r.hunter fitch emergingvsdeveloped

8/6/2019 R.hunter FITCH EmergingVSdeveloped

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1

Richard HunterGroup Managing Director, Corporates

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

ICAP Credit Risk ConferenceBucharest, RomaniaJune 15, 2010

Agenda

Emerging Markets vs. Developed Markets

Corporates How Risky?

What Next?


2/23

2

2

Industrial Production Picking Up

85

9095

100

105

110

115

120

125

Apr05

Oct05

Apr06

Oct06

Apr07

Oct07

Apr08

Oct08

Apr09

Oct09

90

100

110

120

130

140

150OECD G7 Brazil India (RHS)

Industrial Production (2005=100)

Source: OECD

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 dont live in a bubble 2008: Structured Finance

2009: Financial Institutions

2010: Sovereigns

2011: .?


3/23

3

4

Recovered Two Thirds of Collapse in World Trade

130

135

140

145

150

155

160

165

2006M1 2007M1 2008M1 2009M1 2010M1

World Trade Volumes (2000=100)

Source: Dutch Bureau of Economic Policy Research

5

GDP Trough Mid-2009 in Major Advanced Economies

91.0

93.0

95.0

97.0

99.0

101.0

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

Q32009

Q42009

Q12010

Q22010

Q32010

Q42010

US UK EA Japan

Real GDP 2008Q1=100

Source: Datastream, Fitch

Forecast


4/23

4

6

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

April 2010 RevisionDecember 2009 GEO Forecast

GDP Growth in 2010 in Major Advanced Economies

Source: Fitch

7


0.01.02.03.04.05.06.07.08.0

9.010.0

Brazil Russia India China

April 2010 Revis ionDecember 2009 GEO Forecast

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

Source: Fitch


5/23

5

8


-1.5

-1.0-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Romania Bulgaria CzechRepublic

Hungary Poland Serbia

April 2010 Revis ionDecember 2009 GEO Forecast

GDP Growth in 2010 in Convergence Countries

Source: Fitch

9

Fiscal Stimulus Starts to be Withdrawn Next Year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 2010 2011

General Government Balance (% GDP)

Source: Fitch


6/23

6

10

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

WorldAdvanced EconomiesEmerging Market Economies

Source: IMF WEO

GDP Growth, %

11

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

-8

-7

-6

-5

-4

-3

-2

-1

0

2008 2009 2010f 2011f

(%) CEE W EU/NA Romania

-8

-6

-4

-2

0

2

4

6

8

2008 2009 2010f 2011f

(%) CEE WEU/NA Romania


7/23

7

12

Volatility

0

2,000

4,000

6,000

8,000

10,000

12,000

Sep-97 Sep-99 Sep-01 Sep-03 Sep-05 Sep-07 Sep-090

1

2

3

4

BET RON Rating

BB

BB

B

Stock Exchange, USD:ROL, Fitch Sovereign Credit Rating

BET: 10 most liquid issuers on Bucharest Exchange, FX rate includes 2005 redenominationSource: Bloomberg, Fitch

13

Volatility II

2.02.22.42.62.83.03.23.43.63.8

4.0

Jul-05 Jul-07 Jul-090.8

0.9

1.0

1.1

1.2

1.3

1.41.5

1.6

RON EUR

Dollar Exchange Rate

BET: 10 most liquid issuers on Bucharest Exchange, FX rate includes 2005 redenominationSource: Bloomberg, Fitch


8/23

8

14

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

15

Fitch Bank Individual Ratings, 2007-2010

Developed Markets Emerging Markets

Unweighted Issuer CountSource: Fitch


1.1.2007 1.1.2008 1.1.2009 1.1.2010

(%)

A

A/B

B

B/C

C

C/D

D

D/E

E

1.1.2007 1.1.2008 1.1.2009 1.1.2010

(%)

A

A/B

B

B/C

C

C/D

D

D/E

E


9/23

9

16

Fitch Bank Individual Ratings, 2007-2010




1.1.2007 1.1.2008 1.1.2009 1.1.2010

(%)

A

A/B

B

B/C

C

C/D

D

D/E

E

1.1.2007 1.1.2008 1.1.2009 1.1.2010

(%)

A

A/B

B

B/C

C

C/D

D

D/E

E

MajorRomanian

Banks

17

Fitch Negative Corporate Actions, 2008-2010


EMEA/APAC, Rating Downgrades and assignment of Negative Outlooks/WatchesSource: Fitch

-35

-30

-25

-20

-15

-10

-5

0

Jan Apr Jul Oct Jan Apr Jul Oct Jan-35

-30

-25

-20

-15

-10

-5

0

Jan Apr Jul Oct Jan Apr Jul Oct Jan


10/23


11/23

11

Agenda



What Next?

