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Credit Trends:

Europe Is Home To 35% Of Global Fallen Angels And 10 Potential Additions


Global Fixed Income Research: Diane Vazza, Managing Director, New York (1) 212-438-2760; diane.vazza@standardandpoors.com Gregg Moskowitz, Associate Director, New York (1) 212-438-1838; gregg.moskowitz@standardandpoors.com Research Contributors: Nivritti Mishra Richhariya, CRISIL Global Analytical Center, an S&P affiliate, Mumbai Debabrata Das, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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Credit Trends:

Europe Is Home To 35% Of Global Fallen Angels And 10 Potential Additions


As of Sept. 9, 2013, six out of 17 global fallen angels were based in Europe. We define fallen angels as issuers that Standard & Poor's Ratings Services downgrades to speculative grade ('BB+' and lower) from investment grade ('BBB-' and higher). The European-based fallen angels account for $36.7 billion (27.7 billion) in rated debt. The fallen angels count is significantly lower than it was at this same time a year ago (35 entities). The potential fallen angels--issuers rated 'BBB-' with either negative outlooks or ratings on CreditWatch with negative implications--count currently totals 52 entities. Of these, 10 are from Europe (19% of the total) and 18 are based in the U.S. These European entities account for $1.0184 trillion (768.1 billion) in rated debt. The ratings on all 10 issuers have negative outlooks. Four of the 10 entities are constituents of the S&P Europe 350 Index. The large proportion of European fallen angels is supported by economic concerns about the eurozone's financial stability. As countries face elevated unemployment and increased borrowing costs, industries that are aligned with sovereign finances can feel the squeeze. Thus it is not surprising that the European bank sector has the highest number of fallen angels, with four (see table 1).
Table 1

Fallen Angels By Sector


Sector Aerospace/defense Bank Consumer products Fallen angels 1 4 1

Data as of Sept. 9, 2013. Source: Standard & Poor's Global Fixed Income Research.

By country, Italy leads Europe with four fallen angels, followed by the Netherlands and Switzerland with one entity each (see table 2). The Kingdom of Spain is also a potential fallen angel. On Oct. 10, 2012, Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the Kingdom of Spain to 'BBB-' from 'BBB+'. At the same time, we lowered the short-term sovereign credit rating to 'A-3' from 'A-2'. The outlook on the long-term rating is negative. The downgrade reflects our view of mounting risks to Spain's public finances, due to rising economic and political pressures (For more information see "Research Update: Spain Ratings Lowered To 'BBB-/A-3' On Mounting Economic And Political Risks; Outlook Negative," published Oct. 10, 2012).
Table 2

Fallen Angels By Country


Country Italy Netherlands Switzerland Fallen angels 4 1 1

Data as of Sept. 9, 2013. Source: Standard & Poor's Global Fixed Income Research.

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Credit Trends: Europe Is Home To 35% Of Global Fallen Angels And 10 Potential Additions

We closely monitor issuers as they descend to fallen angels status in order to evaluate the size of the rating's transitional movements. In terms of becoming a fallen angel, the smallest incremental downward movement would be from the lowest investment-grade rating to the highest speculative-grade rating (from 'BBB-' to 'BB+'). This transition bucket captures 100% of Europe's fallen angels.
Table 3

