The U.S. commercial real estate sector remains weak but is showing modest signs of recovery from the recent recession, according to Standard & Poor’s Ratings Services.
While the U.S. commercial real estate sector is still recovering from setback experienced during the recent recession, improvements in macroeconomic factorscould slowly provide the momentum it needs for recovery.
“The high unemployment rate remains the biggest macroeconomic problem for the commercial real estate sector,” said Standard & Poor’s credit analyst Matthew Carroll. “Weak demand for labor and the accompanying stress on consumer spending are negative factors for most property types.”
Standard & Poor’s expects interest rates to remain favorably low in 2011, resulting in lower borrowing costs and potentially lower cap rates (the discount rates real estate investors use to value cash flows) and higher valuations, before increasing in 2012. Meantime, inflation should remain tame, and we expect that growth in the consumer price index will remain below 3.0% in 2011 and 2012, following the 1.7% increase in 2010.
Overall, Standard & Poor’s expects all of the major property types to exhibit signs of stabilization in 2011 and to command rent increases in 2012, compared
with the declines in 2010. “These improvements, though perhaps modest, will benefit both debt service coverage and property valuations,” said Carroll.
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Despite the recent downturn in the commercial real estate sector, senior unsecured REITs debtholders have faced minimal losses, and we believe that life insurers and banks generally are well positioned to absorb any further commercial real estate-related investment losses.
For details see A Spring Thaw For U.S. Commercial Real Estate? ($500.00)
Despite the global economic recovery proceeding on track, Fitch Ratings has revised down its global growth forecasts in its latest quarterly Global Economic Outlook (GEO) publication. This is mainly a reflection of rising oil prices resulting from unrest in the Middle East, as well as the impact of the Tohoku earthquake and tsunami on the Japanese economy. The agency has also increased its inflation estimates globally, and expects an earlier policy response by monetary authorities than previously forecast.
“The increase in oil prices following the escalation of political tensions in the Middle East represents a significant headwind to the global economic recovery. As a result, Fitch now expects world growth to moderate to 3.2% in 2011 and 2012 having reached 3.8% in 2010,” says Maria Malas-Mroueh, Director in Fitch’s Sovereign team. ”At the same time, inflationary pressures have increased in both advanced economies and emerging markets, exacerbating the policy dilemma faced by many monetary policy authorities,” adds Malas-Mroueh.
In the US, the economic recovery is on track, aided by accommodative fiscal and monetary policy measures. However, rising oil prices have led to a downward revision of Fitch’s 2011 and 2012 GDP growth forecasts, to 3% in 2011, and 2.8% in 2012, from 3.2% and 3.3%, respectively. In Europe, the agency has revised down its growth forecasts across both core and peripheral economies, partly reflecting the persistent drag from fiscal consolidation, as well as lower consumption and tighter monetary policy in the context of higher oil prices.
For Japan, although it is too early to assess the full economic and fiscal impact of the earthquake and tsunami, Fitch has preliminarily revised down its forecast for 2011 growth to 1% from 1.5%, and revised up its forecast for 2012 growth to 2.2% from 1.7%, primarily reflecting the impact of reconstruction expenditure.
Fitch has also marginally revised down its 2011 and 2012 GDP forecasts for Brazil, China, and India, as policy tightening to control inflation is expected to continue. In contrast, the increase in oil prices has led to a small upward revision of Russia’s GDP forecasts in each of 2011 and 2012.
The March edition of the GEO includes a special section exploring the potential impact of a more extreme oil price shock on the global economy. In this hypothetical worst-case scenario, where oil reaches USD200/barrel (vs. Fitch’s baseline of USD100/barrel for 2011), the impact on the global economy would be severe. Global private consumption would be hit as real incomes become eroded by higher living costs, dragging many advanced economies back into recession.
For details see the full report Global Economic Outlook. ($275.00)
Moody’s today revised its Industry Sector Outlook for the U.S. consumer durables industry to positive from stable. The revision reflects Moody’s belief that, despite the macro-economic uncertainty in the Middle East and Japan and the continuing high unemployment rate and soft housing market in the U.S., fundamental credit conditions of the consumer durables industry should improve over the next 12 to 18 months.
“We expect that earnings for U.S. consumer durables companies will rise off of a low base as the U.S. economy continues on a path of slow recovery,” said Kevin Cassidy, vice president and senior credit officer at Moody’s. “In addition, we believe companies in the sector have lowered their breakeven levels enough to withstand a mild retrenchment in spending and still remain profitable.”
