Moody’s expects base metals companies to be challenged over the next twelve to eighteen months as end markets continue to remain weak. Poor earnings and cash flow generation performance are expected, Moody’s says in its latest Industry Outlook. “Although companies are taking action to reduce capital expenditures, cut their work force and reduce costs overall, it remains to be seen whether such actions will be sufficient. Smaller players, particularly those concentrated in a single commodity, and those whose business footprint is on solely the downstream side, are viewed as being more vulnerable to significant deterioration in fundamentals and more at risk with respect to their rating.”
- Global demand for base metals has collapsed, with no sign of improvement visible today
- Production cuts have proved insufficient to offset weak demand
- Metal prices will continue to exhibit volatility
- Cost side relief is becoming evident
- Benefits from economic stimulus programs will likely be mixed
Our outlook for aluminum, nickel and zinc is weaker than our outlook for copper, but all metals will be challenged over the next twelve to eighteen months.
Rating performance for 2007 U.S. auto loan ABS has and will continue to hold up reasonably well in the face of rapidly rising delinquency and loss levels, according to Fitch Ratings.
Fitch projects cumulative net losses to reach and exceed levels not seen since 2001 due to the economic downturn and rise in unemployment. However, initial credit enhancement levels and the rapid de-leveraging of transaction structures among 2007 deals are serving as an effective shield against significant negative rating actions.
Through the first 16 months, losses on 2007 vintage prime ABS have reached 1.43%, significantly above the 1.00% realized through the same period on the 2001 securitization vintage. Fitch expects that losses on the 2007 vintage will continue to exceed those of the previous years observed and that CNLs will ultimately reach 3.0%−3.5%.
For details see Acceleration: Losses on 2007 Vintage Auto Loan ABS Pick Up Pace.
Standard & Poor’s has reiterated its negative outlook for the U’S’ consumer durables. And today’s news that consumer spending dipped 0.2% in March after rising 0.4% in February offers no sign of relief.
Standard & Poor’s said its base case 2009 outlook for the U.S. consumer durables industry remains largely negative, based on the following fundamentals:
- Continued economic weakness in the U.S. and Europe;
- The extended housing downturn; and
- Weakness in global credit, equity, and housing markets
In total, about 39% of our universe of 18 rated U.S. companies currently have negative outlooks or are on CreditWatch with negative implications.
This number has remained relatively stable for the past year, given the continued weakness in the economy and housing markets.
S&P’s top rated companies in the sector are Steelcase (NYSE: SCS) and Herman Miller (NASDAQ: MLHR). The weakest are Simmons and Ames True Temper. For details click here.
Moody’s has launched a new weekly research report, “Structured Finance Ratings Quick Check,” accessible without charge to any registered user of its public website. This MS Excel workbook is intended to provide a summary view and intuitive means of navigating Moody’s current ratings, rating changes, other monitoring activity, and credit research for all sectors of structured finance globally. Sectors included are Residential and Commercial Mortgage-backed Securities, Asset-backed Securities, Asst-backed Commercial Paper, Covered Bonds and Derivatives (Collateralized Debt and Collateralized Loan Obligations).
The report, expected to be updated each Monday, has three categories of content: first, a thumbnail sketch of current rating and credit activity and reviews by sub-sector; second, a list and capsule summary of recent special comments, recurring reports and announcements, with a link to our compendium of methodologies; and third, transition tables for recent ratings changes. Much of the information is hyperlinked to the full research documents on moodys.com, some of which are restricted to subscribers of the research service.
The tool is designed to organize and summarize the high volume of Moody’s global structured finance rating and research activity in a way that improves its usability and provides some additional context and perspective. www.moodys.com/SFquickcheck
Standard & Poor’s has issued revised assumptions for loan losses that could result in ratings downgrades for the most vulnerable US banks.
However, S&P notes that the potential for extraordinary government support could mitigate the impact on ratings.
“In general, the results of credit stress testing will likely affect the ratings on hybrid capital instruments–including all manner of preferred stock–more than credit ratings. We assume that banks with capital deficiencies are likely to suspend payments first on hybrid capital issues.”
