. - Carla Norfleet Taylor, Director at Fitch.
Del Monte’s (DLM) ratings have a Positive Outlook, after being upgraded in May, while continued debt reduction concurrent with strong operating performance by Tyson (TSN) could result in positive rating actions.’
Liquidity and latest 12-month free cash flow for the firms in Fitch’s universe currently averages approximately $800 million and more than $290 million, respectively. Roughly 57% of the $24 billion in debt of these companies is secured while 43% is unsecured. Fitch views Dole’s (DOLE) covenants as being most restrictive but believes Smithfield (SFD provides the most protection in a leveraged buyout because of change of control put options in all of its bonds.
‘Default risk for even the lowest rated companies, such as Smithfield and Dole, is no longer an immediate concern due to recent refinancing activity and improved operating results,’ said Wesley E. Moultrie, Senior Director at Fitch.
High Yield Food, Beverage, and Restaurants: Cross-Company Liquidity, Debt, and Covenant Analysis has been made available free of charge to Research Recap users for 30 days by special arrangement with Fitch Ratings, an Alacra content partner. After 30 days, the report will revert to its regular AlacraStore price of $275.
For additional free research reports from the Alacra Store click here
Technorati Tags: (DF), (DOLE), (SFD), (STZ), (TSN), ARAMARK, Burger King, complimentary research, Constellation Brands, Dean Foods, Del Monte Foods, Dole Food Co, food-&-beverage, high-yield, restaurants, Smithfield Foods, speculative-grade-bonds, Tyson Foods
Credit default swaps on oil and gas companies tightened nearly 3.7% last week, signaling that perhaps some confidence is gradually returning to the energy markets, according to Fitch Ratings.
Recent CDS spread tightening, along with a fall in theaverage relative differential, indicates that credit markets have stopped pricing in additional risk for the oil and gas industry for the time being. The equity markets also showed some positive sentiment, as the five-year probability of default index for oil and gas companies fell nearly 3%.
The oil spill in the Gulf of Mexico still dominates the market sector despite the latest efforts to cap the well having been called a success., Fitch writes in its latest Risk and Performance Monitor. Potential risks of pressure leaks further down the well remain a concern and will likely continue to represent a dark cloud over this sector. The table below highlights the 10 oil and gas companies for which CDS spreads tightened most over the course of last week. Notably, all companies mentioned are domiciled in North America. CDS on both Devon Energy Corporation (DVN) and Conoco Phillips (COP) are pricing at levels that are five notches higher than implied by the Fitch Issuer Default Ratings (IDRs). Transocean Inc. (RIG) and Anadarko Petroleum Corporation (APC), two companies involved in Gulf oil spill, continue to maintain CDS IRs two notches below their Fitch IDRs despite seeing CDS spread tightening of 23% and 22%, respectively.
For each entity, the CDS IR, weekly change in the CDS IR, relative differential, and the gap between its CDS IR and agency rating are included. Based on historical analysis, notch differentials between the CDS IR and agency rating are highly predictive of future rating agency actions. Click image to enlarge.
Technorati Tags: (APC), (COP), (DVN), (RIG), Anadarko Petroleum Corporation, BP, BP plc, ConocoPhillips, Devon Energy Corporation, oil spill, oil-&-gas, oil-exploration, Transocean
Despite the pension-funding relief recently signed into law, many US companies continue to face pension funding challenges that could affect their credit quality, Standard & Poor’s says in this complimentary download.
Selected excerpts from Pension Deficits Pose Risks To Corporate Credit Quality, Despite Funding-Relief Measures
Although global markets recovered in the latter half of 2009, pressure on U.S. corporate pension plans’ funding levels recently has increased again. Equity markets remained weak in the first half of 2010, while high-quality corporate bond yields, which companies use to discount postretirement plan obligations, are generally flat.
These conditions in our view are likely to make it more difficult for many U.S. issuers to improve the large pension funding gaps they reported at the end of fiscal 2009.
Despite the pension-funding relief recently signed into law, the economic recovery is susceptible to further downturns, and severe market volatility, could continue to affect the value of many corporate issuers’ pension plans, and therefore, affect credit quality.
