President Dilma Rousseff’s re-election during Sunday’s second-round runoff contest does not change Fitch Ratings’ projection of difficult conditions for Brazilian corporates during 2015. Systemic problems such as inflation and an overly complex and inefficient tax system will continue to hurt corporate cash flows. Domestic demand should remain weak as business and consumer confidence are not projected to recover significantly. These challenges, in addition to soft commodity prices, will likely lead to increasing corporate leverage and a bias toward negative rating actions during 2015.
Investments that eliminate logistics bottlenecks will be crucial to accelerating economic growth. The level of state intervention increased under Rousseff’s first term. Clearer signals of reduced state involvement in the private sector during her second term would be important to improving business confidence and reviving investments. Continued progress in attracting private capital for large infrastructure projects will be a crucial component of restoring the credit quality of Brazilian corporates beyond 2015.
During 2015, approximately 15% of the 82 Fitch-rated corporates will likely face a directional rating action. The bias is anticipated to be strongly negative; downgrades could outpace upgrades by a ratio of more than 2:1. Corporates in the electricity sectors, as well as those in the sugar and ethanol industry, are the most vulnerable to negative rating actions. Iron ore and pulp producers will face weak external market conditions due to oversupply, but are not likely to be downgraded, as their costs positions allow them to continue to generate positive cash flow. The protein sector stands out as a sector that could have more positive than negative rating actions. Low grain prices and growing demand for proteins should continue in 2015; balance sheets are projected to strengthen due to strong operating performance.>> Read More
Another day, another record low for the Russian currency.
As investors prepare for S&P to decide whether it will maintain or downgrade Russia’s credit rating today, the rouble has dropped another 0.5 per cent to 46.9 against a dollar/euro basket – the central bank’s preferred measure.
Since late June the rouble has now lost nearly a fifth of its value (-19.5 per cent), resulting from a steep decline in the price of oil and Western sanctions against Russia over its conduct in Ukraine.
Strength in the US dollar has compounded the losses, as investors drive up the value of the greenback and prepare for the Federal Reserve to exit years of loose monetary policy.
At BBB-, Russia sits on the bottom of S&P’s investment grade ladder. A single notch downgrade would place it into “junk” status, which could cause funds that only invest in high-grade debt to have to exit the market.
It could also have a knock-on effect on Russian companies and banks, which could also be relegated to junk as a result>> Read More
International rating agency Standard & Poor’s (S&P’s), which recently upgraded its outlook on the sovereign ratings in the wake of the Narendra Modi turning PM, said today that India’s economic performance could “disappoint optimists” through 2015, but will get better over a longer-term as the government initiates bold reforms.
“We believe that the country’s economic performance will disappoint optimists through 2015 but will likely be better than the fears of pessimists over the long-term,” Standard & Poor’s credit analyst Joydeep Mukherji said in a report today.
In the commentary, which comes a day after exit polls predicted gains for the BJP in the Haryana and Maharashtra polls, Mukherji said Prime Minister Modi will not take any dramatic reform measures immediately but will wait to add as many states in the kitty first before ushering in reforms.
“Modi will seek to win as many state elections as possible, especially in the next two years, to gain seats in the Upper House and ease the passage of legislations,” he said.>> Read More
Ukraine is likely to default on its debts next year when it breaches the conditions of a controversial $3bn bond held by Russia, allowing Moscow to demand immediate repayment and possibly triggering a wider default on all the country’s international debts, Moody’s has warned.
The rating agency notes that Ukraine’s deep 7.5 per cent economic contraction and wilting currency is likely to push its debt-to-GDP ratio up to 66 per cent this year – above the maximum 60 per cent ratio stipulated in the clauses of the Russian Eurobond that the last Kiev government sold to Moscow before the revolution.
When Ukraine’s debt-to-GDP ratio official breaches that level – possibly as early as January 29, when it is slated to release provisional fourth-quarter economic data – Moscow can ask for an immediate payment acceleration.
The final fourth-quarter GDP estimate is supposed to be published on March 10.>> Read More
Hans Michelbach of the Christian Social Union (CSU) – German Chancellor Angela Merkel’s Bavarian sister party – criticised ECB president Draghi, saying he was turning the institute into a “junk bank” with his plans to buy debt rated as junk (On Thursday, the ECB said it plans to buy debt included that with a “junk” credit rating from Greece and Cyprus – conditions apply!)