Global Fallen Angels In 2013*


Date 8/6/2013 7/31/2013 7/29/2013 7/24/2013 7/24/2013 7/17/2013 7/8/2013 6/25/2013 6/21/2013 6/17/2013 6/10/2013 5/28/2013 4/12/2013 3/28/2013 3/22/2013 2/13/2013 1/18/2013 Issuer Al Baraka Banking Group B.S.C. ADT Corp. (The) BMC Software Inc. FGA Capital SpA Iccrea Holding SpA AngloGold Ashanti Ltd. Softbank Corp. NLMK OJSC SNS REAAL N.V. Heinz (H.J.) Co. CommonWealth REIT China Metallurgical Group Corp. RONA Inc. Barry Callebaut AG Banco Popolare Societa Cooperativa SCRL Sagicor Life Inc. Finmeccanica SpA To BB+ BBB+ BB+ BB+ BB+ BB+ BB+ BB+ BBBB+ BB+ BB+ BB+ BB+ BB+ BB+ From BBBBBBBBB+ BBBBBBBBBBBB BBBBBBBBB+ BBBBBBBBBBBBBBBBBBBBBSector Bank High technology High technology Bank Bank Metals, mining, and steel High technology Metals, mining, and steel Bank Consumer products Homebuilders/real estate cos. Capital goods Retail/restaurants Consumer products Bank Insurance Aerospace and defense Country Bahrain U.S. U.S. Italy Italy South Africa Japan Russia Netherlands U.S. U.S. China Canada Switzerland Italy Barbados Italy Debt (Mil. $) 400 3,200 5,744 1,978 2,628 2,750 3,287 2,600 6,564 16,373 2,760 500 564 772 18,667 150 6,127

*Data as of Sep. 9, 2013. Denotes Standard & Poors equity-based index constituent. Source: Standard & Poor's Global Fixed Income Research.

Table 4

'BBB-' Rated Issuers On CreditWatch With Negative Implications


Debt (Mil. $) Index 21,868 S&P 500 Business risk Financial risk

Subsector Finance companies

Issuer SLM Corp.*

Country U.S.

Rationale The CreditWatch placement follows SLM Corp.'s announcement that it will separate the company into two entities, an education loan management business and a consumer banking business via a spin-off transaction. According to Standard & Poor's, the separation of SLM will likely be credit negative for nondeposit debtholders, the degree of which we will determine as SLM provides more information to the market on the strategy of the education loan management business, including its dividend and share repurchase policy.

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Table 4

'BBB-' Rated Issuers On CreditWatch With Negative Implications (cont.)


Transportation International Lease Finance Corp. U.S. 20,550 Satisfactory Significant The CreditWatch placement follows the American International Group Inc.'s, parent of ILFC, confirmation of discussions to sell a 90% stake in ILFC to a group of five Chinese investors. Standard & Poor's will assess the company's operating and financial strategy under the potential new owners to resolve the CreditWatch listing. The Credit Watch placement follows Yanzhou's proposed onshore bond issuance, which will increase its leverage. According to Standard & Poor's, the company's proposed debt issuance will significantly increase its leverage. This is in marked contrast to our earlier estimate that Yanzhou would control its borrowings and reduce its leverage by lowering costs, cutting back capital expenditure, and raising equity.

Metals, mining, and steel

Yanzhou Coal Mining Co. Ltd.

China

1,000

Fair

Significant

*Denotes Standard & Poor's equity-based index constitutent. Data as of Sep. 9, 2013. Source: Standard & Poors Global Fixed Income Research.

Table 5

'BBB-' Rated Issuers With Negative Outlooks


Subsector Bank Issuer Axis Bank Ltd. Country India Debt (Mil. $) Index 1,625 Business risk Financial risk Rationale The negative outlooks on the 11 financial institutions including Axis Bank reflect the outlook on India's sovereign credit rating. The negative outlook on the long-term rating on BBVA mirrors that on the long-term sovereign rating of Spain, which was lowered to 'BBB-' from 'BBB+'. Standard & Poor's could lower the rating on the bank following a further downgrade of Spain. The negative outlook reflects the possibility of a downgrade in the next 12 months if S&P decides that management can't reverse the current negative trend in the bank's overall financial performance and/or if the bank's business stability is affected. The negative outlooks on the 11 financial institutions including the Bank of India reflect the outlook on India's sovereign credit rating.

Bank

Banco Bilbao Vizcaya Argentaria S.A.*

Spain

34,765 S&P Europe 350

Bank

Banco Votorantim S.A. (Votorantim Participacoes S.A.)

Brazil

1,600

Bank

Bank of India

India

2,075

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Credit Trends: Europe Is Home To 35% Of Global Fallen Angels And 10 Potential Additions

Table 5

'BBB-' Rated Issuers With Negative Outlooks (cont.)