While equity markets rebounded in 2009 from 2008 levels, U.S. corporate issuers faced a funding predicament. Standard & Poor’s Ratings Services’ recent review of rated issuers’ corporate pension plans revealed that as pension asset levels surged last year, lower discount rates helped pension obligations grow nearly as much, which offset much of the expected improvement in funding levels. Because we treat post-retirement obligations–including pensions–as debt-like, and adjust derived financial ratios accordingly, the adverse movement negatively affected many corporate debt ratios.
S&P’s report includes rankings of the five most underfunded companies by sector.
Pension Deficits Pose Risks To Corporate Credit Quality, Despite Funding-Relief Measures has been made available free of charge to Research Recap users for 30 days by special arrangement with Standard & Poor’s, an Alacra content partner. After 30 days, the report will revert to its regular Alacra Store price of $550.00)
For additional free research reports from the Alacra Store click here
Technorati Tags: complimentary research, corporate-debt, pension funding
The spreads on credit default swaps can be useful indicator of changing market sentiment. A widening of the spread signifies improving performance relative to historical levels, while a tightening indicates the opposite. We are pleased to offer a complimentary download of Fitch Rating’s weekly Risk and Performance Monitor, which tracks these trends.
Selected Excerpts:
- Globally, CDS spreads resumed widening, nearly 2% on average, after a brief rebound the week before. Equity markets were stable overall, with the five-year Probability of Default (PD) Index remaining largely unchanged.
- Sovereigns led the CDS widening last week, moving out almost 5% and driving the Average Relative Differential (ARD) for the sector higher.
CDS on Greece reached the widest levels seen since the beginning of the sovereign crisis, while CDS on France widened 27%.
- Financials lagged the overall market, widening 2.2% on average, and are now pricing 6% wide of historical trading levels. European banks, in particular, widened more than 5%, as worries surrounding the expiration of the European Central Bank’s (ECB) 12-month bank-lending program rattled the credit markets.
- CDS widening within the oil and gas industry outpaced the broader market last week, and the sector continues to price, on average, 32% wide of historical levels.
- The basic materials sector outperformed across both the debt and equity markets last week.
- The cost of credit protection on technology firms grew less than 1% and is pricing, on average, more than 4% tight of historical levels.
Companies highlighted include: BNP Paribas, Hellenic Telecommunications Organisation, Red Electrica Corp SA, Clariant AG, Heineken NV, Adidas,
GlobalSantaFe Corporation, Hasbro Inc., Halliburton Company, Motorola, Inc., Transalta Corporation, Tyco Electronics Ltd.
Risk and Performance Monitor has been made available free of charge to Research Recap users for 30 days by special arrangement with Fitch Ratings, an Alacra content partner. After 30 days, the report will revert to its regular AlacraStore price of $165.
For additional free research reports from the Alacra Store click here
Technorati Tags: Adidas, BNP Paribas, CDS, Clariant AG, complimentary research, credit-default-swaps, Eurozone, financial-industry, France, GlobalSantaFe Corporation, Greece, Halliburton Company, Hasbro Inc., Heineken NV, Hellenic Telecommunications Organisation, Motorola, oil-&-gas, Red Electrica Corp SA, sovereign-debt, technology, Transalta Corporation, Tyco Electronics Ltd.
Audit Integrity has provided more detail on the methodology behind its list of ten companies that failed its “due diligence test” and whose valuations are based on a degree of investor trust that AI says may not be justified. The list includes big names such as Caterpillar (CAT), which was featured in a subsequent Pulse Check post.
Audit Integrity has provided the example below (based on Caterpillar) of the proprietary accounting and governance metrics compiled in creating its Accounting & Governance Risk (AGR®) ratings. Companies are flagged for negative outliers (relative to their industry peers and to the company’s own history) which have been statistically correlated with manipulation or fraud. Click on the image to enlarge.
Technorati Tags: (ATSG), (CAT), (CPWR), (EXPE), (RJET), (SKYW), (STLD), (UNTD), (WYN), Air Transport Services Group, Belo, BLC, Caterpillar, Compuware, corporate-governance, due diligence, expedia, Republic Airways Holdings, SkyWest, Steel Dynamics, United Online, Wyndham Worldwid
Credit ratings across the European capital goods sector are likely to face an increase in M&A risks during 2010 and 2011, Fitch Ratings says in this complimentary download.
