The number of global corporate debt issuers poised for downgrades continued its decline this month to 824 issuers from 869 issuers last month, according to Standard & Poor’s. This is the lowest tally in the last 14 months. This decrease is largely because of an increase in the number of companies downgraded and assigned stable outlooks.
Potential downgrades are defined as entities that have either a negative outlook or ratings on CreditWatch with negative implications across rating categories ‘AAA’ to ‘B-’. This month, we note the following key points:
- The automotive and media and entertainment sectors showed the largest change in negative bias, narrowing 4% each since last month.
- Consumer products and retail and restaurants followed a similar trend, with a 3% decline in negative bias over last month.
- Although there were downgrades in all sectors, banks displayed the highest downgrade propensity, closely followed by media and entertainment, insurance, consumer products, and utilities.
For details see Credit Trends: Downgrade Potential Across Credit Grades And Sectors. (Premium)
Technorati Tags: automotive, banks, consumer-products, corporate-debt, Insurance, media and entertainment, rating downgrades, restaurants, retail, utilities
Morgan Stanley says the UK could become the first of the G10 countries to have a major fiscal crisis if next year’s election results in a hung parliament. This is one of three potential “surprises” that are more likely than the market is pricing in, Morgan Stanley & Co. International says in a Strategy Euroletter for 2010. The other two are are that the dollar rebounds, leading to developed countries equities outperforming emerging markets; and Pharma is a large outperformer as it cuts costs and benefits from emerging markets exposure and corporate actions.
Overall, Morgan Stanley expects the current rally to continue in the near term, but that the MCSI Europe index will end 2010 at 1030, down 5% from today as stimulus is withdrawn and policy tightens.
The firm is bullish on Energy, Materials, Staples and Healthcare, but bearish on Utilities, Financials, Consumer Discretionary and Tech.
Stocks Morgan Stanley likes include Total (FP) , Wood Group, (WG), Xstrata (XTA), Syngenta (SYNN), Diageo (DGE) , Adidas (ADS), Roche (RO), Cobham (COB), SES (SES) and A2A.
Technorati Tags: (ADS), (COB), (DGE), (FP), (RO), (SYNN), (WG), (XTA), A2A, Adidas, Cobham, Diageo, dollar, European pharma, Roche, SES, Syngenta, Total, UK sovereign debt, Wood Group, Xstrata
capGemini’s latest annual European Energy Markets Observatory (EEMO) charts the deteriorating financial condition of European utilities.
Key findings:
The crisis has put the Utilities sector under pressure and challenged the resilient character attributed to the Utilities sector:
- Decrease in electricity and gas demand in Europe
- Drop in electricity and gas wholesale prices
- The credit crunch combined with decreasing demand and lower prices has pushed down the investments
- Having gone through expensive M&As, many Utilities’ financial situation has deteriorated
Security of supply has improved in electricity, little progress was observed in gas
- Europe’s declining reserves and high dependency on Russian gas supplies are an issue
Progress towards a single electricity and gas market
- The EC Third Package including the ownership unbundling was adopted in April 2009
- Electricity exchanges have increased and wholesale markets have continued to consolidate
- On the retail side, churn continued to increase, but remains small. Retail electricity and gas markets remain highly concentrated
- Electricity and gas prices have increased significantly in H2 2008, raising protests from end-users
Even if the European Union is the only region with a clear policy on climate change, more efforts need to be implemented
- On April 6, 2009 the European Commission adopted the Climate-Energy package
- Consumption and CO2 emission drops are more cyclical than structural
- Investments in renewable energies are hit by the crisis
- Carbon Capture and Storage is needed on the long term
- The crisis has revealed the need for deeper Utilities business models changes
Utilities need to lower their “cost to serve” and distribution costs, adapt to new customer relationship, streamline and simplify their organizations, processes and IT to increase efficiency, manage their strategic resources and take advantage of new technologies.
Technorati Tags: climate-change, electricity industry, Europe, natural gas, utilities
Railroads should pick up market share from trucking companies as economy improves.
Moody’s appears to concur with major investor Warren Buffett’s long-term view of the US railroad industry (or is it the other way around?). On the heels of further reducing Berkshire Hathaway’s (BRK.A) holdings in the ratings agency, Buffet is making a huge bet on the railroad industry through Berkshire’s acquisition of Burlington Northern (BNI).
