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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?
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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: .?
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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
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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
Fitch GDP Forecasts for 2010 Revised Upwards
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
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Fitch GDP Forecasts for 2010 Revised Upwards
-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
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Fiscal Stimulus Starts to be Withdrawn Next Year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
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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
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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
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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
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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
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Fitch Bank Individual Ratings, 2007-2010
Developed Markets Emerging Markets
Unweighted Issuer CountSource: Fitch
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
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Fitch Bank Individual Ratings, 2007-2010
Developed Markets Emerging Markets
Unweighted Issuer CountSource: Fitch
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
MajorRomanian
Banks
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Fitch Negative Corporate Actions, 2008-2010
Developed Markets Emerging Markets
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
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Agenda
Emerging Markets vs. Developed Markets
Corporates How Risky?
What Next?
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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
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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
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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?
Representative sample of Fitch rated universe in EMEASource: Company financials; Fitch forecasts
ClearThinking
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Fitch Corporate Forecasts
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
Representative sample of Fitch rated universe in EMEASource: Company financials; Fitch forecasts
ClearThinking
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Fitch Corporate Forecasts
-100
-50
0
50
100
150
2007 2008 2009 2010f 2011f
Aggregate(USDbn)
Free Cash Flow Recovers to 2007 Levels
Representative sample of Fitch rated universe in EMEASource: Company financials; Fitch forecasts
ClearThinking
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Fitch Corporate Forecasts
-100
-50
0
50
100
150
2007 2008 2009 2010f 2011f
Aggregate Industrials TMTRLCP Infrastructure
(USDbn)
But Again Energy & Utilities are Key
Representative sample of Fitch rated universe in EMEASource: Company financials; Fitch forecasts
ClearThinking
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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
Representative sample of Fitch rated universe in EMEASource: Company financials; Fitch forecasts
ClearThinking
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Net Results: Leverage
1.0
1.5
2.0
2.5
3.0
3.5
2007 2008 2009 2010f 2011f
Aggregate Industrials TMTRLCP Infrastructure
(USDbn)
Pressure Points on Consumer and Energy/Utilities
Representative sample of Fitch rated universe in EMEASource: Company financials; Fitch forecasts
ClearThinking
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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
Representative sample of Fitch rated universe in EMEASource: Company financials; Fitch forecasts
ClearThinking
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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?
Representative sample of Fitch rated universe in EMEASource: Company financials; Fitch forecasts
ClearThinking
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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
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Where Are the Real Risks? Industrials
Developed EMEA Emerging EMEA
Fitch forecasts as at 1.04.10Source: Fitch
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%
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Where Are the Real Risks? Telecom/Media/Tech
Developed EMEA Emerging EMEA
Fitch forecasts as at 1.04.10Source: Fitch
Fitch forecasts as at 1.04.10Source: Fitch
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%
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Where Are the Real Risks? Energy & Utilities
Developed EMEA Emerging EMEA
Fitch forecasts as at 1.04.10Source: Fitch
Fitch forecasts as at 1.04.10Source: Fitch
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
Emerging Markets vs. Developed Markets
Corporates How Risky?
What Next?
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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
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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
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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
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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
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New Criteria Format
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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
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The Fitch Group Fitch Ratings Algorithmics Fitch Solutions
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