For example, S%P has increased its May 2008 assumption for losses on commercial real estate loans from 0.5% to 4.0% today, under a base scenario, and from 4.0% to 7.0% in a stressed-case scenario.
The highest loss rate assumption is 13.0% for credit card loans under a stressed-case scenario, up from 10.0%.
“We believe that our recently updated methodology and the assumptions we discuss here could affect the stand-alone assessments of creditworthiness of U.S. financial institutions. The greatest impact could be on hybrid ratings, which we could lower by as much as several notches. This reflects the rising likelihood that banks will use this source of flexibility as economic and financial sector stress continues to mount. However, we could also lower senior and subordinated ratings for the most vulnerable institutions.”
For details of S&P’s updated assumptions see “Stress Testing U.S. Financial Institutions.“: and for further background see “Credit Stress Testing For Financial Institutions,“
A new working paper* from the International Monetary Fund has generally good news about the prospects for further alleviation of poverty around the world, except for the poorest of the poor.
“The poverty rate is seen to decrease from 1970 to 2000 for all poverty lines, and significantly
so for all, but the lowest poverty line. One can therefore with a reasonable degree of
confidence conclude that relative poverty has decreased,” the paper finds.
The poverty rate is expected to continue to fall sharply from 57.2 percent in 2000 to 49.7 percent in 2010 at a poverty line of one-half of the mean.
“At a poverty line of one-sixth of the mean the decrease in the poverty rate is somewhat lower (from 20.0 percent to 17.7 percent), but at a poverty line of one-tenth of the mean the poverty rate is forecasted to increase (from 8.9 percent to 9.2 percent). Encouragingly, the poverty gap improves for all three poverty lines, but the lower is the poverty line the smaller is the improvement.”
“In line with the results obtained earlier for the 1990s, the tentative conclusion therefore is that there are good prospects for continued poverty alleviation in the 2000s with the exception of poverty alleviation among the poorest of the poor.”
“The significant lowering of relative poverty is impressive and suggestive of major structural changes having taken place in the world economy over this period, ” the paper concludes.
“However, the data also indicate a worsening relative income outcome among the world’s poorest particularly in the 1990s (with indications that this trend continues in the 2000s). This latter result should temper anyone’s optimism with regard to the progress having been made in the fight against poverty.”
*Global Relative Poverty
Prepared by Lynge Nielsen
The Moody’s Credit Card Index charge-off rate continued to climb in March to a record high 9.30%. The delinquency rate, which usually falls this time of year due to tax refunds, continued to climb month-over-month and reached a record high as more and more borrowers fall behind on their credit card debt, Moody’s said. The charge-off rate measures credit card balances written off as uncollectible as an annualized percent of loans outstanding.
Given the pace of this deterioration, we expect the charge-off rate index to peak in the second quarter of 2010 at about 12% (revised from 10.5%).
“Other performance metrics improved in March. The yield index increased for the third consecutive month in March to 18.25%, aided in large part by card companies’ proactive measures to bolster the yield of their respective trusts. Also, as expected, the payment rate index bounced back from last month’s low rate to 16.46% in March. This improvement was mostly attributable to the technical issues related to the number of collection days in the relatively short month of February rather than any fundamental improvement in obligor payment behavior.”
Details are available here.
CreditSights is maintaining its marketweight rating on Real Estate Investment Trusts, after taking another look at the sector in the wake of the bankruptcy filing by General Growth Properties.
“The bankruptcy of General Growth Properties was a seminal event for the REIT industry but the actual filing does not change our view drastically since the company’s situation had first been identified during the post-Lehman bankruptcy credit crisis, reached a boiling point near Thanksgiving with the Las Vegas mall refinancing deadline, and became an obvious default once the company could not repay the principal on $200 million of Rouse bonds that matured on March 15 or secure adequate forbearances from the Rouse bondholders. A bankruptcy filing seemed almost inevitable given likely conflicting interests from Rouse bondholders and the difficulty in negotiating mortgage refinancing with CMBS holders though the timing was a bit unpredictable.”
