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Wed, 24th May 2017

Anirudh Sethi Report

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Archives of “credit rating” Tag

S&P upgrade leaves Alphabet one notch shy of AAA rating

Alphabet was upgraded one notch to double-A plus by credit rating agency S&P Global on Wednesday, putting the owner of the Google search engine and Android operating system a single notch below the highest triple-A opinion.

Analysts with S&P said the move reflected the company’s dominance in both desktop and mobile phone advertising markets and its conservative financial strategies. S&P maintained a stable outlook on the company.

“The ratings upgrade reflects Alphabet’s consistently strong operating performance, despite a challenging and evolving digital advertising market, while it continues to maintain a conservative financial policy and strong liquidity profile,” said David Tsui, an analyst with S&P.

The pristine triple-A rating has become something of an endangered species after the financial crisis, with only two publicly traded US companies holding the highest rating from S&P: Microsoft and Johnson & Johnson. US oil group ExxonMobil was stripped of its long-held triple-A rating last year.

Greece facing fresh junking without bailout cash, warns Fitch

Greece is at risk of being downgraded further into junk territory should its creditors fail to resolve their latest set of differences over the country’s bailout this month, one of the world’s leading rating agencies has warned.

Ahead of its next decision on Greece in less than two weeks, Fitch Ratings said its current “CCC” junk rating on Greece was contingent on the country securing a successful injection of its latest tranche of bailout cash “well ahead of July” when it faces a major a €7bn repayments crunch.

The warning comes as finance ministers are due to thrash out their differences at a meeting in Brussels on February 20 – their last major discussion before a raft of eurozone elections beginning with the Netherlands in March and ending with Germany in September.

Fitch is due to make its next rating decision days after this month’s meeting of the Eurogroup on February 24. Greece has been unable to raise fresh funding on international markets since 2014, undergoing a fresh €86bn bailout in the summer of 2015 having been bought to the brink of default and introducing capital controls on its banking system.

A rating downgrade would also scupper the Syriza government’s ambitious plans to return to the bond markets before the end of its bailout in the summer of 2018.

Trump tweets can change how markets see a company’s credit risk – S&P

A tweet from US President Donald Trump can move markets. It may also move the market’s perception of the credit risk posed by a company named in one of the presidential posts, according to a report from S&P Global Market Intelligence.

“Trump’s willingness to directly call out firms over Twitter has introduced a never-before-seen dynamic to the markets and, correspondingly, it has affected the market-implied credit risk for individual countries,” said Jim Elder, director of corporate and financial institutions at S&P Global Markets Intelligence.

“Since his election, and based on market reactions, the calculations of our Probability of Market Default Signals (PDMS) model have shown a short-term impact on the credit quality of individual firms that have entered his cross-hairs, for better or worse,” he added.

But the impact can vary from tweet to tweet, the report found.

India : Limited room to reduce fiscal deficit to 3% in FY18: Moody’s

The government is likely to achieve its fiscal deficit target of 3.5 per cent of GDP in the current fiscal but higher infrastructure spending will limit the room to reduce it further to 3 per cent in 2017-18, Moody’s said today.

The credit rating agency expects the government to renew its commitment to increase capital spending and address the short-term disruptive impact of demonetisation in the Budget to be unveiled on February 1, 2017.

“On the fiscal front, the government will likely remain committed to achieving its fiscal deficit target of 3.5 per cent of GDP for the fiscal year ending March 2017. However, room to reduce the deficit further to the target of 3 per cent of GDP in the following year will be limited, due to the need for increased infrastructure spending and higher government salaries,” Moody’s Investors Service said in a statement.

It said that in an environment of lacklustre global trade and with economies globally facing the increasing risk of protectionism, India’s very large domestic markets provide a relative competitive advantage when compared to smaller and more trade-reliant economies.

The implementation of the pending GST and other measures aimed at enhancing income declarations and tax collection will help widen India’s tax base and boost revenues, it said, adding that such a boost will however only materialise over time, with the magnitude uncertain at this point.

ICRA pegs revenue loss from toll collections suspension in first 10 day at Rs 460 cr; road project debt servicing under lens

The debt servicing ability of road projects would be under strict watch over the next few months, as the impact of demonetisation on the cash flows becomes clear, say credit rating agencies.

Although the National Highways Authority of India (NHAI) has authorised its regional officers to make payment covering 90% of the interest amount provided in the financial/refinancing package to the concessionaires on submission of the required documents, this would remain inadequate, say analysts.

Shubham Jain, vice president, ICRA said, “Unlike annuity road projects, wherein the principal repayment falls due on semi-annual basis, majority of the toll road projects have monthly debt-repayment frequencies. With only interest cost and operations and maintenance expenses getting compensated, the compensation will be inadequate from the debt servicing point of view, unless the project has DSRA or other cash reserves to fall back on”. However, Jain said that the projects with DSRA constitute a very small percentage of the operational projects and hence the credit impact on the sector can be substantial.

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.