Fitch says the election of the Socialist party candidate, Francois Hollande, as President of the French Republic does not have implications for France’s ‘AAA’ rating, currently on Negative Outlook.
Nonetheless, his electoral victory marks an important change in the leadership of France and Europe.
The new President faces the same challenges as his predecessor: strengthening fiscal credibility; boosting France’s medium-term growth potential; and dealing with the eurozone crisis.
Fitch affirmed France’s ‘AAA’ sovereign rating on 16 December 2011 and revised the rating Outlook to Negative. In the absence of material shocks, the Outlook is unlikely to be resolved until 2013. Fitch’s review of France’s sovereign credit fundamentals will incorporate developments in the eurozone crisis and the economic and public finance risks it poses to France, as well as its latest assessment of the economic outlook and prospects for reducing public debt over the medium term.
For more see France – The Challenges Ahead
Technorati Tags: France, sovereign-debt
Increased financial statement disclosure and transparency can provide early warnings of trouble spots in corporate earnings and/or cash flow for US corporate issuers, according to Fitch Ratings.
Fitch does not expect the recently implemented accounting standards to have a material effect on corporate financial statements or be the sole cause of rating changes.
Fitch’s third annual review of corporate accounting issues evaluates recent accounting guidance, including enhanced footnote disclosures for multi-employer pensions and fair value. Changes in guidance for goodwill, changes in presentation for comprehensive income, as well as topical issues regarding pensions, taxes, and convergence are also discussed. Additionally, the report contains an appendix summarizing common accounting ‘red flags’ that may signal aggressive accounting practices.
The most informative recent enhancements to footnote disclosure relate to employers’ financial obligations to multi-employer pension and postretirement plans (MEPPs). The new disclosures go a long way toward revealing better estimates of a company’s share of its MEPP liabilities and potential impact on future cash flow.
Pension liabilities generally increased during 2011, driven by the decline in discount rates. Also, the weak equity returns in 2011 were not able to offset the increase in liabilities, causing the funding gaps to widen. This problem is likely to be most pronounced for lower-rated companies with materially underfunded pension plans and increased funding requirements. Proposed pension legislation would allow companies to use a higher discount rate for funding purposes, likely resulting in lower required contributions and potentially exacerbating funding problems in the future.
For details, see the full Fitch report Scrutinizing Topical Accounting Issues
Technorati Tags: accounting, corporate-debt, pension funding
A number of recent U.S. economic data releases, as well as management comments during earnings season, continue to support Fitch Ratings’ view that companies are proceeding cautiously when considering expanded investment in plant and equipment.
We see little evidence that a significant ramp up in capital expenditures is at hand, despite some positive signs regarding a modest pick up in manufacturing activity in the April Institute for Supply Management (ISM) survey.
The weaker preliminary read on U.S. GDP growth of 2.2% for the first quarter was driven in large part by a decline in nonresidential fixed investment, which contracted at a 2.1% annualized rate (compared with growth of 5.2% in the fourth quarter of 2011). March durable goods orders also showed weakness, down 1.1% in the month after excluding volatile orders for transportation equipment.
This tracks closely with our expectations for 2012 U.S. corporate capex, which appears to be lagging following a pull-forward of some corporate investment into late 2011.
Corporate capex grew last year, but that growth partly reflected an acceleration of some investment to take advantage of expiring bonus depreciation tax benefits. Heavy investment in the energy sector, which accounts for approximately 30% of total corporate capex, also helped drive 2011 growth. Energy companies remain outliers in early 2012, with aggressive capex plans still on track in light of high oil prices.
The hangover effects of accelerated 2011 spending, persistent concerns about the global demand outlook, and the absence of production capacity constraints are all holding back investment growth. Most management teams across a range of industries remain concerned about potential economic ripple effects from the European debt crisis and a slowdown in emerging market growth this year.
Many U.S. manufacturers have indicated that stronger relative demand conditions in the U.S. and Latin America are offsetting weakness in Europe as well as slowing growth in China. To the extent that companies are heavily exposed to those more challenging markets, the outlook for capex growth in the second half of the year is likely to remain cautious.
For more see Fitch: U.S. Corporate Investment Caution Evident in 1Q Reports
Technorati Tags: capital spending
Public Sector Credit Solutions and PF2 Securities Evaluations have released a quantitative open source tool to provide an alternative or supplement to the more qualitative approach to analyzing government debt used by established ratings agencies such as Fitch, Moody’s and Standard & Poor’s.
