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How Eurozone sovereign downgrades could impact corporate1 ratings John Hatton, Group Credit Officer EMEA Corporates October 2012 (1) Non-financial Corporates EZ sovereign downgrades - corporate ratings What are drivers for corporate ratings to be affected • Sovereign-linked credits • Few in EMEA due to state-aid rules, privatisation and competitive markets • Stand-alone profiles, can be rated above the Sovereign • Economic environment already included in company performance • Liquidity and access to capital • Prospective, precedent, of state interference • Geographical diversification • Stand-alone credits capped by Sovereign-related considerations • +6 notches implied cap for lower likelihood of Transfer and Convertibility (T&C) in Eurozone Member States (see How Sovereign Ratings Relate to other Asset Class Ratings in the Eurozone dd October 2012). • Lower Country Ceiling for individual country – T&C / redenomination risk • Liquidity contagion (disorderly sovereign restructuring) www.fitchratings.com 05/05/2017 2 Existing Portfolio Implications of Sharp Deterioration in Eurozone Sovereign Ratingsa Likely Maximum Foreign Currency IDR for Corporates Which are… Sovereign FC IDR A+ Primarily Domestic Level of Diversification Globally Diversified Potentially no impact A- A+ BBB A- BB+ BBB BB- BBB- B+ BB+ B- BB CCC BB RD BB Potentially no impact Potentially no impact AA A+ ABBB+a BBB-a BBB-a BBB-a a While in practice, the rating of a corporate which is not able to swiftly avoid redenomination risk in a worst case scenario is unlikely to exceed the sovereign rating by much more than six notches, the contours of such sovereign downgrade actions (eg, the approach of a reprofiling of sovereign debt maturities) may indicate that transfer and convertibility risk remains very limited, and could indicate a wider gap for globally diversified corporates than the six notches indicated here Source: Fitch Corporate Headroom Below Ceilings Each Marker Represents a Corporate IDR Spanish Corps Italian Corps Portuguese Corps Spanish "Cap" Italian "Cap" Portuguese "Cap" AAA • Scale of corporate rating movements has been consistent with a “normal” recessionary period, rather than any material linkage to the region’s sovereign ratings • EZ corporates’ ratings within implied cap of +6 notches from sovereign ratings (Spain ‘BBB’, Italy ‘A-’, and Portugal ‘BB+’) AA A BBB BB Spain Italy Portugal B Source: Fitch www.fitchratings.com 05/05/2017 3 What are the Drivers or Warning Signs? • Stand-alone credits above the Sovereign • Economic environment already included in company performance Mobile Service Revenue and GDP (GDP %) North GDP South GDP North Revenue (RHS) South Revenue (RHS) (Rev %) 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% 4% 2% 0% -2% -4% -6% -8% Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212 Source: Fitch; employment figures from Eurostat • Generally, our forecasts and ratings reflect protracted anaemic economic recovery prospects • Unlikely prospective, and no past precedent, areas of state interference • Utilities – interference in independence of regulatory tariff setting. • Tax • Liquidity and access to capital • Contagion from local banking system www.fitchratings.com 05/05/2017 4 Liquidity and Access to Capital Portugal CDS Prices EDP PT Portugal bps 1600 1400 1200 1000 800 600 400 200 0 1-11 Spain Repsol Iberdrola Telefonica Spain CDS Prices bps 700 600 500 400 300 200 100 3-11 5-11 7-11 9-11 11-11 1-12 3-12 5-12 7-12 9-12 Source: Bloomberg 0 1-11 3-11 5-11 7-11 9-11 11-11 1-12 3-12 5-12 7-12 9-12 Source: Bloomberg Italy CDS Prices Eni Enel TI Italy • Periphery corporates have accessed bonds totalling USD51bn of EMEA total USD402bn YTD bps 600 500 400 300 200 100 0 1-11 3-11 5-11 7-11 