credit market quarterly

Credit Market Quarterly - EMEA

September 2013

The Credit Market Quarterly illustrates trends in ratings and outlooks, investor sentiment,

corporate bond issuance, refinancing and market pricing. Our observations on this data are put

in context by reference to topical Fitch research and commentary.

Michael Larsson Monica Insoll

Credit Market Research Credit Market Research

+44 20 3530 1260 +44 20 3530 1060

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1

Signs of Eurozone Recovery Amid

Cautious Investor Expectations

Signs are emerging that eurozone entities are at a turning point as

rating pressures continue to diminish while at the same time the

region exits from a record six consecutive quarters of economic

contraction. Financials are mainly behind the rating stabilisation but

the potential for further downgrades for the sector is highlighted by

the still-elevated level of Negative Outlooks and Rating Watches.

Fitch sees the eurozone approaching a cyclical reversion, with

weak growth anticipated in H213, strengthening in 2014-2015 as

competitiveness gains are realised and fiscal austerity eases.

Investor sentiment turned sharply lower for emerging market (EM)

corporates and sovereigns following talk by the US Fed about the

possibility of early reductions to its monetary stimulus programme.

The overall mood for fixed income is marginally more negative than

in the last quarter, with the exception of developed market (DM)

sovereign debt. High-yield remains resilient, retaining its position as

investors’ top choice despite the cautious mood.

As growth picks up and the interest rate cycle turns, non-financial

issuers appear to be responding to growing investor concerns about

duration risk by increasing the portion of floating rate bonds they

issue. In H113 they increased the share of such bonds to 15% -

higher than in any full-year period since the financial crisis. This

could rise further as levels remain below historical norms.


-0.4-0.3-0.2-0.1

00.10.20.30.4

Q2

10

Q3

10

Q4

10

Q1

11

Q2

11

Q3

11

Q4

11

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13

Q2

13

Q3

13

EM Corporate High Yield

Investor Sentiment Towards High-Yield Resists Downturn for EMExpectations about credit fundamentalsScale: +1 (most optimistic) to -1 (most pessimistic)

(Aggregate

score)a

Source: Fitch Senior Fixed-Income Investor Surveyasee Appendix for scoring methodology

Optimism

Pessimism

05

1015202530354045

Q2

07

Q4

07

Q2

08

Q4

08

Q2

09

Q4

09

Q2

10

Q4

10

Q2

11

Q4

11

Q2

12

Q4

12

Q2

13

Fins. (Global) Fins. (EMEA)

Non-Fins (Global) Non-fins. (EMEA)

(% of portfolio)

Negative Outlooks and Watches on Financials Remain ElevatedNegative outlooks and watches

Source: Fitch

0

20

40

60

80

100

Q112 Q212 Q312 Q412 Q113 Q213

All eurozone issuers

Eurozone financials

Downgrade Relief for Eurozone Issuers Led by Rating Stabilisation for FinancialsShare of total downgrade volume

(%)

Source: Fitch, Bloomberg

0

5

10

15

20

25

30

2005 2006 2007 2008 2009 2010 2011 2012 30Aug2013YTD

Non-Financial Floating-Rate IssuanceTicks UpShare of total issuance

(%)


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http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=716242






http://www.fitchratings.com/creditdesk/press_releases/detail.cfm?pr_id=800971


2


> Overall EMEA bank issuance dropped to the lowest

volume in a first half period since before the financial

crisis, while US banks issued at the fastest first-half

pace since 2008.

> Peripheral eurozone (GIIPS) firms experienced a

striking reduction in downgrades coinciding with

improving sentiment. The stabilisation in ratings has not

yet translated into higher issuance volumes, with both

financial and non-financial corporates exhibiting

declines. However, their associated sovereigns have

managed to tap investor appetite for long-dated debt –

demonstrable in Italy’s successful early-September

EUR500m 40yr bond placement, and with Spain

reportedly considering a 50yr bond.

> Deleveraging continued to weigh on new bank bond

volumes in H113 and this was most evident through the

fall in Italian and Spanish covered bond issuance.

> Subordinated bonds grew to 16% of GIIPS bank

issuance – the highest half-year share since H108 –

amid tightening senior-subordinated CDS spreads,

which set a 3yr low in May.

> LTRO repayments have exceeded expectations, with

close to one-third of the total loan amount repaid. In a

further boost to the region, U.S. money-market funds

have increased their allocation to European banks in

H113 compared to the first-half of 2012.

