Presentation on theme: "How Eurozone sovereign downgrades could impact corporate 1 ratings John Hatton, Group Credit Officer EMEA Corporates October 2012 (1) Non-financial Corporates."— Presentation transcript:
How Eurozone sovereign downgrades could impact corporate 1 ratings John Hatton, Group Credit Officer EMEA Corporates October 2012 (1) Non-financial Corporates
09/01/ EZ sovereign downgrades - corporate ratings What are drivers for corporate ratings to be affected Sovereign-linked credits Few in EMEA due to state-aid rules, privatisation and competitive markets Stand-alone profiles, can be rated above the Sovereign Economic environment already included in company performance Liquidity and access to capital Prospective, precedent, of state interference Geographical diversification Stand-alone credits capped by Sovereign-related considerations +6 notches implied cap for lower likelihood of Transfer and Convertibility (T&C) in Eurozone Member States (see How Sovereign Ratings Relate to other Asset Class Ratings in the Eurozone dd October 2012). Lower Country Ceiling for individual country – T&C / redenomination risk Liquidity contagion (disorderly sovereign restructuring)
09/01/ Existing Portfolio Implications of Sharp Deterioration in Eurozone Sovereign Ratings a Likely Maximum Foreign Currency IDR for Corporates Which are… Sovereign FC IDR Primarily Domestic Level of Diversification Globally Diversified A+Potentially no impact Potentially no impact A-A+ Potentially no impact BBBA- AA BB+BBB A+ BB-BBB- A- B+BB+ BBB+ a B-BB BBB- a CCCBB BBB- a RDBB BBB- a a While in practice, the rating of a corporate which is not able to swiftly avoid redenomination risk in a worst case scenario is unlikely to exceed the sovereign rating by much more than six notches, the contours of such sovereign downgrade actions (eg, the approach of a reprofiling of sovereign debt maturities) may indicate that transfer and convertibility risk remains very limited, and could indicate a wider gap for globally diversified corporates than the six notches indicated here Source: Fitch Scale of corporate rating movements has been consistent with a normal recessionary period, rather than any material linkage to the regions sovereign ratings EZ corporates ratings within implied cap of +6 notches from sovereign ratings (Spain BBB, Italy A-, and Portugal BB+)
09/01/ Stand-alone credits above the Sovereign Economic environment already included in company performance Generally, our forecasts and ratings reflect protracted anaemic economic recovery prospects Unlikely prospective, and no past precedent, areas of state interference Utilities – interference in independence of regulatory tariff setting. Tax Liquidity and access to capital Contagion from local banking system What are the Drivers or Warning Signs?
09/01/ Liquidity and Access to Capital Periphery corporates have accessed bonds totalling USD51bn of EMEA total USD402bn YTD Sovereign rating to BBB and below can reflect, inter alia, its market access and official programme requirements
09/01/ Stand-alone credits above the Sovereign Economic environment already included in company performance Unlikely prospective, and no past precedent, of state interference Liquidity and access to capital Geographical diversification By revenue and profits Selected Issuers – Revenue Diversification EntitySectorCurrent rating Domestic Revenuesª Greece OTETelecomB-, Watch Negative Ireland Electricity Supply BoardUtilityBBB+, Negative Outlook Italy Acea SpAUtilityA, Negative Watch Edison SpAUtilityBB-, Watch Positive Enel SpAUtilityBBB+, Watch Negative Eni SpAOil & GasA+, Stable Outlook Fiat SpAIndustrialBB, Negative Outlook Finmeccanica SpAIndustrialBBB-, Negative Outlook Telecom Italia SpATelecomBBB, Negative Outlook Terna SpAUtilityA, Negative Outlook Wind Telecomunicazioni SpATelecomBB, Negative Outlook Portugal Portugal TelecomTelecomBBB, Negative Outlook EDP – Energias de Portugal SAUtilityBBB-, Negative Outlook Spain AbengoaInfrastructureB+, Stable Outlook Cableuropa SACableB, Positive Outlook Enagas SAUtilityA-, Stable Outlook Gas Natural SDG SAUtilityBBB+, Watch Negative Iberdrola SAUtilityBBB+, Watch Negative Obrascon Huarte Lain SAIndustrialBB-, Stable Outlook Red Electrica CorporacionUtilityA-, Negative Outlook Repsol SA b Oil & GasBBB-, Negative Outlook Telefonica SATelecomBBB+, Negative Outlook What are the Drivers or Warning Signs?
09/01/ What are the Warning Signs? Warning Signs: Sovereign Interference and Contamination Redenomination (fall in Country Ceiling – existing example of Greece B-) Unknown scope and effectiveness of (unlawful) capital control mechanisms, if introduced Nationalisation viewed as unlikely scenario Liquidity Contagion banking system, dis-orderly sovereign restructuring Real World Actions / War Game Scenarios: Accessing and refinancing in bond market. Not over-reliant upon domestic banking system linked to sov. Reducing capex and dividend outflows. Not depositing surplus cash with local banking system. IPO subsidiary, thereby accessing local money or closer to investor base (Telefonica, OHL) Re-domicile – Coca-Cola Hellenic relocate from Greece to Switzerland,. FAGE Greece to Luxembourg Re-list in another jurisdiction – CRH plc
09/01/ Related Research The Future of the Eurozone – The Impact on Corporates Scenario: A Euro Redenomination and Corporate Ratings Corporates in the Eurozone Periphery Updated Issuer-Level Forecasts, May 2012 Scenario: Eurozone Shock Case for EMEA Corporates Scenario: Eurozone Corporate Shock Case – FAQ Scenario: Eurozone Corporate War Game Exercise All relevant Fitch research can be found on our website under the appropriate sector headings
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