Over the next 12 to 18 months, Moody’s expects the sales of consumer durables companies to grow 2% to 5% and their operating income to increase 5% to 10%. In “normal” times, the operating income of companies in the sector grows about 1% to 5%.
Moody’s expects high-end households, which are responsible for a disproportionate share of consumer spending, to lift the sector. In particular, this will benefit marine companies like Brunswick Corporation, higher-end furniture companies like Ethan Allen Inc., musical instrument companies like Gibson Guitar Corp. and Steinway Musical Instruments, and some mattress companies that sell expensive bedding.
Meanwhile, companies that cater to lower-and-middle-income consumers will still experience weak sales as long as the unemployment rate remains high and the housing industry is in a downturn. In addition, high raw material costs will make consumer durables more expensive to produce, and we are concerned companies may have trouble passing these costs on to consumers.
Moody’s Revises U.S. Consumer Durables Sector Outlook to Positive from Stable (Complimentary Summary)
Outlook Update: U.S. Consumer Durables: Companies Benefitting from Downsizing and Slow Economic Growth (Full report $550.00)
Moody’s Japan K.K. today downgraded to Baa1 from A1 the senior secured and long-term issuer ratings on Tokyo Electric Power Co., Inc. (TEPCO). Moody’s also downgraded the short-term rating for TEPCO’s commercial paper to Prime-2 from Prime-1.
All three ratings remain on review for possible downgrade. Debt amounts affected are JPY 5.08 trillion, EUR 1 billion, and Swiss Franc 600 million
The downgrade reflects the significant financial obligations the company faces as it continues to address multiple challenges resulting from the March 11 earthquake and tsunami that seriously damaged several of its nuclear and thermal generating facilities, most notably its Fukushima Daiichi nuclear plant. TEPCO continues to struggle to control reactor temperature and limit radioactive leaks at the plant, problems that appear far from being resolved.
The downgrade takes into consideration the enormous costs the company will incur as it recovers from this disaster, including costs for replacement power, the building of new generation plants to replace the permanently damaged plants, and the decommissioning of the contaminated plant.
These costs will inevitably increase TEPCO’s already high debt leverage and could result in substantial rate increases that its residential and industrial customers may not be able to tolerate over the near term. These costs could lead to losses for at least the next two years if the company cannot increase the rates substantially.
Furthermore, the radiation that has already been released in and around the plant could make TEPCO liable for an unknown amount of damages incurred by local residences, businesses, and farms in the area. Depending on the magnitude of the damages and the extent to which TEPCO is found liable, TEPCO’s ability to meet these large and potentially growing obligations could be severely strained.
As a result, Moody’s believes TEPCO will remain highly leveraged and unprofitable for an extended period of time and will face substantial risk regarding nuclear liability.
The result of these developments is a standalone credit profile that is not longer consistent with an investment-grade rating. The current final rating still reflects the expectation that the Japanese government will ultimately act in a way to preserve TEPCO’s solvency without losses to lenders.
For details see Moody’s downgrades Tokyo Electric to Baa1, ratings remain on review (Complimentary)
For the latest Japan earthquake impact reports visit the Alacra Store.
Following a year of record-setting highs in global corporate defaults, 2010 provided the markets with a noticeable reversal, according to the default studies published today by Standard & Poor’s Global Fixed Income Research.
“In 2010, 81 global corporate issuers defaulted, down from the record high of 265 in 2009. None of the 81 defaulters began the year rated investment grade,” said Diane Vazza, head of Standard & Poor’s Global Fixed Income Research. “The debt amount affected by these defaults fell to $95.7 billion, also considerably lower than in 2009.”
In addition, although distressed exchanges still featured prominently in 2010 as a default type, accounting for 28.4% of defaults globally, missed interest or principal payments claimed a third of the total, according to the report 2010 Annual Global Corporate Default Study And Rating Transitions.
Along with a decline in the number of defaults, credit stability–and even improvement–increased in 2010. There were 1.36 upgrades for every downgrade, while the proportion of unchanged ratings reached 72.7%, a six-year high. Also, the average number of notches recorded among downgrades fell in 2010 to 1.52 from 1.76 the previous year.
