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
Default activity in 2009 has been heavily concentrated in the media and entertainment sector.
Consumer products, media and entertainment, and retail/restaurants remain the most negatively affected sectors amid the economic downturn, according to Standard & Poor’s Ratings Services.
“These sectors consistently have the highest levels of risk among our current lists of distressed companies (defined as speculative-grade companies with securities trading in excess of 1,000 basis points above U.S. Treasuries), weakest links (companies rated ‘B-’ or lower with either a negative outlook or ratings on CreditWatch with negative implications), and potential bond downgrades (investment-grade or speculative-grade companies that have either a negative outlook or ratings on CreditWatch negative).”
“In line with the broader nonfinancial universe, these sectors have a ratings mix with the greatest concentration in the ‘B’ rating category, which includes ‘B+’, ‘B’, and ‘B-’. Despite having ratings concentrated in this category, the overall ratings distribution for these sectors has improved in recent months, in part because of an increase in the number of defaults from
the lowest-rated companies in these sectors.”
The lowest-rated companies transitioning to default leaves behind the stronger, more highly rated companies.
For details, see: “Stress In Corporate America: Consumer-Reliant Sectors Face Easing Conditions But Are Still The Hardest Hit (Premium).“
Technorati Tags: consumer-products, credit quality, distressed credits, media and entertainment, restaurants, retail
Excerpted from Looking for Signs of Change in Moody’s Industry Outlooks
Moody’s Investors Service holds negative outlooks on about two-thirds of the non-financial corporate sectors in the Americas, but almost all of them have a medium or high probability of an upward revision to stable in the next 12 to 18 months.
The eight industry sector outlooks most-likely to be changed to stable from negative include technology hardware, integrated oil, exploration and production (E&P), and five consumer-dependent sectors.
Key Findings
- Most of the 27 sectors with a medium or high probability of an upward revision in the ISO in the next 12 to 18 months are cyclical sectors like retail and capital goods. These are more sensitive to consumer discretionary spending and the business investment cycle and will benefit most immediately from an economic recovery.
- For the 29 sectors that currently have a negative outlook, the primary factors that Moody’s analysts are watching include stabilization – but not necessarily improvement – in consumer confidence, unemployment, retail sales, inventory de-stocking, and industrial capacity utilization rates, along with a firming of commodity prices.
- Seventeen sectors have a medium probability of moving to stable from negative. A typical viewpoint of the Moody’s analysts covering these sectors is that industry conditions will not worsen, but they may muddle along at very weak levels for an extended period. Sectors in this group include automakers, basic materials, building materials, capital goods, consumer durables, and for-profit hospitals.
- Most of the 17 sectors with stable ISOs are more likely to be revised downward than upward, but we believe most of these changes have a low probability. Many of these sectors are more defensive, steady performers, such as global consumer products and information technology (IT) services.
- U.S. cable television is the only industry with a positive ISO. Competitive threats prompt a medium probability that the ISO will move to stable over the next 12 to 18 months.
Technorati Tags: apparel, gaming, integrated oil, lodging, oil-exploration, restaurant, retail, technology
Moody’s has issued the first in a series of Special Comments looking at whether and how fast (or rather, how slowly) various sectors of the economy are recovering.
Focusing on corporates, it contains an overview of the economy and coverage of the following global industries: autos, base metals, chemical, consumer durables, homebuilders, media and entertainment, oil and gas, packaging, retail, steel, and transportation.
Moody’s answers some of the following questions for each of these industries:
- How is the credit picture different than it was a few months ago?
- Have conditions stabilized? Are they beginning to improve?
- Is improvement in credit conditions well-established or precarious?
- Why haven’t credit conditions gotten better?
- What has to happen to improve credit conditions further?
Moodys.com Chief Economist Mark Zandi writes that “Another round of fiscal stimulus may also be warranted. The current stimulus, which includes aid to state governments and unemployed workers, tax cuts and increased infrastructure spending, has not yet had time to work and it may very well succeed. It is no accident that the recession will wind down in the next few months as the stimulus payout ramps up. The impact on jobs and unemployment should show up more clearly later this year and early in 2010. ”
However, given how surprisingly severe this economic downturn has been, it is only prudent to consider the need for even more temporary tax cuts and spending increases for next year. -Mark Zandi, Chief Economist, Moody’s.com
“The Obama administration will almost certainly have to significantly adjust its response to the foreclosure crisis, Zandi adds. ” Foreclosures continue to surge, weighing heavily on already crashing house prices. As long as house prices are falling and undermining household wealth and the financial system’s capital base, a self-sustaining economic recovery will not take hold. For foreclosures to abate and house prices to stabilize anytime soon, policy efforts to mitigate foreclosures through loan modifications must soon begin to work more effectively. To date, the Obama administration’s foreclosure mitigation plan has not had a meaningful impact.”
