richard hunter group managing director, corporates emerging vs. developed markets how corporates...

Richard HunterGroup Managing Director, Corporates

Emerging vs. Developed MarketsHow Corporates have Fared, and Where are the Real Risks Hiding

ICAP Credit Risk ConferenceSofia, Bulgaria December 2, 2010

Agenda

Emerging Markets vs. Developed Markets

Corporates – How Risky?

What Next?

ICAP Conference, Sofia, December 2010 3

Fitch View: Decoupling No, Convergence Yes

> Gap between developed & emerging market corporates shrinking

> Ratings for emerging market corporates have been more resilient

> Corporate outlooks (were) stabilising

> In weak growth environment, corporates relatively robust…

> … But they don’t live in a bubble

– 2008: Structured Finance

– 2009: Financial Institutions

– 2010: Sovereigns

– 2011: ….?


Fitch GDP Forecasts for 2010 Revised Upwards

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

US Euro Japan UK MAEs

September 2010 Revision April 2010 GEO Forecast

GDP Growth in 2010 in Major Advanced Economies

Source: Fitch



-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Brazil Russia India China


GDP Growth in 2010 in Brazil, Russia, India, China

Source: Fitch



-2.5-2.0-1.5-1.0-0.50.00.51.01.52.02.53.0

Romania Bulgaria CzechRepublic

Hungary Poland Serbia


GDP Growth in 2010 in Convergence Countries

Source: Fitch


Fiscal Stimulus Starts to be Withdrawn Next Year

-15.0

-13.0

-11.0

-9.0

-7.0

-5.0

-3.0

-1.0

France Germany Italy Spain UK US Japan

2009 2010f 2011f 2012f

General Government Balance (% GDP)

Source: Fitch


No Decoupling, But Shift in Credit Quality

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2007 2008 2009 2010f 2011f

World Advanced Economies Emerging Market Economies

Source: IMF WEO

GDP Growth, %


Central & Eastern Europe in Context

Fitch View on GDP Growth Fitch View on Deficit/GDP

Source: Fitch Sovereign ComparatorCEE – Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia, Slovenia

-6

-5

-4

-3

-2

-1

02008 2009 2010f 2011f

(%)CEE WEU/NA Bulgaria

-6

-5

-4

-3

-2

-1

0

1

2

3

4

2009 2010 2011f 2012f

(%)CEE WEU/NA Bulgaria


Rating Impact

1.1.2007 1.1.2008 1.1.2009 1.1.2010

Developed Markets Emerging MarketsB

B/C

C

C/D

D

Bank Individual Ratings 2007-2010

Simple Average by Issuer Count, not Asset-WeightedSource: Fitch


Fitch Bank Individual Ratings, 2007-2010

Developed Markets Emerging Markets

Unweighted Issuer CountSource: Fitch

Unweighted Issuer Count Source: Fitch

1.1.07 1.1.08 1.1.09 1.1.10 1.10.10

(%)

A

A/B

B

B/C

C

C/D

D

D/E

E

1.1.07 1.1.08 1.1.09 1.1.10 1.10.10

(%)

A

A/B

B

B/C

C

C/D

D

D/E

E


Fitch Bank Individual Ratings, 2007-2010


Unweighted Issuer CountSource: Fitch

Unweighted Issuer Count Source: Fitch

1.1.07 1.1.08 1.1.09 1.1.10 1.10.10

(%)

A

A/B

B

B/C

C

C/D

D

D/E

E

1.1.07 1.1.08 1.1.09 1.1.10 1.10.10

(%)