“At the end of December 2010, speculative-grade default rates fell to 3.27% in the U.S., compared with 1.03% in Europe, 1.23% in the emerging markets, and 7.82% in an assorted grouping of other developed markets,” said Vazza. “In all regions, default rates in 2010 fell relative to 2009. When including all rated entities, the global default rate fell to 1.14% in 2010 from 4.04% a year earlier.”
For more details about regional defaults and rating transitions, see:
2010 Annual U.S. Corporate Default Study And Rating Transitions,
2010 Annual European Corporate Default Study And Rating Transitions, and
2010 Annual Asian Corporate Default Study And Rating Transitions.
As the incidence of default fell dramatically compared with the heights of the credit crisis in 2009, the one-year Gini ratio–a key measure of the relative ability of ratings to differentiate risk–rose for a third consecutive year, to 90.1% in 2010. This is the fourth-highest level in the 30-year history of the database and higher than the one-year average of 84%.
All of Standard & Poor’s default studies have found a clear correlation between ratings and defaults: The higher the rating, the lower the observed frequency of default, and vice versa. Over each time span, lower ratings correspond to higher default rates. This is also true when the data are broken out separately by rating or by region.
For details about the global corporate defaulters in 2010, see 2010Default Synopses.
Moody’s says that this month’s triple disaster of earthquake, tsunami, and nuclear crisis in Japan will not result in wholesale rating changes for Japanese automakers, but its aftermath will weaken the issuers’ operations and financial performance at least through the first half of fiscal-year 2011, ending next March.
Tadashi Usui, the lead author of the report and a Moody’s vice president in Tokyo, says, “To a large extent, the financial health of our rated Japanese automakers before the disaster determines their vulnerability: Toyota and Yamaha were less well positioned in their ratings and thus are more vulnerable, Nissan and Honda are better positioned, and Isuzu is in the middle of the pack.”
Usui adds, “For example, Toyota had been trying to recover after widespread product recalls in 2010; whereas, Nissan’s performance had been improving and was on review for possible upgrade.”
Usui says, “None of these companies have assembly plants that experienced lasting direct damage from the earthquake or tsunami.” He adds, “However, the indirect effects of power shortages and rolling-black outs, disruptions to supply chains, and staffing issues represent a more serious problem.”
A contributor to the report, Michael Mulvaney, a managing director for Moody’s in New York, adds adds, “Problems at geographically dispersed second- and third-tier suppliers may be severe, and for critical parts, the added costs of finding alternative sources of supply could shave 1% to 2% from automakers’ margins.”
Mulvaney says, “We expect Japanese automakers’ full-year revenues for the coming fiscal year to at best show low single-digit growth as overseas markets help to offset weakness in the domestic Japanese market in the first half of the year.”
For details see A Long Road Back for Japanese Automakers ($550.00)
In a separate report Moody’s sees no material threat tothe ratings of Europe-based automotive suppliers, which have limited direct exposure to the consequences of the disaster:
However, we believe that they will feel ripple effects in the global supply chain as original equipment manufacturers (OEMs) reduce output in Europe and North America. Although OEMs and suppliers worldwide are exploring alternatives to supply shortages caused in Japan, we believe it will take some time to realign the supply chain where necessary.
Once this has happened, we expect at least some of the lost production volumes to be recovered. We expect the disaster to negatively impact revenue and earnings, primarily in Q2 2011. In addition, halts in OEM production might impact working capital consumption. However, we estimate that the impact on the credit metrics of Europe-based automotive suppliers will only be temporary.
Japan’s Earthquake: Europe-Based Auto Suppliers Also Affected, But No Material Threat to Ratings ($550.00)
The failure so far of financial regulators to restructure banks following the financial crisis has resulted in persistent weaknesses at banks that is likely retarding economic recovery.
Excerpts from International Monetary Fund unofficial discussion paper Crisis Management and Resolution: Early Lessons from the Financial Crisis (Complimentary)
The financial upheavals of 2007–09 exposed serious weaknesses in crisis management and resolution. In many ways, the crisis is ongoing and further analysis is needed, but this paper provides some preliminary lessons on the basis of experience in 12 countries in the recent crisis and 17 more in past crises going back to 1991. The major lessons and the policies requiring urgent attention include those in the following areas:
- The overall policy mix and sequencing. The major advanced countries have dealt with the recent crisis differently, and except for the initial period, less decisively from the ways countries dealt with past crises. In the recent crisis, they quickly enacted accommodative monetary and fiscal policies and sustained them for extended periods of time. That helped to reestablish confidence and stabilize economies. But unlike the responses in past crises, they made little effort at in-depth diagnoses of banks’ balance sheets and follow-on restructuring (removal of bad loans and other assets devalued by the crisis).
