Moody’s latest Sovereign Aaa Sovereign Monitor has generated considerable interest as it details adverse scenarios in which the Aaa rating of the US and the UK could come under threat. We are pleased to offer a complimentary download.
Selected Excerpts:
The stable outlook on the Aaa ratings of the largest governments reflects the observation that the affordability of public debt is deteriorating significantly in all cases but, on current projections, not to a level that would threaten their ratings.
Moreover, all these governments maintain very high levels of finance-ability, by which we mean that they are still able to raise considerable amounts of debt without experiencing a sharp rise in their cost of funding. A rise in the cost of funding is, however, a possible, even plausible scenario as the recovery gathers pace and central banks discontinue the exceptional measures put in place during the crisis. Sensitivity analyses (provided in the country-specific pages that follow) show that this could quickly raise the debt burden of the large countries, especially those – such as the US – that will need to roll over a large proportion of their debt in coming years.
Should that be the case, the ability of governments to reverse debt dynamics (the concept we label ‘debt reversibility’) will be tested and this ability will have to be demonstrated to continue to provide support for the ratings.
As discussed on page 24, we believe that all the large Aaa governments have the capacity to raise to the challenge that they face. Those, for which we assume a lower debt reversibility, such as France, are also governments that face comparatively lesser challenges. By contrast, the United Kingdom or the United States have stretched debt affordability farther but, in our view, also have higher debt reversibility. On balance, we believe that the ratings of all large Aaa governments remain well positioned – although their ‘distance-to-downgrade’ has in all cases substantially diminished, and tail risk has widened.
The full report Aaa Sovereign Monitor March 2010 has been made available for free download to Research Recap users for 30 days by special arrangement with Moody’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, credit-ratings, sovereign-debt, UK, US
Standard & Poor’s has updated its 2008 analysis of the correlation between credit ratings and price performance for S&P stocks, and finds that investment grade companies as a group continue to outperform speculative grade firms. But interestingly, the highest-rated companies underperformed the benchmark as a group in the last few years and have lagged ‘BBB’-rated firms.
The update takes into account the effects of the equity market’s crash and its subsequent rebound.
Key findings:
- Stocks of investment-grade rated companies (particularly ‘A+’ to ‘A-’ rated companies) in the S&P 500 outperformed the overall index.
- Stocks of speculative-grade rated companies in the S&P 500 underperformed the overall index.
- Stock performance of companies not rated by Standard & Poor’s Ratings Services fell in the middle of investment- and speculative-grade rated companies, underperforming the index.
This suggests that the creation of low-cost mutual funds or exchange-traded funds that track the performance of only the investment-grade companies or long/short versions that also short the speculative-grade companies would be attractive investments and thus worthwhile as new index-related products.
When looking at portfolios based on individual ratings, the investment-grade portfolios outperformed, with the exception of the ‘AAA’ to ‘AA-’ portfolio, which has fallen behind ‘BBB’-rated companies since 2007.
For details, see Market Intellect: How Equity Performance Tracks The Credit Quality Of S&P 500 Companies (Premium)
Technorati Tags: credit-ratings, investment-grade-bonds, invetsment strategy, S&P-500, speculative-grade-bonds, Standard & Poor's
Fitch Ratings expects the rating outlooks for EMEA Industrials’ issuers to continue to stabilize in 2010 but with a significant variance between sub-sectors and, in some cases, at lower re-based rating levels.
As of December 2009, 48% of Fitch-rated EMEA Industrial issuers had a Negative Outlook or were on Rating Watch Negative (RWN) compared with 20-30% for other EMEA corporate sectors.
“Fitch expects to see a modest revenue and profitability improvement in most industrials sub sectors in 2010. However, these anticipated improvements will be more likely due to cost-cutting than from a recovery in end-users demand which remains fragile,” says Frederic Gits, Head of Fitch’s EMEA Industrial Team.
The stabilisation of rating outlooks should accelerate in 2010 and, although further downgrades are still possible given the still uncertain economic outlook, headroom under current rating levels has nonetheless improved in the last six months.
The more defensive aerospace and defence and property investment sectors have been relatively less affected by the global financial crisis than other industrial sub-sectors. The former, notably due to the long lead-time on defence programmes, and the latter due to the resilience of long-term contracted rental income. Among the more cyclical segment, the mining sector has been the first to see rating stabilisation. Building materials, high-value-added chemicals, steel, and capital goods are expected to follow suit in 2010.