We remain marketweight the REIT sector, which benefited from the massive high beta compression trade in 1Q. Our marketweight is based on decent liquidity measures and still wide spreads mitigated by clearly declining fundamentals.
CreditSights’ complete analysis is available here.
Marketing, eCommerce, CRM, and advertising will be transformed by social networks over the next five years as new technology provides consumers with portable online identities, according to Forrrester Research. In The Future of the Social Web, Forrester analyst Jeremiah Owyang writes that social experience is disjointed because consumers have separate identities in each social network they visit.
“The Social Web is about to evolve into something much broader than a few social network sites: a consistent backdrop for every online activity. Portable social IDs and the changes they enable will transform how consumers, brands, and social networks interact. This online social experience will evolve through five eras.”
A simple set of technologies that enable a portable identity will soon empower consumers to bring their identities with them — transforming marketing, eCommerce, CRM, and advertising.
- The era of social relationships. This was the first stage of the Social Web, starting in the mid- 1990s with communities like AOL and maturing a few years ago. In this era, people connected to each other using simple profiles and friending features to share information, discussions, and media.
- The era of social functionality. Today’s social networks have evolved beyond “friending” into
platforms that support social interactive applications and provide new meaning and utility to
communities. Even so, social relationships are still locked up within sites.
- The era of social colonization. In the next stage of social evolution, starting later in 2009,
technologies like OpenID and Facebook Connect will let individuals traverse the Internet with
their social connections along for the ride. The boundaries of social networks and traditional
sites will blur, making every Web site into a social experience.4
- The era of social context. Next year, as sites begin to recognize people’s personal identities and their social relationships, they will customize visitors’ experiences based on their preferences, their behaviors, and who their friends are. In addition to enabling more intense social applications, in this stage social networks will absorb features of email and become a base of operations for everyone’s online experiences.
- The era of social commerce. Starting about two years from now, as social networks become the repository for identities and relationships, they will become more powerful than corporate Websites and CRM systems. Communities will become the driving force for innovation. As a result, brands will cater to communities, resulting in a power shift toward the connected customer.
destinationCRM.com provides more detail on the report, including an interview with the author. The full report is available here.
Standard & Poor’s added three companies to its list of the global weakest links in the last month, bringing it to a record high of 300 as of April 22. Eroding credit quality is leading to lower ratings and more entities with negative outlooks or with ratings on CreditWatch with negative implications.
This is the 14th consecutive month that has seen an increase in weakest links, S&P said. The 300 weakest links have combined rated debt worth $485.75 billion. By sector, media and entertainment, retail and restaurants, and forest products and building materials were the most vulnerable, with the highest concentrations of weakest links, according to S&P’s Global Bond Markets’ Weakest Links And Monthly Default Rates report. Weakest links are defined as issuers rated ‘B-’ or lower with either a negative outlook or with ratings on CreditWatch negative, and they are at greater risk of default.
The 12-month-trailing global corporate speculative-grade bond default rate increased to 4.92% in March 2009 from 4.28% in February and is now more than 6x the 25-year low of 0.79% recorded in November 2007. The U.S. speculative-grade corporate default rate increased for the 16t consecutive month, reaching 5.42% in March 2009, up from 4.9% in February and now about5.5x the level from year-end 2007.
Corporate defaults continue to rise rapidly in 2009. Through April 22, 2009, 92 issuers defaulted, affecting debt worth $243.95 billion. By comparison, 126 defaults were recorded in all of 2008, affecting debt worth $433 billion.
We expect the U.S. corporate speculative-grade default rate to continue rising to an all-time high of 14.3% by March 2010. – Diane Vazza, head of Standard & Poor’s Global Fixed Income Research Group.
“Historically, defaults have continued to escalate even after signs of economic recovery. This cycle will be no different. We expect the economy to bottom out in the third quarter of 2009, but defaults likely will be abundant past that time horizon.”