Despite improved liquidity profiles and access to the unsecured debt market, weak property operating fundamentals across the U.S. equity REIT sector and the uncertainty as to the exact timing of a full economic recovery remain areas of concern for U.S. equity REITs in 2010, according to Fitch Ratings.
Fitch is maintaining is a negative Negative outlook Outlook for the U.S. equity REIT sector heading into 2010.
While Fitch’s REIT Outlook remains Negative, ‘Fitch may revise the Outlook to Stable if expectations regarding property-level fundamentals, liquidity, and access to capital hold true in 2010,’ according to Managing Director and U.S. REIT group head Steven Marks.
‘If liquidity and access to capital remains strong, expect more rating affirmations and fewer downgrades and downward Outlook revisions that characterized 2009,’ said Marks. ‘Conversely, less access to capital and increased use of secured debt will put a strain on liquidity,’ which Marks adds will lead to a more circumspect view of the sector.
Despite weakened fundamentals, Fitch maintains a Stable Outlook for multifamily REITs in 2010 due to limited supply and continued access to low-cost financing from Fannie Mae and Freddie Mac.
Health care REITs‘ Stable Outlook is largely driven by demographic trends that continue to benefit the health care sector, portfolio diversity and limited supply.
Meanwhile, the prospect of further store closures and weak leasing activity will continue to weigh on retail REITs (Negative Outlook). ‘
Unemployment remains a more pivotal factor in the health of office REITs (Negative Outlook).
Above-average leverage and a slow economic recovery, which has reduced overall productivity and the need for space are the key drivers behind the Negative Outlook for industrial REITs.
For details see 2010 REIT Outlook: Back to Basics (Premium)
Commercial real estate prices as measured by Moody’s/REAL Commercial Property Price Indices (CPPI) dropped 1.5% in October, as the pace of monthly declines continued to moderate.
U.S. commercial property values are now down 36.4% from a year ago, and 43.7% from the peak in prices two years ago.
The pace of declines has tapered off since the large drops measured in April and May. However, further declines are anticipated.-Moody’s Managing Director Nick Levidy.
Commercial real estate transactions have been holding steady at reduced volumes throughout 2009, with a small increase recorded in October. During the month there were 407 sales, the second highest monthly total for 2009, and a dollar volume of $5.4 billion, the highest for the year.
Annual indices for the four quarters ending September 30, 2009, show poor performance in New York over the past year dragging down the eastern office market overall. New York offices saw the largest annual price declines among the three MSA-level office indices in the CPPI. Office prices in New York fell 38.1% over the past four quarters, and have dropped 39.3% overall.
Fore details, see Moody’s/REAL Commercial Property Price Indices, December 2009 (Premium)
Confidence is returning to the European mergers and acquisitions market, with a significant proportion of companies planning a major deal in 2010, according to the second annual survey of European companies’ M&A plans, conducted by The Boston Consulting Group (BCG) and UBS Investment Bank.
Yet ongoing uncertainties about the economic outlook and sustainable levels of profitability are likely to lead to smaller, lower-risk consolidation deals than before and might deter some companies from entering the M&A market.
As the survey reveals, there are grounds for being both courageous and cautious.
Key findings include the following:
- One in five companies plans to buy a business with sales of more than €500 million in 2010, including nearly one in two large companies with market capitalizations in excess of €20 billion.
Although there are substantial variations among industries, one of the encouraging signs is that 44 percent of companies within the chemicals sector—often a harbinger of economic recovery—are planning to make a large-scale acquisition within the next 12 months.
- M&A transactions are most likely to be “horizontal” consolidation deals, expected to be the dominant deal type by 68 percent of surveyed companies. Typically, these are expected to be smaller, lower-risk acquisitions than the transformational deals previously anticipated for and to some extent executed in 2009. This indicates that there is a degree of caution in the market and that the effects of the financial and economic crisis are still being felt.
- Restructuring deals are also expected to rise steeply, with nearly one out of three companies planning to strengthen its strategic and financial positions by divesting businesses. These disposals will be essential not only for cleaning up corporate portfolios but also for generating proceeds to help fund new acquisitions as the M&A market picks up. In fact, 75 percent of companies believe that investors, banks, and other creditors will exert greater pressure to go down the deal-based restructuring route in the coming 12 months. Moreover, one-third of companies believe that even distressed divestitures could make valuable targets.
Full free report can be downloaded here.