However, this rating stabilisation may take place at a re-based level as in the case of the building materials sector, which is one of the three sectors in Fitch’s corporate universe for which the average rating downgrade between December 2007 and December 2009 exceeded one notch. The automotive, low-value-added chemicals and UK homebuilder sectors may take longer to stabilise, due to continued uncertainty on sustainable demand trends, and these sub-sectors also have a higher risk than others of stabilising at a lower rating level. Civil construction, whilst having credit metrics presently stronger than the cycle average, is expected to endure a weakening in issuer credit profiles due to the lagged impact of the downturn on weakening order-books and project cancellations at the height of the crisis.
For details, see EMEA Industrial: 2010 Outlook; Encouraging Signs, But Risks Remain (Premium)
Technorati Tags: Aerospace, building materials, checmicals, corporate-debt, credit-ratings, Defense, EMEA, homebuilding, industrials, mining, steel
In light of surveillance process changes and the continued deterioration in the mortgage market, Standard & Poor’s expects negative rating actions on rated RMBS transactions to continue.
In February 2009, Standard & Poor’s Ratings Services announced that, in the interest of enhancing transparency, we would review our surveillance criteria for rated U.S. residential mortgage-backed securities (RMBS) and issue a series of publications to explain our criteria for rating transactions backed by various types of mortgage collateral.
By applying updated criteria and the assumptions in other previously published criteria, S&P has taken more than
125,000 rating actions.
These actions have yielded approximately 204 upgrades, approximately 53,000 downgrades, and more than 72,000 affirmations.
S&P said it will continue to prioritize surveillance reviews based on a number of relevant indicators, including:
- Criteria changes for recent vintages;
- The amount of time since we previously reviewed a class (for older transactions);
- The CreditWatch status of a particular transaction or class;
- Whether a rated class has experienced a principal write-down; and
- The dependence of a class or rating on a bond insurer.
For details, see Standard & Poor’s Provides Update On U.S. RMBS Surveillance Process
Technorati Tags: credit-ratings, mortgage-backed-securities, RMBS, structured-finance
Standard & Poor’s Ratings Services has published a report that summarizes its definition of models, briefly describes what its models are used for, and discusses in general terms its view on methods of combining qualitative and quantitative considerations in the ratings process.
The report also addresses some distinctions Standard & Poor’s sees between models suitable for ratings analysis and models more suitable for use in valuation, portfolio optimization, and risk measurement.
“The ratings process can involve use of quantitative considerations, such as models, in addition to qualitative considerations,” said Martin Goldberg, Senior Director at Standard & Poor’s.
The applicable published Standard & Poor’s criteria will, in general, outline the nature of those considerations. And the importance of models in the ratings process varies. Analysis of more complicated debt often calls for
more elaborate tools.
For certain securities, the use of quantitative financial models can be an important tool in the ratings process.
“The models Standard & Poor’s uses are built to embody its assumptions and are specifically designed for use in the ratings process. These models can differ from those intended for other purposes and from those embodying
different assumptions. We may use these models earlier in the ratings process than qualitative analysis, or later, or simultaneously, depending on our view on how best to analyze a particular aspect of credit risk.”
For details, see On The Use Of Models By Standard & Poor’s Ratings Services (Premium)
Technorati Tags: credit-ratings, quantitative analysis, standard-and-poors
Standard & Poor’s has issued a Credit FAQ report on the ratings implications of potential M&A activity for diversified industrial companies. The full report is available as a complimentary download from the AlacraStore.
Excerpts from Credit FAQ: How Mergers And Acquisitions Could Affect The Ratings Of Diversified Industrial Issuers In 2010
Standard & Poor’s does not consider the capital goods sector as particularly fertile ground for large multibillion dollar transactions, and does not expect a big wave of transformative merger and acquisitions (M&A) in 2010. Nonetheless, over the past few months, we have observed early signs of increasing activity among certain diversified industrial issuers. Others have acknowledged a growing appetite for external growth and commented that they see more potential opportunities developing in their acquisition pipeline. This is gradually supplanting the very cautious sentiment and focus on preserving financial strength of the first nine months of 2009.
The dozen investment-grade-rated diversified industrial issuers in the capital goods sector have all experienced reduced revenues and profits in 2009. Many entered the downturn with what we consider solid credit measures and the capacity to absorb some downside risk. Although most issuers’ credit ratios have often fallen short of our expectations, most have managed to limit the deterioration and have preserved liquidity. While we left many issuer ratings unchanged throughout the downturn, we nonetheless lowered the ratings on several high-profile issuers or revised their rating outlook to negative in 2009.