Bank First Horizon National Corp.* U.S. 2,100 S&P Mid-Cap 400 The negative outlook reflects the possibility that First Horizon National Corp. (FHN) may not rebuild its capital to strong enough levels to counterbalance its higher-than-peers' risk profile. In particular, FHN may not increase its Standard & Poor's risk-adjusted capital ratio above 10%, a level which S&P considers strong under their criteria. The outlook revision followed FHN's announcement that it will incur pretax charges of approximately $272 million in second-quarter 2012, resulting in a substantial quarterly net loss. The negative outlook reflects the fact that South Africa's sovereign credit rating was downgraded to 'BBB' from 'BBB+' on Oct. 12, 2012. The negative outlook on the Government Development Bank for Puerto Rico reflects Standard & Poor's outlook on the rating for the Commonwealth of Puerto Rico. Standard & Poor's views Puerto Rico as a weak economy with a potential to delay structurally balanced budgets beyond fiscal 2013. The negative outlook on HDFC Bank reflects the long-term sovereign rating on India. The negative outlooks on the 11 financial institutions including ICICI Bank reflect the outlook on India's sovereign credit rating. The negative outlooks on the 11 financial institutions including IDBI Bank reflect the outlook on India's sovereign credit rating. The negative outlooks on the 11 financial institutions including Indian Overseas Bank reflect the outlook on India's sovereign credit rating. The outlook revision indicates the company's potential weakening in profitability and key credit metrics in 2013, and it is expected that Janus will continue to experience net asset outflows over the next year. If net asset outflows were to accelerate and financial performance were to further deteriorate, it could result in materially weaker credit metrics, leading to a lower rating.

Bank

FirstRand Ltd.

South Africa

650

Bank

Government Development Bank for Puerto Rico

U.S.

5,435

Bank

HDFC Bank Ltd. ICICI Bank Ltd.

India

500

Bank

India

6,320

Bank

IDBI Bank Ltd.

India

1,770

Bank

Indian Overseas Bank

India

1,000

Bank

Janus Capital Group Inc.*

U.S.

1,648 S&P Mid-Cap 400

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Credit Trends: Europe Is Home To 35% Of Global Fallen Angels And 10 Potential Additions

Table 5

'BBB-' Rated Issuers With Negative Outlooks (cont.)


Bank NIBC Bank N.V. Netherlands 2,738 The negative outlook reflects the possibility that S&P could lower the rating on the bank if they were to take a more negative view of the economic environment in which Dutch institutions operate, in the absence of offsetting bank-specific considerations. Standard & Poor's observes a weakening economic backdrop in The Netherlands, in conjunction with incremental deterioration in the European economic outlook. The outlook reflects Standard & Poor's view of the risk that the strengthening in the bank's capital position, as measured by the risk-adjusted capital ratio, may be slower or more limited than they anticipate. On Jan 24, 2013, we removed the ratings from CreditWatch to outlook negative, when we placed them with negative implications on June 2012. The rating action on Oriental Bank following the acquisition of BBVA PR in December 2012 has improved Oriental's competitive market position, loan diversification, and funding profile. The negative outlook indicates the potential for a deterioration in loan performance, the weak local economy, and integration risks. We could lower the rating if its loan performance deteriorates further and integration challenges arise or if our projection for capital ratios declines substantially. The negative outlook on Santander BanCorp reflects the outlook on its parent, Banco Santander S.A., which, in turn, reflects the outlook on the sovereign ratings on Spain. The rating downgrade followed Spain's downgrade to 'BBB-' from 'BBB+' with a negative outlook on the long-term rating on Oct. 10, 2012. The negative outlooks on the 11 financial institutions including State Bank of India reflects the outlook on India's sovereign credit rating. Also, Standard & Poor's revised the stand-alone credit profile of SBI to 'bbb-' from 'bbb' based on their anticipation of the bank's weak asset quality performance.

Bank

Oriental Bank U.S. (OFG Bancorp)

50

Bank

Santander BanCorp. (Banco Santander S.A.) Santander Consumer Finance S.A. (Banco Santander S.A.) State Bank of India

U.S.

