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ICAP Credit Risk Conference
Sofia, Bulgaria
December 2, 2010
Emerging vs. Developed Markets
How Corporates have Fared, and
Where are the Real Risks Hiding
Richard Hunter
Group Managing Director, Corporates
Agenda
Emerging Markets vs. Developed Markets
Corporates – How Risky?
What Next?
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: ….?
ICAP Conference, Sofia, December 2010
2
Fitch GDP Forecasts for 2010 Revised Upwards
GDP Growth in 2010 in Major Advanced Economies
September 2010 Revision
April 2010 GEO Forecast
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
US
Euro
Japan
UK
MAEs
Source: Fitch
ICAP Conference, Sofia, December 2010
3
Fitch GDP Forecasts for 2010 Revised Upwards
GDP Growth in 2010 in Brazil, Russia, India, China
12.0
September 2010 Revision
April 2010 GEO Forecast
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
Brazil
Russia
India
China
Source: Fitch
ICAP Conference, Sofia, December 2010
4
Fitch GDP Forecasts for 2010 Revised Upwards
GDP Growth in 2010 in Convergence Countries
September 2010 Revision
April 2010 GEO Forecast
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
Romania
Bulgaria
Czech
Republic
Hungary
Poland
Serbia
Source: Fitch
ICAP Conference, Sofia, December 2010
5
Fiscal Stimulus Starts to be Withdrawn Next Year
General Government Balance (% GDP)
2009
-15.0
2010f
2011f
Italy
Spain
2012f
-13.0
-11.0
-9.0
-7.0
-5.0
-3.0
-1.0
France
Germany
UK
US
Japan
Source: Fitch
ICAP Conference, Sofia, December 2010
6
No Decoupling, But Shift in Credit Quality
GDP Growth, %
World
Advanced Economies
Emerging Market Economies
10.0
8.0
6.0
4.0
2.0
0.0
2007
2008
2009
2010f
2011f
-2.0
-4.0
Source: IMF WEO
ICAP Conference, Sofia, December 2010
7
Central & Eastern Europe in Context
Fitch View on GDP Growth
(%)
CEE
WEU/NA
Bulgaria
4
3
(%)
CEE
WEU/NA
Bulgaria
0
2008
2009
2010f
2011f
-1
2
1
0
-1
-2
-3
-4
Fitch View on Deficit/GDP
-2
2009
2010
2011f
-5
-6
2012f
-3
-4
-5
-6
Source: Fitch Sovereign Comparator
CEE – Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia, Slovenia
ICAP Conference, Sofia, December 2010
8
Rating Impact
Bank Individual Ratings 2007-2010
Developed Markets
Emerging Markets
B
B/C
C
C/D
D
1.1.2007
1.1.2008
1.1.2009
1.1.2010
Simple Average by Issuer Count, not Asset-Weighted
Source: Fitch
ICAP Conference, Sofia, December 2010
9
Fitch Bank Individual Ratings, 2007-2010
Developed Markets
Emerging Markets
(%)
(%)
A
A
A/B
A/B
B
B
B/C
B/C
C
C
C/D
C/D
D
D
D/E
D/E
E
E
1.1.07
1.1.08
1.1.09
Unweighted Issuer Count
Source: Fitch
ICAP Conference, Sofia, December 2010
1.1.10
1.10.10
1.1.07
1.1.08
1.1.09
1.1.10
1.10.10
Unweighted Issuer Count
Source: Fitch
10
Fitch Bank Individual Ratings, 2007-2010
Developed Markets
Emerging Markets
(%)
(%)
A
A
A/B
A/B
B
B
B/C
B/C
C
C
C/D
Major
Bulgarian
D
Banks
D/E
C/D
D
D/E
E
E
1.1.07
1.1.08
1.1.09
Unweighted Issuer Count
Source: Fitch
ICAP Conference, Sofia, December 2010
1.1.10
1.10.10
1.1.07
1.1.08
1.1.09
1.1.10
1.10.10
Unweighted Issuer Count
Source: Fitch
11
Outlooks Leading Rating Actions
Net Rating Changes versus Net Outlook/Watch Changes
Net Actions
Outlook stabilisation
starts, June ‘09
Rating stabilisation
starts, Dec ‘09
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
July
Aug
Sep
15
10
5
0
-5
-10
-15
-20
-25
-30
Net Outlook Changes
Source: Fitch
ICAP Conference, Sofia, December 2010
12
Corporate Downgrade Actions, 2008-2010
Developed Markets
Emerging Markets
0
0
-2
-2
-4
-4
-6
-6
-8
-8
-10
-10
-12
-12
-14
-14
-16
-16
-18
-18
-20
-20
Jan Ma
Se Jan Ma
Se
Jan Ma
Europe, Middle East, Africa, Asia
Source: Fitch
ICAP Conference, Sofia, December 2010
Se
Jan Ma
Se
Jan Ma
Se
Jan Ma
Se
Europe, Middle East, Africa, Asia
Source: Fitch
13
Negative Outlooks – What Happened Next?
