In a new outlook report on the Latin American SF sector, Fitch Ratings highlights that while most of the world continues to feel the effects of the global credit crisis, Latin American ratings continue to be fairly resilient.
Fitch Ratings’ credit outlook for Latin American structured finance (SF) transactions in 2012 is stable. This view is consistent with most of the outlooks for the sovereigns in the region.
The stable outlook is based on the continued recovery and growth of Latin American sovereigns, which foster improved asset performance. Improving economic conditions in the region exerted a stabilizing influence on the credit quality and collateral performance of the majority of SF portfolios.
On the cross-border market, the report comments on Fitch’s outlook for transactions backed by oil & gas related assets in Brazil and the transactions securitizing public-private initiatives to help finance certain infrastructure needs in Peru. On the national scale side, the outlook elaborates on the stage of the developing RMBS market in Brazil and new regulation that can affect the local FIDC market. The report also describes asset performance levels in Colombia, Chile, Mexico, and Argentina.
For details see the full report 2012 Outlook: Latin American Structured Finance
Despite continuing criticism of the big credit ratings agencies, the challenges facing potential competitors to the big three – Fitch, Moody’s and Standard & Poor’s, remain significant.
A new Harvard Business School case study suggests new entrants effectively face a “Catch 22″ situation.
Morningstar and Meredith Whitney Advisory Group are attempting to make inroads, focussing on corporate and municipal bonds, respectively. Now comes Kroll Bond Rating Agency, founded by Jules Kroll, a pioneer of the corporate risk consulting and privacy security industry. Kroll’s initial focus is on commercial mortgage-backed securities and other structured and public finance.
The HBS case notes that:
- Many users of ratings were obliged to look only at ratings issued by Nationally Recognized Statistical Ratings Organizations, so any serious entry into ratings would require NRSRO designation.
- However, getting through the SEC application process could be a slow and expensive. In particular, a ratings agency had to be in business for at least three years and provide a list of bona fide customers to apply for NRSRO status. But getting customers interested would pose a challenge without that status.
- An alternative to getting a brand new certification would be to join forces with one of the smaller NRSROs.
Other challenges facing new entrants include hiring enough skilled analysts and support staff quickly enough.
The full HBS Case Study on Kroll can be purchased here.
Brazil’s banking sector, the largest in Latin America, will sustain double-digit loan growth next year even if the global economic situation continues to deteriorate, according to Oxford Analytica.
However, Santander’s recent decision to sell a stake in its highly profitable Brazilian subsidiary there, together with other recent regional sales, points to continued turmoil in its Spanish and European markets.
Lending next year will be helped by the reduction from 3.0% to 2.5% of a consumer loan tax, part of a series of measures launched by the government in December to prevent the economy from slowing too sharply. This tax had been raised from 1.5% in April, when the government’s main aim was fighting inflation.
Brazilian banks are well capitalised, with most having capital adequacy ratios well above the minimum 11% that the Central Bank demands (already high compared with the current Basel committee recommendation of 8%).
The largest state banks, Banco do Brasil and Caixa Economica Federal, are expected to step in if the global situation deteriorates significantly next year and private sector banks become more cautious in their lending. These banks — together with the National Development Bank (BNDES) — played a critical role in ensuring credit availability during the 2008-09 downturn.
In a strong sign of the growing power of Brazil’s largest banks, Banco Safra recently announced the purchase of Swiss bank Sarasin. The acquisition fits well into Safra’s large and successful private banking business and will strengthen its geographical footprint in Asia, the Middle East and also in Europe.
For details, see BRAZIL: Credit growth to continue despite global woes
Fitch Ratings expects further credit and operating improvements for U.S. steel producers in 2012 although downside risks from developed markets remain.
Risk aversion earlier in the fourth quarter 2011 resulted in investment and stocking pullbacks and weak pricing, which resulted in lower earnings for the quarter relative to the second and third quarters. Demand is slowly growing from the auto, energy, and heavy equipment manufacturing segments, while construction has bottomed out.
Fitch expects steel demand to continue to grow, not reaching full recovery until 2013 at the earliest.
The U.S. steel industry is challenged by low capacity utilization (about 75% on average in 2011) as a result of weak order rates. Margins are vulnerable when capacity utilization is below 80%, especially in a rising/high raw material cost environment. New capacity in flat-rolled steel may take upwards of 18 months to be absorbed. Fitch expects average capacity utilization to rise but not to reach 80% on average in 2012.
