Standard & Poor’s has published a summary of a recent roundtable of its top analysts that provides some insight into the ratings agency’s thinking on the economic outlook and credit markets. The group gave their views on the impact of government stimulus in the U.S. and globally, the implications of the resulting shift in spending from individuals and companies to governments, the continuing ramifications of the recession and other shocks to the financial system, prospects for the various sectors that Standard & Poor’s rates, and lessons learned from the housing bubble and its aftermath.
The participants were Standard & Poor’s Chief Economist David Wyss, Standard & Poor’s Ratings Services Executive Managing Director David Jacob of Global Structured Finance Ratings, and Managing Directors John Bilardello of Corporate Ratings, John Chambers of Sovereign Ratings, Jayan Dhru of Financial Institutions Ratings, and William Montrone of U.S. Public Finance Ratings.
Some key points:
- Peak to trough in taking our estimate of the second quarter, we’re looking at a 21% drop in household net worth since the end of 2007. That’s the result of the 57% drop in the stock markets combined with a 32% decline in home prices.
- … as we look forward into 2010, there’s a large amount of debt coming to maturity that will start to spike in 2010 through 2014. That’s going to weigh very heavily on corporate credit quality and the ability to refinance that debt, starting now and carrying through the next four or five years.(Bilardello)
For CMBS, the credit deterioration is just beginning and we believe the outlook is negative.
- Commercial real estate lags the overall economy, so problems with CMBS have really just begun. Refinancing needs are huge and will exacerbate the credit issues if banks don’t start lending again. Downgrades will far exceed upgrades for the foreseeable future. (Jacob)
- The outlook for RMBS is slightly less negative. Most of the subprime issues are behind us from a ratings perspective. However, we still have a lot of work to do on Alt-A and prime because the credit picture in those segments has continued to deteriorate. (Jacob)
- We’re seeing some companies take a relook at their capital structure with an eye toward deleveraging, if that’s possible. Some companies who are on the fence of speculative grade and investment grade, they’re looking to either stay investment grade or get back to investment grade, so we’re seeing a bit of that. But with that said, corporate executives have short memories. (Bilardello)
For details see 2009 Midyear Outlook: A Tough Road To Recovery For Global Markets.
Technorati Tags: CMBS, corporate-debt, credit-markets, credit-ratings, deleveraging, economic-forecast, RMBS
Securitization has taken a beating for its role in the financial and economic crisis ignited by the meltdown of securities backed by subprime mortgages. But a new study by NERA Economic Consulting finds that securitization has many benefits including lower borrowing costs and increased lending to underserved populations.
In the fall of 2007, the American Securitization Forum (ASF) commissioned a NERA team — led by Senior Vice President Dr. Chudozie Okongwu and Vice President Dr. Faten Sabry — to conduct a study to evaluate the impact of securitization on consumers, investors, and the broader financial markets. A primary motivation for commissioning this study was ASF’s assessment that there was little academic or other research that attempted to evaluate and quantify the broader economic impact of securitization in an analytically rigorous way. The study assesses the long term impact of securitization, with a focus on the residential mortgage-backed securities market.
The study found that securitization has produced significant economic benefits in certain markets.
Specifically, the study highlights that:
- Securitization lowers the cost of consumer credit, reducing yield spreads across a range of products including mortgages, credit card receivables, and automobile loans.
- Increases in secondary market purchases and securitization of mortgage loans have positive and significant impacts on the amount of mortgage credit available per capita, particularly among traditionally underserved populations. Conversely, declines in secondary market purchase and securitization activities negatively impact the amount of available mortgage credit. The analysis controls for the credit quality and demographics of the loans.
- A reduction in securitization activity has a negative impact on all types of lending activity, including but not limited to residential mortgages. The study predicts that bank lending activity is likely to be significantly and negatively impacted if securitization remains at its current, depressed level.
Study of the Impact of Securitization on Consumers, Investors, Financial Institutions, and the Capital Markets
Technorati Tags: credit-crisis, credit-markets, mortgage-backed-securities, RMBS, securitization
The latest monthly letter from PIMCO’s Bill Gross, makes for depressing reading, especially for those who make their living off other people’s money.