Standard & Poor’s Ratings Services has published a report that summarizes its definition of models, briefly describes what its models are used for, and discusses in general terms its view on methods of combining qualitative and quantitative considerations in the ratings process.
The report also addresses some distinctions Standard & Poor’s sees between models suitable for ratings analysis and models more suitable for use in valuation, portfolio optimization, and risk measurement.
“The ratings process can involve use of quantitative considerations, such as models, in addition to qualitative considerations,” said Martin Goldberg, Senior Director at Standard & Poor’s.
The applicable published Standard & Poor’s criteria will, in general, outline the nature of those considerations. And the importance of models in the ratings process varies. Analysis of more complicated debt often calls for
more elaborate tools.
For certain securities, the use of quantitative financial models can be an important tool in the ratings process.
“The models Standard & Poor’s uses are built to embody its assumptions and are specifically designed for use in the ratings process. These models can differ from those intended for other purposes and from those embodying
different assumptions. We may use these models earlier in the ratings process than qualitative analysis, or later, or simultaneously, depending on our view on how best to analyze a particular aspect of credit risk.”
For details, see On The Use Of Models By Standard & Poor’s Ratings Services (Premium)
The UK, Spain and France must articulate more credible fiscal consolidation programs over the coming year in order to ensure they maintain their sovereign ratings, Fitch ratings says in its Sovereign Review and Outlook (Premium)
Fitch says that the impact of extraordinary levels of sovereign intervention and support for the financial sector, as well as fiscal stimulus packages and the severity of the recession, has weakened high-grade (rated ‘AA-’ and above) sovereign credit profiles during 2009.
For large ‘AAA’ rated sovereigns with greater financing flexibility, the capacity to absorb and finance the expansion of their balance sheets this year has been impressive,Fitch says. “Nonetheless, the capacity to finance large budget deficits over a prolonged period without financing stress is not in it self sufficient to preserve ‘AAA’ status, as the experience of Japan in the 1990s demonstrated.”
“While current ratings incorporate a further substantial rise in public indebtedness, all major ‘AAA’ sovereign governments need to articulate more credible and stronger fiscal consolidation plans during the course of 2010 to underpin confidence in the sustainability of public finances over the medium-term and the commitment to low and stable inflation.
In Fitch’s opinion, the UK, Spain and France in particular must articulate more credible fiscal consolidation programs over the coming year given the pace of fiscal deterioration and the budgetary challenges they face in stabilizing public debt. Failure to do so will greatly intensify pressure on their sovereign ratings.
Fitch adds that though emerging economies, especially in Asia, have led the global economic recovery, this primarily reflects the rebound in global trade and the inventory cycle that will only be sustained if final consumption demand in the MAEs, most notably the US, recovers. “The success of emerging market economies is a function of strengthened macroeconomic policy frameworks and globalisation – global economic recovery cannot be sustained without the emerging economies, but nor can it be powered by them alone.”
Fitch’s latest global economic forecasts, also published today in its quarterly Global Economic Outlook, predict that for the MAEs , the recovery will prove self-sustaining even as policy authorities begin to withdraw extraordinary monetary and fiscal stimulus, but that it will be very weak by historical standards. The global economy is expected to show more dynamism next year as growth in the so-called ‘BRIC’ emerging economies (Brazil, Russia, India and China) is forecast by Fitch to accelerate from 4% this year to more than 7% in 2010.
However, Fitch cautions that China’s (’A+’) transition to greater reliance on market mechanisms and a private consumption-led economy – both necessary to reducing global macroeconomic imbalances and sustaining steady and strong growth over the medium-term – is not without risk.
For details see Sovereign Review and Outlook (Premium) and Global Economic Outlook (Premium)
As concerns mount as to whether traditionally rock-solid issuers of sovereign debt, including the United Kingdom and the United States, can hold onto their Aaa ratings, we are pleased to offer a complimentary download via the AlacraStore of Moody’s Sovereign Risk: Review 2009 & Outlook 2010.
As the global economic recovery attains a more solid footing, 2010 will at best see a ―normalization and at worst a severe tightening in government financing conditions. Long-term interest rates may increase more rapidly than expected because of an over-reaction to economic news, which we believe will be mildly positive overall. Moreover, the slow unwinding of quantitative easing will accelerate this credit repricing process.
- The end of exceptionally low financing conditions will expose the true cost of the crisis on government debt affordability across the world.
Aaa governments will probably not have the luxury of waiting for the recovery to be secured before announcing and perhaps also implementing credible fiscal consolidation programs.
