Global Credit Outlook

8/6/2019 Global Credit Outlook

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Credit Market Research

The Credit OutlookJanuary 2011 2

taxbacked credit remains resilient and that while the incidence of default mayincrease from very low historical levels, defaults will continue to be isolatedsituations.

The interaction between sovereign debt concerns and financial sector stabilitycontinues to be a key source of fragility in peripheral EAMS. This tight linkageproduces rating actions for banks and structured finance transactions in tandemwith rating changes for the sovereign. This has been illustrated by the downgradesof Greece, Spain, Ireland and Portugal.

Real estate remains a weakness, negatively affecting banks and structured finance.The legacy of overleveraged commercial real estate and in the US residential realestate as well financed during the peak 20052008 period is a continuing sourceof stress, as well as an impediment to broader economic recovery.

Corporates have largely weathered the crisis well. They have resized and arebuilding cash piles based on accessing external funds and internal cost cuts. Creditrisks include increased M&A activity as well as even more shareholderbiasedactions such as share buybacks and dividend increases. Capex is starting to expandmoderately again following severe restraint in the last two years.

EMs are thriving overall or at least managing to stage an impressive recovery fromthe credit crisis. This diagnosis applies to sovereigns as well as other asset classes.

FundingA number of market factors as well as impending regulation are expected to affectaccess to funding in several sectors in 2011.

In the low interest rate environment, bond markets are continuing to display highappetite for corporate risk, allowing highyield (HY) borrowers to benefit byterming out and swapping bonds for loans.

US HY bond demand should continue from both traditional and nontraditional bondinvestors as returns from other fixedincome products are less compelling anddefaults remain low. HY funds should see similar inflows up until the point interestrates begin to rise. In Europe, Fitch anticipates continuing supply in the absence ofspeculative grade loan markets as banks and CLOs remain constrained with legacyexposures and costs associated with regulatory capital and funding. However, thelimited European HY investor base will continue to be discerning. Best positioned arewell regarded, frequent borrowers in favoured sectors with high singleB ratings andabove. More marginal corporate and leveraged buyout borrowers with low singleBratings attempting to refinance bank loan maturities will be less favoured.

In the US public finance area, negative news flow regarding the creditworthiness of certainmunicipalities has led to jitters in this otherwise stable and large market. While Fitch

believes such fears are overdone, the large proportion of retail investors in this asset classmay be a weakness should defaults occur, even if only in isolated cases.

In the euro zone, peripheral economies are likely to continue to struggle to securecontinuous market access. However, overall, Fitch expects net borrowing by centralgovernments across Europe to fall in 2011 as governments implement budget cuts.

After several years of severely curtailed funding ability, the structured financemarket is gradually reopening. Nevertheless, refinancing remains difficult for manystructured finance segments, including CMBS.

For banks, the many different regulatory initiatives for introducing various forms ofbailin debt at senior as well as subordinated levels are raising the level ofcomplexity for investors. Funding remains a concern for banks in Ireland, Greece,

Portugal and the Spanish cajas, which continue to depend on lines from the ECB andthe private repo market. There are still some question marks around how easilybanks will be able to replace governmentguaranteed debt as this falls due,although there is investor appetite for covered bonds. Fitch considers that most

HY and EM issuance continued support fromyieldseeking investors

Euro zone peripherysovereigns struggle for

market access

US public finance retailinvestor reliance may turnfrom strength tosensitivity

Structured finance gradual reopening offunding markets

Banks face substantialrefinancing needs,including governmentguaranteed debt


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northern European banks will not have difficulties with funding in 2011, given theirdeeper domestic investment markets, including for covered bonds, and moreinterest from international capital markets.

Solvency II, which will impact insurance companies capital requirements, may leadto a reallocation of assets towards those with lower risk profile potentiallyincreasing government bond exposure to the detriment of corporate bonds.

Outlooks Overview

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Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410

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Banks InsuranceCorporates SFSovereign InfrastructureUS Publ Fin Intl Publ FinAggregate (ex.SF, Infrastructure, Intl Publ Fin)

(% of portfolio)

Negative Outlooks

Source: Fitch

On the whole, outlooks have continued to stabilise across most sectors, reflectingboth improved creditworthiness and downgrade action, with subsequent ratingstabilisation. Outlooks on insurance ratings have stabilised over recent quarters asasset risk is increasingly captured within the current rating levels. However, a smallnumber of other market segments remain challenged.

In structured finance, the rating outlook for US residential mortgagebackedsecurities (RMBS) is negative due to the continued falls in house prices, the largeinventory and lengthening loan resolution timelines. The magnitude and severity ofnegative rating actions in 2011 are expected to decline substantially, comparedwith prior years levels.