Downside risks to growth expectations should result in conservative working capital management and capital spending in 2012. Most companies have raised capital and expanded and extended revolving commitments since the first quarter of 2009.
The rising share of raw materials costs to total costs has narrowed the gap between marginal cost and average cost. Producers expected to show a sustainable advantage include those with raw materials integration, depending on the cost position of captive capacity; producers with relatively high exposure to value-added steel products given premium pricing; and producers with substantial operating scale, affording the ability to temporarily curtail production during lulls to reduce costs while serving customer demand.
The Rating Outlook for the U.S. steel industry is Stable.
For details, see 2012 Outlook: U.S. Steel Producers and 2012 Outlook: Steel Raw Materials
As of the end of the third-quarter reporting period, S&P 500 information technology companies held $386.2 billion in cash and short-term investments on their collective balance sheets, up 7.8% from year-end 2010 totals.
Partially as a result, merger and acquisition (M&A) deals in the information technology sector involving U.S. buyers totaled nearly $128 billion this year, up from $101.5 billion for 2010, according to S&P Capital IQ data.
Specifically, a search of S&P Capital IQ data reveals that foreign acquisitions by U.S. firms in the information technology sector is at an all-time high, with over $33 billion in deals, and the number of transactions to date in 2011 is poised to be the highest annual count since 2000.
For details, see Cross-Market Commentary: U.S. Foreign Technology Purchases Hit An All-Time High In 2011
The worsening of the eurozone crisis since July constitutes a significant negative shock to the region’s economy and financial sector with adverse consequences for sovereign credit profiles across the region and further afield, according to Fitch Ratings’s outlook for 2012.
In the absence of a “comprehensive solution”, with politicians instead taking a gradualist approach to putting in place the institutional and policy framework for a more viable eurozone and ultimately greater fiscal union, Fitch expects the eurozone crisis to persist and be punctuated by further episodes of severe financial market volatility.
In Fitch’s opinion more active and explicit commitment from the ECB is necessary to mitigate the risk of self-fulfilling liquidity crises for solvent Euro Area Member States (EAMS).
Tightening financial conditions, falling confidence and new fiscal austerity measures have recently led Fitch to revise down its forecast for eurozone GDP growth to just 0.4% in 2012, from 1.6% in 2011. However, the agency forecasts emerging market (EM) growth at a still fairly robust 4.9% in 2012, from 5.6% in 2011, bolstered by domestic demand growth and greater fiscal and monetary policy flexibility.
Nonetheless, Fitch warns that a further intensification of the eurozone crisis has the capacity to inflict considerable damage on EMs through trade exposure and financial linkages. Emerging Europe (EE) is by far the most exposed region, but others would not be immune.
For details, see Sovereign Review and Outlook
New issue credit quality for US commercial mortgage-backed securities (CMBS) as measured by Moody’s loan to value (LTV) ratio will start the new year consistent with that of normal pre-peak vintages. Unless market participants remain vigilant, however, the measure could slip as competition heats up among conduit lenders.
While the credit quality of the collateral supporting seasoned deals varies by sector and location ratings will be stable in 2012. Affirmations will constitute most of our rating actions in 2012, with the remainder evenly divided between upgrades and downgrades.
Barring a double dip recession, which we do not expect, property values in aggregate will be flat to down slightly for the next two to three years, and will then grow moderately. Multi- family and hotels will lead the recovery, while office and retail lag.
We do not expect valuations from the 2007 peak to return prior to the maturity of the 10- year loans originated that year in 2017. As a result, we expect to see numerous maturity defaults four to five years out, many of which will result in extensions to maturities.
The current delinquency rate of around 9% is near the high-water mark we expect for this cycle. Loans entering and leaving special servicing will remain roughly in balance during 2012. The delinquency rate will then transition downward until the problematic 2016-2017 refinancing years cause it to reverse, although not back to current levels.
We expect $40 billion of CMBS issuance in 2012, of which $15 billion will come from the guaranteed portion of Freddy Mac sponsored bonds collateralized solely by multi-family loans. Issuance will be light in the first half because of crimped loan origination pipelines resulting from Eurozone turmoil, but will ramp up during the year as loan spreads tighten.
For details, see US CMBS: 2012 Outlook
The pace of filings of class actions under federal securities and commodity laws is relatively steady in 2011 as compared to the past three years, according to NERA Economic Consulting.