For details, see: Are Corporates on the Road to Recovery.
Technorati Tags: autos, base metals, chemicals, consumer durables, corporate-debt, foreclosures, homebuilders, media and entertainment, oil-&-gas, packaging industry, retail, steel, stimulus, transportation
Large loan defaults coupled with declining performance on multifamily and retail properties resulted in a 29 basis point climb to 2.07% for U.S. CMBS delinquencies in May, according to the latest Fitch Ratings Loan Delinquency Index.
This marks the highest percentage of delinquencies since Fitch began its Index in 2001.
Meanwhile, in the first of what will be monthly reports, Moody’s CMBS Delinquency Tracker (DQT) for June (based on data through the end of May) records the aggregate rate of delinquencies among US CMBS conduit and fusion loans at 2.27%.
Moody’s expects the aggregate rate to reach 4% to 5% by the end of this year.By comparison, the aggregate rate was at a low of 0.22% in late 2007.
Declining performance, particularly in oversupplied markets, as well as in secondary and tertiary markets, has pushed Fitch’s multifamily delinquency rate to 4.55%, the highest of all property types. Multifamily properties have been highly susceptible to default in CMBS during the current economic downturn.
Moody’s tracker shows multifamily delinquency rates rising most dramatically in recent months, to a level of 4.56% in May, from a low of 0.51% in August 2007. Its previous high had been 1.53%, recorded in March 2005.
Fitch’s 60 days or more delinquency rate for retail properties is slightly higher than the index at 2.24%. This number is expected to climb. As consumer spending continues to tighten, retail properties will likely lose tenants to bankruptcy or store downsizing. Many of the loans that are currently 30 days delinquent are likely to remain delinquent and be included in the Index in June.
Moody’s says loans for retail properties have seen their delinquency rate nearly triple since the start of the year, reaching 2.47%, well surpassing its previous peak of 0.89% in August 2003.
Loans backed by hotels have thus far withstood economic pressures and continue to slightly outperform Fitch’s Index with a 1.91% delinquency rate. Possible reasons for the relative resilience include generally more sophisticated sponsorship and management teams; slightly lower leverage and shorter amortization schedules at issuance; and a reporting lag whereby many year-end audited financials have not yet been finalized. Fitch maintains its expectation that, as occupancy rates and revenues per available room (RevPAR) continue to decline, putting additional stress on borrowers’ operating margins, defaults could rise precipitously.
Moody’s says the other two core property types – industrial and office — have seen more moderate increases in delinquencies in 2008 and 2009.
Technorati Tags: CMBS, commercial-real-estate, delinquency rate, mortgage-backed-securities, retail
Consumer products, media and entertainment, and retail/restaurants continue to be the most negatively affected sectors during the economic downturn, according to Standard & Poor’s.
S&P says these sectors “have the highest levels of risk among our lists of distressed companies (defined as speculative-grade companies with securities trading in excess of 1,000 basis points above U.S. Treasuries), weakest links (companies rated ‘B-’ or lower with either a negative outlook or ratings on CreditWatch with negative implications), and potential bond downgrades (investment-grade or speculative-grade companies that have either a negative outlook or ratings on CreditWatch with negative implications).
S&P identified 375 companies across these sectors on the basis of the three criteria described above. Of these, 81 are on more than one list, indicative of even higher vulnerability. Fifteen companies are featured on all three lists.
“Over the past 12 months, 96.8% of all rating actions in the media and entertainment sector were downgrades, which is well more than the 87.7% among nonfinancials overall,” said Diane Vazza, head of Standard & Poor’s Global Fixed Income Research Group. “The consumer products sector, at 88.9%, also exceeds nonfinancials, while retail/restaurants comes in with downgrades accounting for 78.7% of all rating actions over the past 12 months.”
As of May 13, the three stressed sectors accounted for about 35% of the issuers listed as weakest links and about half of the defaulters in 2009.
Technorati Tags: consumer-products, media and entertainment, restaurants, retail
As concern over commercial mortgage backed securities (CMBS) rises, Moody’s has issued a report identifying the characteristics of malls and open air retail centers that increase or reduce the risk of their failure during the current economic recession.