Developed market sovereigns, notably peripheral EAMS, are struggling with large

fiscal financing needs against the backdrop of fragile and volatile funding markets.Many subnationals, both in Europe and the US, share these problems. The ratingoutlook for these issuers is negative in certain segments.

Outlooks mostly stabilising Challenges remain for US

RMBS, developed marketsovereigns and certainpublic finance segments

Solvency II may lead toinsurance company assetreallocation


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Key Risks In Europe, failure to meet

fiscal targets andprolonged economicstagnation

In the US, failure to put

public finances onto asustainable path over themedium term

Excessive and volatilecapital inflows posemediumterm risks tomacrofinancial stability inEMs

Sovereign

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Sov DM Sov EM Sov all

(% of portfolio)

Sovereign Negative Outlooks

Source: Fitch

AA14%

B17%

A13%

AAA16%

BB20%

BB B19%

Sovereign Rating Distribution as at31 Dec 2010

Source: Fitch

CCC & below1%

Developed Markets Europe It is likely that there will be further episodes of extreme market volatility and a riskthat more EAMS may be forced to seek financial support from the EU and IMF.Moreover, the dramatic deterioration in market access and funding conditions forseveral EAMS is eroding their sovereign credit fundamentals as the cost of borrowingapproaches levels that in the longrun are not consistent with public debtstabilisation in light of mediumterm growth prospects.

Until economic adjustment and recovery are secure, especially in the socalledperipheral EAMS, confidence in the sustainability of public finances and bankasset quality will remain fragile and credit profiles will deteriorate, placing furtherdownward pressure on bank and sovereign ratings.While the epicentre of the 20072009 financial crisis was in the US and UK, andpublic finances in both have deteriorated dramatically, it is sovereigncreditworthiness of EAMS that has been subjected to the greatest market scrutinyand financing pressure. This focus is driven by concerns that in the absence ofmonetary and exchange rate flexibility, the peripheral economies will stagnate asthey struggle to regain competitiveness and close large current account imbalances.

Fears over euro sovereign creditworthiness and the viability of the euro area havebeen compounded by worries about the health of some European banks, notably inthe periphery and those that remain reliant on wholesale and especially ECBfunding. The crisis is systemic inasmuch as it reflects concerns about the viability of

the euro as well as countryspecific vulnerabilities.The policy response has been extensive, yet has not so far succeeded in preventingepisodes of extreme market volatility and runs on sovereigns and banks, as theIrish crisis starkly illustrated. In part this is due to a widespread belief that only fullfiscal, economic and political union will ensure the survival of the euro, which inFitchs opinion is neither being pursued nor likely.

The fragility of confidence in the euro area also reflects miscommunication andmixed messages from European policymakers, especially with respect to euro areasovereign debt default and perceived regulatory forbearance and lack of fulldisclosure of losses by some banks. Until further clarity is provided on themechanics of the European Stability Mechanism (ESM), concerns aboutpolicymakers intentions regarding private creditors will continue to weigh oninvestor confidence.

Outlook Trend

Negative for developedmarket sovereigns Positive for EM sovereigns


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North America In the US, fears of a doubledip recession have receded considerably with theextension of tax relief agreed in December 201 and the QE2 in November. High

frequency activity has also turned more positive, reflecting strength in privateconsumption and corporate profitability.

QE2 was launched in November 2010 in an effort to further stimulate the economyand reduce the risk of deflation. It follows an initial round of asset purchases inNovember 2008 and consists of the purchase by the US Federal Reserve (Fed) of afurther USD600bn of longterm treasury securities by the end of Q211.

Together with ultralow interest rates, and in the absence of a credible fiscalconsolidation strategy, QE2 risks undermining confidence in the US dollar andraising inflation expectations. It also poses challenges for the rest of the world,including fastgrowing developing and emerging economies. Nonetheless, the risksassociated with the current stance of monetary policy, including QE2, must be setagainst the risk of deflation and the fragile economic recovery and highunemployment and seen in the context of the Feds dual mandate of price stabilityand maximum employment.

The impact of QE2 on the real economy is very uncertain, but it is likely that other things being equal it implies higher asset prices (and hence household andcorporate net worth) and a weaker US dollar, boosting net exports. Ever sinceChairman Bernanke first hinted at QE2 in a speech made on 27 August 2010,equities have responded positively. In contrast, in the period preceding his speechand beginning from the joint EUIMF rescue of Greece on 23 April 2010, the S&P hadfallen by 12%.

On 17 December 2010, President Barack Obama signed into law a number of taxrelief measures, including extending Bushera tax cuts, reauthorising insurance

benefits to the unemployed, and extending credit for lowincome families. Themeasures also included a new payroll tax reduction for workers and a number ofchild, education and investment tax incentives aimed at boosting growth. Accordingto Congressional Budget Office estimates, the measures equate to a USD858bnpackage. This is equivalent to around 2.6% of GDP for both 2011 and 2012, with thetotal cost of the package (from 2011 until 2020) equivalent to around 5.5% of GDP.

