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
capGemini’s latest annual European Energy Markets Observatory (EEMO) charts the deteriorating financial condition of European utilities.
Key findings:
The crisis has put the Utilities sector under pressure and challenged the resilient character attributed to the Utilities sector:
- Decrease in electricity and gas demand in Europe
- Drop in electricity and gas wholesale prices
- The credit crunch combined with decreasing demand and lower prices has pushed down the investments
- Having gone through expensive M&As, many Utilities’ financial situation has deteriorated
Security of supply has improved in electricity, little progress was observed in gas
- Europe’s declining reserves and high dependency on Russian gas supplies are an issue
Progress towards a single electricity and gas market
- The EC Third Package including the ownership unbundling was adopted in April 2009
- Electricity exchanges have increased and wholesale markets have continued to consolidate
- On the retail side, churn continued to increase, but remains small. Retail electricity and gas markets remain highly concentrated
- Electricity and gas prices have increased significantly in H2 2008, raising protests from end-users
Even if the European Union is the only region with a clear policy on climate change, more efforts need to be implemented
- On April 6, 2009 the European Commission adopted the Climate-Energy package
- Consumption and CO2 emission drops are more cyclical than structural
- Investments in renewable energies are hit by the crisis
- Carbon Capture and Storage is needed on the long term
- The crisis has revealed the need for deeper Utilities business models changes
Utilities need to lower their “cost to serve” and distribution costs, adapt to new customer relationship, streamline and simplify their organizations, processes and IT to increase efficiency, manage their strategic resources and take advantage of new technologies.
Technorati Tags: climate-change, electricity industry, Europe, natural gas, utilities
CreditSights has identified “a number of credits that we believe are well suited to an environment of slow economic growth, entrenched high levels of unemployment, constrained lending and continued conservatism from consumers in the world’s developed economies.”
CreditSights’ list includes household names FedEx FDX), Kellogg (K) and Kroger (KR) and also eight European utilities. [Deutsche Bank Securities initiated coverage of FedEx with a "buy" rating on Oct 1. JP Morgan upgraded Kroger from "neutral" to "overweight on Oct 12.].
Kellogg remains a favorite in the Food & Beverage sector due to its consistently solid operating results, strong balance sheet, disciplined financial policy, and versatile management team.
Only one financial institution is included: “Standard Chartered (STAN) looks well positioned to outperform peers on the basis that its Asian franchise will continue to produce better results than those of most banks with operations in Europe.”
The full list and rationale see Credits We Like In the New Normal.
Technorati Tags: (FDX), (K), (KR), (STAN), FedEx, Kellogg, Kroger, Standard Chartered, utilities
“Smart” computing will drive the next period of growth in the information technology industry, according to Forrester Research.
IBM, Oracle, Microsoft are current IT vendors best positioned to win in next-gen technology, but GE and Siemens will become bigger factors, analyst Andrew Bartels says in a presentation on Forrester’s IT 2009-2016 Long-Term Forecast. Bartels describes smart computing as “Flexible, adaptable, responsive, and extended IT systems that incorporate awareness (location, status, condition) and analytics to make IT more intelligent to solve new business problems.”
After a tough 2009, Bartels expects tech investment to lead the economic recovery in the US by 2011, with a CAGR of 2.7% from 2008-2016.
Highlights of the report:
- New smart computing technology will drive a new period of rapid growth in tech investment.
- Old technology continues to be in demand, but purchases grow at trend rate.
- Solutions based on smart computing technology will address critical business issues.
- Sales directly to business, not to IT.
- Investment in new technology driven by strategic rationales, not cost/benefit calculations, with multimillion-dollar deals.
- Highly vertical solutions will capture more of the growth, although not the largest share of sales.
- Asset-intensive industries like government, healthcare, utilities, education, and professional services will be the biggest buyers.
Technorati Tags: Healthcare, higher-education, IBM, information-technology, Microsoft, MSFT, Oracle, professional services, Siemens, smart computing, subprime-mortgage, utilities
Fitch Ratings notes a significantly negative trend in U.S. Public Finance rating actions during the first quarter of 2009, accelerating a decline in municipal credit from 2008. This deterioration reflects the severe recessionary macro-economic environment, dislocations in the credit markets, and increased fiscal and liquidity pressures, Fitch said.
In 1Q’09, Fitch’s U.S. Public Finance group upgraded underlying ratings on only 40 credits totaling $12.9 billion in par value, while it downgraded underlying ratings on 56 credits totaling $84.2 billion.
This resulted in an upgrade-to-downgrade ratio of only 0.71:1 in terms of rating changes and a ratio of 0.15:1 on a par value basis. This was considerably worse than the annual ratios for 2007 and 2008, which were 3.67:1 in terms of rating changes and 8.6:1 in terms of par value and 1.59:1 in terms of rating changes and 5.13:1 in terms of par value, respectively.
Fitch notes also that last quarter saw the largest number of Fitch U.S. Public Finance rating downgrades since at least 2002, when Fitch began reporting quarterly municipal rating change totals.
The number of downgrades in the last quarter was nearly two-thirds of the total number of downgrades in all of 2008 and greater than the total number of downgrades in all of 2007.
The bulk of the par value in downgrades was attributable to the state of California. Other significant downgrades were in Florida, Tennessee, and Detroit, Michigan.
During 1Q’09, there were 20 upgrades and 29 downgrades in the tax-backed sector, four upgrades and eight downgrades in healthcare, six upgrades and seven downgrades in water & sewer, three upgrades and five downgrades in public power, no upgrades and four downgrades in transportation, and four upgrades and no downgrades in tax-exempt housing.
The ratio of Positive to Negative Rating Watches and Outlooks indicates the declining trend in public finance ratings is likely to continue for some time, Fitch concludes.