In a new report, titled Retail Property Type Differentiation in a Down Economy, Moody’s notes that lower risk factors for regional malls include being the dominant mall within a trade area, being in a strong trade area marked by above average population and income growth, and producing in-line comparable store sales of greater than $450 per square foot at an acceptable occupancy cost to sales ratio.
High-risk factors for regional malls include an anchor alignment with three or less department stores, department stores whose sales productivity are lower than their chain-wide averages, low in-line comparable store sales and a high occupancy cost to sales ratio.
For open-air centers, some factors that lower risk are having grocery stores that are ranked #1 or #2 in their market as anchors, good visibility, and strong in-fill locations. High risk factors include being a newly built center developed in anticipation of the housing boom.
Much of the retail development over the recent past has occurred within the open air segment, most of which was driven by the housing boom as retail development typically “follows the roof tops”. Lifestyle centers, often anchored by an array of fashion-oriented retailers, home-oriented shops, or restaurant and entertainment tenants, draw in crowds during economic boom times, but often are the first to feel the pain of a recession.
Of note are Moody’s higher risk factors for open air centers:
- Unanchored shopping centers.
- Grocery anchored centers with weak supermarket operators or operators who compete head on with a Wal-Mart supercenter or Costco.
- Lifestyle centers with a significant tenant concentration targeting discretionary consumer spending (ie. restaurants, apparel).
- Newly built centers which were developed in anticipation of the housing boom.
- Significant component of tenancy subject to co-tenancy and kick-out clauses.
- Centers with material exposure to the following tenants: Linen’s ‘N Things, Circuit City, Bally Total Fitness, Goody’s Clothing, Filene’s Basement, Blockbuster, Hollywood Video, Loehmann’s, Levitz, Michael’s, Burlington Coat Factory, Rite Aid, Guitar Center and Sports Authority.
- Weak sponsorship.
Technorati Tags: CMBS, commercial-real-estate, retail, shopping malls
Even as consumer confidence hovers around all-time lows and most consumer companies struggle to even match last year’s revenue, shoppers are nonetheless turning to the Web and driving growth in the online channel, according to Forrester Research.
“Despite the fact that consumers are in the midst of unprecedented belt-tightening, online retail is one of the only types of retail outlets poised to fare reasonably well during the economic crisis. Aside from an abominable offline holiday shopping season in Q4 2008 that many retailers conceded was their worst ever, a Forrester survey with Shop.org (conducted at the same time) showed that 53 of 85 online retailers that responded actually had increased sales, with average growth being 9.8%.
Furthermore, Web retailers only trailed mass merchants and warehouse clubs in the percentage of consumers who planned to increase their spend in the coming 12 months.
“While consumers had previously shopped online because it offered convenience and selection, more consumers now are shopping online for value, while being seduced by the price transparency and the ability to comprehensively research products online. In 2008, 48% of consumers agreed with the statement: “I can usually find the best values/deals online,” compared with 41% who agreed with the same statement in 2007.”
Forrester’s full analysis and recommendations for online retailers can be found here.
Technorati Tags: online-shopping, retail
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
Revenues across European consumer food, beverage and tobacco companies are expected to be flat in 2009, but profits could be under further pressure due to the weakening of the euro, and despite the decline in most commodity prices in the second half of 2008, according to Standard & Poor’s Credit Research.
Among the trends noted in S&P’s just-released Industry Report Card on the sector:
- Retailers ran down inventories in the fourth quarter of 2008.
- The volume declines were the worst for products with longer shelf lives, suggesting that retailers ran down inventories to preserve cash — not a good sign for early 2009 trends.
- Central and Eastern Europe bore the brunt of the volume declines.
- For the most diversified consumer goods manufacturers, volume declines were offset by product mix and “positive pricing.”
- Gross margins are likely to remain under pressure in spite of commodity price drops.
The consumer goods sector remains sharply polarized in terms of liquidity and investment funding: While the nondurable and relatively noncyclical food, beverage, tobacco, and personal/household goods manufacturers retain preferential access to funding, durable consumer goods manufacturers remain vulnerable and show widespread signs of financial distress.
As the following chart from S&P shows, downgrades have been more prevalent in the non-investment-grade area and the default rate was 20 percent among the 20 junk-rated European companies.
Among developments that are positive for credit ratings in this sector, S&P cited the widespread suspension of share buyback programs.
Technorati Tags: consumer goods, credit-crisis, European corporates, recession, retail, S&P Credit, S&P Industry Report Card
