This week The Economist offers a Special Report on financial risk. Selected excerpts from the accompanying leader:
Europe’s troubles have given investors good reason to worry; but they are not the only cause for concern. Policy changes around the world have also spooked investors. China’s government began to rein in its lending binge last month, worried about accelerating inflation and asset bubbles. India’s central bank has raised reserve requirements and Brazil’s fiscal stimulus is being phased out (see article). The rich world’s big central banks are gradually unwinding the emergency liquidity facilities they introduced at the height of the crisis. “Quantitative easing”, the process of printing money to buy longer-dated securities, is coming to an end—or at least being put on hold.
To minimise the risk that they fall into a Japanese-style morass of high public debt and slow growth, the rich world’s economies must spur productivity, encourage investment and foster competition. That points to a renewed focus on freeing trade, cutting spending rather than raising taxes and agreeing on new financial regulations.
Some of today’s nervousness comes from “policy risk”. Nobody—neither firms, banks nor individuals—is quite sure where government policy is going. The more that governments can do to reduce such uncertainty, the stronger the recovery is likely to be.
Topics covered in the Special Report:
- Taming financial risk
- Number-crunchers crunched
- The role of the risk manager
- Banks and risk management
- Evaporating liquidity
- The future of financial regulation
- Risk after the crisis
Technorati Tags: credit-risk, economic-policy, risk
Fueled by “very high” refunding risks and other factors, the default rate on US speculative grade bonds is expected to quadruple to over 16% by November, compared with 4.4% last November and only 1% in 2007.
According to Moody’s , refunding risk, measured by market conditions and ratings, for U.S. speculative-grade companies is very high due to the continuing turmoil in the credit markets, general lack of market liquidity and weak economic conditions.
Refunding risk is magnified by investors’ flight to quality and by banks’ cautious approach in lending to lower-rated speculative-grade companies.
Other key points:
- Refunding needs for rated U.S. issuers over the next three years have more than doubled to $190 billion compared to $86 billion in last year’s study; this is the highest the refunding needs have been since the inception of this annual study 11 years ago.
- Refunding risk for the 2009 maturities is particularly high, despite refunding needs being less than the 2010 and 2011 maturities, due to the current weak credit market environment. However, these maturities are almost evenly distributed throughout the year, thereby spreading the risk, although more lower-rated companies have maturities in the first half of the year than in the second half.
- With the flight to quality witnessed in today’s markets, lower ratings equate to a substantial increase in refunding risk for lower-rated speculative-grade companies with 23% of the $26 billion maturing in2009 having instrument ratings of Caa1 or lower.
- The default rate for U.S. speculative-grade issuers is expected to increase sharply to 16.4% by November 2009 versus 4.4% in 2008 and 1% in 2007. The higher expected default rate is due to eroding liquidity at many companies and decisions to restructure balance sheets (potentially engaging in a distressed exchange).
Moody’s report Moody’s Refunding Risk and Needs for U.S. Speculative-Grade Corporate Issuers, 2009-2011 also includes a complete listing of maturity dates for US speculative-grade corporate bond issues.
Technorati Tags: corporate defaults, credit-risk, junk-bonds, speculative-grade-bonds
After the euphoria of President Barack Obama’s historic inauguration it has not taken long for lofty ideals to fall to earth with a thud. First came Treasury Secretary nominee Timothy Geithner’s the-dog-ate-my-homework-level excuse for dodging his taxes. Hardly the promised higher standard of accountability. Then comes President’s Obama’s undoubtedly necessary economic stimulus plan, loaded up with a disappointingly generous portion of pork, as pointed out by The Washington Post, among others:
Helping hire, equip and pay police, a $4 billion item under the bill, might be a good idea, but writing checks to individual households for the same amount would do more to stimulate the economy. Ditto for $16 billion in Pell Grants for college students, $2.1 billion for Head Start and $50 million for the National Endowment for the Arts. All of those ideas may have merit, but why do they belong in an emergency measure aimed to kick-start the economy?