Eurozone Periphery – Key Trends

0102030405060

May-1

1

Ju

l-11

Sep

-11

No

v-1

1

Ja

n-1

2

Mar-

12

May-1

2

Ju

l-12

Sep

-12

No

v-1

2

Ja

n-1

3

Mar-

13

May-1

3

Ju

l-13

Eurozone France Europe (all)

(% of Total MMF Assets Under Management)

US MMF Allocation to European Banks

Source: Fitch, MMF public websites, SEC

0

50

100

150

200

250

Ja

n-1

3

Mar-

13

Apr-

13

May-1

3

Ju

n-1

3

Ju

l-13

Aug

-13

Sep

-13

Oct-

13

LTRO I LTRO II(EUR bn)

LTRO Cumulative Repayment Rate

Source: European Central Bank

Repaid: EUR325bn (32%)Outstanding: EUR694bn

2345678

0

20

40

60

80

100

Q1

11

Q2

11

Q3

11

Q4

11

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13

Q2

13

% total downgrade volumeItaly 10yr (RHS)Spain 10yr (RHS)

Downgrades from GIIPS-Domiciled Firms and Benchmark Sovereign Yields

(%)


(%)

0

5

10

15

20

25

30

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

H1

13

% GIIPS fins. / total fins.

% GIIPS non-fins. / total non-fins.

New Issuance from GIIPS-Domiciled Firms

(%)


0

4

8

12

16

20

010203040506070

H1

05

H2

05

H1

06

H2

06

H1

07

H2

07

H1

08

H2

08

H1

09

H2

09

H1

10

H2

10

H1

11

H2

11

H1

12

H2

12

H1

13

Secured Snr UnsecuredSubordinated % Subordinated

New Issuance from GIIPS-Domiciled Banks

(EURbn)


(%)

0

100

200

300

400

500

600

700

Ja

n-1

0

Apr-

10

Ju

l-10

Oct-

10

Ja

n-1

1

Apr-

11

Ju

l-11

Oct-

11

Ja

n-1

2

Apr-

12

Ju

l-12

Oct-

12

Ja

n-1

3

Apr-

13

Ju

l-13

Oct-

13

Senior financials

Subordinated financials(bp)

European Financials: CDS Indices

Source: Bloomberg, Markit, Fitch

Senior-Subordinated

spread 3yr low

Tigntening spread







3

> QE withdrawal has become a key

investor concern, according to a

recent Fitch survey of European

fixed-income asset managers.

However, most respondents

believe central banks will manage

the process smoothly, without

threatening economic recovery.

> Investors see the dual themes of

the eurozone sovereign debt

crisis and refinancing challenges

posing declining risks over the

next 12 months, while hopes

remain relatively high for

loosening bank lending

conditions to corporates.

> Banking union plans are viewed

as imperfect – most investors do

not see them as reducing default

risk for eurozone banks due to

incomplete implementation or

deficiencies in the proposals.

Investor Sentiment – Eurozone Crisis, Central Bank Tightening


0

20

40

60

80

100

Q2

10

Q3

10

Q4

10

Q1

11

Q2

11

Q3

11

Q4

11

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13

Q2

13

Q3

13

Sovereign debt high risk to credit markets

Highest refinancing challenge faced by DM sovereigns

Loosening bank lending conditions to corporates (RHS)

Expectations about Sovereign Debt Risk, Refinancing and Bank Lending

(%)

Source: Fitch Senior Fixed-Income Investor Survey

Will Banking Union Reduce Default Risk in Eurozone Countries?


Yes28%

No - proposed measures are

insufficient6%

No, all three pillars will not be fully implemented

39%

No, independent resolution reduces

support27%

Will central banks be tightening monetary policy too quickly?


No, timely and smooth, causing no threat to economic recovery

73%

No, too slow, risking inflation and

asset bubbles18%

Yes, risking financial market volatility

9%

0

20

40

60

80

100

Q2

10

Q3

10

Q4

10

Q1

11

Q2

11

Q3

11

Q4

11

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13

Q2

13

Q3

13

Recession QE withdrawal(%)

Greatest Risk to European Credit Markets





4

> Emerging market sentiment fell to

new lows following summer sell-

off, while high-yield remained

resilient - attracting greatest

overall investor optimism.

> Sentiment towards EM switched

from optimistic to pessimistic

territory in the last quarter with

DM sovereign debt experiencing

the largest improvement.

> Investors are overweight

financials, cash and industrials

while underweight TMT, energy &

utilities and retail & consumer

segments. The relatively high

cash holding underscores the

prevailing cautious mood despite

improving market conditions.

> High-yield is the preferred

investor choice for third

consecutive quarter despite

rising concerns that the asset

class is overvalued.

Investor Sentiment – Aggregate Mood, Allocations and Risk Pricing


-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

DMSov.