- As most governments simply cannot afford another financial crisis, they will attempt to ring-fence their balance sheets from selected contingent liabilities. This could in some cases create disorderly market conditions.
- EMU membership will protect some countries against liquidity risk but not against long-term insolvency risk.
- Despite a slow process of global sovereign risk convergence – i.e. a narrowing of the ratings gap between rich and poorer G20 countries – BRIC countries are unlikely to replace the large Aaas’ role as anchors to the system any time soon.
A further theme identified by Moody’s is that the crisis has once again revealed the dangers of financial globalization for emerging markets — namely, the upside of the recurrence of asset price inflation after the downside of precipitous outflows of capital. However, the arsenal of policy levers has not expanded.
The full report Sovereign Risk: Review 2009 & Outlook 2010 — Fasten Your Seat Belts: Tumultuous Times Ahead has been made available for free download to Research Recap users for 30 days by special arrangement with Moody’s, an Alacra content partner. (After 30 days the report will revert to its regular AlacraStore price of $550.00)
As Research in Motion (RIM) rallies in the wake of strong quarterly results, it is worth noting the prevalence of Blackberry devices on this list from comScore: looks like 51 percent of potential smartphone purchasers surveyed plan to buy a Blackberry device in the next three months. This compares with 20% for Apple’s (AAPL) iPhones, 17 percent for Google (GOOG) Android-based devices and a puny 3 percent for Palm (PLM) devices. This helps to explain why RIM’s results impressed, while Palm’s disappointed.
The focus of the comScore report is how Android is shaking up the smartphone market. “Although Android’s share of the smartphone market is relatively small, it has quickly doubled in the past year to 3.5 percent in October 2009. Understanding the mobile media behavior of Android users highlights why operators and media companies might embrace the platform and fuel its growth.”
An analysis of mobile media consumption on smartphones revealed that users of both Apple and Android-supported devices were more likely to engage with mobile media than an average smartphone user.
Users of the Apple iPhone were most likely to consume mobile media, with 94 percent of users doing so in September 2009, while 92 percent of Android device users, predominantly T-Mobile G1 users, engaged in mobile media activities, 12 percentage points higher than an average smartphone user.
Apple and Android users were equally likely to engage with news via their browser and nearly identical in their mobile application engagement. Email was the only major activity in which iPhone users (87 percent) were far more likely to participate than Android users (63 percent). Overall, these data suggest that Android users will behave more like iPhone users than other smartphone users.
For more analyst comment on RIM, see Alacra Pulse.
Audit Integrity says Oshkosh Corporation (OSK) and BorgWarner (BWA) are among riskiest North American public companies in the automotive sector, based on their “Very Aggressive” corporate governance practices. Borg Warner is also on Audit Integrity’s Investor Watchlist. Among other factors, the company was “Flagged for incentive compensation of CEO & CFO (91st percentile), ratio of CEO to CFO compensation (83rd percentile), and Chairman is CEO (since June 2003).”
However, Morningstar noted on Oct 29 that BorgWarner’s investment-grade balance sheet’s net debt/capital ratio had declined to 21% from 25% at year-end. “Only healthy firms can strengthen their balance sheet in a recession rather than increase leverage to survive. If the positive scenario comes true, then BorgWarner can quickly increase production without hiring more people. Despite the recent decline in auto stock prices, we think BorgWarner is one of the best parts suppliers we cover. The firm’s products should see higher demand for years as governments keep imposing higher fuel economy regulations.”
The least risky, according to audit Integrity, are Genuine Parts Company (GPC) and Westport Innovations (WPT), both which have Conservative governance practices.
Audit Integrity’s forensic analysis of accounting and corporate governance practices distinguishes between the companies of greatest and least risk based on its Accounting and Governance Risk (AGR) ratings.
Companies in the bottom-ranked Very Aggressive AGR category have had consistently opaque financial reporting, weak corporate governance, and as a group are expected to have inferior performance relative to their peers over the next three months on a total return basis.
In contrast, companies in the top-ranked Conservative AGR category have had consistently transparent financial reporting, strong corporate governance, and as a group are expected to surpass their peers over the next three months on a total return basis.
Audit Integrity says its AGR Ratings and AGR Equity Model scores are highly correlated with equity returns. “Companies with better Audit Integrity ratings outperform those with poor ratings. Our 10- year back-testing produced evidence of a 15.3% return spread between the best and worst deciles.” For the auto industry, trailing-twelve month equity returns are as follows:
The full report is available free of charge here.