Despite recent signs of sequentially improving order rates and the potential for some inventory rebuilding, we expect that growth will generally remain tepid throughout 2010. Therefore, it is not surprising that acquisitions are returning as a potentially attractive growth engine for management teams.
Through the downturn, industrial manufacturers’ cash flows have benefited from tight working capital controls and from lower capital expenditures. Some companies have used cash flows to reduce debt, while others have gradually built up cash reserves. This liquidity may help fund acquisitions for several issuers. Still, at the end of 2009, we believe that credit measures will remain generally weaker than our expectations for many issuers. While operating leverage could spur some recovery in operating profits in 2010 even with modest sales growth, the risks of a protracted period of flat demand or a “double dip” recession remains a concern.
While we believe that diversified industrials have generally retained, consistent with their current rating levels, some moderate capacity for acquisitions, those issuers with weaker-than-average credit metrics and modest excess cash reserves have limited capacity overall, in our view.
The full report Credit FAQ: How Mergers And Acquisitions Could Affect The Ratings Of Diversified Industrial Issuers In 2010 has been made available for free download to Research Recap users for 30 days by special arrangement with Standard & Poor’s Credit Research, an Alacra content partner. After 30 days the report will revert to its regular AlacraStore price of $300.00)
Technorati Tags: (DHR), (DOV), (EMR), (HON), (IR), (ITT), (ITW), (PH), (TYC), (UTX), credit-ratings, Danaher, diversified industrial companies, Dover Corp, Eaton Corp, Emerson Electric, ETN), free research, GE, General Electric, Honeywell International, Illinois Tool Works, Ingersoll Rand, ITT Corp, M&A, mergers and acquisitions, Parker Hannifin, Tyco International, United Technologies
Ratings agency says corporate debt upgrades remained limited in the third quarter but the pace of credit deterioration slowed.
Excerpts from Fewer Corporate Downgrades in the Third Quarter Point to Moderating Credit Conditions
Downgrades contracted 52% during the third quarter, compared with the previous three months, Fitch said. The ratio of downgrades to upgrades, while still negative and firmly in recessionary territory, contracted to 5 to 1 from highs of 12 to 1 and 10 to 1, respectively, recorded in the first and second difficult quarters of 2009. The improvement in the margin of downgrades to upgrades was due exclusively to fewer downgrades.
The third quarter contraction in downgrades spanned both financial and industrial firms. Negative rating activity fell 56% quarter over quarter among financials and 42% among industrials. The ratio of downgrades to upgrades among financial entities however remained wide at 9 to 1 in the third quarter compared with a more moderate 3 to 1 ratio among industrial companies. Credit quality among industrials has stabilized at a relatively faster pace in 2009 than financials.
In another sign of moderating credit conditions, there were fewer multi-notch downgrades and fewer fallen angels in the most recent quarter’. – Charlotte Needham, Senior Director of Fitch Credit Market Research.
Multi-notch downgrades fell more than 60% quarter over quarter and fallen angels fell 52%. Fitch’s global corporate rating trends suggest that downgrades peaked in the 1Q’09.
Through September, the default rate across Fitch-rated global corporate entities was 2.1%, ahead of 2008 full year rate of 1.3%. Of the year’s defaults, 95% were rated speculative grade by Fitch at the beginning of the year with nearly 50% of the year’s defaults rated ‘CCC’ or below.
The distribution of outlooks, a reflection of the still uncertain global economic environment, remained net negative at the end of the 3Q’09 but improved slightly from second quarter levels. As of the end of 3Q’09, the share of global corporate issuers carrying a Negative Outlook or Watch was 33%, down from 35% at the end of 2Q’09 (June 30). The share of issuers on Positive Outlook or Watch remained steady at a modest 3%.
Technorati Tags: credit quality, credit-ratings
Rating trends for non-financial corporates in the Americas indicate firming credit quality and a possible emergence from the economic downturn.
Excerpts from Turning the Corner? Ratings Suggest an Upturn
The number of monthly downgrades of non-financial corporate ratings in the Americas has plunged by more than two-thirds since December to levels last seen prior to Lehman Brothers’ bankruptcy filing. While downgrades still outnumber upgrades, the gap has narrowed substantially.
There are one-third as many ratings under review for downgrade as there were in March, suggesting further ebbing of the downgrade wave.
