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.
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.
One week ago, in the aftermath of the dramatic downgrade to junk of Asian commodity giant Noble Group, we showed readers the list of potential “fallen angel” companies, those “investment “grade companies (such as Freeport McMoRan whose CDS trades at near-default levels) who are about to be badly junked, focusing on the 18 or so US energy companies that are about to lose their investment grade rating.
Perhaps inspired by this preview, earlier today Moody’s took the global energy sector to the woodshed, placing 175 global oil, gas and mining companies and groups on review for a downgrade due to a prolonged rout in global commodities prices that it says could remain depressed indefinitely.
The wholesale credit rating warning came alongside Moody’s cut to its oil price forecast deck. In 2016, it now expects the Brent and WTI to average $33 a barrel, a $10 drop for Brent and $7 for WTI.
Warning of possible downgrades for 120 energy companies, among which 69 public and private US corporations, the rating agency said there was a “substantial risk” of a slow recovery in oil that would compound the stress on oil and gas firms.
As first reported first by Reuters, the global review includes all major regions and ranges from the world’s top international oil and gas companies such as Royal Dutch Shell and France’s Total to 69 U.S. and 19 Canadian E&P and services firms. Notably absent, however, were the two top U.S. oil companies ExxonMobil and Chevron.
Moody’s said it was likely to conclude the review by the end of the first quarter which could include multiple-notch downgrades for some companies, particularly in North America, in other words, one of the biggest event risks toward the end of Q1 is a familiar one: unexpected announcements by the rating agencies, which will force banks to override their instructions by the Dallas Fed and proceed to boost their loss reserves dramatically.
Since last summer, the Greek government has recapitalized the country’s systemic banks, and put into place budgetary consolidation measures.
Despite multiple shocks, the economy has proved more resilient than we had previously expected.
By the end of March, despite differences between the government and its creditors, we expect Greece to meet the conditionality attached to its €86 billion financial support program, opening the way for discussions on official debt relief.
As a consequence, we are raising our long-term sovereign credit rating on Greece to ‘B-‘ from ‘CCC+’.
The stable outlook reflects our opinion that risks to the ratings are balanced.
Anaemic demand and high debt are the main constraints for credit profiles of Indian companies as overall economic conditions remain lacklustre in the country, credit rating agency S&P said on Tuesday.
“Economic conditions in India remain lacklustre despite several government measures to boost investments in the economy,” said Standard & Poor’s credit analyst Mehul Sukkawala. In a report, ‘Revival In Domestic Demand Can Reduce Downside Risk For Indian Companies In 2016’, S&P said the first 6-9 months will be crucial for rated companies. This period will provide signs on whether domestic demand is reviving, Government reforms are moving ahead, and global economic conditions are stabilising.
“Companies still face anaemic demand and lower capacity utilisation, resulting in weak profitability,” it said. S&P said about half of the 22 Indian companies that S&P rates in India are large and have good business positions. Many of these companies also have conservative-to-moderate financial policies, and some are also Government owned.
Most private companies are not initiating large projects to focus on organic and inorganic deleveraging, it said, adding that many rated companies have undertaken significant debt-funded investments over the last five years. They are at their peak debt levels, limiting the scope for positive rating actions, it said.
Net Profit: For the quarter ended December 2015, the company posted a consolidated net profit of Rs 7290 crore, up 38.69 per cent year-on-year, against Rs 5,256 crore in the corresponding quarter a year ago. The company earned Rs 6720 crore in the sequential quarter ended September 2015.
Sales: Total income from operations of RIL stood at Rs 68,261 crore, down 27 per cent, against Rs 93,528 crore in the same quarter last year. Decline in revenue was led by the 42.7 per cent year-on-year decline in benchmark (Brent) oil price.
Gross Refining Margin (GRM): Gross Refining Margin stood at $11.5 per cent bbl for the quarter under review, highest in highest in the past seven years.
Employee Cost: Employee costs stood higher by 30.9 per cent at Rs 2,026 crore ($ 306 million) as against Rs 1,548 crore in corresponding period of the previous year due to VRS payment and increased employee base in subsidiaries.
EPS: Basic earnings per share (EPS) for the quarter ended December 2015 was at Rs 24.8 as against Rs 17.8 in the corresponding period of the previous year.
Outstanding Debt: Outstanding debt as on 31st December 2015 stood at Rs 178,077 crore ($ 26.9 billion) compared to Rs 160,860 crore as on 31st March 2015.
