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
Standard & Poor’s does not expect all European financial groups to emerge from the current recession intact.
In an Industry Report Card , S&P points out that European banks’ credit loss provisions more than doubled in 2008 compared with 2007. “The annual total for the 50 largest European banks was €128 billion, with a progressive increase in the third and fourth quarters of the year. If the rate of provision for credit losses in second half 2008 simply were to continue throughout 2009, the total for the 50 largest European banks would increase a further €50 billion,” said Standard & Poor’s credit analyst Scott Bugie.
We expect (credit loss) provisions to rise faster still in 2009. In many European countries, the rates of domestic loan losses in 2009 will be double that for 2008.
The bottom quintile of European banks in 2008 as measured by the ration of pretax earnings to assets:
Bayerische Landesbank
Credit Suisse Group (US GAAP accounts)
Dexia Credit Local
Fortis Bank SA/NV
HBOS PLC
HSH Nordbank AG
Hypo Real Estate Bank AG
KBC Group N.V.
Royal Bank of Scotland Group PLC
UBS AG
Moody’s on Monday placed bottom ranked UBS (NYSE: UBS) on review for downgrade.
“Our outlooks are negative on the credit ratings of more than half of the largest banking groups in Europe, due to our assessment that they have poor earnings prospects and that industry fundamentals have weakened. While positive recent news from equity and credit markets and flush first quarter 2009 trading results of some banking groups provide encouragement, we believe that the multiyear costly process of cleaning damaged loan books will dominate bank results over the medium term. Weakened revenue flow from other business lines in the recessionary environment will make the cleanup task harder still.”
“The ratings on many European banks would be lower if not for the highly supportive stance governments have taken. The future credit standing of the European banking industry largely depends on the impact of current and future sovereign government policy actions that cover several fronts. Ratings on bank hybrid capital securities are under particular pressure. In our view, the poor financial performance of the banking sector increases the potential that certain institutions will suspend payments on their hybrid securities to preserve much needed capital.
… the path from the troubled present to a potentially more stable future will be rocky. In our opinion, not all European financial groups will survive the journey intact.
Technorati Tags: banking, credit-ratings, european-banks, UBS, write-downs
Worries increase over potential sovereign debt downgrades in the United Kingdom and even the United States are not credible, according to Oxford Analytica. Even worse, the fears themselves could slow economic recovery, OxAn says in Downgrade threats are not credible.
As government debt-to-GDP ratios in advanced economies are set to increase substantially as a result of stimulus spending and reduced tax receipts, credit-rating downgrades are being threatened.
Yet such threats are derived from overly simplistic and orthodox logic, and risk stimulating premature policy tightening, thus destabilising recovery.
Average deficits of 3% of GDP or less, and debt below 60% of GDP, are reasonable, though simplistic, guidelines for mature economies in normal circumstances. However, they are inadequate for treating extreme and unusual situations:
- • In a failing or volatile state, the prudent level for debt may be much lower if this can only be funded with short-term debt, and/or the country’s risk premium is high (eg due to other economic risks or political instability).
- • In contrast, in a very stable economy with high, conservative savings, a much higher supply of government debt may be tolerable, as seen in Japan, where debt of 170% of GDP coexists with bond yields of 1-2% and low inflation.
“There is no simple or precise yardstick by which these variables can be judged. The truthful, but unpopular, answer to the question of whether or not a particular debt level is “risky” is based on the contingency of context. ”
Another way of looking at this problem is to ask what effect higher deficits and debt levels may have on the economy concerned — what matters is the effect of these intermediate variables on the final targets of policy (such as sustainable improvements in welfare and living standards for the whole population):
- • It is sensible to ask a series of questions such as whether deficit spending might overheat the economy and feed inflation; whether high debt ratios will push up real interest rates and crowd out private spending, or simply and safely take up the economy’s slack; and what, if any, policies the government might propose to reduce debt, should this be necessary (ie the ‘exit strategy’).
- • If the answers to these questions suggest that there are few risks attached to raising debt (now and in the future), then whether government debt is 50% or 150% of GDP, it would seem to pose no discernable threat to the economy.
In effect, this has been the Japanese position — although economic orthodoxy might prevent it being acknowledged. Japan is among the countries with highest government debt, but it has not become a high-inflation, weak-currency country, and has few other characteristics in common with these other debtors.
It is important that rating agencies and markets not overreact to the sharp rise in government deficits and debt. After such a serious recession, it is crucial to ensure that the global economy recovers before starting to review — very carefully, on a country-by-country basis — the appropriate scale of public sector involvement in the economy, deficit spending rates and level of government debt.
This would imply a need for more informed debate on these issues to prevent impulsive reactions from credit analysts or governments too anxious to reverse the current expansion in debt too rapidly. After extraordinary efforts to avoid an even deeper recession in the global economy, governments will seek to retrench. However, such exit strategies will need to be phased extremely carefully to avoid destabilising a fragile recovery.
Technorati Tags: credit-ratings, sovereign-debt, United Kingdom, United States
As part of its efforts to increase transparency around its ratings process, Standard & Poor’s Ratings Services has published Understanding Standard & Poor’s Rating Definitions.