EMSov.

IG Fin. IG -Non-fin.

HY EMCorp.

Struct.Fin.

Fitch Investor Sentiment IndexAggregate scorea

+1 = Most optimistic-1 = Most pessimistic

ª See Appendix for methodologySource: Fitch Senior Fixed-Income Investor Survey

Low

High

Current (Q313)

Previous (Q213)Av. - s

Av. + s

Pessimism

Optimism 46

34

23

16

15

15

27

43

58

63

60

56

27

23

19

21

25

29

0 25 50 75 100

Financials

Cash

Industrials

TMT

Energy & Utilities

Retail & Consumer

Overweight Neutral Underweight

What are your current allocations to these corporate credit segments and cash?

Source: Fitch Senior Fixed-Income Investor Survey(%)

0

10

20

30

40

50

60

70

Q320 Q111 Q311 Q112 Q312 Q113 Q313

Weakening credit fundamentals

Rising issuance

Tightening spreads

Investor preference*

Expectations for European High Yield

(% of respondents)

Source: Fitch Senior Fixed-Income Investor Survey*Current

indicates high-yield mostpreferred asset class

25

40

50

66

31

26

9

30

24

0 25 50 75 100

Investment Grade

High Yield

Emerging Markets

Overvalued Correctly Valued Undervalued

Is Risk Correctly Priced In The Following Asset Classes?


(%)



5

> Bank deleveraging explains the

declining share of new issuance

from the financial sector.

> The trend is behind a 28% drop

in total bond issuance in the

year to end August, compared

to the same period in 2012, as

11% higher issuance by non-

financials has been insufficient

to offset a 44% decline in new

volume from financials.

> The share of fixed-rate non-

financial bonds dropped to the

lowest full-year level since 2008

as issuers appear responsive

to growing investor concerns

about duration risk.

> Overall issuance reflected

improvements in credit markets

as funding costs continued to

fall and maturities crept higher.

Bond Issuance


0

20

40

60

80

100

0

20

40

60

80

100

120

140

160

Jan

11

Feb

11

Ma

r 11

Apr

11

Ma

y 1

1Jun

11

Jul 1

1A

ug

11

Sep

11

Oct

11

Nov 1

1D

ec 1

1Jan

12

Feb

12

Ma

r 12

Apr

12

Ma

y 1

2Jun

12

Jul 1

2A

ug

12

Sep

12

Oct

12

Nov 1

2D

ec 1

2Jan

13

Feb

13

Ma

r 13

Apr

13

Ma

y 1

3Jun

13

Jul 1

3A

ug

13

Financials excl. covered bondsCovered bondsNon-financials% Financials including covered bonds (RHS)

New Issuance by Sector

(EURbn)


(%)

0

20

40

60

80

100

0

150

300

450

600

750

900

2006 2007 2008 2009 2010 2011 2012 H113

AAA AAA BBBBB BCCC – C % AAA-A (RHS)

New Issuance by Rating CategoryExcl. covered bonds

(EURbn)


(%)

0

5

10

15

20

25

30

35

4

5

6

7

8

9

10

20

06

20

07

20

08

20

09

20

10

20

11

20

12

H1

13

Average of median fixed coupons

Share with maturities ≥10 yrs (RHS)

New Issuance Funding Costs* and Maturities

(%)

Source: Fitch, Bloomberg*using coupons as a proxy

(%)

0

20

40

60

80

100

0

150

300

450

600

750

900

1,050

1,200

1,350

2006 2007 2008 2009 2010 2011 2012 H113

Financials excl. covered bonds

Covered bonds

Non-financials

% Financials including covered bonds (RHS)

New Issuance by Sector

(EURbn)


(%)






6

> Financials and non-financials have total

maturities amounting to EUR371bn for

H213, peaking in 2014 when EUR891bn

in bonds fall due.

> The maturity profile for non-financials has

widened noticeably since June 2012 for

bonds due in 2016 and beyond as

corporates continue to issue at a faster pace

than existing maturities – causing a 21% rise

in maturing bond volume over 2014-2020.

In contrast, deleveraging financial-sector

institutions have hardly changed their

maturity profile since mid-2012.

> Financials have refinanced 39% of 2013

maturities in the year to end August,

compared to 73% at the same stage in 2012.

Non-financials continue to seek maximum

benefit from low yields by issuing at a rate

of 2.5 times 2013 maturities – similar to the

path in 2012.

> Cumulative total issuance represents 58%

of scheduled 2013 maturities by financials

and non-financials.