Of one thing you can be sure however: over the next several decades, the ability to make a fortune by using other people’s money will be a lot harder.
Gross writes that it ” is probable that trillion-dollar deficits are here to stay because any recovery is likely to reflect “new normal” GDP growth rates of 1%-2% not 3%+ as we used to have. Staying rich in this future world will require strategies that reflect this altered vision of global economic growth and delevered financial markets. Bond investors should therefore confine maturities to the front end of yield curves where continuing low yields and downside price protection is more probable. Holders of dollars should diversify their own baskets before central banks and sovereign wealth funds ultimately do the same. ”
All investors should expect considerably lower rates of return than what they grew accustomed to only a few years ago. Staying rich in the “new normal” may not require investors to resemble Balzac as much as Will Rogers, who opined in the early 30s that he wasn’t as much concerned about the return on his money as the return of his money.
Ed Harrison at CreditWritedowns offers a good analysis of Gross’s analysis:
In the end, one can only conclude that the U.S. is indeed likely to deficit spend for a considerable period and that this is going to have negative effects on its credit rating and relative standing in the global economy. A diminished future for America is an inevitability of having lived beyond its means for far too long. Accepting this fact is likely to provide a better outcome than resisting it as the U.K. did when its tenure as king of the hill came to an end.
Technorati Tags: Bill-Gross, bonds, credit-markets, investment-strategy, PIMCO
Standard & Poor’s added three companies to its list of the global weakest links in the last month, bringing it to a record high of 300 as of April 22. Eroding credit quality is leading to lower ratings and more entities with negative outlooks or with ratings on CreditWatch with negative implications.
This is the 14th consecutive month that has seen an increase in weakest links, S&P said. The 300 weakest links have combined rated debt worth $485.75 billion. By sector, media and entertainment, retail and restaurants, and forest products and building materials were the most vulnerable, with the highest concentrations of weakest links, according to S&P’s Global Bond Markets’ Weakest Links And Monthly Default Rates report. Weakest links are defined as issuers rated ‘B-’ or lower with either a negative outlook or with ratings on CreditWatch negative, and they are at greater risk of default.
The 12-month-trailing global corporate speculative-grade bond default rate increased to 4.92% in March 2009 from 4.28% in February and is now more than 6x the 25-year low of 0.79% recorded in November 2007. The U.S. speculative-grade corporate default rate increased for the 16t consecutive month, reaching 5.42% in March 2009, up from 4.9% in February and now about5.5x the level from year-end 2007.
Corporate defaults continue to rise rapidly in 2009. Through April 22, 2009, 92 issuers defaulted, affecting debt worth $243.95 billion. By comparison, 126 defaults were recorded in all of 2008, affecting debt worth $433 billion.
We expect the U.S. corporate speculative-grade default rate to continue rising to an all-time high of 14.3% by March 2010. - Diane Vazza, head of Standard & Poor’s Global Fixed Income Research Group.
“Historically, defaults have continued to escalate even after signs of economic recovery. This cycle will be no different. We expect the economy to bottom out in the third quarter of 2009, but defaults likely will be abundant past that time horizon.”
Technorati Tags: building materials, corporate defaults, credit-markets, forest products, junk-bonds, media and entertainment, restaurants, retail, speculative-grade-bonds
CreditSights is maintaining its Overweight rating on US utility bonds. “Despite the challenges of lower usage, difficulty in asking for rate increases during hard economic times and the necessity of spending on maintenance and capex, most of our utilities should weather the storm relatively well, ” Creditsights says in Utilities: Why We Remain Overweight. “That does not mean that some will not be very stressed and others somewhat stressed. Despite coming challenges, the sector is still a relatively safe one, and, at least in Q1, also outperformed corporates as a whole.”
We expect a rough first quarter for many of our names, but the overall stability of the sector keeps it a good place to look for reasonably safe and attractive yields in a time of turmoil.