The argument about whether the stimulus plan is too big or too small become almost moot when such extraneous measures are included.
Still, even this cannot take away from the majesty of an Inauguration more than two centuries in the making.
The year has gotten off to a bleak financial start with bearish posts on Research Recap drawing the most attention.
Top of the heap so far are Fitch Ratings‘ list of the top risks to credit quality for 2009, Oxford Analytica’s warning that the US is unprepared to cope with double-digit unemployment, and Standard & Poor’s update on the steady flow of corporate debt defaults so far this year. Today, S&P reports a further 4 defaults in the last week, bring the year’s total to date to 12. Of the four most recent defaults, two are media and entertainment companies, Nevada-based gaming company Black Gaming LLC and television broadcaster Young Broadcasting Inc. (NASDAQ:YBTVA). The remaining two are consumer products companies, tomato producer and marketer EuroFresh Inc. and mattress manufacturer Simmons Co.
Also very popular was our Research Roundup on the demise of the financial supermarket, Citigroup: Bowing to the Inevitable,
Research Recap Quote of the Week:
We remain a young nation, but in the words of Scripture, the time has come to set aside childish things. – President Barack Obama, (HT St Paul 1 Corinthians XIII)
Technorati Tags: (c), banking, Barack Obama, Citibank, Citigroup, consumer-products, corporate-default, credit-risk, economy, Geithner, stimulus, unemployment, Zeitgeist
Fitch Ratings’ summary of the potential rating impact of some of the more prominent credit market risks for 2009 makes for depressing, but prudent, reading.
A year ago, Fitch’s 2008 Outlook presentation identified a number of possible developments for the year. These included banking system crises (though the agency was more concerned regarding emerging than developed markets), the failure of a systemically major bank, a run on money market funds and a dramatic
equity market slump. Unrealised developments included a collapse in a major convertible currency, systemic failures in the CDS market through counterparty and/or settlement risks and an economically significant adverse geopolitical event.
These latter unrealized risks have been carried forward into 2009. In addition, Fitch sees the following
potential developments with negative ratings consequences for 2009:
- Broader nationalization of banks
- Prolonged dislocation of capital markets
- Failure of traditional trade finance market for corporate finance
- Negative formal credit growth at the global level
- Government support extension to failing industrial entities
- Market access failure for developed market governments/other ‘AAA’ borrowers
- Further hedge fund failures
- Deterioration in counterparty and settlement risk on credit derivatives
- Precipitous devaluation of a major bloc currency
Finally, as the sum of all these fears, the risk of global or at least regional
deflation is very real.
For details see Prominent Risks in 2009 – Top Risks for the Traditional Debt Sectors.
Technorati Tags: capital markets, credit-risk, derivatives
Recent actions by ratings agencies on financial companies in the news:
Morgan Stanley (NYSE: MS)
Moody’s reviews A1 Morgan Stanley for downgrade; Prime-1 affirmed (Oct 10)
Goldman Sachs (NYSE: GS)
Moody’s affirms Goldman Sachs’ Aa3 long-term ratings and changes outlook to negative (Oct 9)
Iceland
Moody’s: Iceland – Downgrade Reflects Dislocations from Global Banking Crisis Oct 9)
S&P: Glitnir Bank Rating Lowered To ‘D’ On Receivership (Oct 9
Moody’s downgrades Glitnir’s covered bonds to Ba3 direction uncertain (Oct 9)
Moody’s downgrades Kaupthing to Caa1/NP/E from Baa3/P-3/D+ (Oct 9)
S&P: Icelandic Insurer Tryggingamidstödin Group Ratings Downgraded And Kept On Watch Neg (Oct 9)
Previous Ratings Roundup.
Technorati Tags: (MS), banking, credit-crisis, credit-ratings, credit-risk, Glitnir, Goldman-Sachs, GS, iceland, morgan-stanley, research-roundup
With Iceland skirting with a sovereign debt default, the International Monetary Fund has published a timely working paper that finds that the economic consequences of such a default may be significant but last no more than a couple of years.