Developed Markets
Lowered
Emerging Markets
Stabilised
20
15
20
15
10
5
0
-5 Q108
-10
-15
Lowered
Stabilised
10
5
0
Q408
Q309
-20
-25
-30
Europe, Middle East, Africa, Asia
Source: Fitch
ICAP Conference, Sofia, December 2010
Q210
-5 Q108
-10
-15
-20
Q408
Q309
Q210
-25
-30
Europe, Middle East, Africa, Asia
Source: Fitch
14
Negative Outlooks – What Happened Next?
Cyclical Sectors
Net
Lowered
Non-Cyclical Sectors
Stabilised
Net
20
20
10
10
0
0
-10
-10
-20
-20
-30
-30
-40
Q108
-40
Q408
Q309
Europe, Middle East, Africa, Asia
Source: Fitch
ICAP Conference, Sofia, December 2010
Q210
Q108
Lowered
Q408
Q309
Stabilised
Q210
Europe, Middle East, Africa, Asia
Source: Fitch
15
Quality of Issuance
Emerging Markets
High Yield (Dev. Mkt. <BBB)
Speculative Grade
Investment Grade
BB
B/below
20,000
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
Q109
Q409
Europe, Middle East, Africa, Asia
Source: Fitch
ICAP Conference, Sofia, December 2010
Q310
Q108
Q408
Q309
Europe, Middle East, Africa, Asia
Source: Fitch
16
Directional Fitch Rating Outlooks, 2006-2010
Global Developed
Global Emerging
Negative
Negative
Positive
Emerging EMEA
Positive
Negative
20%
20%
20%
10%
10%
10%
0%
0%
0%
Q406
Q407
Q408
Q409
Q406
Q407
Q408
Q409
Q406
-10%
-10%
-10%
-20%
-20%
-20%
-30%
-30%
-30%
-40%
-40%
-40%
-50%
-50%
-50%
-60%
-60%
-60%
Q407
Positive
Q408
Q409
Corporate Issuer Default Ratings
Source: Fitch
ICAP Conference, Sofia, December 2010
17
Agenda
Emerging Markets vs. Developed Markets
Corporates – How Risky?
What Next?
Fitch Forecasts 2009 to 2011
Sub-Sectors by Cumulative EBITDA Movement 2007 A – 2011 E
EBITDA
(%)
30
Revenue
20
10
0
-10
FBT
Consumer
Transport
Healthcare
Retail
Telco
Other
manuf.
Media
Oil & gas
Nat
resources
Chemicals
Build mats
Tech
-30
Auto
-20
Source: Forecasting EMEA Corporates' Recovery, December 2009
ICAP Conference, Sofia, December 2010
19
Clear
Thinking
Corporate Europe’s Future – in Aggregate
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
Representative sample of Fitch rated universe in EMEA
Source: Company financials; Fitch forecasts
ICAP Conference, Sofia, December 2010
20
Where Next?