The resulting persistent weaknesses at banks are likely retarding economic recovery.
- Institutional tools for resolution. In the recent crisis, countries had little ability to orderly wind down large cross-border banks and systemic nonbank financial institutions. The ongoing challenge is to design the framework—the institutional infrastructure—for such resolutions, including principles for burden sharing, so as to reduce moral hazard and enhance financial stability. Measures need to limit government bailouts by providing greater capital and liquidity buffers and better cost-sharing arrangements with creditors in case of distress. Establishing the framework is even more urgent today because concentration in the financial sector has increased.
- The approaches to reduce systemic risks. The recent crisis showed that systemic risk had built to cataclysmic levels during the preceding boom. Since the lenses through which markets and supervisors looked for such risk kept it mostly hidden, national and international bodies will need to provide for greater public transparency on exposures and other aspects of systemic risks to facilitate supervisors’ work and enhance market discipline. Greater supervisory cooperation, including through supervisory colleges, will be needed. Developing methods for containing the buildup of systemic vulnerabilities will make a systemic crisis less likely and make it easier to deal with should it occur. Measures being considered include those that encourage institutions to reduce complexity or prohibit them from engaging in risky types of activities.
Over the past few months, U.S. prime money market funds (MMF) have reduced exposure to Spanish banks while maintaining broadly consistent exposure to other European banks, according to a Fitch Ratings report. U.S. money funds, due to their size and focus on credit quality, are an important funding channel for banks worldwide.
MMF exposure to Spanish banks declined from peaks of roughly 3% of total MMF assets in 2008 and 2009 to just under 0.2% as of February 2011, down markedly from the first half of 2010 (1H 2010) levels of 1.7%. MMF exposure to Italian banks, which until recently has followed roughly similar patterns as Spanish banks, has not experienced the same sharp decline.
Overall MMF exposure to European banks – including certificates of deposit (CDs), commercial paper (CP), asset-backed CP (ABCP), and repurchase agreements (repos) – remains significant at 44% of total MMF assets as of February 2011, down slightly from 2H 2010 of 45.9%. The largest country exposures are to banks in France and the U.K., while the largest individual European bank exposure is to Deutsche Bank.
Fore details see U.S. Money Fund Exposure to European Banks: Recent Developments ($275.00)
Unless you own a home in Washington DC there is little to cheer about in the latest S&P/Case Shiller Home Price Indexes. Data through January 2011 show further deceleration in the annual growth rates in 13 of the 20 MSAs and the 10- and 20-City Composites compared to the December 2010 report.
The 10-City Composite was down 2.0% and the 20-City Composite fell 3.1% from their January 2010 levels. San Diego and Washington D.C. were the only two markets to record positive year-over-year changes. However, San Diego was up a scant 0.1%, while Washington DC posted a healthier +3.6% annual growth rate. The same 11 cities that had posted recent index level lows in December 2010, posted new lows in January.
Keeping with the trends set in late 2010, January brings us weakening home prices with no real hope in sight for the near future – David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s.
Continuing the trend set late last year, we witnessed 11 MSAs posting new index level lows in January 2011, from their 2006/2007 peaks. These cities are Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Miami, New York, Phoenix, Portland (OR), Seattle and Tampa. These same 11 cities had posted lows with December’s report, as well. “Looking across some of the markets, we see that with a January 2011 index level of 99.59, Atlanta has joined Cleveland, Detroit and Las Vegas as markets where average home prices are now below their January 2000 levels.”
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Interestingly, Fortune reported just prior to the release of the latest Index that “Robert Shiller and Karl Case can’t agree.” The two economists, who together created the widely followed S&P/Case-Shiller Home Price indices, are right now offering sharply contrasting views of housing’s future. Shiller recently warned that the chances were high for a further double-digit drop in U.S. home prices. But in an interview with Fortune, Case took a far brighter view: “The lack of new home building is a huge help that a lot of people are ignoring,” says Case. “People think I’m crazy to be optimistic, but housing is looking like the little engine that could.”
Below is a roundup of commentary on Standard&Poor’s downgrade today of the sovereign debt ratings of Portugal and Greece.
Click titles for full report.
