ir magazine continental europe conference the growing importance of credit ratings and the impact of...
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IR Magazine Continental Europe Conference
The growing importance of Credit Ratings and the Impact of IFRS
Vienna, 30 November 2005
Jens Schmidt-Bürgel
Managing Director
Fitch Deutschland
Agenda
1 Introduction
2 The Rating Process
3 Impact of IFRS on Ratings
4 Useful Tips
Fitch Ratings
► Only one of the three international Rating Agencies with an European owner
Owned by FIMALAC, S.A.
Head offices in London and New York
Staff of over 1,750 (over 850 Analysts) in 49 offices world-wide
► Strong Presence in Europe
European head office in London with staff of over 450
Offices in Barcelona, Milan, Moscow, Paris und Warsaw
Frankfurt Office since 1999 (currently staff of 28)
Global Coverage
► 2.000 Financial Institutions
► 1.800 Insurance Companies
► 1.700 Corporates
► 9.150 Structured Finance Transactions
► 78.000 Municipalities Transactions
► 117 Sub-Sovereigns
► 93 Sovereigns
Market Share in Bond Issuance in Europe
90 91 92 91
7367
79 77
47
5761
66
2002 2003 2004 2005*
(%)
Financial Institutions Structured Finance Corporates* Up to 30 September 2005
Introduction
1
What is a Credit Ratings?
► An opinion about the ability of an issuer to meet its financial commitments on a timely basis
Across sectors
Across countries
► Opinion only on the default probability
In case of high yield issuers also opinion on Recovery Rates
Does not take into account other risks (fraud etc.)
► External Support is generally not taken into account
Exceptions maybe for subsidiaries and in the case of guarantees
Different for financial institutions - Fitch Support Rating
Increased Importance of Credit Ratings
► Diversification of corporate funding
Increased ‘capital market’ funding
Innovative capital market transactions
► Increased disintermediation
Banks face continued consolidation and profitability pressures
Continued trend to move ‘assets’ off-balance sheet
► Introduction of Basle lI
‚Risk adjusted pricing‘ and improved portfolio management
Bank and capital market prices should converge
Fitch integrated in the leading Bond Indices
Merrill Lynch Indices
► Fitch Ratings included since January 2005
► Dominant in global High Yield Segment, strong in GBP & Euro
► Modifications:
Averaging across 3 agencies puts a line of best fit through ratings (new algorithm)
Lehman Brothers Indices
► Fitch Ratings included sinceJuly 2005
► Dominant in US High Grade Segment and eminent in Euro
► Modifications:
In case of 3 different ratings highest and lowest will be ignored, the medial will be used
In case of 2 different ratings the usage of the lowest will be preserved.
The Rating Process
2
Standard Rating Process
Rating Mandate
Questionnaire Information Preparation
Rating Meeting
Rating Publication
Rating Report
Rating Committee
Rating Report Comments
Issuer Rating Agency Issuer/Rating Agency
Corporate Rating Methodology
Credit Rating
Quantitative Factors
► Cash-Flow Focus
Stability of Earnings
Operating Cash-Flow
► Capital Structure
Company Leverage
Off Balance Sheet Items
► Financial Flexibility
Capitalisation
Financing Sources
Qualitative Factors
► Industry Risk
Industry Risk Profile
‘Sector-Ceiling‘
► Operating Environment
Market Position
Diversification
► Management
Strategy / Track Record
Risk Appetite
Comparison of Ratings
European Corporates
AAA Nestlé, Novartis
AA BP, BASF, E.ON, Siemens
A DPWN, RWE, Telekom, VW
BBB DaimlerChrysler, LVMH, Metro
BB Kabel Deutschland, Kamps
B Jenoptik, Wind
US Corporates
AAA ExxonMobil, Pfizer
AA Wal-Mart, PepsiCo
A Coca-Cola, McDonald‘s
BBB Walt Disney, Ford
BB Xerox, Eastman Kodak
B General Motors, Levi Strauss
Impact of IFRS on Ratings
3
Where We are Coming From
► Lack of consistency
Different accounting in each country, need to adjust before start to analyse, UK/US GAAP used as basis by analysts
► Lack of transparency
Profit smoothing
Hidden reserves, general reserves, “estimated” reservesfor future costs
Hidden gains and losses on securities and other investments
Off-balance sheet exposures e.g. derivatives, guarantees, embedded options, pension deficits
► Accounting volatility pre-IFRS rarely reflects economic volatility
Where We are Going
► IFRS will bring improved financial reporting in terms of
Disclosure
Consistency
Discipline
► Transition phase 2005-2007 brings new challenges
Transition maybe an excuse to hide mistakes of the past
Many unconsolidated accounts and some consolidated will remain under local GAAPs
► Transparency and disclosure are key to getting the right message across
Expect gradual blending of local GAAPs and IFRS
Accounting Standards - Rated Banks in EMEA
2004
39%
60%
1%
US GAAP IFRS Local GAAP
2007
85%
14%1%
US GAAP IFRS Local GAAP
Source: Fitch Survey
Accounting Standards - Rated Corporates in EMEA
2004
25%
65%
10%
US GAAP IFRS Local GAAP
2007
78%
16%6%
US GAAP IFRS Local GAAP
Source: Fitch Survey
Rating Implications of IFRS
► Changing accounting standards do not have a direct impact on economic reality and therefore should not affect ratings
► New information on transition may reveal new aspects of a company’s business or financial profile
Could lead to some rating actions, but expected to be rare
► The new standards may have real economic effects
Changes to business operations
Changes to the cost of funding (e.g. penalty for greater volatility)
Change in taxation and change in dividend pay-out
► Increased transparency and disclosure should provide an improved perception of risk
What is Fitch Doing?
► Implementation of IFRS is a catalyst for stepping up analytical tools
► Enhanced and rejuvenated focus on real cash flow for rated corporates
► More balance sheet focussed analysis means more to do for banks and insurance companies:
Blending raw data collection for IFRS banks and introducing new analytical ratios
Improving capital model for insurance
► Fitch has published a number of special comments on IFRS,of which most are available on: www.fitchratings.com
Useful Tips
4
Number of Ratings and Rating Advisor
Number of Ratings
► No Rating - bonds are increasingly difficult to place
► 1 Rating - generally sufficient for domestic bonds issues
► 2 Ratings - common for EMTN- und CP-Programs
► 3 Ratings - standard for large frequent borrowers
Rating Advisor
► Helpful by …
preparing of ratinginformation pack
preparing of management meetings
► Should never …
write the „Credit Story“for the company
actively participate in the management meeting
Time and Cost of Obtaining a Rating
Time
► Length of the entire rating process depends on
Availability of information
Preparation of company
Complexity of company
► Completion of rating
Generally within 4-6 weeksafter the management meeting
Depends on open questions from management meeting
Cost
► Standard Rating Fee:
from € 50,000 p.a.
Plus issuance fees
► Relationship Fee:
from € 140,000 p.a.
Incl. issuance fees
► Credit Assessment:
from € 37,500
Non-public
Contacts
Banks, Insurance
► Jens Schmidt-Bürgel
► Geschäfstführer
► Fitch Deutschland
T: 0049 69 7680 76110
F: 0049 69 7680 76250
Corporates
► Andreas Roderburg
► Director Capital Markets
► Fitch Deutschland
T: 069 7680 76246
F: 069 7680 7620