325

Bank

Spain

2,173

Bank

India

6,241

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Table 5

'BBB-' Rated Issuers With Negative Outlooks (cont.)


Bank Syndicate Bank India 1,000 The negative outlooks on the 11 financial institutions including Syndicate Bank reflect the outlook on India's sovereign credit rating. The negative outlooks on the 11 financial institutions including Union Bank of India reflect the outlook on India's sovereign credit rating. Also, Standard & Poor's revised the stand-alone credit profile of UBI to 'bb+' from 'bbb-' based on their anticipation of the banks' weak asset quality performance. The negative outlook reflects the possibility that Standard & Poor's could lower the ratings on Unione di Banche Italiane Scpa, if they anticipate situations like deteriorating economic and operating conditions, or feel that the company's capital position has weakened because of higher economic risk or because of higher-than-expected pressures on the bank's profitability. Satisfactory Intermediate The negative outlook reflects the possibility of a downgrade if continued subdued activity in the company's infrastructure and metal segments continue to hamper its profitability and cash flow generation. Harsco Corp. continues to face difficult market conditions in two of its major businesses, and its credit metrics remain weaker than expected. The negative outlook reflects Standard & Poor's expectation that the company's operating performance will continue to be weak and leverage will be above 3.5x, unless the company reduces its debt levels. The negative outlook reflects S&P's opinion that EBITDA contribution from the company's various acquisitions and capital investments may not sufficiently lead to better credit measures over their outlook horizon, meaning credit measures may remain weaker than expected beyond fiscal 2013.

Bank

Union Bank of India

India

1,271

Bank

Unione di Banche Italiane Scpa

Italy

9,426

Capital goods

Harsco Corp.*

U.S.

850 S&P Mid-cap 400

Consumer products

Avon Products Inc.*

U.S.

2,850 S&P 500

Satisfactory

Significant

Consumer products

Land O'Lakes Inc.

U.S.

966

Satisfactory

Significant

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Table 5

'BBB-' Rated Issuers With Negative Outlooks (cont.)


Financial institutions CaixaBank S.A. (Caja de Ahorros y Pensiones de Barcelona) Spain 10,632 The negative outlook primarily reflects that on Spain. It also reflects Standard & Poor's view that the difficult economic and operating conditions in Spain could lead to a deterioration of Caixabank's SACP. The negative outlook on parent company la Caixa mirrors that on Caixabank. Also, on Nov. 27, 2012, the Caixabank's announced that the governing committee of the Fondo de Reestructuracin Ordenada Bancaria (FROB) has accepted its offer to acquire all of the shares the FROB holds in Banco de Valencia (BdV) for a total consideration of 1. Satisfactory Intermediate The outlook revision follows the delay of financial reporting requirements due to accounting improprieties. The negative outlook reflects Standard & Poor's expectation that they could lower the rating if Tech Data does not achieve compliance by Oct. 31, or obtain additional waivers. The outlook revision reflects Standard & Poor's view that Argo has a strong business as well as financial risk profile as per their revised insurance criteria. The negative outlook also indicates that the companys management faces execution risks related to achieving its plans to improve the group's operating performance. The negative outlook reflects Standard & Poor's view that Maiden's growth could deteriorate its capital adequacy under revised insurance criteria. We believe the company is unable to maintain sustainable redundancies at the 'A' level according to our capital model. Strong Significant The negative outlook reflects Standard & Poor's expectation that the company wil continue to post lower-than-anticipated credit measures because of continuing weakness in aluminum prices. Its operating performance and credit metrics remain weaker than expected. The negative outlook reflects the possibility of a downgrade if CSN continues to maintain its current high debt ratios due to sluggish global steel demand and lower iron ore volumes.

High technology

Tech Data Corp.*

U.S.

350 S&P Mid-Cap 400

Insurance

Argo Group US, Inc. (Argo Group International Holdings Ltd.)

U.S.