S&P: Republic of Portugal Ratings Lowered To ‘BBB-/A-3′ On ESM Lending Conditions; Outlook Negative ($175.00)
Standard & Poor’s Ratings Services said today that it lowered its sovereign credit ratings on the Republic of Portugal to ‘BBB-/A-3′ from ‘BBB/A-2′. At the same time, the ratings on Portugal were removed from CreditWatch with negative implications, where they were placed on Nov. 30, 2010. The outlook is negative. The ‘AAA’ transfer and convertibility assessment is unchanged.
The downgrade reflects our view of the concluding statement of the European Council (EC) meeting of March 24-25, 2011, that confirms our previously published expectations that (i) sovereign debt restructuring is a possible pre-condition to borrowing from the European Stability Mechanism (ESM), and (ii) senior unsecured government debt will be subordinated to ESM loans. Both features are, in our view, detrimental to the commercial creditors of EU sovereign ESM borrowers.
Credit Notice: S&P To Assess Credit Impact On Portuguese Banks Of Its Downgrade Of The Republic of Portugal ($100.00)
We believe that this rating action could have a negative impact on the creditworthiness of the five Portuguese banks and two related subsidiaries that we rate,
- Caixa Geral de Depósitos S.A. (BBB/Watch Neg/A-3);
- Banco Comercial Português, S.A. (BBB-/Watch Neg/A-3);
- Banco Espirito Santo, S.A. (BBB/Watch Neg/A-3) and its core subsidiary
Banco Espirito Santo de Investimento, S.A. (BBB/Watch Neg/A-3);
- Banco Santander Totta, S.A. (BBB/Watch Neg/A-3); and
- Banco BPI S.A. (BBB/Watch Neg/A-3) and its core subsidiary Banco
Português de Investimento S.A. (BBB/Watch Neg/A-3).
Fitch Sovereign Update: Portugal ($165.00)
Fitch Ratings downgraded Portugal’s sovereign ratings to ‘A−’ from ‘A+’ on 24 March 2011 and placed them on Rating Watch Negative. The downgrade reflects
heightened risks to policy implementation and fiscal financing following the parliament’s failure to pass fiscal consolidation measures, and the resignation
of the Prime Minister on 23 March.
- Fitch now expects an EU/IMF financial support package to be agreed in the coming months.
- Fiscal outturns are subject to considerable downside risks in light of the domestic recession in 2011. Low nominal GDP growth prospects and high funding costs pose risks to debt sustainability.
FTAlphaville reports that RBS analyst Harvinder Sian believes there is real risk of a downgrade of Portugal’s debt to junk status, while UBS’ head of European economic research, Stephan Deo points out that it might be hard to hammer out a bailout and accompanying budget cuts.
S&P: Research Update: Greece Downgraded To ‘BB-’ On Confirmed ESM Borrowing Terms; Still On Watch Negative ($175.00)
Standard & Poor’s Ratings Services said today that it has lowered its long-term sovereign credit rating on the Hellenic Republic (Greece) to ‘BB-’ from ‘BB+’. The rating remains on CreditWatch with negative implications, where it was placed on Dec. 2, 2010.
At the same time, Standard & Poor’s placed its ‘B’ short-term sovereign credit rating on Greece on CreditWatch with negative implications. Both the ‘4′ recovery rating and ‘AAA’ transfer and convertibility assessment are unchanged.
The downgrade reflects our view of the concluding statement of the European Council (EC) meeting of March 24-25, 2011, that confirms our previously published expectations that (i) sovereign debt restructuring is a possible pre-condition to borrowing from the European Stability Mechanism (ESM), and (ii) senior unsecured government debt will be subordinated to ESM loans,” said Standard & Poor’s credit analyst Marko Mrsnik. “Both features are, in our view, detrimental to the commercial creditors of EU sovereign ESM borrowers.
Credit Notice: S&P To Assess The Credit Impact Of Its Downgrade Of Greece On Four Greek Banks And One Subsidiary ($100.00)
We believe that this downgrade could have a negative impact on the creditworthiness of the four Greek banks and one related international
subsidiary that we rate, namely:
- National Bank of Greece S.A. (BB+/Watch Neg/B) and its strategically important Bulgarian subsidiary United Bulgarian Bank A.D. (BB/Watch
- EFG Eurobank Ergasias S.A. (BB/Watch Neg/B),
- Alpha Bank A.E. (BB/Watch Neg/B), and
- Piraeus Bank S.A. (BB/Watch Neg/B).