The liquidity of speculative-grade companies has also improved as the reopening of the high-yield bond market and narrowing credit spreads have allowed more companies to refinance their debts. Moody’s Liquidity-Stress Index sits at a nine-month low and has declined every month since its peak in March.
These improving trends are consistent with our forecast that the U.S. speculative-grade default rate will peak at 13.2% in November, followed by a steady decline to 4.1% — near the average of the last 20 years — by next August.
Technorati Tags: corporate-debt, corporate-default, credit-ratings, economic-data, speculative-grade-bonds
Sees signs of very modest growth but does not expect improvement to be exceptionally robust.
Excerpts from Moody’s revises North American Manufacturing Industry Outlook to stable
Moody’s Investors Service today changed its Industry Sector Outlook for the North American Diversified Manufacturing sector to stable from negative. This outlook expresses Moody’s expectations for the fundamental credit conditions in the industry over the next 12 to 18 months.
This change in outlook reflects Moody’s view that the drastic reduction in manufacturing activity experienced over the better part of the past year has begun to moderate and that very modest growth trends may take hold.
This should contribute to the firming of business fundamentals for the diversified manufacturers. A stable outlook indicates that Moody’s does not expect business conditions for the manufacturers to materially improve or worsen.
However, “while Moody’s believes fundamentals to be firming for the manufacturers, the agency does not expect the improvement to be exceptionally robust. Underpinning this view is the weakness that persists in the global economy, which will be a constraint on volume levels for some time. Low capacity utilization of about 67% currently — well below the long-term average of almost 80% — will also constrain growth. Consequently, investment activity will likely remain lackluster while pricing power remains elusive even as higher commodity costs begin to filter through on the input side.”
Technorati Tags: credit-ratings, economic-data, manufacturing
Few further downgrades expected unless conditions worsen.
Excerpts from Banking System Outlook: United Kingdom
Moody’s maintains its negative outlook for credit conditions for the UK banking sector over the next 12 – 18 months. We expect the sustained weakness of the macroeconomic environment in the UK to continue to feed through into higher loan arrears with ensuing pressures on profitability and capital from higher loan loss provisions and the elevated cost of funding, as well as uncertainty regarding the effect of certain regulatory developments.
Following the start of the crisis in the global financial sector in 2007, the UK banking sector absorbed losses on loans and securities of around £110 billion by the end of 2008 and raised or arranged around £120 billion of new capital by the middle of 2009. Our current rating levels incorporate our estimates of further losses of around £130 billion from the loan books and securities portfolios of rated UK financial institutions, on the basis of our assumptions about the performance of key asset classes and earnings and available capital.
These developments have underpinned the change in the weighted average Bank Financial Strength Rating (BFSR) of rated UK banks to C- from B over the past 12 months, and the weighted average senior debt and deposit rating to Aa3 from Aa1. The ongoing pressure on earnings and capital remains our key analytical focus for UK financial institutions.
However, having already incorporated our estimates of these risks in our ratings, we do not expect a large number of further rating downgrades in the UK over the next 12 -18 months.
Importantly, government support has provided a certain amount of stability to the banking sector through large-scale capital injections, credit guarantees and support for depositors. This has resulted in relatively more stable senior debt and deposit ratings, which we expect this to remain stable throughout the crisis.
However, the banks will continue to face many challenges over the next couple of years as they work their way out of the current problems on their balance sheets. As well as the asset quality problems and pressure on capital, this includes pressure on profitability due to the higher cost of deposits and wholesale funding and depressed revenues. Moreover, we expect regulation and government intervention, to remain a key driver for developments in the UK banking sector over the next 1 – 3 years, and EU requirements have the potential to lead to significant changes in the franchise of large banks that have received State Aid.
As a result, there may be adjustments to the ratings of individual institutions where performance is worse than our base-case scenario. Consolidation, particularly in the building society sector, may drive further rating changes. We have taken a conservative view on future developments in the economy, but should the downturn be significantly worse than our base-case scenario (which incorporates a 40% peak-to-trough house price fall, 60% peak-to-trough commercial property price falls, and GDP contraction of 3-4% in 2009) then we could see further downgrades of the BFSRs and possibly also the senior debt ratings of some institutions. Furthermore, any explicit or implicit reduction of the currently extraordinarily high state support at a time when the intrinsic strength of banks is still low may result in further downgrades of banks’ senior debt and deposit ratings
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