A

A/B

B

B/C

C

C/D

D

D/E

E

Major Bulgarian

Banks


Outlooks Leading Rating Actions

-30

-25-20

-15

-10-5

0

510

15

Jan

Fe

bM

ar

Ap

rM

ay

Jun

Jul

Au

gS

ep

Oct

No

vD

ec

Jan

Fe

bM

ar

Ap

rM

ay

Jun

Jul

Au

gS

ep

Oct

No

vD

ec

Jan

Fe

bM

ar

Ap

rM

ay

Jun

July

Au

gS

ep

Net Actions Net Outlook Changes

Net Rating Changes versus Net Outlook/Watch Changes

Source: Fitch

Outlook stabilisation starts, June ‘09

Rating stabilisation starts, Dec ‘09


Corporate Downgrade Actions, 2008-2010


Europe, Middle East, Africa, AsiaSource: Fitch

Europe, Middle East, Africa, Asia Source: Fitch

-20

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

Jan Ma Se Jan Ma Se Jan Ma Se-20

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

Jan Ma Se Jan Ma Se Jan Ma Se


Negative Outlooks – What Happened Next?



-30

-25

-20

-15

-10

-5

0

5

10

15

20

Q108 Q408 Q309 Q210

Lowered Stabilised

-30

-25

-20

-15

-10

-5

0

5

10

15

20

Q108 Q408 Q309 Q210

Lowered Stabilised



Negative Outlooks – What Happened Next?

Cyclical Sectors Non-Cyclical Sectors


-40

-30

-20

-10

0

10

20

Q108 Q408 Q309 Q210

Net Lowered Stabilised

-40

-30

-20

-10

0

10

20

Q108 Q408 Q309 Q210

Net Lowered Stabilised



Quality of Issuance

Emerging Markets High Yield (Dev. Mkt. <BBB)


02,0004,0006,0008,000

10,000

12,00014,00016,00018,00020,000

Q108 Q408 Q309

BB B/below

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Q109 Q409 Q310

Speculative GradeInvestment Grade



Directional Fitch Rating Outlooks, 2006-2010

Corporate Issuer Default RatingsSource: Fitch

Global Developed

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

Q406 Q407 Q408 Q409

Negative Positive

Emerging EMEA

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

Q406 Q407 Q408 Q409

Negative Positive

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

Q406 Q407 Q408 Q409

Negative Positive

Global Emerging

Agenda



What Next?


Fitch Forecasts 2009 to 2011

-30

-20

-10

0

10

20

30

Au

to

Te

ch

Bu

ild m

ats

Ch

em

ica

ls

Na

tre

sou

rce

s

Oil

& g

as

Me

dia

Oth

er

ma

nu

f.

Te

lco

Re

tail

He

alth

care

Tra

nsp

ort

Co

nsu

me

r

FB

T

(%) EBITDA Revenue

Sub-Sectors by Cumulative EBITDA Movement 2007 A – 2011 E

Source: Forecasting EMEA Corporates' Recovery, December 2009


USDbn 2007 2008 2009 2010f 2011f

Revenue 5,257 5,895 5,415 5,827 6,124

OCF 998 1,057 1,083 1,059 1,142

Capex 454 544 515 525 538

FCF 80 -26 22 53 92

Corporate Europe’s Future – in Aggregate

Representative sample of Fitch rated universe in EMEASource: Company financials; Fitch forecasts

ClearThinking


Where Next?


Fitch Corporate Forecasts

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2007 2008 2009 2010f 2011f

Aggregate(USDbn)

2009 – Not the Massive Correction Expected?


ClearThinking



0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2007 2008 2009 2010f 2011f0

500

1000

1500

2000

2500

3000

Aggregate Industrials TMTRLCP Infrastructure

(USDbn)

… But Energy & Utilities predominate in top-line increases


ClearThinking



-100

-50

0

50

100

150

2007 2008 2009 2010f 2011f

Aggregate(USDbn)

… Free Cash Flow Recovers to 2007 Levels…


ClearThinking



-100

-50

0

50

100

150

2007 2008 2009 2010f 2011f


(USDbn)

… But Again Energy & Utilities are Key…


ClearThinking


Net Results: Leverage

1.0

1.5

2.0

2.5

3.0

3.5

2007 2008 2009 2010f 2011f

Aggregate(USDbn)