In its timely annual Industry Outlook, Moody’s says that “While the worst appears to be over for the railroad sector, it will be a long road back to the industry’s peak activity levels. Thus, the stable outlook for the North American railroad industry anticipates a slow recovery of depressed freight volumes during the next couple of years.”
“There is unlikely to be a meaningful upswing in demand until employment levels rebound, housing stabilizes and capital investment picks up,” said Moody’s Vice President-Senior Credit Officer David Berge.
Overall, railroad freight volumes are expected to recover slowly from their cyclical trough, with carloads up 5% to 8% in 2010 and 10% in 2011, the report said.
The railroads are poised to pick up market share from truckers in an upturn because they have continued to spend significant amounts on infrastructure investments while trucking companies have slashed capital spending to cope with reduced volumes.
In the process, railroad operations have become more nimble and cost-efficient. When an upturn takes hold, they should be able to bring excess capacity to bear quickly. Trucking companies have not been investing in equipment, systems and training, and therefore will be less able to respond to increased demand.
Although there has been an improvement in industrial categories such as metals and chemicals, demand associated with consumer goods, housing and automobiles is likely to remain weak. In addition, coal shipments, which are highly profitable for railroads, will be hampered in the near term by high inventories at electric utilities.
“Railroad freight volume is a leading indicator of economic activity, as volumes tend to reflect positive trends in the re-stocking of inventories and feedstocks that precede growth in industrial output,” Berge said.
According to the report, railroads’ pricing power should hold up due to service improvements and repricing of unfavorable legacy contracts despite pressure on demand.
The industry has the capacity to handle an unexpectedly strong increase in demand, said Berge, which is an operating condition that has not always been characteristic of this industry in periods of demand recovery. “Since demand is only expected to recover at a moderate pace, network congestion is unlikely to be a major concern over the next few years.”
For details see North American Railroads Poised for Slow Recovery.
For latest analyst comments on Burlington Northern see Alacra Street Pulse.
For a transcript of the conference call on the deal, click here.
Technorati Tags: (BNI), (BRK.A), (MCO), berkshire-hathaway, Burlington Northern, Moodys, railroads, transportation, trucking
Capgemini survey also finds interest in green vehicles continues to rise.
Capgemini’s annual Cars Online study is out and it shows continuing trends towards online shopping and greater interest in green vehicles. The study surveyed more than 3,100 consumers in eight countries: Brazil, China, France, Germany, India, Russia, the UK and the US.
Key findings:
- Almost 90 percent of consumers today use the internet to research vehicles.
Nearly 40 percent would like to buy a car over the internet, and half would purchase parts and accessories online, the main drivers being price discounts and dissatisfaction with the dealer/retailer process.
- Reinforcing the 08/09 findings, green vehicle ownership continues its upward trend: 41 percent own a fuel-efficient or alternative-fuel vehicle, up from 36 percent the year before, and 30 percent plan to buy one. Fuel economy and environmental impact are the primary reasons.
- Customer loyalty remains vital with 68 percent of respondents likely to purchase the same make/brand again as their current vehicle, up from 61 percent last year. In addition, 63 percent would purchase from the same dealer where they bought their current car.
- The vast amount of information available on the internet is resulting in a shrinking buying cycle. Over two-thirds of respondents begin the research process two to four months in advance. Over half of respondents expect a response to an enquiry made online within four hours, and nearly three-quarters said they would look for another company if the response was too slow.
- Less than half of consumers with cars still in-warranty have their vehicles serviced at the purchasing dealership, emphasizing the importance of delivering a strong aftersales and servicing experience. Spare parts and service typically offer a profit margin up to ten times greater than that of the initial sale.
Capgemini’s recommendations for the industry:
- Eliminate the bureaucracy and inefficiency inherent in the current buying model. Consumers want a faster, easier way to buy vehicles. Improved lead management systems, dealer optimization and online buying capabilities are among the tools that can be implemented to help achieve this objective.
- Get serious about online selling. Consumer interest in buying vehicles and parts and accessories over the Internet is real. Providing a viable online option will be a key to maintaining customer loyalty in the coming years. Models may vary – ranging from services operated by individual manufacturers or dealers, to sites run entirely by third-parties such as eBay, to joint ventures between the two – but online buying will become the preferred approach for a significant group of consumers.