The publication is designed to further promotes greater understanding of ratings, including differences among the various rating categories, S&P said. Ratings embody multiple factors that compose the overall assessment of creditworthiness.
The primary factor in Standard & Poor’s analysis of creditworthiness is likelihood of default, although payment priority, potential repayment following default, and credit stability are factors that can also play a role in Standard & Poor’s assessment of credit risk.
The article also highlights the economic stress scenarios Standard & Poor’s uses
as part of calibrating its criteria for various ratings categories across sectors. This includes an appendix detailing the stress levels during previous recessions and financial crises, dating back to Britain’s Panic of 1797.
Full details are available in Understanding Standard & Poor’s Ratigs Definitions.
Technorati Tags: credit-rating-agencies, credit-ratings, standard-and-poors
Standard & Poor’s Ratings Services has launched a new credit rating scale that provides additional transparency about the credit risk of borrowers active in the ASEAN (Association of South East Asian Nations) region.
S&P says the new ratings will provide information for investors in the region’s developing debt markets, and help companies across South East Asia access new sources of capital.
ASEAN scale credit ratings have already been assigned to 19 issuers in the region (see Standard & Poor’s Releases 19 ASEAN Regional Scale Ratings). Standard & Poor’s ASEAN ratings are based on the same criteria and methodology as Standard & Poor’s global scale. The main difference between the two scales resides in calibration and basis of comparison: A regional scale rating is based on credit-risk comparisons within a specific region, while a global rating is based on global comparisons. The ASEAN rating scale is clearly marked with its own identifying prefix ax (for ASEAN).
S&P also provides Credit FAQ: ASEAN Regional Credit Rating Scale Explained, to address the most pertinent investor questions about the new scale.
In a related report Emerging ASEAN Sovereigns’ Business Cycles Show Significant Synchronicity, S&P finds a high correlation between the fortunes of the ASEAN economies and those of China, Japan and the US. Also, there is significant element of synchronicity of business cycles across ASEAN emerging economies, particularly first-generation members Malaysia, Thailand, Philippines, and Indonesia.
One significant implication of this pattern is that producers in these countries, particularly exporters, face synchronous business risks.
“This, in turn, feeds into risks faced by other businesses, which feed into exports as well as the risks faced by financial institutions, whose lending and investment activity is both directly and indirectly linked to export activity.”
Technorati Tags: ASEAN, credit-rating-agencies, credit-ratings, Indonesia, Malaysia, Philippines, Singapore, standard-and-poors, Thailand
Fitch Ratings has issued a bleak prognosis for the recovery of corporate credit conditions. Even with positive economic growth from 2010, due to the time lag in achieving “trend” growth - the point at which recovery begins to manifest itself in corporates - the agency still does not forecast a return to more benign credit conditions for its corporate portfolio until mid-2011.
As a result, the current heavily negative bias to corporate rating actions represents a forward-looking assessment, rather than a reaction to current earnings reports.
From a financial perspective, those issuers most exposed to downgrades will be those where economic conditions both generate a material increase in leverage (through gross debt increases or depletion of operating cash flow), and, also, where a rebound in future profitability will be unlikely to restore the financial profile within the foreseeable future, Fitch says. Also more at risk are sectors or companies where an individual business model or industry position is likely to exit the current recession in a materially impaired condition.
Typically, vulnerable companies are more likely to be in the manufacturing and media sectors.
Issuers where Fitch’s forecasts indicate more financial resilience to the current economic stress include those where either current Fitch forecasts indicate profiles staying broadly within the tolerance bands for the current rating, or where a more material increase in leverage is offset by the potential for strong recovery as and when the economy recovers.
Typically, these companies are more likely to be in the energy, telecom and non-discretionary consumer product sectors, and services such as health care and education.
A final category of vulnerability relates to the most difficult area to forecast - liquidity. Fitch’s report notes that the hurdle for ‘access assumption’ - the assumption that an issuer can generally access funds both on reasonable terms and with no material delay - rises in current conditions from investment grade to mid- to high-investment grade for many industries. Exceptions to this include defensive sectors such as major telecom companies and regulated utilities.
Thus far in 2009, liquidity pressure in western economies from the rationing of bank refinancing has been in part offset by surprisingly robust corporate access to both investment-grade bond and equity markets. Bond market funding has also typically been inexpensive on an all-in basis, with spreads at record highs offset by interest rates at or near record lows. Fitch, however, regards this level of access, notably for ‘BBB’ and lower rated entities, as vulnerable to further deterioration in sentiment.
For details see “Corporate Forecasts: Macro-Level Assumptions: April 2009 Update“, which outlines Fitch’s principal assumptions driving its internal forecasts for corporate performance in the next two years.
Technorati Tags: consumer staples, corporate-debt, credit-ratings, education, energy, health care, manufacturing, Media, telecom, utilities
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
The increasing “socialisation of risk” has led Moody’s to acknowledge that not all Aaa-related sovereign debt is equally safe. In a new Special Comment, How Far Can Aaa Governments Stretch Their Balance Sheets?, Moody’s categorises Aaa countries into three groups.
