Mon, 05th December 2016

Anirudh Sethi Report


Archives of “credit rating” Tag

Power sector debt worth Rs 1.34 trillion at high risk: Crisil

Nearly Rs 1.34 lakh crore worth of debt on operational and under-construction power projects is at risk, says ratings agency Crisil.

As per Crisil estimates, around 17,000 MW of operational power projects with a debt of Rs 70,000 crore and additional 24,000 MW under-construction projects with a debt exposure of around Rs 64,000 crore are at high risk.

“These operational projects are those, which are facing the consequences of aggressive bidding for coal supplies or facing huge cost overruns, and those with gas-supply issues,” Crisil Senior Director Sudip Sural said.

He said over the period, the credit growth to the sector will moderate to 5 per cent over the next three years as compared to an average of 18 per cent witnessed in the last five years.

“This is primarily because the discoms debt which has been the key components of this exposure, is going to go out of the banking system over a period of time and move to the fold of the state government because of the UDAY scheme,” Sural said.

S&P ups outlook on France’s AA rating

Here’s something to cheer up France’s deeply unpopular president François Hollande.

S&P Global Ratings has upped its outlook on the country’s AA rating from negative to stable, with analysts at the agency citing the government’s recent labour and tax reforms for the move.

The outlook revision reflects the authorities’ gradual introduction of reforms to the tax system and the labor code, and the stabilizing effects these are expected to have on employment, growth, and competitiveness, as well as public finances. The rating has been on a negative outlook for nearly two years. We do not believe that the downside risks we identified then have materialized.

It has been nearly two years since S&P first put Europe’s second largest economy’s credit rating on negative outlook and Friday’s move should a much needed respite to Mr Hollande, whose approval ratings have sank to record lows with less than six months to go before the presidential elections.

This Week Eyes on 4 Events

Of the forces driving prices in the week ahead, events appear more important than economic reports.   There are four such events that investors must navigate.  The Bank of Canada and the European Central Bank meet.  The UK High Court will deliver its ruling on the role of Parliament in Brexit.  The rating agency DBRS updates its credit rating for Portugal.
The Bank of Canada is not going to change interest rates.  Still, growth has disappointed, and price pressures appear to be ebbing.  It will take longer than the BoC is currently anticipating to close the output gap.  It may adjust its forecasts accordingly.  In addition, the recent use of macro-prudential policies to address housing market activity eases one of the inhibitions for a rate cut.  The market is currently pricing in about a one in 20 chance of this materializing next year.
The risk may be somewhat greater than that  In part, there seems to be too much made of the trade-off between the fiscal stimulus and monetary easing.  It is so pre-crisis.  This week’s data is likely to show that CPI continues to moderate and, despite the launch of a new low-income family benefits program, retail sales like fell in August, and the risk is on the downside of the median forecast of -0.1%.
It does not appear that the ECB is prepared to announce a decision about whether it will extend its asset purchases after the current soft end date of March 2017, or about how it will address the potential scarcity of particular securities.  Although we thought there was an opportunity to do so last month, it now seems more likely that the ECB will make its decision at the December meeting.

RED ALERT – China Shocker: A Quarter Of All Companies Can’t Pay The Interest On Their Debt

Almost exactly one year ago, we reported that as a result of the commodity crash of 2015, more than half of Chinese companies in the commodity sector did not generate enough cash flow to pay the interest on their debt. Months later this has manifested in a countrywide push for debt-for-equity exchanges, and outright bankruptcies including the first ever liquidation of a Chinese state-owned enterprise.

While dramatic, the question remained: what about other Chinese companies not directly involved in the commodity space? We now know the answer: according to Reuters, profits at roughly a quarter of all Chinese companies were too low in the first half of this year to cover their debt servicing obligations, i.e., merely the mandatory interest payment let along debt maturities, as earnings languish and loan burdens increase. Read More 

Turkey junked by Moody’s

The unkindest cut.

Ratings agency Moody’s cut Turkey’s long-term issuer and senior unsecured bond ratings by one notch to Ba1 with a ‘stable’ outlook on Friday — placing the country’s credit rating in junk territory.

Moody’s, which had previously delayed its decision, cited two key reasons for the downgrade:

1. The increase in the risks related to the country’s sizeable external funding requirements.

2. The weakening in previously supportive credit fundamentals, particularly growth and institutional strength.

The agency said it expects that the deterioration in Turkey’s credit rating will continue over the next two to three years. It added that the stable outlook reflected “the government’s robust balance sheet, which would allow for the absorption of shocks and flexible responses”.

Moody’s also said it sees Turkey’s real GDP growth averaging 2.7 per cent between 2016 and 2019.

S&P Global Ratings has already placed Turkey’s credit rating in junk territory while Fitch has Turkey’s BBB- investment grade rating on review for a downgrade.

Debt-Led Telecom War May Blow $74 Billion ( Rs. 4,92,140 crores )Hole in India’s Budget

Aggressive price wars that pushed some calls below a penny per minute in India may be catching up with wireless carriers.

