Thu, 25th August 2016

Anirudh Sethi Report


Archives of “credit rating” Tag

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.

Sovereign Credit Is Deteriorating At A Record Pace

Culminating with the tipping of the UK’s numerous real estate fund “dominoes” and the subsequent fallout in the wake Brexit, Fitch has been on a ratings-slashing spree, having cut the credit ratings on 14 nations so far in 2016, most recently that of the United Kingdom – a record downgrade pace for the rating agency. As the FT reports the majority of those 14 nations are concentrated in the Middle East and Africa: areas that have the most exposure to slumping commodity prices and declining nominal exports. Fitch also downgraded the UK citing falling oil prices, a stronger US dollar and Britain’s pending exit from the EU.

The decline in global sovereign ratings highlights the sensitivity to geopolitical shocks felt by the world economy as a result of sluggish growth and rising debts, Fitch notes.

Fitch’s competitor S&P has cut 16 sovereign ratings, a number only exceed once prior and that was during the EU turmoil in 2011. Moody’s registered 14 downgrades in 2016, up 4 from this same period last year. 

So far this year, S&P has downgraded 16 sovereigns — a half-year figure only exceeded once, at the height of the eurozone crisis in 2011. Moody’s has downgraded 24, compared with 10 at the same point last year.

On Europe, Fitch had this to say: “Europe’s political backdrop could have negative implications for sovereign ratings . . . Comparatively high government debt levels are observed in several eurozone sovereigns, and are likely to remain effective rating constraints.”

Not even Saudi Arabia was safe. Fitch downgraded the kingdom on April 12, 2016 citing weakness in oil prices. The downgrade took place after oil had already rebounded roughly 40% from the February low. Fitch also stated their target for oil at the time of the downgrade was $35 for 2016 and $45 for 2017.

Moody’s: Markets see main risk to China’s economy stemming from SOE-related contingent liabilities-Full Text

Moody’s Investors Service says that market participants throughout Asia view sizeable contingent liabilities, stemming largely from the state-owned enterprise (SOE) sector, as the main source of risk facing the Chinese authorities.

At the same time, market participants appear split over whether or not China will face a financial crisis over the coming years.

Moody’s also acknowledges that the high debt load of Chinese entities connected with the government raises contingent liability risk for the sovereign, further noting that the liabilities of China’s SOEs are significantly higher than for those any other rated sovereign.

At the same time, Moody’s says an imminent financial crisis in China is unlikely, although this will come at the expense of credit quality.

Moody’s conclusions were contained in a just-released report on the results of polls it had taken of market participants from late May through to mid-June in Beijing, Shanghai, Hong Kong and Singapore. All those polled were attendees of “Moody’s Mid-Year China Conference: Understanding the Risks of High and Rising Leverage.”

The sustainability of a rising debt burden is arguably the key credit issue for China, particularly as it undergoes a structural shift towards services-orientated and consumption-led growth, the report says.

India : 240 companies face debt of Rs 2,28,000 crore ($ 35 Billion )

Even as new reforms get rolled out and the economy sees an uptick, barring renewed inflationary risks, India Inc, particularly its debt-stressed companies, will continue to face an extremely tough year ahead. A rating agency report on Tuesday warned that 240 of the top 500 borrowers among Indian companies, listed and unlisted, will find it extremely difficult to re-finance their debt obligations arising in current financial year (FY17).

These 240 companies, according to India Ratings and Research, face debt obligations to the tune of Rs 2,28,000 crore in FY17, about 60 per cent of which they would have to resort to refinancing.

Of these, 83 firms, which were already in the stressed or default category, faced a debt obligation of Rs 1,01,000 crore in FY17. Their collective total outstanding debt stood at Rs 5,10,000 crore. The remaining 157 companies, which were in the elevated risk of refinancing category, faced debt obligations of Rs 1,27,000 crore in FY17, out of their collective outstanding debt of Rs 6,72,000 crore. Together, these 240 high-risk firms would need to seek refinancing to the extent of Rs 1,37,600 crore.

Siddhartha Khemka, head of research at Centrum Broking, said companies facing refinancing risks are likely to pay higher interest rates and provide more collateral. Interestingly, the India Ratings report noted “The median credit metrics for the elevated risk of refinancing (ERR) category have deteriorated over FY11-FY16 and public sector banks are rationing credit due to mounting losses and capital constraints.”

The rating agency conducted a sectoral break-up, which indicated “a significant concentration in leveraged sectors such as metal and mining, infrastructure and construction, oil and gas, power, real estate and telecom contributing 65 per cent to the total debt and 53 per cent to the total refinancing requirement.”

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.