“….new issues of utility bonds are still offering fairly generous spreads, as many utilities are taking advantage of their ‘celebrity’ status and low interest rates to issue debt. At the moment, at least, utility bonds and CDS are offering, for the most part, the best of both worlds: safety and some performance. Also, they are issuing when many other sectors cannot or will not, giving investors relatively safe havens for cash at attractive spreads.”
Technorati Tags: credit-default-swaps, credit-markets, utilities
Standard & Poor’s expects local governments to maintain credit quality, despite the effects of the housing slump. S&P’s view contrasts with Moody’s recent negative outlook rating for the sector.
With government revenues hit hard by still-falling home prices in many parts of the U.S., S&P looks at the implications for municipal debtholders in Local Governments Prove Resilient In Weathering The Housing Slump.
Despite a much-weaker housing market, Standard&Poor’s Ratings Services believes that many municipal government managers and elected officials will likely be able to balance budgets and maintain strong credit quality, although doing so may require considerable discipline and a willingness to make tough choices.
Many of these municipal bond issuers may, however, have to draw down on their reserves, and take other actions, S&P says.
The New York Times reports the results of a survey by the Nelson Rockefeller Institute showing a sharp drop in tax revenues in the fourth quarter, especially in western states such as Arizona, California and Nevada, hard hit by the housing slump.
Utah, for example, where construction-related employment has been battered, had the sharpest decline in personal income tax collections in the nation in the last quarter of 2008, down 18.5 percent from the same period in 2007.
Technorati Tags: credit-markets, housing crisis, municipal-bonds, state-and-local-government
Moody’s says the overall global credit quality for corporate issuers continued to worsen during the first quarter of 2009, with a downgrade rate of 13.8% that highlights the negative credit climate in the first part of the year.
During the first quarter of 2009, overall credit quality continued to worsen, with an upgrade-downgrade ratio of 0.04, or 4 upgrades for every 100 downgrades.
“This upgrade-downgrade rate is much lower than pre-economic crisis figures. For example, the
At the end of the first quarter of 2009, 9.7% of rated issuers were on review for downgrade, compared to 1.0% on review for upgrade. Similarly, a greater percentage of issuers held negative outlooks than positive ones, and the negative trends have been growing. At the end of the first quarter, 26.7% of rated issuers were given negative outlooks, compared to 2.7% with positive outlooks.”
At the end of the first quarter of 2009, 9.7% of rated issuers were on review for downgrade, compared to 1.0% on review for upgrade, Moody’s said. “Similarly, a greater percentage of issuers held negative outlooks than positive ones, and the negative trends have been growing. At the end of the first quarter, 26.7% of rated issuers were given negative outlooks, compared to 2.7% with positive outlooks.”
Regardless of the region, there are more issuers on review for downgrade than review for upgrade, said Moody’s. However, Europe, the Middle East, Africa and Asia Pacific have the largest disparity. Similar to last quarter, the U.S. and Canada, Europe and Middle East and Africa are the regions with the largest percentage of negative outlooks.
On a positive note however, the U.S. and Canada also have the highest percentage of positive outlooks and watches-for-upgrade.
The type of ratings actions and outlooks differed by industry: Finance, Securities and Leasing, Automotive and Hotels, Gaming and Leisure had the largest absolute number of downgrades. All of these industries also currently have many more issuers on review for downgrade than review for upgrade.
For details see Moody’s Rating Actions, Reviews and Outlooks: Quarterly Update — First Quarter 2009
Technorati Tags: corporate-debt, credit-markets, credit-ratings
In its first-ever assignment of a sector-wide outlook for US local government ratings, Moody’s gives a negative outlook for the sector over the next 12 to 18 months. While it does not address local governments individually, it does imply increasing downgrades and possibly defaults by individual municipal debt issuers. Local governments with above average exposure to real estate, auto and financial services industries “could well experience significant downward rating pressure in the near-term.”
“The real estate development slowdown could impact areas with recent high growth levels such as certain areas of Florida and California. Troubles in the auto manufacturing industry may well affect many governments in Michigan, Indiana and Ohio, while the turmoil in the financial services industry is affecting issuers in New York, New Jersey and Connecticut. Tourism, gaming, and manufacturing generally, may also be disproportionately affected by the current downturn. Local governments with above average exposure to these particular industries could well experience significant downward rating pressure in the near-term.”