The paper, The Costs of Sovereign Default by Eduardo Borensztein and Ugo Panizza, does not represent the IMF’s official view. It evaluates empirically four types of cost that may result from an international sovereign default: reputational costs, international trade exclusion costs, costs to the domestic economy through the financial system, and political costs to the authorities. It finds that the economic costs are generally significant but short-lived, and sometimes do not operate through conventional channels.
The political consequences of a debt crisis, by contrast, seem to be particularly dire for incumbent governments and finance ministers, broadly in line with what happens in currency crises.
Key Conclusions:
- Reputation of sovereign borrowers that fall in default, as measured by credit ratings and spreads, is tainted but only for a short time.
- While there is some evidence that international trade and trade credit are negatively affected by espisodes of default, we could not trace it to the volume of trade credit, as the default literature suggests.
- Debt defaults seem to cause banking crises, and not vice versa, but we found weak evidence to suggest the presence of default-driven credit crunches in domestic markets.
- Finally, defaults seem to shorten the life expectancy of governments and officials in charge of the economy in a significant way.
- On the positive side, we found a fairly sensible estimate of the effect on credit ratings and bond spreads, and we call attention to the sharp increase in government turnovers following debt crises.
- On the negative side, our result regarding how international trade credit affect the link between trade and default and our finding that default episodes do not seem to affect bank lending do not seem to be very plausible.
Perhaps the most robust and striking finding is that the effect of defaults is short lived, as we almost never can detect effects beyond one or two years.
Technorati Tags: credit-crisis, credit-risk, financial-system, sovereign-debt
Recent actions by ratings agencies on financial companies in the news:
BNP Paribas (Euronext Paris: BNP) Fortis (Euronext Brussels: FORS)
Moody’s affirms BNP Paribas’ ratings with stable outlook (Oct 7)
Moody’s downgrades Fortis Group’s ratings after the sale of its main operations (Oct 7)
Moody’s confirms the A1 long term ratings of Fortis’ banking entities in Belgium and Luxembourg (Oct 7)
Moody’s confirms Fortis Bank Nederland (Holding)’s long term ratings at A1, outlook stable (Oct 7)
Iceland
S&P: Iceland Ratings Would Not Default If Depositor Guarantee Fund Obligations Not Honored
Fitch Takes Further Rating Actions on Icelandic Banks (Oct 7)
S&P: Glitnir Bank Downgraded To ‘CCC’; On Watch Neg On Increased Systemic Concerns (Oct 7)
Ireland
Moody’s updates its comments on the Irish government’s guarantee for six financial institutions (Oct 7)
Previous Ratings Roundup.
Technorati Tags: (BNP), (FORS), banking, BNP Paribas, credit-crisis, credit-ratings, credit-risk, Fortis, Glitnir, iceland, Ireland
Bank of America (NYSE: BAC)
S&P: Bank of America Corp. Rating Unaffected By Earnings And Other Announcements (Oct 7)
BNP Paribas (Euronext Paris: BNP) Fortis (Euronext Brussels: FORS)
Fitch Affirms BNP Paribas at ‘AA’ on Fortis Acquisition (Oct 6)
Fitch Places Fortis Bank & Fortis Banque Luxembourg on Watch Positive On BNP Plans to Acquire Stakes (Oct 6)
Fitch Revises Rating Watch on Fortis Insurance Units and Holdings Companies (Oct 6)
S&P: BNP Paribas Outlook To Negative On €14.5 Bil Fortis Acquisition; ‘AA+/A-1+’ Ratings Affirmed (Oct 6)
Hypo Real Estate (Frankfurt: HRX)
Fitch: No Rating Impact on Hypo Real Estate Group from Additional Support (Oct 6)
JPMorgan Chase (NYSE: JPM)/Washington Mutual (NYSE: WM)
Fitch: Washington Mutual Ratings Downgraded and Withdrawn (Oct 6)
Royal Bank of Scotland (London: RBS)
S&P: Royal Bank of Scotland PLC L-T Rating Lowered To ‘AA-’ On Financial Profile; Outlook Neg (Oct 6)
Iceland
S&P: Republic of Iceland Ratings Lowered And Taken Off CreditWatch Negative (Oct 6)
S&P: Landsvirkjun Ratings Cut To FC ‘BBB/A-3′, LC ‘BBB+/A-2′, Outlook Negative On Iceland Downgrade (Oct 6)
Previous Ratings Roundup.