9-11 11-11 1-12 3-12 5-12 7-12 9-12 Source: Bloomberg www.fitchratings.com • Sovereign rating to ‘BBB’ and below can reflect, inter alia, its market access and official programme requirements 05/05/2017 5 What are the Drivers or Warning Signs? • Stand-alone credits above the Sovereign Selected Issuers – Revenue Diversification • Economic environment already Entity included in company performance Greece OTE Sector Current rating Domestic Revenuesª Telecom ‘B-’, Watch Negative Utility ‘BBB+’, Negative Outlook Utility Utility Utility Oil & Gas Industrial Industrial Telecom Utility Telecom ‘A’, Negative Watch ‘BB-‘, Watch Positive ‘BBB+‘, Watch Negative ‘A+’, Stable Outlook ‘BB’, Negative Outlook ‘BBB-‘, Negative Outlook ‘BBB’, Negative Outlook ‘A’, Negative Outlook ‘BB’, Negative Outlook Telecom Utility ‘BBB’, Negative Outlook ‘BBB-’, Negative Outlook Infrastructure Cable Utility Utility Utility Industrial Utility Oil & Gas Telecom ‘B+’, Stable Outlook ‘B’, Positive Outlook ‘A-’, Stable Outlook ‘BBB+‘, Watch Negative ‘BBB+‘, Watch Negative ‘BB-‘, Stable Outlook ‘A-’, Negative Outlook ‘BBB-’, Negative Outlook ‘BBB+’, Negative Outlook Ireland • Unlikely prospective, and no past precedent, of state interference • Liquidity and access to capital • Geographical diversification • By revenue and profits Electricity Supply Board Italy Acea SpA Edison SpA Enel SpA Eni SpA Fiat SpA Finmeccanica SpA Telecom Italia SpA Terna SpA Wind Telecomunicazioni SpA Portugal Portugal Telecom EDP – Energias de Portugal SA Spain Abengoa Cableuropa SA Enagas SA Gas Natural SDG SA Iberdrola SA Obrascon Huarte Lain SA Red Electrica Corporacion Repsol SA b Telefonica SA www.fitchratings.com 05/05/2017 6 What are the Warning Signs? Warning Signs: Sovereign Interference and Contamination • Redenomination (fall in Country Ceiling – existing example of Greece ‘B-’) • Unknown scope and effectiveness of (unlawful) capital control mechanisms, if introduced • Nationalisation • viewed as unlikely scenario • Liquidity Contagion • banking system, dis-orderly sovereign restructuring Real World Actions / War Game Scenarios: • Accessing and refinancing in bond market. Not over-reliant upon domestic banking system linked to sov. • Reducing capex and dividend outflows. Not depositing surplus cash with local banking system. • IPO subsidiary, thereby accessing local money or closer to investor base (Telefonica, OHL) • Re-domicile – Coca-Cola Hellenic relocate from Greece to Switzerland,. FAGE Greece to Luxembourg • Re-list in another jurisdiction – CRH plc www.fitchratings.com 05/05/2017 7 Related Research All relevant Fitch research can be found on our website www.fitchratings.com under the appropriate sector headings The Future of the Eurozone – The Impact on Corporates Scenario: A Euro Redenomination and Corporate Ratings Corporates in the Eurozone Periphery Updated Issuer-Level Forecasts, May 2012 Scenario: Eurozone Shock Case for EMEA Corporates Scenario: Eurozone Corporate Shock Case – FAQ Scenario: Eurozone Corporate ‘War Game’ Exercise www.fitchratings.com 05/05/2017 8 8 Disclaimer Fitch Ratings’ credit ratings rely on factual information received from issuers and other sources. Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings are inherently forward-looking, embody assumptions and predictions that by their nature cannot be verified as facts, and can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. The information in this presentation is provided “as is” without any representation or warranty. A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its agents in connection with a sale of securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM. www.fitchratings.com 05/05/2017 9 New York One State Street Plaza New York, NY 10004 London 30 North Colonnade Canary Wharf London E14 5GN