Moody’s ratio of municipal scale upgrades to downgrades deteriorated to 0.8 to1, from the fourth quarter’s 1.1 to 1. The most recent quarter marked a low point for this ratio, falling below the 1.1 to 1 set in the first quarter of 2003 following the last recession. The ratio of upgrades to downgrades based on affected par value also weakened further, falling to 0.1 to 1 from the fourth quarter’s 0.7 to 1.
Technorati Tags: energy, health care, housing, municipal-bonds, state-and-local-government, transportation, utilities
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
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
Refunding risk for the $300 billion of investment-grade non-financial corporate bonds that will mature during the next three years is elevated at a time of tight credit markets and weak economic conditions, according to a new study from Moody’s Investors Service.
The study of 330 investment-grade non-financial corporate issuers in the U.S. with debt maturing between 2009 and 2011 indicates that credit ratings have migrated downward during the last year. About $100 billion of the $300 billion of maturing debt is rated Baa2 or Baa3, the lowest investment-grade ratings. Of the $10 billion of Baa3-rated bonds maturing in 2009, 28% have either a negative outlook or are under review for a possible ratings downgrade.
The broad financial crisis is elevating refunding risk for most companies. However, many investment-grade issuers are benefiting from investors’ relative confidence in companies with higher credit quality, reduced appetite for other forms of investment and need to continue deploying capital. This is reflected in a more than 150% increase in investment-grade non-financial corporate bond issuance during the first two months of 2009 versus the same period in 2008.
Investment-grade issuers have an advantage in these tight credit markets. But considering current conditions, we still consider refunding risk as relatively high for the $99 billion of maturities in 2009.
Moody’s study is its first to examine the refunding risk and needs of investment-grade issuers. The study includes a listing of all debt maturities and putable obligations for U.S. non-financial companies during the next three year.
The full report, Refunding Risk and Needs for U.S. Investment-Grade Corporate Bond Issuers, 2009-2011, is available for purchase.
Technorati Tags: Auto-Industry, corporate bonds, credit-markets, energy, entertainment, food, Healthcare, industrials, investment-grade-bonds, telecom, transportation, utilities
There’s no doubt that Jon Stewart’s extended defenestration of Jim Cramer and CNBC has captured the national zeitgeist. When the topic takes up a good chunk of the likes of public radio’s Diane Rehm Show , you know the topic has transcended the financial news arena. On the show’s Friday News Roundup The Atlantic’s Andrew Sullivan likened the event to the storming of the Bastille, with Stewart championing the cause of the populace.
Whether it will have any real impact on Cramer’s “Mad Money” antics or the boosterism of CNBC is debatable, but it was certainly cathartic to witness them in the modern equivalent of the medieval stocks and pelted with virtual rotten fruit and vegetables.
Meanwhile, Cramer and CNBC are rapidly being usurped as whipping boys by AIG, the object of public tongue lashings from Ben Bernanke, Larry Summers and Barack Obama, in what seemed like a coordinated attack. Not that AIG doesn’t deserve whatever it gets, but it would be a shame if the focus on AIG drew attention away from the industry-wide issues that still have not been adequately addressed.
Posts on struggling financial institutions have been the most popular at Research Recap recently. The top post by a mile was our Research Roundup of the latest efforts to recapitalize Citigroup, while another Roundup, featuring HSBC was also well read.
Standard & Poor’s report on US regional banks feeling the pain featured prominently, and outside the financial sector the most popular posts were a Forrester Research report finding that booksellers offer the best online experience and S&P’s analysis of the recession’s impact on public power utilities and co-ops.
Research Recap Quote of the Week: What else, but….
I understand you want to make finance entertaining. But it’s not a fucking game. Jon Stewart to Jim Cramer on The Daily Show.
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Technorati Tags: (c), booksellers, Citigroup, CNBC, HSBC, Jim Cramer, Jon Stewart, online, regional-banks, utilities, Zeitgeist
Last week, we wrote about the gloomy outlook for public power utilities in 2009 due to the severe recession. This week, we take a longer view, thanks to a pair of reports from Standard & Poor’s Credit Research.
Largely as a result of new priorities under the Obama administration and stimulus spending aimed at energy efficiency, S&P sees a new era for electric utilities in the U.S.
Energy efficiency and conservation schemes could reduce demand for electricitiy, but S&P sees mitigating factors, such as “decoupling” or divorcing sales from revenues. This would allow a utility to earn a predetermined level of revenue regardless of the actual electricity sold.
Amid the current recession and the significant increase in federal spending on energy efficiency, we believe that utility sector credit quality may benefit from regulatory and public policy that addresses concerns over cost under recovery. Provisions like decoupling mechanisms may untie or lessen the correlation between a utility’s profits and energy sales, mitigating potential utility financial risks.
The stimulus package provides $41 billion toward a modernized power grid, or “smart grid,” that would allow utilities and customers to monitor and control the flow of electricity.
S&P points out that the CEOs of two major electric utilities – American Electric Power Inc. (NYSE: AEP) and ITC Holdings Inc. (NYSE: ITC) – have said they see little trouble raising private funds for a smart grid and would pursue it with or without the stimulus.
Several obstacles remain, however, including:
- Siting: overlapping state and local government jurisdictions will make it difficult to get approvals for new transmission lines
- Standardization: establishing national standards for lines and switching stations
- Loan guarantees: the Department of Energy has been slow in handing out loan guarantees
For details, see “When Energy Efficiency Means Lower Electric Bills, How do Utilities Cope?” and “Credit Implications for Smart Grid for U.S. Electric Utilities.”
Technorati Tags: (AEP), (ITC), American Electric Power, conservation, energy, ITC Holdings, Obama stimulus, utilities