160

Insurance

Maiden Holdings Ltd.

Bermuda

358

Metals/mining/steel

Alcoa Inc.*

U.S.

7,557 S&P 500

Metals/mining/steel

Companhia Siderurgica Nacional (CSN)*

Brazil

3,050 S&P LatAm 40

Satisfactory

Significant

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Table 5

'BBB-' Rated Issuers With Negative Outlooks (cont.)


Metals/mining/steel MMC Norilsk Nickel OJSC Russia 1,500 Satisfactory Intermediate The negative outlook reflects Standard & Poor's view that the Norilsk Nickels new shareholder agreement with aggressive dividend distribution may lead to an increase in the future debt of the company. Uncertainties related to the conflict between the shareholders could also put pressure on the rating. The negative outlook reflects Standard & Poor's view that the company's rating will remain under pressure due to weaker financials and liquidity. Declining silver prices and rising costs could lead Volcan to post weaker results. The negative outlook reflects the uncertainties regarding the timing and proceeds from planned asset sales, and Standard & Poor's view that the company's credit metrics could remain weak for the rating over the medium term. The outlook revision reflects the potential for Newfield's funds from operations to debt ratio to deteriorate from current levels and remain below our downgrade threshold of 30% over the medium term. The negative outlook on ONGC reflects the outlook on the sovereign credit rating on India and the company's sensitivity to government intervention. The rating outlook is negative, reflecting the company's weak credit protection measures and the uncertainties surrounding its Macondo-related liability exposure. Standard & Poor's could lower the rating if Transocean is unable to restore the ratio of fund from operations to debt to more than 25% by the end of 2013. Transocean has completed the acquisition of Aker Drilling ASA through the combination of cash and assumed debt, which has weakened the company's financial profile at a time of soft operating performance.

Metals/mining/steel

Volcan Compania Minera S.A.A.

Peru

600

Fair

Intermediate

Oil and gas exploration and production

Newfield Exploration Co.*

U.S.

3,050 S&P 500

Satisfactory

Intermediate

Oil and gas exploration and production

Oil and Natural Gas Corp. Ltd.

India

800

Strong

Modest

Oil and gas exploration and production

Transocean Inc.

U.S.

6,250

Strong

Significant

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Table 5

'BBB-' Rated Issuers With Negative Outlooks (cont.)


Retail Sobeys Inc. (Empire Co. Ltd.) Canada 1,489 Satisfactory Significant The outlook revision reflects the possibility of a sharp increase in Sobeys debt leverage, after the company announced its acquisition of Canada Safeway Inc. The negative outlook reflects the possibility of a downgrade within 18-24 months of the transaction, if the company is unable to reduce its leverage. The negative outlook reflects Standard & Poor's view that they could lower the rating if the fiscal and current account deficits do not narrow significantly and sustainably, social pressures escalate to a degree that they jeopardize political stability or impede coherent reforms, or economic performance is materially harmed by a weakening external economic environment. The negative outlook on the long-term rating reflects Standard & Poor's view of the significant risks to Spain's economic growth and budgetary performance, and the lack of a clear direction in eurozone policy. The negative outlook reflects that we could lower the ratings over the next two years if household debt forgiveness substantially worsens Iceland's fiscal ratios or weakens our assessment of the effectiveness and predictability of policymaking. The outlook revision reflects S&P's view of the at least a one-in-three likelihood of a sovereign ratings downgrade within the next 24 months if the country's external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow in a weakened political setting. Also, India's budget for fiscal 2013-2014 had no rating impact on S&P sovereign credit rating on India. Satisfactory Intermediate The negative outlook reflects the likelihood that Standard & Poor's will lower the long-term rating on MegaFon if they conclude that its corporate governance practices and financial policies could weaken its credit quality.

Sovereign

Kingdom of Morocco

Morocco

5,092

Sovereign

Kingdom of Spain

Spain

902,773

Sovereign

Republic of Iceland

Iceland

6,968

Sovereign

Republic of India

India

4,630

Telecommunications

MegaFon OJSC

Russia

300

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Credit Trends: Europe Is Home To 35% Of Global Fallen Angels And 10 Potential Additions

Table 5

'BBB-' Rated Issuers With Negative Outlooks (cont.)