Cash and cash equivalents: Cash and cash equivalents as on 31st December 2015 were at Rs 91,736 crore ($ 13.9 billion). These were in bank deposits, mutual funds, CDs and Government Bonds and other marketable securities.
It’s clear from Markit’s CDS spread rankings that the oil and commodities rout is hurting creditworthiness. Six of the seven widest CDS spreads are miners or commodity traders, while 21 of the 110 companies with implied junk ratings are energy groups. Some miners have seen their CDS spreads balloon over the last few months
Chart courtesy of Markit
Countries that have at least one investment grade rating, but a CDS priced at junk levels include South Africa at 340bps, Russia at 339bps and Kazakhstan and Turkey at 301bps.
The health of indebted companies globally has deteriorated at its fastest pace since the financial system was wracked by crisis in 2009, according to Standard & Poor’s.
The assessment by the credit rating agency, released on Tuesday, is the latest sign of deteriorating business conditions and comes after the worst start to the year for global stock markets in decades.
Three times as many companies are at risk of a downgrade to their credit rating as are likely to register an improvement in their creditworthiness, according to S&P.
However, problem borrowers are so far concentrated in the oil and gas and metals and mining industries. “We’re sitting on a see-saw here, and it’s a question to what extent business confidence will hold up in the face of the broader dislocations developing in the rest of the world”, said Paul Watters, head of corporate research for S&P Ratings Europe.
Investors around the world are attempting to assess the impact of a slowdown in the Chinese economy, as well as an end to the era of cheap debt finance after the Federal Reserve raised interest rates in December for the first time in almost a decade.
“I would not use this as a leading indicator of credit quality declining but as an indicator of what the market is pricing in,” said Srikanth Sankaran, a credit strategist at Morgan Stanley. “My focus would be more on how the macro themes play out.”
Noble Group has been cut to junk by ratings agency Standard & Poor’s, hours after a further drop in commodity prices sunk its share price to the lowest level in eight years.
Asia’s largest commodity trader by volume has been battling accusations of aggressive accounting and fears a drop in energy and metals prices to the lowest level in more than a decade will dent its ability to generate cash and handle its debt load
S&P said it was lowering its rating on Hong Kong-headquartered Noble to BB+ – which is below investment grade – from BBB-, and put it on review for a further downgrade.
S&P analyst Cindy Huang said:
In our view, the company’s credit standing in the capital markets and with lenders has weakened, reflected in its depressed securities prices.
Given the prospects for a prolonged slump in commodities prices, we expect lenders to take a more cautious view toward financing commodities businesses.
S&P said Noble has about $360m in bonds maturing in the coming months as well as a $2.2bn revolving credit facility to renew in May of this year.
Maintaining an investment grade credit rating is seen as key by big commodity traders as they operate with razor thin margins and rely on cheap financing to move millions of barrels of oil and tonnes of metal around the world.
Rating agency Moody’s first cut Noble to junk last week.
Defaults on rated debt instruments are growing at a fast clip this year compared to last year, according to data from two of the country’s largest rating agencies, suggesting stress on corporate balance sheets remains high. Some say such defaults may not have peaked particularly in the case of large corporates which have taken on excess debt to expand operations before the economy hit a rough patch.
The economic downturn of recent years and delays in government approvals stalled many infrastructure projects, which in turn, hurt corporate cash flows and impaired the companies’ ability to repay debt. This has led to a build-up of bad loans across the country’s banking sector and led to defaults on market borrowings. While banks classify a loan as a non-performing asset if repayment is delayed by more than 90 days, rating agencies downgrade a debt instrument even if repayment is delayed by a single day.
According to Credit Rating Information Services of India Ltd (Crisil), debt in default was at Rs.25,895 crore as of September 2015 compared to Rs.28,323 crore for the full year in 2014. This suggests the monthly run rate of defaults is higher than last year.
The stress is more evident in India Ratings and Research Pvt. Ltd data, which shows debt in default jumped to Rs.21,457 crore as of 8 December from Rs.9,035 crore in 2014.
The other two of India’s largest rating agency firms—ICRA Ltd and Credit Analysis and Research Ltd (CARE)—refused to share debt default data.
“These predominantly include small entities but also include large corporates where financial restructurings have not worked out. It reflects a combination of stress in cash flow generation given disinflation and high leverage,” Rakesh Valecha, senior director and head of corporate ratings from India Ratings, said. He added that most of these defaults were in the non-investment grade segments.