“For a Aaa government to be downgraded, Moody’s must have concluded that the deterioration in credit metrics is (1) observable and material in absolute terms; (2) observable and material in relative terms; and (3) unlikely to be reversed in the near future,” Moody’s says. “The decision underlying a potential downgrade would also depend on the extent of the actual and potential deterioration of a government’s balance sheet; whether a country’s economic model can be regenerated, thereby allowing the economy to rebound; and whether governments can repair their fiscal position by raising taxes or cutting expenditure.”
Moody’s report concludes that all Aaa governments are affected, but to different degrees.
The rating agency distinguishes between three groups of countries:
- Resistant Aaa countries, such as Germany, whose rating is so far largely untested despite strong headwinds;
- Resilient Aaa countries, such as the UK and the US, whose ratings are being tested but, in our view, display sufficient capacity to grow out of their debt and repair the damage;
- Vulnerable Aaa countries (Ireland and, to a lesser extent, Spain) who face equally stern challenges and whose rating will depend on their ability to rapidly regenerate their economies. Indeed, in the case of Ireland, Moody’s placed its Aaa rating on negative outlook on 29 January 2009.
Moody’s believes that there will always have to be at least one Aaa issuer — an ‘anchor’ of the rating scale, representing the most creditworthy class of issuers. In Moody’s view, governments are the ultimate Aaa bond issuers across asset classes because of their unconstrained ability to raise resources.
This new report builds on another recent Moody’s Special Comment featured on Research Recap, in which Moody’s maps government liabilities in order to assess the safety of public debt for investors.
Moody’s notes that the new report does not constitute a change in the rating or outlook for any of the issuers mentioned.
Technorati Tags: credit-ratings, financial crisis, Moodys, sovereign-debt
Moody’s has launched a “Government Liability map” to better reflect the complexity of assessing sovereign-backed debt during the current economic and financial crisis.
Moody’s says the crisis has led to the proliferation of government financial operations, such as the granting of guarantees and the raising of debt for the purpose of acquiring assets, among other measures. As investors are being invited to purchase billions worth of government debt, the measurement of the true extent of government liabilities has become critical.
“Gaining an accurate picture of government liabilities by examining government financial statements has always been challenging. Indeed, information about government net worth, the concept that ultimately matters, is generally unavailable. As a result, most government credit risk analyses rely on simplistic gross debt information. Even in Europe, where statistics are well-developed and homogeneous, and where debt metrics have been enshrined in the Maastricht Treaty, the analyses are rather unsophisticated – and often circumvented by creative accounting.”
“This issue had previously been of limited interest (except to Moody’s) because Aaa-rated government finances seemed rock-solid. However, in the current circumstances, it is necessary to enhance transparency and illustrate in greater detail analytical efforts with regard to government liabilities.”
In a Special Comment Moody’s seeks:
- to demonstrate that sovereign credit risk must surpass the rudimentary analysis of reported gross public debt and shift to a balance sheet approach;
- to propose an approach (the Government Liability Map) that better reflects the complexity of assessing a “government-at-risk” – in other words, how much of a government’s net worth is affected by liabilities.
The important point here is that, for a government, being equally committed to repay a bond on the one hand and face the cost of bank recapitalization (or future pension shortfalls) on the other, does not mean the same thing: the impact on public finances will be of a certain “value” in one case and a highly uncertain “value” on the other.
In addition to the stylized case, Moody’s provides a sample based on the United States in the Special Comment: Not All Public Debt is the Same: Navigating the Public Accounts Maze.
Technorati Tags: bank bailout, credit-markets, credit-ratings, Moodys, sovereign-debt
Maybe it’s because the short term outlook looks so grim, but visitors to Research Recap are interested in the long view. The top post of the last week was based on Stratfor founder George Freidman’s new book looking ahead to the next 100 years.
Despite its current troubles, Friedman sees the US retaining its leading role in the world in the coming century. He also sees Japan, Turkey, Poland and Mexico as rising powers, each for different geopolitical and demographic reasons.
A longer-term perspective also was evident in the popularity of McKinsey’s analysis that the current US recession so far is following the pattern of previous ones, contrary to claims that it is “unprecedented.” Likewise the finding by Moody’s that the recent meltdowns of hedge funds uncover some underlying and long standing flaws in some hedge funds.
Back to the (nearer) future, The Motley Fool drew attention to a number of large-cap companies at risk of bankruptcy, and there was a surge of interest in Standard & Poor’s snapshot of credit ratings of US states, perhaps signaling concern that any stimulus plan may not be enough to bolster state finances in the current sharp downturn.
No doubt all eyes will be on that stimulus plan this week, given its massive short and long-term implications. And also on the long-awaited “son-of-TARP” bank bailout plan.
Technorati Tags: (F), (GM), (VZ), AMD, bankruptcy, china, credit-ratings, economic-policy, Ford Motor, foreign policy, General-Motors, geopolitical, Hedge-Funds, japan, JDS Uniphase, Mexico, population, Qwest, recession, Russia, states, turkey, Verizon, Zeitgeist