Technorati Tags: (BNP), (FORS), (JPM), (rbs), banking, BNP Paribas, credit-crisis, credit-ratings, credit-risk, Fortis, Hypo, iceland, JPMorgan-Chase-&-Co, royal-bank-of-scotland, Washington-Mutual
Once considered recession-resistant, the gaming, hotel and leisure industries are proving to be anything but in 2008, and Standard & Poor’s sees more pain ahead in 2009.
Credit defaults in U.S. gaming have soared this year, starting with Legends Gaming LLC in the first quarter of 2008. The credit crunch, weakening U.S. economy and surging energy costs have all hit consumer discretionary spending, according to the S&P’s “U.S. Gaming Defaults Reach Record Levels.”
In “Hotels & Gaming: The Odds Favor Consumers Staying at Home,” S & P said the cards will continue to be stacked against hotels and casinos over the next couple of years.
While rising defaults have been the most severe consequence for rated gaming companies under existing operating and credit market conditions, rating activity has been significantly negative in the first nine months of 2008, as highly leveraged balance sheets have not been able to tolerate the unprecedented operating declines, often leading to covenant problems.
A related report ranked the credit of gaming, lodging and leisure companies from strongest to weakest. Harley-Davidson Inc. (HOG) tops the list with an A/A-2 rating with negative implications and UTGR Inc. sits at the bottom of the list with a D rating.
Even so, S&P said recovery rates for bond holders in gaming and leisure are in the top one-third of all industries, with “substantial recovery” of 70 to 90 percent of principal expected.
In an industry credit outlook, “The Economic Slowdown Continues to Weigh on U.S. Gaming, Lodging, and Leisure Sectors,” S & P compared economic conditions for casinos in Las Vegas, Atlantic City and Macau. Revenues in Las Vegas were down 6.6 percent year-over-year in August and revenues in Atlantic City were down 5.2 percent. In contrast, Macau has seen its gaming revenues surge 52 percent in the same period.
Ultimately, hotels and casinos tend to do roughly as well as the economy, which is exactly what is posing problems for them right now. At the moment, the economic outlook is for a mild recession, albeit a long one. And that could have consumers sitting out the next few games and staying put for a while.
Technorati Tags: (HOG), Atlantic City, casinos, consumer discretionary, Consumer-spending, corporate-default, credit-outlook, credit-ratings, credit-risk, Gambling, gaming, gaming revenues, Harley-Davidson, hotels, Las Vegas, Legends Gaming LLC, leisure, Macau, travel
Wachovia (NYSE: WB) Wells Fargo (NYSE: WFC)
Fitch: Wells Fargo/Wachovia Deal a Credit Positive for Bondholders (Oct 3)
Moody’s changes outlook on Wells Fargo’s ratings (snr Aa1) to negative (Oct 3)
S&P: Wells Fargo On Watch Negative; Wachovia On Watch Developing (Oct 3)
AIG (NYSE: AIG)
Moody’s downgrades AIG (senior to A3); ratings remain under review (Oct 3)
S&P: CreditWatch Status Of AIG And Guaranteed Subs Ratings Revised To Negative (Oct 3)
Bradford & Bingley (London: BB)
Moody’s reviews Bradford & Bingley’s Covered Bond ratings for possible upgrade
(Oct 3)
Previous Ratings Roundup.
Technorati Tags: (AIG), (bb), (WB), (WFC), banking, Bradford & Bingley, credit-crisis, credit-ratings, credit-risk, iceland, Wachovia-Corporation, Wells-Fargo-&-Company