- Focus on the aftersales and servicing experience. Keeping in-warranty consumers coming back to the purchasing dealership for servicing is imperative, particularly at a time when vehicle sales are slow. Service and spare parts operations typically offer a profit margin up to 10 times greater than that of the initial sale. In addition, the service experience can be a factor in securing customer loyalty and driving future repurchase decisions.
- Manage your marketing mix according to each market. A one-size-fits-all marketing approach won’t work in today’s diverse automotive marketplace. Understand where to spend on the web and where to continue to invest in traditional media. And be sure to incorporate new media channels such as blogs and discussion groups into the mix. Web-based discussion groups, in particular, are growing in popularity. Consider how you, as a manufacturer or dealer, can facilitate or participate in these kinds of discussion sites.
- Communicate with consumers before they reach the showroom. By the time vehicle buyers enter a dealership they are likely to have done a considerable amount of research and reduced their list of choices to one or two vehicles. The opportunity to influence them is nearly lost. Using new types of such as a Virtual Adviser, can help automotive companies grab consumers’ attention before it is too late.
- Go green now. Consumers, automotive companies, governments, utilities and other types of businesses will increasingly focus on alternative-fuel vehicles. In the near future, “CO2” will become as important as “mpg” in vehicle buying decisions. It is becoming clear that alternative-fuel vehicles have the potential to be a market-changing force. However, the continued development of this business will require collaboration both inside and, more importantly, beyond the automotive industry.
Technorati Tags: automakers, automotive, green, online-shopping
So far this year, fallen angels have exceeded rising stars by a margin of 51 issuers.
Standard & Poor’s Ratings Services upgraded two issuers to investment grade (’BBB-’ and higher) from speculative grade (’BB+’ and lower) this past month, bringing the tally of rising stars to 16 issuers so far this year, affecting debt worth US$51.46 (€34.84) billion.
This is the lowest year-to-date tally of rising stars since 2003, when 14 issuers had ratings raised to investment grade.
S&P defines potential rising stars as entities rated ‘BB+’ with either a positive outlook or ratings on CreditWatch with positive implications. Since last month, two issuers were removed and two issuers were added to the list of global potential rising stars, leaving the total unchanged at 10 issuers with US$12.07 (€8.17) billion in rated debt. This is the lowest tally on record since the series began in 2002.
U.S.-based financial information processor and S&P 500 constituent Fidelity National Information Services Inc. (FIS) now leads the list of largest potential rising stars, poised to ascend to investment grade with about US$3.29 (€2.23) billion in rated debt.
The 67 fallen angels so far this year have accounted for rated debt worth US$224.18 (€151.80) billion. .By debt volume, the current fallen angel tally nearly matches that of the US$226.42 billion in all of 2008.
By count, finance companies lead 2009’s fallen angels to date with 12 entities, followed by banks with nine entities and utilities with eight entities.
The number of global potential fallen angels decreased by five from this past month’s report to a total of 70 issuers with US$186.47 (€126.26) billion in rated debt. These companies are rated ‘BBB-’ and have either a negative outlook or ratings on CreditWatch with negative implications. Sectors poised to lead fallen angel incidence are banks with 16 entities, followed by consumer products with nine entities and metals, mining, and steel with six entities.
SLM Corp. (SLM), formerly known as Sallie Mae, is the largest potential fallen angel this month, with US$32.50 (€22.01) billion in rated debt.
Fore details see Credit Trends: Global Potential Rising Stars and Credit Trends: Global Potential Fallen Angels.
Technorati Tags: (FIS), (SLM), fallen angels, Fidelity National Information Services, rising stars, SLM Corp.
CreditSights has identified “a number of credits that we believe are well suited to an environment of slow economic growth, entrenched high levels of unemployment, constrained lending and continued conservatism from consumers in the world’s developed economies.”
CreditSights’ list includes household names FedEx FDX), Kellogg (K) and Kroger (KR) and also eight European utilities. [Deutsche Bank Securities initiated coverage of FedEx with a "buy" rating on Oct 1. JP Morgan upgraded Kroger from "neutral" to "overweight on Oct 12.].
Kellogg remains a favorite in the Food & Beverage sector due to its consistently solid operating results, strong balance sheet, disciplined financial policy, and versatile management team.
Only one financial institution is included: “Standard Chartered (STAN) looks well positioned to outperform peers on the basis that its Asian franchise will continue to produce better results than those of most banks with operations in Europe.”