21

Fitch Forecasts 2009 to 2011

-30

-20

-10

0

10

20

30

A u

t o

T e c

h

B u

i l d m a

t s

C h e m

i c a

l s

N a

t

r e s o u r c e s

O i l & g a s

M e

d i a

O t h e r

m a n u

f .

T e

l c o

R e

t a i l

H e a

l t h c a r e

T r a n s p o r t

C o n s u m e r

F B T

(%) EBITDA Revenue

Sub-Sectors by Cumulative EBITDA Movement 2007 A 2011 E

Source: Forecasting EMEA Corporates' Recovery, December 2009


12/23

12

22

80454998

5,2572007

925322-26FCF538

1,1426,1242011f

5151,0835,4152009

525544Capex

2010f2008USDbn

1,0591,057OCF5,8275,895Revenue

Corporate Europes Future in Aggregate

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

ClearThinking

23

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


13/23

13

24


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

25


-100

-50

0

50

100

150

2007 2008 2009 2010f 2011f

Aggregate(USDbn)

Free Cash Flow Recovers to 2007 Levels


ClearThinking


14/23

14

26


-100

-50

0

50

100

150

2007 2008 2009 2010f 2011f


(USDbn)

But Again Energy & Utilities are Key


ClearThinking

27

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


15/23

15

28

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

29

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


16/23

16

30

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

31

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


17/23

17

32

Where Are the Real Risks? Industrials

Developed EMEA Emerging EMEA

Fitch forecasts as at 1.04.10Source: 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%

33

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%


18/23

18

34

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?


19/23

19

36

End of the RiskTrade?

Investor Need forYieldResurgent

Consumption

Where Did theLeverage Go?

Liquidity Bubbleforming forCorporates

Capacity Gap,depressing BusinessInvestment

2010

37

Other Fitch Concerns?

> Consumer Confidence

> Zombies!

> Commodities Long-run Up, Short-run Down

> Policymaker Shuffle

> Crowding Out of Corporate Debt

> Reliance on Banks


20/23

20

38

Bond Markets Getting a Rating

> CRAs place a high value on trustworthiness of responses Opacity (public or private) is penalised by committees

A genuine Dont Know is better than a bluff

> Nobody likes surprises CRAs operate with confidentiality undertakings

Bad news is best served warm

Dont 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

39

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

Dont 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


21/23

21

40

ClearThinking

> New research initiative

> Each issuer reportcarries a peer studyand a selection offorecast information

> New, transparentcriteria reports by

sub-sector and region> Visit our microsite for

more information

> clearthinking.fitchratings.co.uk

41

New Criteria Format


22/23

22

4242

Smallerincumbents andstrong marketchallengers20%-40%

Marketchallenger15%-20%

Marketchallenger40% + no. 1 orno. 2 marketposition

Incumbent operators

A

AA

Pre div FCF/sales (%)

Op. EBITDARmargin (%)

FFO int. cover(x)

FFO adj. netleverage (x)FFO adj. leverage (x)

Geographicaldiversification& absolutescale

Technologyleadership

Integratednetworkowner

Market share &competitiveintensity

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-sectorsmay 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 exhaustivein scope nor uniformly applicable. Additional factors will influence ratings, particularly in emerging markets and where group relationships constrain or enhance a rating level.

Smallerincumbents andstrong marketchallengers20%-40%

Marketchallenger15%-20%

Marketchallenger40% + no. 1 orno. 2 marketposition

Incumbent operators

A

AA

Pre div FCF/sales (%)

Op. EBITDARmargin (%)

FFO int. cover(x)

FFO adj. netleverage (x)FFO adj. leverage (x)

Geographicaldiversification& absolutescale

Technologyleadership

Integratednetworkowner

Market share &competitiveintensity

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-sectorsmay 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 exhaustivein 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

4343

Issuer Reports

Key financial and operationalmetrics

Historical and prospectivecomparisons against sector andrating medians

Prospective cashflow-basedratios based on Fitch internalforecasts, to provide anindication of expected trend

Context and key assumptionsexplained


23/23

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Fitch Ratingswww.fitchratings.com

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