Telecommunications Telecom Italia SpA* Italy 44,573 S&P Europe 350 Satisfactory Significant The negative outlook reflects the possibility that Standard & Poor's could lower the long-term rating by one notch within the next 12 months if the Telecom Italia group's operating performance continues to weaken further and its fully adjusted debt-to-EBITDA ratio exceeds levels aligned with the rating category. The negative outlook indicates a one-third or greater possibility of a downgrade over the next 12 months, reflecting the risk that competitive pressure at U.S. Cellular could intensify beyond Standard & Poor's base case, resulting in increased subscriber losses and depressed wireless EBITDA service margins. The company's recent acquisition of cable operator Baja Broadband LLC for $267.5 million highlights its diversification strategy at TDS Telecom. Standard & Poor's assumes that the company will pursue this strategy in conjunction with its low-2x leverage threshold, and largely fund future acquisitions with cash balances and asset sale proceeds. The negative outlook reflects Standard & Poor's view that FirstGroup's financial risk metrics may not recover to a level that they consider commensurate with the 'BBB-' rating in 2013 and may not recover to levels in the following year. Notwithstanding, continued weak economic conditions and high fuel prices, Standard & Poor's anticipates that FirstGroup will be able to restore the profitability of its core U.K. and U.S. bus operations. The negative outlook reflects Standard & Poor's view that Post NL might be unable to maintain its credit metrics due to the structural volume decline in The Netherlands' mail market. Also difficult operating conditions stemming from the weak economic outlook put pressure on the company's profitability. The outlook revision follows the downgrade of parent SNC-Lavalin Group Inc. to 'BBB' from 'BBB+' by Standard & Poor's. We believe that the parent continues to have the willingness and capacity to support AltaLink's capital program.

Telecommunications

Telephone and Data Systems Inc.*

U.S.

1,521 S&P Mid-Cap 400

Fair

Modest

Transportation

FirstGroup PLC*

U.K.

2,227 S&P Europe 350

Satisfactory

Significant

Transportation

PostNL N.V.*

Netherlands

2,087 S&P Europe 350

Satisfactory

Significant

Utility

AltaLink Investments L.P.

Canada

2,186

Excellent

Aggressive

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Table 5

'BBB-' Rated Issuers With Negative Outlooks (cont.)


Utility Colbun S.A. Chile 500 Satisfactory Significant The negative outlook reflects the possibility that Standard & Poor's could lower the rating if Colbun's 2013 and 2014 cash flow generation and key financial ratios do not reach levels aligned with the rating category. The outlook revision primarily reflected Colbun's weakening financial performance and the delay in the start-up of the Angostura hydro plant. The negative on outlook Energy Partnership (Gas) Pty Ltd. reflects continuing weak metrics and potential delay in Multinet's financial profile improvement relative to our expectations. The negative outlook on MEP reflects our expectation that the company's cash flow could be pressured over time due to sustained compression in basis differentials, which heightens recontracting risk in 2019. The negative outlook on Power Grid is consistent with the sovereign's credit rating outlook, and reflects Power Grid's sensitivity to government intervention. The weak credit quality of the company's customers and the country and macroeconomic risk associated with India offset the company's overall credit profile. We could downgrade Power Grid if we lower the sovereign credit rating or ongoing government support declines.

Utility

Energy Partnership (Gas) Pty Ltd. (DUET Group)

Australia

726

Excellent

Aggressive

Utility

Midcontinent Express Pipeline LLC

U.S.

800

Strong

Significant

Utility

Power Grid Corp. of India Ltd.

India

500

Satisfactory

Significant

*Denotes Standard & Poor's equity-based index constitutent. Data as of Sep. 9, 2013. Source: Standard & Poors Global Fixed Income Research.

Note: References to Europe exclude countries from the EEMEA region (Eastern Europe, the Middle East, and Africa).

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