Behind this apparently steady number, however, was a substantial shift in the composition of cases filed. Two types of suits have primarily accounted for this compositional shift: M&A objection suits and suits involving Chinese companies listed in the US.
The brisk rate of filings of shareholder class actions against Chinese companies this year has drawn much attention. It represents the most notable development in the composition of filings this year.
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Cases alleging breach of fiduciary duty in connection with a merger or an acquisition continue to be filed in large numbers. The number so far this year, 61, has declined only slightly from last year’s total of 68 such suits. M&A objection lawsuits continue to be the single largest category of non-standard cases tracked by NERA.In 2010, M&A cases took that top spot from credit crisis-related suits.
Presently, the wave of credit crisis- related filings largely seems to have subsided. With 11 federal class actions filed in 2011 relating to the credit crisis, such litigation is approximately one-third of its level last year, when it had already declined by about two-thirds from its 2008 peak.
The percentage of suits alleging damages in connection with complex financial instruments such as mortgage-backed securities and collateralized debt obligations has also declined from the elevated levels observed over the past several years to levels consistent with those observed in 2005 and 2006.
Securities class actions have been filed at a slower pace in the second half of 2011 than in the first half, and 2011 filings are on track to be slightly below the total in 2010.
A free download of NERA’s full report is available here.
Fitch Ratings says future government support for US banks is likely to be limited to a few systemically important banks, leading it to remove its assumption of support from its ratings of larger regional banks.
US government financial support and the potential for future support for banks is declining, although not entirely eliminated, Fitch says in a new report.
In conjunction with the report, Fitch has taken rating actions resolving the Rating Watch status for 17 banks.
The group of banks that Fitch believes would receive support if needed was reduced by more than 50%.
Nonetheless, Fitch views the eight most prominent and systemically important banks, including the recent addition of Morgan Stanley and Goldman Sachs, as the sole candidates for support. The Support Rating Floor (SRF) for these banks is now at ‘A’, which has been lowered from ‘A+’.
Fitch’s actions are predicated on the view that one of the clear focal points of bank regulators in response to the current crisis should be to establish a framework to enhance market discipline and remove government financial support for troubled banks. Evidence of this trend can be seen in many of the major markets around the world. The response in the US has been the most pronounced in terms of definitive legislative action.
The intent of the US to move away from providing direct support to problem banks is evidenced in the recent rating actions. Fitch believes that while untested, the government has the framework to resolve large regional banks without support or disrupting the market.
While the intent to remove support from all banks is clear, Fitch believes still heightened risks and unsettled funding markets will not allow for the same approach to be applied to the largest and most interconnected banks without creating unwanted ripple effects.
For details see the full report US Banks – Sovereign Support: When Does it End?
Despite global financial turmoil and ongoing economic uncertainty, Latin America remains a region with increased flexibility to weather external shocks, according to Moody’s Latin America Corporate Credit Outlook 2012.
While we do not foresee a meaningful reversal in the positive corporate ratings trend which we have observed since the third quarter of 2009, we do expect a more balanced ratings drift following a number of recent negative rating actions in the paper and pulp, and steel sectors – Moody’s Senior Vice President Filippe Goossens
From a sovereign perspective, corporates benefit from Latin America’s high liquidity buffers, flexible exchange rates and robust banking systems. Additionally, sovereign credit risk has been reduced as governments have improved domestic debt structures. However, the better-than-expected economic conditions during the first half of 2011 are weakening as deceleration signs emerge, warns the report.
Moody’s expects most countries to report below-trend growth during 2012. While the region remains fairly insulated from the European crisis as trade flows are dominated by Asia- and US-linked transactions, a meaningful slowdown in China given its trade relations with Europe could ultimately channel back into the more commodities-oriented countries in South America, especially Brazil, Chile and Peru.
Reduced capital inflows will limit local currency appreciation in the region and as such provide a boost to the cash flows of export-oriented companies in the paper and pulp, protein and mining sectors while also mitigating rising import competition, notes the report.
Moody’s says companies most vulnerable to a deterioration in their credit profile will be those that are unable to reduce large capital investment programs during a cyclical downturn, such as in the steel and paper and pulp sectors. Additionally, companies with significant amounts of U.S. denominated debt are likely to see leverage increase meaningfully in the short term, resulting in potential financial covenant issues which will need to be addressed.
For more information including sector-by-sector analysis please see the full report Latin American Corporate Credit Outlook 2012.