In addition to credit market disruptions that required swift action by state debt managers, the American Recovery and Reinvestment Act (ARRA) has brought significant change to the municipal market and how debt is issued, according to Standard & Poor’s. “Add to this the worst economic and revenue decline in decades, and it’s evident to us that there are numerous challenges.”
Highlights of U.S. Public Finance Report Card: 2009 State Debt Review: Significant Challenges Lie Ahead (Premium)
We expect that the current economic and budget climate will continue to translate into more borrowing. Following the 2001 recession, states issued nearly $30 billion of debt to meet budget requirements. We estimate that more than $15 billion has been issued or will be issued in the next year and a half.
While this is much reduced compared with the previous recession in 2001, the federal stimulus funding in this recession is unprecedented and in our view has limited the need to use debt up to this point. As the stimulus funds diminish, we expect this trend to change. As in past downturns, we believe that state revenues will continue to decline well after the economy begins to rebound.
While we do expect a higher level of leverage for the sector overall, we think some states face challenges related to their debt affordability guidelines that could constrain debt issuance.
In addition to issues that we describe above, there are other reasons that lead us to expect an increase in state debt issuance next year:
- Interest rates are relatively low.
- Many ARRA provisions were designed to stimulate economic activity and improve conditions in the municipal bond market and, in our opinion, debt issuance under the program has been significant.
- Even before the federal stimulus, there were many state bond initiatives to stimulate economic activity, such as in Pennsylvania, Ohio, Mississippi, and New York.
- Discretionary resources to fund capital requirements have evaporated in many states, causing a shift to debt issuance.
- There continue to be proposals relating to asset sales and the use of public-private partnerships and we expect this to continue due to the current budget climate.
- As the spotlight continues to shine on the cost of postretirement benefits, we continue to see debt initiatives to deal with unfunded pension liabilities.
- Finally, we see pressure on states to fund infrastructure improvements as a high priority and we believe the needs across a range of infrastructure areas are well documented.
Useful free background paper from PwC on Cleantech Infrastructure development (via @Cohen_Yoni) http://bit.ly/4DuIi1
Credit Suisse projects non-Japan Asia economic growth at 8.0% in 2010 even as monetary policy tightens http://bit.ly/86i1Xt
Fannie, Freddie, AIG need more money from the government to pay the government (NY Times) $FNM $FRD$AIG http://bit.ly/7q5Y1c
RT @zerohedge: New post: Too Bigger To Fail? St. Louis Fed Warns Risk Concentration Of Ever Growing “Big Banks” http://tinyurl.com/yaaf8fn
China’s economy growing at annual rate of close to 10% in current and next quarter, Deloitte says http://bit.ly/7YnaZy
WEF/HBS Study Finds Some Government Help Good For Venture Capital (via VentureWire) http://bit.ly/8fV3Q4
Another reason for reasonable people to be disgusted with big banks, government: Huge IRS tax break for Citi $C http://bit.ly/7ilByE
Online US Holiday Season Spending Accelerates in Latest Week to Up 4 Percent for Season-to-Date (comScore) http://bit.ly/6q1w02
RT @OECD: US, UK & France are top OECD countries in venture capital investments, says OECD STI Scoreboard http://bit.ly/8Z7mDj
Aaa countries probably cannot wait for full recovery before announcing credible fiscal consolidation (Moody’s) http://bit.ly/91biMp.
RT @DickBoveSays: “What does [Citi repayment] do for the co.? Mgmt. can increase salaries…What else? Nothing.” $C http://bit.ly/5EelX3
RT @comScore: Over 2/3 Credit Card Consumers Modify Spending Habits or Change Providers in Response to Issuer Changes http://bit.ly/83RPTh
Cadbury vigorously rejects Kraft offer, cites interest from other bidders $CBRY $KFT $HSY http://bit.ly/6O1Xqj and http://bit.ly/694LiL
RT @alacra1: Investors Business Daily highlights Seeking Alpha; @AlacraPulse; @stocktwits and @stockpickr http://bit.ly/6PLv2h
Outlier Alert: Legg Mason’s Bill Miller says US GDP could reach 7-8% in 2010 via @graubart $$ http://bit.ly/72uiNT
Ginnie Mae continuing to back issuers of risky mortgage loan securities (Washington Post) http://bit.ly/4uo2CK
Interesting post on coming @yodlee revolution in online consumer banking by @felixsalmon at Reuters http://bit.ly/5gyOor