Mountains of debt could hinder their bidding for airwaves in next month’s auction, potentially blowing a $74 billion (roughly Rs. 4,92,140 crores) hole in the government’s plans. One operator already said it will sit out the sale starting October 1, and some competitors likely won’t spend on certain wavelengths.

India plans its biggest sale of the spectrum that can reduce buffering on videos and speed up downloads for 1 billion-plus users in the world’s second-largest smartphone market. The government wants to raise Rs. 5.6 lakh crores ($83 billion), yet companies may bid only a small fraction of that because they bought bandwidth the past two years and need cash to fend off billionaire Mukesh Ambani’s newest venture.

“We believe that the spectrum auction is going to be a failure,” said Chris Lane, a Hong Kong-based analyst for Sanford C. Bernstein. “Overall, we don’t see carriers bidding like they did in previous years.”

The nation’s 12 wireless companies carry more than $61 billion (roughly Rs. 4,05,558 crores) in debt, and their average revenue per user is declining as customers replace voice calls with apps that use data plans, according to company earnings. That total debt increased 41 percent since March 2014, according to credit rating agency ICRA.

The auction will be successful and the government has provided spectrum in every band, Telecom Secretary J.S. Deepak told reporters in New Delhi on Tuesday.

Phone calls already are the cheapest among the world’s major economies, Lane said, averaging about 2 cents a minute now after dropping below 1 cent.

Fitch cuts outlook for Turkey’s rating to negative

Safe, for now.

Fitch has cut its outlook for Turkey’s sovereign credit rating to negative from stable, but maintained the country’s BBB- investment grade rating, as the agency continues to assess the fallout from the unsuccessful coup attempt in July.

The change to Turkey’s outlook comes just a week after Moody’s decided to delay its ratings decision for the country. The decision should also come as a relief for those who have been bracing for Fitch to follow Standard & Poor’s move last month to downgrade Turkey’s rating.

In a statement, Fitch said:

An unsuccessful coup attempt in July confirms heightened risks to political stability…Political uncertainty is expected to impact economic performance and poses risks to economic policy. Growth is forecast to dip due to lower investment, although a strong start to the year means that at a Fitch-forecast 3.4% of GDP in 2016, it will be above the peer median.

Global corporate debt is expected to swell to $75tn by 2020-Standard & Poor’s

Global corporate debt is expected to swell to $75tn by 2020, from $51tn at present, and a correction in credit markets is unaviodable, analysts at ratings agency Standard & Poor’s warn.

And with central banks around the world engaging in expansive monetary policy that has seen interest rates turn negative in Europe and Japan, investors on the hunt for yield are expected to push global corporate borrowing demand to $62tn.

S&P Cuts Deutsche Bank Outlook To Negative On “Challenging Operating Conditions”-FULL TEXT

It has been a while since investors focused their attention on the world’s “most systematically risky” bank, Deutsche Bank. Moments ago, S&P made sure to remind us that nothing is fixed, when it released a report saying that “Operating Conditions May Challenge Strategy Execution” but keeping the bank at a BBB+ rating.

The full report below:

Deutsche Bank Outlook Revised To Negative As Operating Conditions May Challenge Strategy Execution; Ratings Affirmed

  • We believe the difficult operating environment may challenge Deutsche Bank as it undertakes a material restructuring of its business model and balance sheet.
  • We are revising our outlook on Deutsche Bank to negative from stable.
  • We are affirming our ‘BBB+/A-2’ issuer credit ratings on Deutsche Bank.
  • The negative outlook reflects the possibility that we may lower the long-term issuer credit rating if market conditions challenge Deutsche Bank’s ability to preserve its capital and maintain its franchise while implementing its restructuring plans.

LONDON (S&P Global Ratings) July 19, 2016–S&P Global Ratings said today that it revised the outlook on Germany-based Deutsche Bank AG to negative from stable. The ‘BBB+/A-2’ global scale, ‘cnA+’ Greater China regional scale, and ‘trAAA/trA-1’ Turkey national scale issuer credit ratings were affirmed.

Sovereign downgrades set to accelerate – S&P

S&P says the “dominance of downgrades” in sovereign credit ratings is likely to accelerate into next year, as its balance of negative to positive outlooks dropped at the fastest rate since 2009.

Negative outlooks on countries’ creditworthiness now outnumber positive outlooks by 30, compared to a seven-year low of 4 last June.

Moritz Kraemer, S&P chief rating officer for sovereign ratings, said:

This constitutes the most negative 12-monthly swing in the outlook balance since June 2009 and indicates that the dominance of downgrades is likely to accelerate in 2017 and what remains of 2016.

The ratings agency said outlooks have deteriorated in all regions since the second half of 2015, bringing an end to two years of improvements.

Just over half of rated countries are rated investment grade (BBB- or above). The share of AAA-rated countries is now at an all-time low of 9.2 per cent, after the UK’s vote to leave the EU led to a double downgrade last month.