Bond Maturities and Refinancing


0

20

40

60

0

50

100

150

200

250

H213 2014 2015 2016 2017 2018 2019 2020

AAA AAA BBBBB BCCC-C % AAA-A (RHS)

Maturities by Rating Category - Non-financialsAs at 30 Jun 2013

(EURbn)


(%)

70

75

80

85

90

0

200

400

600

800

H213 2014 2015 2016 2017 2018 2019 2020

AAA AAA BBBBB BCCC-C % AAA-A (RHS)

Maturities by Rating Category - FinancialsAs at 30 June 2013

(EURbn)


(%)

58%

0

20

40

60

80

100

050

100150200250300350400

Q1 Q2 Q3 Q4 31 Aug2013 YTD

Non-financialsCovered bondsFinancials excl. covered bonds

2013 Maturities by SegmentAs at 31 Dec 2012

(EURbn)


(%)

% 2013 issuance / total maturities

0

200

400

600

800

2014 2015 2016 2017 2018 2019 2020

30 June 2013 30 June 2012

Maturity Profiles - Financials

(EURbn)


0

50

100

150

200

250

300

350

Ja

n

Feb

Mar

Apr

Ma

y

Ju

n

Ju

l

Aug

Sep

Oct

No

v

De

c

2012 Fins. 2013 Fins.

2012 Non-Fins. 2013 Non-Fins.

Refinancing RatesPercentage of annual maturities

(%)


0

50

100

150

200

250

2014 2015 2016 2017 2018 2019 2020

30 June 2013 30 June 2012

Maturity Profiles - Non-Financials

(EURbn)




7

> The European high-yield

(EHY) default rate settled at

0.25% by volume of

outstanding bonds for the

trailing twelve months to the

end of the second quarter,

down from 1.34% at the

same stage in 2012.

> Meanwhile, the US high-

yield (USHY) default rate

declined to 1.7% at the end

of June, from 2.2% a year

earlier. The rate rose

modestly to 1.9% in July.

> Fitch expects European

leveraged loan default rates

to rise in the coming months.

2013 has so far been

dominated by large-sized

defaults.

High Yield Issuance & Default Rates


0

2

4

6

8

10

De

c-0

7

De

c-0

8

De

c-0

9

De

c-1

0

De

c-1

1

De

c-1

2

LT

M M

ay 1

3

Adj. L

TM

Ma

y 1

3(a

)

Leveraged Loan Default Rates(%)

a Adjusted LTM is pro forma for C*/CC* rated issuersSource: Fitch (Credit Opinions Database)

0

2

4

6

8

10

12

14

16

18

0

25

50

75

100

125

150

175

200

225

250

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

H1

13

EHY (DM and EM) USHY

EHY Yields (RHS) USHY Yields (RHS)

Issuance, Yields: European and US High-Yield

(EURbn)

Source: Fitch, Bloomberg, Bank of America Merrill Lynch (Yields)

(%)

0

200

400

600

800

1000

1200

0

5

10

15

20

25

30

35

Q4

01

Q2

02

Q4

02

Q2

03

Q4

03

Q2

04

Q4

04

Q2

05

Q4

05

Q2

06

Q4

06

Q2

07

Q4

07

Q2

08

Q4

08

Q2

09

Q4

09

Q2

10

Q4

10

Q2

11

Q4

11

Q2

12

Q4

12

Q2

13

EHY USHY 5yr Crossover (RHS)*(%)

Default Rates - EHY and USHY

Source: Fitch, Bloomberg*end of quarter values

(bp)

0

50

100

150

200

250

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

H1

13

Leveraged Loan New Issuance

(EURbn)

Volumes may include undrawn facilities

Source: Thomson Reuters LPC, Bloomberg, Fitch












8

˃ Bank deleveraging

continues to drive declines

in the share of the

outstanding universe

attributable to financial

sector bonds.

˃ The share of bank bonds in

the investment grade (IG)

category is falling further,

primarily due to reduced

funding needs rather than

negative rating actions.

˃ Record low yields and

booming issuance have

enabled IG issuers to extend

maturities – increasing

duration risk of the

outstanding universe – and

attracted riskier issuers into

the bond markets as bank

loans become more scarce.

Corporate Bond Market Profile


0%

20%

40%

60%

80%

100%

2006 2007 2008 2009 2010 2011 2012 H113

AAA AA A BBB BB B CCC-C

Amount Outstanding by Rating CategoryExcl. covered bonds; Total EUR4.00trn as at 30 June 2013


50

55

60

65

70

75

80

85

0

1

2

3

4

5

6

7

2006 2007 2008 2009 2010 2011 2012 H113

Financials Non-financials % Financials (RHS)

Total Bonds Outstanding by Sector

(EURtrn)


(%)

3.8

4.0

4.2

4.4

4.6

4.8

5.0

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

YT

D 2

013

Duration RiskInvestment grade financials and non-financials

(Effective

duration, yrs)

Source: Bank of America Merrill Lynch

0

25

50

75

100

50

55

60

65

70

75

2007 2008 2009 2010 2011 2012 H113

% in IG (LHS) % in HY (RHS)

Bank Bonds OutstandingIncl. covered bonds

(%)


(%)



9

˃ Spreads have broadly

recovered from the summer

sell-off following first mention

of a reduction of monetary

stimulus by the US Fed.