Michelbach, is chairman of the conservative faction in the parliamentary financial committee
Recovering earnings, a weaker yen and higher share prices are enhancing the creditworthiness of Japanese companies, according to fresh data from Rating and Investment Information.
R&I said 20 companies scored credit rating upgrades in the period from April to September, three fewer than in the second half of fiscal 2013, which ended in March. At the same time, only three companies were downgraded, the fewest since the first half of fiscal 2007.
The new data covered rating decisions through Friday.
Corporate bond issuances, meanwhile, reached the highest level in four years because companies were able to procure funds at lower interest rates.
“Credit rating upgrades for Japanese companies with improved corporate earnings will continue,” said Toshiyasu Ohashi, chief credit analyst at Daiwa Securities.
Tire manufacturer Bridgestone was upgraded by one rank to AA in August — its first boost in about a decade. Trading houses Itochu and Marubeni saw their ratings raised for the first time in about six and a half years.>> Read More
After yet another profit warning from Sony, S&P warns it may cut its credit rating to below investment grade, or junk.
S&P said the outlook on Sony’s “BBB-” rating on Sony – the lowest on the investment grade scale – has now been revised to “negative,” indicating a cut to junk grade could be next.
Amid intensifying competitive pressure, our assumption of EBITDA from Sony’s mobile business is likely to decrease substantially, and, in turn, the negative impact on consolidated earnings and financial ratios for the company is likely to be larger than we are able to incorporate in the current rating.
Sony shares fell 8.6 per cent on Thursday after it warned its current year loss is now expected to increase almost five-fold from its initial forecast to Y230bn ($2.1 bn), a prediction that would mean cumulative losses of over Y1tn over the past five years.
Moody’s Investors Service has today changed the outlook on Brazil’s Baa2 government bond rating to negative from stable. The change of outlook applies to all rating classes for “Brazil, Government of”, i.e. issuer ratings, government bond ratings and shelf ratings. The foreign currency and local currency country ceilings remain unchanged.
The rating action reflects the rising risk that sustained low growth and worsening debt metrics indicate a reduction in Brazil’s creditworthiness, which would trigger a downward migration in its credit rating.
The drivers of the outlook change are:
1. A sustained reduction in Brazil’s economic growth, which shows little sign of a return to potential in the near term;
2. A marked deterioration in investor sentiment which has negatively impacted fixed capital formation in Brazil; and
3. The fiscal challenges these economic headwinds pose, impeding the reversal of the upward trend in government debt indicators
At the same time, Moody’s has affirmed Brazil’s government bond rating at its current Baa2 level on account of the country’s continued resilience to external financial shocks given its international reserve buffers; the government balance sheet’s limited vulnerability to sudden changes in global risk appetite compared with its peers; and the underlying credit benefits derived from Brazil’s large and diversified economy.
Global rating agency Standard & Poor’s said it is evaluating policies of the Narendra Modi government for a review of India’s sovereign rating, now pegged at the lowest investment grade.
“We are evaluating the new government’s policies and are forming a view on the likelihood of their success,” S&P analyst Agost Benard told PTI when asked if the agency was contemplating a review of India’s sovereign rating. “Any rating implications or possible changes to the outlook on the rating will be communicated to the market and the media through the usual channels,” he said in the e-mail reply.
S&P representatives had recently held extensive discussions with the finance ministry officials. The agency, however, refused to share the details saying it is “confidential”.
The finance ministry officials had impressed upon the agency the government’s resolve to push economic reforms, promote growth and contain fiscal deficit at 4.1% in 2014-15, sources said.>> Read More
Standard & Poor’s slapped emerging markets with 70 sovereign and corporate credit rating downgrades in the second quarter, and awarded just 29 upgrades, but at least ratio of cuts to promotions is improving.
The downgrade-to-upgrade ratio eased to 2.4 times in the three months through June, compared to 5.3 times in the first three months of the year, the rating agency said in a report today.
The demotions were largely triggered by cuts to Argentina, Russia and South Africa’s sovereign ratings, as well as a dimmer view on Brazil’s banking sector.
Diane Vazza, head of Standard & Poor’s global fixed income research, said in the report.
Looking forward, the rating outlooks in the EEMEA region show the highest net negative bias, followed by emerging Asia and Latin America. Russian entities are driving the elevated negative bias in the EEMEA region, just as Indian entities are doing in emerging Asia, and Brazilian and Argentine entities are doing in Latin America.