Excerpts from the Press Release:
PF2’s Public Sector Credit Framework (PSCF) avoids several of the pitfalls facing traditional public finance methodologies used by credit rating agencies. It relies on a multi-year budget simulation that estimates annual default probabilities based on the likelihood of exceeding a user-specified fiscal threshold in any given year. These default probabilities are then converted to ratings.
“Rating agency sovereign and muni bond groups do not take advantage of the power and objectivity of quantitative techniques, leaving their methodologies vulnerable to bias and inconsistency,” said PF2 Consultant Marc Joffe, who previously researched and co-authored Kroll Bond Rating Agency’s Municipal Bond Default Study. PF2 is an independent consulting firm founded by a group of former Moody’s analysts.
The approach of using stochastic budget projections to estimate government credit risk is a natural and appealing approach to an important problem.- Ronald Lee, Director of the Center on the Economics and Demography of Aging at UC Berkeley
Programmers and analysts can review the tool’s source code and adapt it to fit their needs. PF2 has posted the software along with sample models for the US and California at http://www.publicsectorcredit.org/pscf.html and the source code on GitHub, a popular open source repository, at https://github.com/joffemd/pscf .
The California sample provided uses as a default point the ratio of interest and pension expenses to total revenue. Budget projections in this analysis rely on a range of population, economic growth, inflation, interest rate and policy scenarios. While these modeling choices may be appropriate for California, the framework accommodates a wide variety of threshold choices and budget simulation methods.
Anthony Randazzo, Director of Economic Research at The Reason Foundation, commented, “An open source tool like PSCF is a great answer to complaints about rating agency transparency. By linking a government’s projected debt burden to its risk, the framework sends the right signal both to bondholders and policymakers.”
FT Alphaville provides some additional analysis here.
Technorati Tags: credit-ratings, municipal-bonds, PSCF, Public Sector Credit Framework, public-finance, sovereign-debt, state-and-local-government
Standard & Poor’s Ratings Services’ base-case outlook for global auto sales in 2012 is for sharper differences between regions than in 2011. The mixed outlook for passenger vehicle sales reflects an economic outlook that varies by region and so the outlook for credit quality also varies. The mixture of regional exposures is a key aspect of credit quality in 2012.
Our forecast for 2012 US sales of 14.2 million units means sales may climb comfortably above estimated replacements of 13 million for the first time since 2008.
And the first three months of 2012 have seen annualized rates of sales in excess of our 2012 forecast. Still, we remain cautious about potential weakness in the economic recovery because of challenges in Europe, the impact of slower growth in China, and the potential for U.S. fiscal showdowns late in 2012.
In Europe our base-case outlook assumes that light-vehicle sales will decline more significantly in 2012 than in 2011 (the fourth consecutive year of European decline). In Japan, new vehicle sales during the first three months of 2012 jumped by 47.5% compared with the same period in 2011; we expect improved supply conditions and the government’s new eco-car subsidy program to boost new vehicles sales. In the important markets of China and Brazil our base case is for slower, but still positive growth.
More from S&P Credit Research
Industry Report Card: Mixed Regional Sales Outlooks Equals Mixed Prospects Among Global Automakers
Technorati Tags: automakers
Fitch Ratings says that the proposed new Solvency II regulation for European insurance companies in respect of their exposure to securitisations could discourage insurance companies from investing in highly rated and historically strongly performing securitisations.
Fitch says that the new measures, set to come into force at the beginning of 2014, could lead to disproportionately high capital charges, and in the process, restrict funding opportunities for European banks.
The proposed capital charges for securitisations are a multiple of both existing charges and those for other asset classes such as covered bonds and corporate bonds, so insurers using the standard formula will be incentivised to invest in these asset classes in preference to securitisations.
The proposed capital charges are also a multiple of the proposed Basel III capital charges for banks, largely because they are reflective of the volatility of credit spreads rather than probability of default. Under the new rules insurers, who typically would seek to hold long dated assets to match their long dated liabilities, would be incentivised to buy shorter dated assets with lower market price volatility.
“The investor base for European securitisations has been severely diminished since the onset of the global credit crisis,” says Ian Linnell, Fitch’s Global Head of Credit Ratings. “However, over the past 18 months or so there has been a gradual return of ‘real’ investors to the securitisation market. Insurers and pension funds are an important part of that investor base. If Solvency II is implemented in its current form and if, as is expected, similar regulation for pension funds follows, the recovery of the market could be put in jeopardy, with negative implications for the supply of credit and ultimately the recovery of the European economy.”