Non-Critical Rise – Less than One Turn of Cash Flow


ClearThinking


Net Results: Leverage

1.0

1.5

2.0

2.5

3.0

3.5

2007 2008 2009 2010f 2011f


(USDbn)

… Pressure Points on Consumer and Energy/Utilities…


ClearThinking


Net Results: Interest Cover

0.02.04.06.08.0

10.012.014.016.018.020.0

2007 2008 2009 2010f 2011f

Aggregate(x)

In Aggregate, Sustainable and Comfortable Levels


ClearThinking


Net Results: Interest Cover

0.02.04.06.08.0

10.012.014.016.018.020.0

2007 2008 2009 2010f 2011f

Aggregate Stressed(x)

Add Another 200bps of Funding Cost?


ClearThinking


Where Are the Real Risks?

0

1,000

2,000

3,000

4,000

5,000

6,000

2010f 2011f0

150

300

450

600

750

900

DM Revenues DM EBITDAEM Revenues (rhs) EM EBITDA (rhs)

(USD)

Developed EMEA vs. Emerging EMEA

Growth rates in constant USD termsSource: Fitch forecasts

5%

7%

7%

9%

ClearThinking


Where Are the Real Risks? Industrials

Developed EMEA Emerging EMEA

Fitch forecasts as at 1.04.10Source: Fitch

Fitch forecasts as at 1.04.10 Source: Fitch

0

40

80

120

160

200

2010f 2011f

Revenues EBITDA

0

400

800

1,200

1,600

2,000

2010f 2011f

Revenues EBITDA

5%

13%

11%

17%


Where Are the Real Risks? Telecom/Media/Tech




0

25

50

75

100

125

2010f 2011f

Revenues EBITDA

0

250

500

750

1,000

2010f 2011f

Revenues EBITDA

2%

2.5%

6%

5%


Where Are the Real Risks? Energy & Utilities




0

100

200

300

400

500

600

2010f 2011f

Revenues EBITDA

0

500

1,000

1,500

2,000

2,500

2010f 2011f

Revenues EBITDA

5%

8%

6%

8%

Agenda



What Next?


End of the “Risk Trade”?

Investor Need for YieldResurgent

Consumption

Where Did the Leverage Go?

Liquidity “Bubble” forming for Corporates

Capacity Gap, depressing Business Investment

201011


Other Fitch Concerns?

> Consumer Confidence

> “Zombies!”

> Commodities – Long-run Up, Short-run Down

> Policymaker Shuffle

> “Crowding Out” of Corporate Debt

> Reliance on Banks


Bond Markets – Getting a Rating

> CRAs place a high value on trustworthiness of responses

– Opacity (public or private) is penalised by committees

– A genuine “Don’t Know” is better than a bluff

> Nobody likes surprises

– CRAs operate with confidentiality undertakings

– “Bad news is best served warm”

– Don’t turn a good surprise into a bad one

> Admit mistakes

– People who never make mistakes never learn

– Admission shows thoughtfulness and readiness to respond

– Explain the problem - and your remedy

ClearThinking


We Live in the Future, not the Past

> CRAs are more forward-looking, respond to that

– Discuss forecasts with CRAs as freely as you can

– Detail on your assumptions will be impressive

– Don’t expect your forecasts to be adopted by the CRA

– But do ask the CRA where their forecasts came out

> Talk frankly about your position

– Feel free to discuss your peer group - but avoid insults!