The negative outlook “reflects the significant fiscal challenges local governments face as a result of the housing market collapse, dislocations in the financial markets, and a recession that is broader and deeper than any recent downturn.”
“With the past year’s relentless stream of negative economic and financial news, the current economic environment will clearly pose significant challenges for many if not most local governments. Sharply falling property values, contracting consumer spending, job losses, and limited credit availability lead the long list of developments that will make balancing budgets in the coming year particularly difficult.”
The negative outlook assigned to the U.S. local government sector encapsulates our view of this challenging environment and the strains that will be evident in credit for issuers across the industry.
“The negative sector outlook does not suggest that the prospects for local government credit ratings are uniformly negative. Its meaning is distinct from our rating outlooks for individual credits, which are predictive of future rating direction for that particular credit.”
“Credit pressures faced by local governments and their responses to these pressures will vary significantly across and within states due to uneven economic conditions, differing revenue mixes and service mandates, inconsistent property assessment practices, and different levels of revenue raising authority. The governance strength of individual issuers and the behaviors which demonstrate their willingness and ability to adapt to that environment will determine the overall trend in individual ratings.”
For details see: Moody’s Assigns Negative Outlook to U.S. Local Government Sector.
Technorati Tags: credit-markets, municipal-bonds, state-and-local-government
Despite recent borrowing binges, Moody’s believes most European countries have limited sovereign debt refinancing risk, with the exception of some countries in eastern Europe.
In a new Special Comment, Moody’s introduces its Government Refinancing Risk Indicators (GRRI/GRRI+), which examine the interplay of refinancing volumes and market access.
“The analysis indicates that the only countries exhibiting refinancing risk are those whose refinancing needs are concurrently constrained in their ability to tap the market. Hence, the majority of European countries rated by Moody’s have limited refinancing risk. This holds particularly true for EMU countries and the Aaa-rated euro “outs” of Sweden, Denmark and the UK.”
However, some countries, particularly those in Central and Eastern Europe (CEE), are more vulnerable than others.
When we combine government and external refinancing pressures, a handful of countries stand out: we see considerable refinancing risk in the case of Ukraine; Estonia, Latvia, Lithuania and Hungary show elevated risk levels.
For details see: European Sovereigns Face Differentiated Refinancing Risk.
Technorati Tags: credit-crisis, credit-markets, Estonia, Hungary, Latvia, Lithuania, sovereign-debt, Ukraine
A dramatic rise in delinquencies has led Fitch Ratings to raise its average loss estimates for recent vintage jumbo prime mortgage pools to between 3 and 5 times higher than its previous estimate.
Fitch’s revised average loss estimates as a percentage of the remaining pool balance for recent vintage jumbo prime RMBS are as follows:
Fixed-rate loan pools 2005: .97; 2006: 2.05; 2007: 2.58.
Hybrid ARM pools 2005: 1.60; 2006: 3.55; 2007: 4.81.
These 2005, 2006 and 2007 revised loss estimates are approximately three, four and five times higher, respectively, than the prior loss estimates.
In analyzing recent prime mortgage performance Fitch found that:
- Loans with multiple risk attributes such as limited income documentation and second-liens, are defaulting at rates approximately three times that of loans without those characteristics;
- A growing percentage of prime borrowers have lost all home equity due to declining home prices. Borrowers with negative equity in some recent vintage mortgage pools are approaching 50%;
- After adjusting for home price declines to date, loans estimated to have no equity in the property are defaulting at rates approximately three times that of loans estimated to have equity remaining.
- In addition to high default rates, recovery rates on defaulted loans are also trending downward.
“Delinquencies have risen dramatically for prime RMBS transactions as borrowers have come under increasing pressure from declining home values, lack of mortgage financing, and rising unemployment.”
For details see U.S. Prime RMBS: Performance Update.
Technorati Tags: credit-markets, delinquencies, mortgage-backed-securities, RMBS, structured-finance