“Fitch expects a number of capital goods companies to be active buyers,” says Ewan Macaulay, Director in Fitch’s Industrials team. “This could create negative pressure for certain credit ratings, especially if deals are funded with significant amounts of debt or cash, in turn weakening financial profiles.”
Following a 24-month lull in M&A volumes within the European CG sector, there are initial signs of a pick-up in activity. Leading players including Schneider Electric and ABB have announced significant acquisitions over recent months, while others such as Philips, GEA, Siemens and Legrand have publicly indicated that they will consider acquisitions during 2010.
Fitch expects the M&A trend to gather pace, driven by a growing desire among many management teams to deploy sizable cash balances built up during the recent downturn.
Cash balances rose by an average of 50% (an increase in excess of EUR10bn), between 2008 and 2009 across Fitch’s 10 rated European CG companies. Cash was initially hoarded to provide liquidity and balance sheet strength during the height of the global financial crisis, but with market conditions and access to finance now both improving, management teams are increasingly looking to spend this cash, with acquisitions being a priority.
The structure of the European CG sector, with its competitive, mature and high-fixed cost nature, creates an ongoing need for M&A, as consolidation brings cost synergies, enhanced bargaining power, greater scale, and access to attractive new end-markets. Furthermore, M&A activity should be spurred by a number of other factors, including growing business confidence, the need to “buy” growth in the face of stagnant European demand, relatively subdued corporate valuations, rising shareholder pressure for improved returns, and falling cost of funding.
Although M&A can strengthen credit profiles if conducted diligently and conservatively, Fitch believes that a new round of acquisition activity could weaken credit ratings within the sector. This would apply especially to the credit ratings of those acquiring companies, and the risks are likely to be exacerbated should deals be significant in amount, funded through cash or debt, expensive in valuation terms, and executed while market conditions still remain fragile. Similarly, some mid-sized CG companies may once again become acquisition targets, which could also threaten credit profiles should potential buyers be low-rated emerging market peers or involve highly-leveraged private equity deals.
Fitch’s report covers Siemens AG (SIE) – ‘A+’/ Stable; Royal Philips Electronics (PHIA) – ‘A-’/Stable; Schneider Electric SA (SU) – ‘A-’/Stable; ABB Ltd (ABBN) – ‘BBB+’/Positive; Legrand SA (LR) – ‘BBB’/Stable; AB Electrolux (ELUX B – ‘BBB-’/Stable; GEA Group Aktiengesellschaft (G1A) – ‘BBB-’/Stable); AB Volvo (VOLV A) ‘BBB-’/Negative), Arcelik (ARCLK) – ‘BB-’/Positive) and Vestel Elekronik AS – ‘B’/Stable.
The Rising M&A Risks for European Capital Goods Manufacturers has been made available free of charge to Research Recap users for 30 days by special arrangement with Fitch Ratings, an Alacra content partner. After 30 days, the report will revert to its regular AlacraStore price of $275.
For additional free research reports from the Alacra Store click here
Technorati Tags: (ABBN), (ARCLK), (ELUX B), (G1A), (LR), (PHIA), (SIE), (SU), (VOLV A), AB Electrolux, AB Volvo, ABB Ltd, Arcelik, capital goods, complimentary research, GEA Group Aktiengesellschaft, Legrand SA, M&A, Royal Philips Electronics, Schneider Electric SA, Siemens AG, Vestel Elekronik AS
Audit Integrity has identified ten companies that failed its “due diligence test” and whose valuations are based on a degree of investor trust that may not be justified.
In a Chairman’s Corner letter, Audit Integrity’s Jim Kaplan cites the recent scandals involving Bernie Madoff, Lehman Bros, Goldman Sachs and the ratings agencies along with the the due diligence effort that would have protected stakeholders from being damaged.
The obvious rule of thumb is to obtain independent third-party verification before investing. That is neither hard, expensive, nor time-consuming – and avoids continuous head-slapping.
Audit Integrity’s list includes big names such as Caterpillar (CAT), which recently reported strong earnings and also a management shakeup.
Technorati Tags: (ATSG), (CAT), (CPWR), (EXPE), (RJET), (SKYW), (STLD), (UNTD), (WYN), Air Transport Services Group, Belo, BLC, Caterpillar, Compuware, corporate-governance, due diligence, expedia, Republic Airways Holdings, SkyWest, Steel Dynamics, United Online, Wyndham Worldwide