For details, see Solvency II and Securitisation: Significant Negative Impact on European Market
Technorati Tags: european-banks, Insurance, Solvency II
Standard & Poor’s Ratings Service said that while it expects European governments’ fiscal consolidation efforts to reduce net sovereign borrowing during 2012, it does not anticipate that gross medium- and long-term (MLT) commercial issuance will fall much this year (see European Sovereign Borrowing To Stabilize In 2012 At Close To All-Time High Levels).
Sovereign gross debt issuance will, under our projections, remain only slightly below 2011 levels, equivalent to 1.5x pre-crisis amounts. Sovereign refinancing needs in Europe continue to rise, leading the overall stock levels of European sovereign MLT commercial debt to reach an all-time high.
Our projections show that European sovereign medium- and long-term (MLT) debt at the end of 2012 will reach justunder €9 trillion, a rise of 50% since 2005.
As in 2011, net borrowing is likely to continue to fall. Nevertheless, our forecasts on net sovereign borrowing requirements for 2012 are subject to considerable uncertainty. Were GDP growth to be lower than we currently anticipate, the resulting fiscal slippage could push up public sector borrowing needs. Meanwhile, the one-off costs associated with financial sector recapitalization programs could also raise funding needs materially.
Technorati Tags: European sovereign debt
Last Tuesday, the International Monetary Fund (IMF) released a research paper advising policymakers to consider creating bail-in rules to deal with distressed systemically important financial institutions (SIFIs). Moody’s says the IMF’s support for cross-border bail-ins is credit negative for bondholders of SIFIs because, if implemented, a practical bail-in mechanism increases the likelihood that bondholders will receive a haircut on the debt of banks close to insolvency.
However, implementation of a credible bail-in framework for SIFIs faces significant challenges because they generally operate through a number of legal entities in different jurisdictions. We consider it unlikely that all regulators would recognise the bail-in powers of foreign peers, especially when it involves imposing losses on local bank creditors to protect a foreign SIFI.
The creation of a bail-in framework will likely receive significant public support since it aims to reduce the systemic risk caused by a SIFI’s disorderly default and restore its capital without tapping taxpayer funds. Consequently, government support to an ailing bank may be limited to providing emergency liquidity to restore market confidence. The IMF’s research paper follows a European Commission (EC) proposal outlining several options to implement a viable bail-in framework. Currently, most countries lack a detailed bail-in framework for senior unsecured bondholders, although some, including the UK, Denmark and Ireland, have legislation in place that allows bailing-in certain liabilities.
For details, see IMF Support for Bail-Ins Is Credit Negative for Bondholders of Systemically Important Financial Institutions
Technorati Tags: big banks, SIFI, systemically important financial institutions
Western Europe’s housing markets seem to defy generalization, with some countries and cities bouncing back from the financial crisis more quickly than others, Standard & Poor’s says.
With a recession looming, though, any rebound may be running out of steam.
France’s real estate market has perhaps been the biggest surprise. After a short slump in the wake of the most recent economic recession, prices have again reached historic highs. Much of this is attributable to a stark imbalance in supply and demand. With the French population growing by an annual 370,000 per year, on average, and the number of people who live alone increasing, the country will need 400,000-500,000 new dwellings in the coming decade, according to the French housing authority.
For more see Western Europe’s Housing Markets Brace For Recession
Technorati Tags: European real estate, France, housing
Strong refi-driven mortgage banking results and a rebound in capital markets business drove surprisingly solid revenue growth for the large U.S. banks, according to Fitch Ratings.
Though revenues were generally higher for most banks, spread income was flat or down given the prolonged low interest rate environment. The uneven economic recovery produced modest organic loan growth in 1Q12. Banks reported more normalized levels of C&I loan growth (down from the robust activity reported last quarter), which was offset by lower consumer balances and continued CRE runoff.
Based on new regulatory guidance related to second liens, several institutions reported an increase in home equity nonperforming balances. Excluding this increase, nonaccruing loans were lower on a sequential basis. Fitch does not view this as a material shift in the performance of these loans or the reserving methodology.
Fitch would probably revisit its loss estimates on second lien loans if there is a sufficient increase in principal modification activity.
Exposure to home equity loans remains of Fitch’s top concerns for U.S. banks, particularly for the largest institutions where most of these loans are concentrated. While Fitch believes there is a possibility that losses in these portfolios could be material, current ratings reflect Fitch’s assumption that losses will remain above historical levels for several years.
For details, see the full Fitch report U.S. Banking Quarterly Comment: 1Q12
Technorati Tags: U.S. banks