– Admission of weaknesses displays candour

– Rating committees will focus on your challenges

> So should your discussion with the CRA

ClearThinking


“ClearThinking”

> New research initiative

> Each issuer report carries a peer study and a selection of forecast information

> New, transparent criteria reports by sub-sector and region

> Visit our microsite for more information

> clearthinking.fitchratings.co.uk


New Criteria Format


Smaller incumbents and strong market challengers20%-40%

Market challenger15%-20%

Market challenger<15% market share

Sector Risk Profile Financial Profile (Historical where relevant and forecast, mid-points) Company-Specific Traits

Building Blocks - European Telecoms Companies:

General• Essential service• Broadly constant demand• Technology risk• Regulated licenses and tariffs• Benefits from economies of

scale

Negative-2c. 1535.05.0

Single geography

Limited by scale to upgrade

Single platform and may not have ownership

B

0-7c. 2044.04.0Single geography

Selective network upgrades

Ownership often limited to single platform

• Cable TV and AltnetsBB

10c. 3062.53.0

Limited to one or two geographies.Smaller incumbents

Slower rollout of technology upgrades

Ownership can be limited to single platform

BBB

15c. 3582.02.5

Operates in a number of markets.Large multi-jurisdictional operators

Deploying latest network upgrades (FTTH/ FttC) + 4g

Operates and owns both fixed and mobile platforms

Dominant market positions>40% + no. 1 or no. 2 market position

Incumbent operators

A

AA

Pre div FCF/ sales (%)

Op. EBITDAR margin (%)

FFO int. cover (x)

FFO adj. net leverage (x)FFO adj. leverage (x)

Geographical diversification & absolute scale

Technology leadership

Integrated network owner

Market share & competitive intensity

Indicative factors observed or extrapolated for rated issuers in developed markets. Ratio levels refer to the mid-point of a through-the-cycle range; actual observations are likely to vary from these. Certain sub-sectors may contain a small number of observations; where no observations currently exist, guidelines for a category are extrapolated based on Fitch judgement. The factors give a high-level overview and are neither exhaustive in scope nor uniformly applicable. Additional factors will influence ratings, particularly in emerging markets and where group relationships constrain or enhance a rating level.

Smaller incumbents and strong market challengers20%-40%

Market challenger15%-20%

Market challenger<15% market share

Sector Risk Profile Financial Profile (Historical where relevant and forecast, mid-points) Company-Specific Traits

Building Blocks - European Telecoms Companies:

General• Essential service• Broadly constant demand• Technology risk• Regulated licenses and tariffs• Benefits from economies of

scale

Negative-2c. 1535.05.0

Single geography

Limited by scale to upgrade

Single platform and may not have ownership

B

0-7c. 2044.04.0Single geography

Selective network upgrades

Ownership often limited to single platform

• Cable TV and AltnetsBB

10c. 3062.53.0

Limited to one or two geographies.Smaller incumbents

Slower rollout of technology upgrades

Ownership can be limited to single platform

BBB

15c. 3582.02.5

Operates in a number of markets.Large multi-jurisdictional operators

Deploying latest network upgrades (FTTH/ FttC) + 4g

Operates and owns both fixed and mobile platforms

Dominant market positions>40% + no. 1 or no. 2 market position

Incumbent operators

A

AA

Pre div FCF/ sales (%)

Op. EBITDAR margin (%)

FFO int. cover (x)

FFO adj. net leverage (x)FFO adj. leverage (x)

Geographical diversification & absolute scale

Technology leadership

Integrated network owner

Market share & competitive intensity

Indicative factors observed or extrapolated for rated issuers in developed markets. Ratio levels refer to the mid-point of a through-the-cycle range; actual observations are likely to vary from these. Certain sub-sectors may contain a small number of observations; where no observations currently exist, guidelines for a category are extrapolated based on Fitch judgement. The factors give a high-level overview and are neither exhaustive in scope nor uniformly applicable. Additional factors will influence ratings, particularly in emerging markets and where group relationships constrain or enhance a rating level.

Example – Virgin Media


Issuer Reports

• Key financial and operational metrics

• Historical and prospective comparisons against sector and rating medians

• Prospective cashflow-based ratios based on Fitch internal forecasts, to provide an indication of expected trend

• Context and key assumptions explained

The Fitch Group Fitch Ratings Algorithmics Fitch Solutions

Fitch Ratingswww.fitchratings.com

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richard hunter group managing director, corporates emerging vs. developed markets how corporates...

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