ICAP Conference, Sofia, December 2010
21
Clear
Thinking
Fitch Corporate Forecasts
2009 – Not the Massive Correction Expected?
(USDbn)
Aggregate
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2007
2008
2009
2010f
2011f
Representative sample of Fitch rated universe in EMEA
Source: Company financials; Fitch forecasts
ICAP Conference, Sofia, December 2010
22
Clear
Thinking
Fitch Corporate Forecasts
… But Energy & Utilities predominate in top-line increases
Aggregate
RLCP
(USDbn)
Industrials
Infrastructure
TMT
7,000
3000
6,000
2500
5,000
2000
4,000
1500
3,000
1000
2,000
500
1,000
0
0
2007
2008
2009
2010f
2011f
Representative sample of Fitch rated universe in EMEA
Source: Company financials; Fitch forecasts
ICAP Conference, Sofia, December 2010
23
Clear
Thinking
Fitch Corporate Forecasts
… Free Cash Flow Recovers to 2007 Levels…
(USDbn)
Aggregate
150
100
50
0
2007
2008
2009
2010f
2011f
-50
-100
Representative sample of Fitch rated universe in EMEA
Source: Company financials; Fitch forecasts
ICAP Conference, Sofia, December 2010
24
Clear
Thinking
Fitch Corporate Forecasts
… But Again Energy & Utilities are Key…
Aggregate
RLCP
(USDbn)
Industrials
Infrastructure
TMT
150
100
50
0
2007
2008
2009
2010f
2011f
-50
-100
Representative sample of Fitch rated universe in EMEA
Source: Company financials; Fitch forecasts
ICAP Conference, Sofia, December 2010
25
Clear
Thinking
Net Results: Leverage
Non-Critical Rise – Less than One Turn of Cash Flow
(USDbn)
Aggregate
3.5
3.0
2.5
2.0
1.5
1.0
2007
2008
2009
2010f
2011f
Representative sample of Fitch rated universe in EMEA
Source: Company financials; Fitch forecasts
ICAP Conference, Sofia, December 2010
26
Clear
Thinking
Net Results: Leverage
… Pressure Points on Consumer and Energy/Utilities…
Aggregate
RLCP
(USDbn)
Industrials
Infrastructure
TMT
3.5
3.0
2.5
2.0
1.5
1.0
2007
2008
2009
2010f
2011f
Representative sample of Fitch rated universe in EMEA
Source: Company financials; Fitch forecasts
ICAP Conference, Sofia, December 2010
27
Clear
Thinking
Net Results: Interest Cover
In Aggregate, Sustainable and Comfortable Levels
(x)
Aggregate
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2007
2008
2009
2010f
2011f
Representative sample of Fitch rated universe in EMEA
Source: Company financials; Fitch forecasts
ICAP Conference, Sofia, December 2010
28
Clear
Thinking
Net Results: Interest Cover
Add Another 200bps of Funding Cost?
(x)
Aggregate
Stressed
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2007
2008
2009
2010f
2011f
Representative sample of Fitch rated universe in EMEA
Source: Company financials; Fitch forecasts
ICAP Conference, Sofia, December 2010
29
Clear
Thinking
Where Are the Real Risks?
