Wed, 01st June 2016

Anirudh Sethi Report


Archives of “credit rating” Tag

Toyota to float bonds with record-low coupons

 Toyota Motor will issue 60 billion yen ($546 million) in 10- and 20-year bonds with the lowest interest rates ever seen in Japan’s private sector, becoming the latest company to take advantage of ultralow borrowing costs to feed its appetite for capital.

The terms set Friday put the coupons on the 10- and 20-year notes at 0.09% and 0.343%, respectively. The automaker expanded the 10-year tranche from 20 billion yen to 40 billion yen to meet brisk investor demand. This will mark its first offering of 20-year debt in 18 years. 

The previous all-time low for 10-year bonds had been 0.17%, set by West Nippon Expressway, while Central Japan Railway had held the 20-year record with a 0.421% coupon.

Toyota will use the funds for capital expenditures and as working capital. It sees sustained investment to bolster its competitiveness as essential, even with operating profit projected to fall amid a strengthening yen. Capital spending is set to rise 4% to 1.35 trillion yen and research and development expenditures by 2% to 1.08 trillion yen for the year ending in March. The automaker needs funds for such projects as autonomous driving technology.

ALERT : S&P strips ExxonMobil of ‘AAA’ rating

Standard & Poor’s has stripped ExxonMobil, the world’s biggest publicly-traded energy group, of its top-notch credit rating in the latest sign of the tumult caused by the collapse in oil prices.

The ratings agency sliced the group’s rating to “AA+” from “AAA”, citing “low commodity prices, high reinvestment requirements, and large dividend payments”.

That leaves just software maker Microsoft and healthcare company Johnson & Johnson as the sole remaining US companies with “AAA” ratings.

S&P said its action comes as Exxon’s debt level has “more than doubled in recent years, reflecting high capital spending on major projects in a high commodity price environment and dividends and share repurchases that substantially exceeded internally generated cash flow”. The agency added that ExxonMobil’s credit measures will remain below its expectations for the ‘AAA’ rating through 2018.

It added that Exxon will likely benefit in the near-term from production gains as major projects reach completion, however, it reckons the company may have to spend more to maintain production and replace oil reserves in coming years.

India : Deterioration in credit quality continues in March

CARE Ratings’ Debt Quality index (CDQI) captures on a scale of 100 (index value for the base year FY12) whether the quality of debt is improving or declining.

An upward movement indicates improvement in the quality of debt benchmarked against the base year.

As it is contemporary with minimum time lags, the health of the debt and credit markets is captured on a near real-time basis. Currently, the volume of debt of the sample companies stands at Rs.27.79 trillion as of 31 March 2016.

A look at the chart shows how the quality of credit deteriorated in FY16.

The important question is: has a bottom been reached for credit quality?

Unfortunately, after the CDQI improved a bit in January and February this year, it fell sharply in March to its lowest level for the fiscal. That indicates that the quality of debt continues to decline.

ALERT-Falling exports, high gross deficits affect India rating: Japan Credit Rating Agency

Japan Credit Rating Agency (JCR) today said even though India has positives such as high growth rate and forex reserves, factors like higher fiscal deficit and weakness in exports constrain its sovereign rating.

“On exports, India is not doing as much as it can. The biggest constraint is ease of doing business, infrastructure, financial intermediation, land and labour, and supply side factors,” JCR’s Special Representative for Asia, Satoshi Nakagawa, told reporters here.

Even though Finance Minister Arun Jaitley has promised to adhere to the fiscal consolidation targets, the overall deficit figure, including that of states and public debt, is high, he said.

“It (deficit) is still very high, which actually strains further room for the government in case they need to do fiscal stimulus,” he said.

JCR has a BBB+ rating on the country. The agency upgraded the outlook on it to stable in February, when the last review was done.

Nakagawa said his company has a two-member dedicated analyst team tracking the developments in India and the agency’s annual review of the rating is due anytime now.

S&P Downgrades BP ,Total ,Standard Oil

After revising its crude oil market price assumptions in January, rating agency Standard & Poor’s on Monday lowered its corporate credit ratings on three of Europe’s largest oil & gas companies. The three are BP plc (NYSE: BP, Total SA (NYSE: TOT), and Statoil ASA (NYSE: STO).

Saying that current and expected debt coverage is likely to remain lower than its ratings guidelines for two or three years, S&P assigned new ratings and outlooks to the three oil companies:

  • Lowered the long- and short-term corporate credit ratings on BP PLC to
    ‘A-/A-2’ from ‘A/A-1’ and assigned a stable outlook;
  • Lowered the long- and short-term corporate credit ratings on Total S.A.
    to ‘A+/A-1’ from ‘AA-/A-1+’ and assigned a negative outlook; and
  • Lowered the long- and short-term corporate credit ratings on Statoil ASA
    to ‘A+/A-1’ from ‘AA-/A-1+’ and assigned a stable outlook. We also
    lowered the long-term ratings on captive insurer Statoil Forsikring AS to
    ‘A’ from ‘A+’. The outlook on both entities is stable.

ALERT : Bahrain junked by Standard & Poor’s

Bahrain has been stripped of its investment grade credit rating by Standard & Poor’s amid the swoon in crude prices which is now in its twentieth month.

The ratings agency lowered its ratings on Bahrain to “BB” with a stable outlook, from “BBB-” with a negative outlook, citing the impact that falling oil prices have had on the kingdom’s revenues and its impact on its public finances. S&P said:

We expect the impact of lower oil prices will further strain Bahrain’s already weak fiscal and debt metrics to the extent that we now view these credit measures as consistent with a ‘BB’ rating.

