How Eurozone sovereign downgrades could impact corporate1 ratings

John Hatton, Group Credit Officer

EMEA Corporates

October 2012

(1) Non-financial Corporates

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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)

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Existing PortfolioImplications of Sharp Deterioration in Eurozone Sovereign Ratingsa

Likely Maximum Foreign Currency IDR for Corporates Which are…Sovereign FC IDR Primarily Domestic Level of Diversification Globally DiversifiedA+ Potentially no impact Potentially no impact

A- A+ Potentially no impact

BBB A- AA

BB+ BBB A+

BB- BBB- A-

B+ BB+ BBB+a

B- BB BBB-a

CCC BB BBB-a

RD BB 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

Spanish Corps Spanish "Cap"

Italian Corps Italian "Cap"

Portuguese Corps Portuguese "Cap"

Corporate Headroom Below Ceilings Each Marker Represents a Corporate IDR

Source: Fitch

AAA

AA

A

BBB

BB

B

SpainItaly

Portugal

• 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+’)

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• Stand-alone credits above the Sovereign• Economic environment already included in company performance

• 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

What are the Drivers or Warning Signs?

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Liquidity and Access to Capital

• Periphery corporates have accessed bonds totalling USD51bn of EMEA total USD402bn YTD

• Sovereign rating to ‘BBB’ and below can reflect, inter alia, its market access and official programme requirements

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• Stand-alone credits above the Sovereign

• Economic environment already included in company performance

• Unlikely prospective, and no past precedent, of state interference

• Liquidity and access to capital

• Geographical diversification• By revenue and profits

What are the Drivers or Warning Signs?

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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

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Related Research

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

All relevant Fitch research can be found on our website www.fitchratings.com under the

appropriate sector headings

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Disclaimer

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