Developed EMEA vs. Emerging EMEA
DM Revenues
EM Revenues (rhs)
(USD)
DM EBITDA
EM EBITDA (rhs)
6,000
5,000
900
5%
7%
750
4,000
600
3,000
450
2,000
1,000
9%
300
150
7%
0
0
2010f
2011f
Growth rates in constant USD terms
Source: Fitch forecasts
ICAP Conference, Sofia, December 2010
30
Where Are the Real Risks? Industrials
Developed EMEA
Revenues
Emerging EMEA
EBITDA
2,000
Revenues
EBITDA
200
1,600
5%
1,200
120
800
80
13%
400
0
11%
160
17%
40
0
2010f
Fitch forecasts as at 1.04.10
Source: Fitch
ICAP Conference, Sofia, December 2010
2011f
2010f
2011f
Fitch forecasts as at 1.04.10
Source: Fitch
31
Where Are the Real Risks? Telecom/Media/Tech
Developed EMEA
Revenues
Emerging EMEA
EBITDA
1,000
Revenues
EBITDA
125
2%
6%
100
750
75
500
2.5%
250
50
5%
25
0
0
2010f
Fitch forecasts as at 1.04.10
Source: Fitch
ICAP Conference, Sofia, December 2010
2011f
2010f
2011f
Fitch forecasts as at 1.04.10
Source: Fitch
32
Where Are the Real Risks? Energy & Utilities
Developed EMEA
Revenues
Emerging EMEA
EBITDA
2,500
Revenues
EBITDA
600
5%
2,000
6%
500
400
1,500
300
1,000
200
500
8%
0
8%
100
0
2010f
Fitch forecasts as at 1.04.10
Source: Fitch
ICAP Conference, Sofia, December 2010
2011f
2010f
2011f
Fitch forecasts as at 1.04.10
Source: Fitch
33
Agenda
Emerging Markets vs. Developed Markets
Corporates – How Risky?
What Next?
Resurgent
Consumption
End of the “Risk
Trade”?
Liquidity “Bubble”
forming for
Corporates
ICAP Conference, Sofia, December 2010
Investor Need for
Yield
2010
Where Did the
Leverage Go?
Capacity Gap,
depressing Business
Investment
35
Other Fitch Concerns?
> Consumer Confidence
> “Zombies!”
> Commodities – Long-run Up, Short-run Down
> Policymaker Shuffle
> “Crowding Out” of Corporate Debt
> Reliance on Banks
ICAP Conference, Sofia, December 2010
36
Bond Markets – Getting a Rating
Clear
Thinking
> 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
ICAP Conference, Sofia, December 2010
37
We Live in the Future, not the Past
Clear
Thinking
> 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
ICAP Conference, Sofia, December 2010
38
“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
ICAP Conference, Sofia, December 2010
39
New Criteria Format
ICAP Conference, Sofia, December 2010
40
Example – Virgin Media
Building Blocks - European Telecoms Companies:
Company-Specific Traits
Sector Risk Profile
Market share &
competitive
intensity
Integrated
network
owner
Financial Profile (Historical where relevant and forecast, mid-points)
Technology
leadership
Geographical
diversification
& absolute
scale
Operates in a
number of
markets.
Large multijurisdictional
operators
FFO adj. leverage (x)
FFO adj. net
leverage (x)
FFO int. cover
(x)
Op. EBITDAR
margin (%)
Pre div FCF/
sales (%)
2.5
2.0
8
c. 35
15
Limited to one
or two
geographies.
Smaller
incumbents
3.0
2.5
6
c. 30
10
Single
geography
4.0
4.0
4
c. 20
0-7
5.0
5.0
3
c. 15
Negative-2
AA
A
 Incumbent operators
BBB
BB
• Cable TV and Altnets
B
Dominant
market positions
>40% + no. 1 or
no. 2 market
position
Operates
and owns
both fixed
and mobile
platforms
Deploying
latest network
upgrades
(FTTH/FttC) +
4g
Smaller
incumbents and
strong market
challengers
20%-40%
Ownership
can be
limited to
single
platform
Slower rollout
of technology
upgrades
Market
challenger
15%-20%
Ownership
often
limited to
single
platform
Selective
network
upgrades
Market
challenger
<15% market
share
Single
platform
and may
not have
ownership
Limited by
scale to
upgrade
Single
geography
General
• Essential service
• Broadly constant demand
• Technology risk
• Regulated licenses and tariffs
• Benefits from economies of
scale
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.
ICAP Conference, Sofia, December 2010
41
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
ICAP Conference, Sofia, December 2010
42
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