It added:

Bahrain’s fiscal vulnerability to oil-price fluctuations has increased since 2009, when, in response to the global economic slowdown and civil unrest, government expenditures started to rise (reaching 30% of GDP in 2012, from 23%in 2008), particularly through recurrent items such as public-sector wages and subsidies. Expenditures have remained elevated since then, including over 2015 and despite consolidation measures.

One Third Of Energy Companies Could Go Bankrupt Deloitte Warns As Credit Risk Hits Record High

At 1600bps, the extra yield investors are demanding to take on US energy credit risk has never been higher. However, if a new report from Deloitte proves true, this is far from enough as they forecast roughly a third of oil producers are at high risk of slipping into bankruptcy this year as low commodity prices crimp their access to cash and ability to cut debt.

Record high US Energy credit risk…

The report, as Reuters reports, based on a review of more than 500 publicly traded oil and natural gas exploration and production companies across the globe, highlights the deep unease permeating the energy sector as crude prices sit near their lowest levels in more than a decade, eroding margins, forcing budget cuts and thousands of layoffs

Germany Predicts Doom and Gloom as Eurozone Worries Mount

Despite Germany’s Federal Finance Minister Wolfgang Schauble running a 2015 surplus of US$13.5 billion, experts in his department are predicting “substantial sustainability risks” to Germany’s long-term debt-to-GDP ratio because of an aging population. 

A report to be put before Schäuble next week, states that — unless Germany starts making huge cuts to its state budget now — it will be unable to sustain the debt burden caused by an aging population and a low birthrate.

Unless the finance minister takes drastic action, the German debt-to-GDP ratio will reach 220 percent by 2060 — massively above the 60 percent limit set out under the Maastricht agreement of 1992. Germany — being a central pillar of the Eurozone — is under huge pressure to keep within the fiscal rules of the single currency agreement.

The report — leaked to the newspaper Welt am Sonntag — suggests that state spending will have to be capped each year over the next five years by around 5.8 percent. At its most pessimistic, Germany would need to start cutting US$26 billion annually.

This figure is seen as difficult to achieve given the current strain on the federal budget owing to the refugee crisis, which has seen 1.1 million migrants arrive in Germany.

Italian and Portuguese Pain

S&P- Downgraded 10 Of The Biggest US Energy Companies

Just 10 days after “Moody’s Put Over Half A Trillion Dollars In Energy Debt On Downgrade Review”, moments ago S&P decided it wanted to be first out of the gate with a wholesale downgarde of the US energy companies, and announced that it was taking rating actions on 20 investment-grade companies, including 10 downgrades.

The full release is below:

Standard & Poor’s Ratings Services said today that it has taken rating actions on 20 investment-grade U.S. oil and gas exploration and production (E&P) companies after completing a review. The review followed the recent revision of our hydrocarbon price assumptions (see “S&P Lowers its Hydrocarbon Price Assumptions On Market Oversupply; Recovery Price Deck Assumptions Also Lowered,” published Jan. 12, 2016).

While oil prices deteriorated over the past 15 months, the U.S.-based investment-grade companies we rate had been largely immune to downgrades. However, given the magnitude of the recent reductions in our price deck, most of the investment-grade companies were affected during this review. We expect that many of these companies will continue to lower capital spending and focus on efficiencies and drilling core properties. However, these actions, for the most part, are insufficient to stem the meaningful deterioration expected in
credit measures over the next few years.

A list of rating actions on the affected companies follows.


Chevron Corp. Corporate Credit Rating Lowered To AA-/Stable/A-1+ From AA/Negative/A-1+

The downgrade reflects our expectation that in the context of lower oil and  gas prices and refining margins, the company’s credit measures will be below our expectations for the ‘AA’ rating over the next two years. We anticipate Chevron will significantly outspend internally generated cash flow to fund major project capital spending and dividends this year and generate little cash available for debt reduction over the following two years. We note that the company has significantly more debt than in the last cyclical downturn while oil and gas production are at similar levels. The stable outlook reflects our expectation that credit measures will improve over the next three
years assuming lower capital spending and higher commodity prices.

Bla Bla Continues …Small deficit slippage not to impact India’s profile: Moody’s

Moody’s has said India’s credit profile will be unaffected by a small slippage in fiscal deficit target as it expects the government to continue fiscal consolidation and target lower deficits every year despite headwinds from global slowdown.

Moody’s Investors Service Associate MD (Sovereign Risk Group) Atsi Sheth said a rise in corporate profits and bounce back in government revenues hold key to India meeting 3.5 per cent fiscal deficit target in 2016-17.

“We see fiscal consolidation as a process, not an event determined on the day of the budget announcement. While we are not focused on a shift in the fiscal deficit target by a few basis points, we do anticipate that the government will target lower fiscal deficits every year than in the previous year,” Sheth told PTI.

She was replying to a question whether a delay in the roadmap could impact India’s credit profile assessment.

The fiscal consolidation trend that has been underway for a few years now, Moody’s said “will continue despite headwinds from global growth”.

IMF had projected world economic growth to slow to 3.4 per cent in 2016, from earlier projected 3.6 per cent.

As per the fiscal consolidation path laid out by the government, deficit is to be brought down to 3.9 per cent of GDP in current fiscal and further to 3.5 per cent in 2016-17.