˃ European corporate bonds

have suffered less than bonds

from US firms during the first

half due to the more-distant

prospect of rising rates – the

latter experiencing its worst

half-year performance since

H208 as investors adjusted

expectations about the timing

of rising rates.

˃ Improving sentiment towards

the eurozone is reflected in the

tightening spread between

Spanish and Italian benchmark

yields, which recently fell to an

18-month low.

Yields & Spreads


-8

-6

-4

-2

0

2

4

6

8

10

12

H1

07

H2

07

H1

08

H2

08

H1

09

H2

09

H1

10

H2

10

H1

11

H2

11

H1

12

H2

12

H1

13

European Corporate Bonds US Corporate Bonds

Total Return Performance

(%)

Source: Bank of America Merrill Lynch, Bloomberg

0

100

200

300

400

500

600

700

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Financials Non-financials

Corporate Spreads

(bp)

Source: Bank of America Merrill Lynch, Fitch

Averages, 2000 - 30 Jun 2007:Financials: 50bp

Non-Financials: 88bp

Eurozone unemployment

at new high

2nd Greece bailout:

EUR70bn

Draghi euro support

pledge

ECB 3yr LTRO:

phase II

ECB outlines OMT

US QE taper speculation

Italian election

stalemate

Monti announces resignation

Cyprus bank bail-in

3.0

4.0

5.0

6.0

7.0

8.0

9.0

01-Jan-12 17-Mar-12 01-Jun-12 16-Aug-12 31-Oct-12 15-Jan-13 01-Apr-13 16-Jun-13 31-Aug-13

Italy Spain

Italian and Spanish 10yr Government Bond Yields


(%)

Draghi: Cyprus

no template

Hollande:eurozone crisis over

Spain unemployment

rate falls

Eurozoneeconomic

expansion for 1st time since

Q3 2011



10

Terminology

˃ Financials: financial institutions including banks, insurance companies and other finance companies.

Bond Issuance and Refinancing Data

˃ Based on outstanding paper in all currencies issued by entities in EMEA (excluding convertibles), and converted to euros at

applicable exchange rates on the last day of the review period.

˃ Includes rated-only international public paper and private placements with 144A registration rights and ISIN identifier.

˃ Includes issues with a minimum of EUR50m (equivalent) and medium-term notes with maturity dates of one year or greater.

Fundamental Credit Expectations (p.1) – Scoring Methodology

˃ Digital representation of primary survey data on fixed-income investor expectations for fundamental credit conditions over the

next 12 months. Survey participants are asked to select responses from predefined categories, which are subsequently scored

(see brackets). Q: Over the next 12 months, fundamental credit conditions in the following European asset classes will:

˃ A: i) Deteriorate significantly [−2]; ii) Deteriorate somewhat [−1]; iii) Stay the same [0]; iv) Improve somewhat [+1]; and v)

Improve significantly [+2].

˃ Aggregate scores are calculated for each asset class and remapped on a linear scale from -1 to +1, representing most

pessimistic and most optimistic expectations for credit fundamentals, respectively.

Fitch Investor Sentiment Index (p.4) – Scoring Methodology

˃ Similar to the above, the index is a digital representation of primary survey data about fixed-income investor expectations for

fundamental credit conditions, spreads, issuance over the next 12 months as well as investment desirability. Aggregate scores

are calculated for each asset class and remapped on a linear scale from -1 to +1, representing most pessimistic and most

optimistic sentiment, respectively.

Total Return Performance by Asset Class

˃ Based on total return data and calculated as the holding period return on a monthly basis.

Appendix




11

> EMEA Corporate Bond Market – Rating and Issuance Trends - August 2013

Next issue: Oct 2013

> Fitch Ratings European Senior Fixed-Income Investor Survey Q313 - August 2013

Next issue: Nov 2013

> Fitch Ratings/Fixed-Income Forum Senior Investor Survey (US) - March 2013

Next issue: Sep 2013

> The Credit Outlook – July 2013

Next issue: Jan 2014

> European High-Yield Chart Book - August 2013

Next issue: Nov 2013

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12

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