The full list and rationale see Credits We Like In the New Normal.
Technorati Tags: (FDX), (K), (KR), (STAN), FedEx, Kellogg, Kroger, Standard Chartered, utilities
Senate passage of a cap-and-trade emissions reduction regime this autumn is less than a 50-50 proposition; it is much more likely that Congress will approve an energy bill that promotes a renewable energy standard for electricity production.
Guest Post from Oxford Analytica
The House of Representatives in June narrowly passed the American Clean Energy and Security (ACES) Act, sponsored by Democrats Henry Waxman of California and Edward Markey of Massachusetts. The bill marked the first time that either chamber of Congress had successfully pushed through legislation to limit US greenhouse gas emissions. President Barack Obama wants to push a similar bill through the Senate to bolster his international credibility ahead of the Copenhagen climate conference in December, but faces an uphill battle.
House ACES legislation. ACES would establish:
- a gradually tightening cap on greenhouse gas (GHG) emissions, designed to cut emissions by 83% below 2005 levels by 2050 (17% below 2005 levels in 2020);
- a renewable energy standard for electric utilities (to require given percentages generation from wind and solar energy);
- funding for carbon capture and storage demonstration plants; and
- additional funding for advanced vehicle technology and battery research.
Business community positioning. While many coal and oil companies continue to oppose any climate legislation, many large businesses — including some energy companies — are supporting the ACES approach. The course of the Senate debate will determine whether a critical mass of businesses get behind the bill:
- Opportunity for deals? Waxman proved to be an effective dealmaker during the debate on ACES. By offering more and more free allocations of carbon credits to businesses, more companies decided to acquiesce and not lobby against the bill. One key concession was his agreement to set aside 15% of all carbon permits in the first 15 years of the programme for energy intensive trade exposed industries, such as cement, iron and steel, and aluminium.
- ‘Price collar’. One idea likely to gain momentum in Senate deliberations is the concept of a ‘price collar’ on a cap and trade system. Such a scheme would impose both a ceiling and floor on carbon prices, and could be seen as a compromise between the business and green camps. Businesses would have an assurance that carbon prices would not raise more rapidly than expected, and volatility would be restrained, while the environmental community would receive assurances that carbon prices would not fall sharply as they have in Europe in the face of recession and other special factors. However, one potential downside to use of a price collar is that it may limit the ability of a US cap and trade system to be integrated with the European Trading System or a future international trading system.
- Technological parochialism. A chronic problem in congressional climate change debates is that many senators or representatives are champions of particular technologies. For example, many conservatives see nuclear power as the only practical solution while legislators from oil and gas producing states tend to believe that expanding domestic production should be top priority. However, several business organisations, including the cross-industry Climate Action Partnership and CEO-based Business Roundtable, are increasingly advocating multi-pronged approaches to climate change — including a blend of all technologies. Given uncertainties involved in technology development, pursuing a diverse portfolio of technologies appears more logical.
Obama’s unwieldy agenda. In the face of lingering worries about prolonged recession, some missteps on his healthcare agenda, and growing concerns about large budget deficits, Obama’s approval ratings have dropped to around 50%. As a result, his ability to force Senate action on climate change is diminished. Even some fellow Democrats now maintain that Obama’s decision to bring up both climate change legislation and healthcare reform in his first year violated a key Washington political tenet — do not overload the system with too many ambitious reforms. It appears that the president’s healthcare imbroglio reduces the chances of Senate action on climate change in 2009.
Outlook. Senate passage of a cap-and-trade emissions reduction regime this autumn is less than a 50-50 proposition; it is much more likely that Congress will approve an energy bill that promotes a renewable energy standard for electricity production.
If cap-and-trade fails this year, Obama may attempt to revisit simpler carbon tax scheme in 2010 as economic recovery gathers pace.
[ A new Washington Post/ABC News poll shows a narrow majority, 52 to 43 percent, back a cap-and-trade system; that margin is unchanged since June.]
Technorati Tags: cap-and-trade, carbon-tax, electricity, emissions, greenhouse-gases
Guest Post by Noam Neusner
The Obama administration is counting on nuclear power to be “an important factor in getting us to a low-carbon future,” says Energy Secretary Steven Chu. But that statement, so direct and clear in the abstract, does little to address the biggest problem plaguing the nuclear industry: What’s to be done with the radioactive spent fuel rods that these plants produce as waste? In other words, by opting for nuclear energy, which represents a carbon-free alternative to coal-firing and oil-burning utilities, are we trading one potential environmental disaster for another?
Nuclear power supporters had long hoped that the solution to the nuclear waste problem could be found in a storage facility hollowed out of Yucca Mountain, deep in the Nevada desert roughly 80 miles north of Las Vegas. But questions about Yucca’s long-term ability to keep radioactivity from leeching into groundwater energized nuclear opponents, as well as nearby residents and Nevada political leaders. Soon after taking office, President Obama defunded the project.
Pending another solution, the roughly 60,000 tons of nuclear fuel waste currently in the U.S. is stored on-site at nuclear plants, either in subsurface canisters or in secure “ponds” filled with boric acid. If this approach continues much longer, it could cost Washington a lot of money: Utilities have successfully sued the federal government for failing to provide a permanent storage solution after they ponied up roughly US$30 billion in fees paid over several years to fund the Yucca project.
Indeed, untangling the nuclear waste problem may be more a matter of economics than of location. As of now, states have no real financial incentive to collect and store spent nuclear fuel, and doing so has serious downsides, including expensive environmental litigation and other unwelcome possibilities. But states’ resistance could ease if the U.S. adopted an intriguing option: a price-to-store system — nuclear waste’s version of cap and trade. That would not only address the storage problem, but also provide a new business opportunity by creating a market for long-term storage sites and nuclear waste reprocessing.
A cap-and-trade system for storing radioactive waste may be the best means to wake up a critical but moribund industry.
Under the price-to-store approach, utilities operating nuclear plants — currently, there are 104 reactors in 31 states, and 26 more reactors under consideration — would be compelled to buy spent-fuel vouchers with the annual environmental impact fees they pay each year to federal regulators; these fees now total close to $800 million a year. The vouchers would then be given to states operating federally regulated, long-term waste disposal sites; in turn, the states could redeem the vouchers for federal dollars.
Although most states might initially reject the idea of having nuclear waste within their borders, the participation of only a handful of states would be required to develop a market. And in reasonably short order, the price to store nuclear waste could become even attractive enough to make Nevada think twice about its not-in-my-backyard response to Yucca.
The full article is available here.
strategy+business is published by the global commercial consulting firm booz&co
Technorati Tags: cap-and-trade, energy, nuclear-power
Fitch Ratings takes a look at how US companies are faring with increasing the transparency of their derivatives activities. Fitch found that while transparency has improved, even more disclosure would be beneficial.
Improvements to derivatives disclosure, which became mandatory for all U.S. companies in 2009, are now shining more light on the use of derivatives across all issuers. To assess the improvements in disclosure, Fitch reviewed the quarterly filings of 100 companies from a range of industries representing nearly $6.4 trillion in aggregate outstanding debt.
Key findings;
- Not surprisingly, an overwhelming majority (approximately 80%) of the derivative assets and liabilities carried on the balance sheets of the companies reviewed were primarily concentrated in five financial services firms: JPMorgan Chase; Bank of America; Goldman Sachs; Citigroup; and Morgan Stanley.
- Fifty-eight percent of the companies reviewed disclosed the presence of credit risk related contingent features in their derivative positions. These contingent features generally require a company to post additional collateral or settle any outstanding derivative liability in the event of a downgrade of the company’s credit rating.
- The use of credit derivatives was limited to financial institutions, with 17 of these reporting such exposure.
- Proprietary derivatives trading by utilities and energy companies appear to be very limited, but most of the companies reviewed in both industries report the use of derivatives for hedging commodity risks.
- Generally, non-financial companies appear to use derivatives only for hedging specific risks.
- Derivative valuation is often model-based, making changes in significant valuation assumptions particularly important. Analysis would be enhanced if issuers provided additional disclosure on the sensitivity of their derivative valuations to major assumptions.
The new derivative disclosures are a welcome addition for analysts and investors. They vastly improve the public disclosure of derivative positions and they bring some much needed transparency to the financial reporting of derivatives.
Despite the improvements, Fitch believes that disclosure can go further. In particular, additional information with regard to sensitivity analysis would be very valuable to analysts. Fitch encourages issuers to provide additional information in this regard.
For details see Derivatives: A Closer Look at What New Disclosures in the U.S. Reveal.
Technorati Tags: derivatives, disclosure, financial-regulation, investment-banking, transparency