Fitch expects the new plan to add around 0.6% to GDP growth in 2011 and 2012.Despite the boost to the nearterm economic outlook of the additional fiscalstimulus, it does imply both budget deficits and debt will be higher than previouslyprojected. The US fiscal metrics will be the worst of any AAArated sovereign.However, the extraordinary fundamental credit strengths associated with theflexibility and dynamism of the US economy, as well as the US dollars status as the

global reserve currency, imply a higher debt tolerance than for other AAA andhighly rated sovereigns. Nonetheless, the absence of a credible mediumterm fiscalconsolidation strategy is eroding confidence in the sustainability of public financesand commitment to low inflation, with potentially adverse implications for the USsovereign credit standing.

Emerging Markets The contrast in economic and credit outlook between EMs and socalled advancedeconomy sovereigns is becoming more pronounced. EM economies are estimated tohave grown at almost three times the rate of advanced economies in 2010 andpublic finances are on a broadly improving trend.

Capital flows to fastgrowing EMs, especially in Asia and Latin America, do posepolicy challenges, especially with respect to monetary and exchange rate policiesand the potential for price and asset market inflation. Despite these challenges andthe uncertain economic and sovereign credit prospects for advanced economies,the outlook for EM sovereign credit ratings is broadly positive.


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Public Finance US

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Rev. supported Tax supported All(% of portfolio)

US Public Finance NegativeOutlooks

Source: Fitch

AA51.3%

B0.9%

A24.1%

AAA13.8%

BB2.1%

BBB7.6%

US Public Finance RatingDistribution as at 31 Dec 2010

Source: Fitch

CCC &below0.3%

The US public finance outlook for 2011 is characterised by limited economic and taxrevenue recovery, the scheduled phasingout of federal fiscal relief for the states,and the likelihood of continued state aid cuts and local property tax base weakness.As in 2010, local and state governments (LSGs) across the country will face varyingdegrees of fiscal and economic pressure as the prospects for recovery differ widelyacross the sector. In light of this pressure, Fitch anticipates downgrades to continueto outpace upgrades, although ratings stability will continue to dominate the sector.

Governments reliant upon property taxes will be negatively affected by continuedfalls in real estate values. Declining state funding and/or the shifting ofresponsibilities from states to local governments will present an additional burden

to municipal budgets, many of which are already strained by the withdrawal offederal stimulus money this year. With falling revenues, reserve levels will continueto decline. An increasing proportion of LSGs will report minimal or even negativeamounts of operating fund balance at the end of 2011, which may lead to increasedborrowing for cash flow, although Fitch believes most will continue to retain atleast a moderate level of reserves.

Costcutting efforts will focus on wage cuts. Labour contracts with low or zero wageincreases have become increasingly common, and this trend will likely intensify in2011. In addition, healthcare plan design changes and the introduction or extensionof employee costsharing will be important tools for LSGs seeking to cut costs.Temporary and permanent layoff activity is also likely to continue. However,pensionrelated fixed costs will continue to play a prominent, and sometimes

increasing, role in municipal budgets.US LSGs are currently experiencing financial stress at a level not seen for decades.However, Fitch believes that, as a class of debt, municipal taxbacked creditremains strong and that while the incidence of default may increase from very lowhistorical levels, defaults will continue to be isolated situations. In addition, LSGshave captive tax bases and strong control over taxing and spending, and bondsecurity for general obligation and dedicated tax bonds is very strong. Further, dueto market norms of 20 to 30year principal amortisation, large bullet maturitiesand consequent refinancing risk are limited.

Debt levels for these issuers are relatively low, with annual debt servicerepresenting a relatively small part of budgets. The taxsupported debt of anaverage state is equal to just 3% 4% of personal income, and local debt roughly 3%5% of property value. Debt service is generally less than 10% of a LSGs budget, andin many cases much less.

Key Risks Continued real estate

downturn Increasing pensionrelated

fixed costs Downshifting of state

responsibilities to localgovernments

Outlook Trend Mostly stable, but

negative in a smallnumber of revenuesupported sectors


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Public Finance International

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Q409 Q110 Q210 Q310 Q410

(Quarter/year)

(% of portfolio)

Intl. Public Finance NegativeOutlooks

Source: Fitch

AA36%

CCC &below

1% AAA15%

BB15%

BBB9%

A18%

B6%

International Public Finance Rating Distribution as at

31 Dec 2010

Source: Fitch

EMEA Fitch expects negative rating actions to continue to dominate in 2011, primarily indeveloped markets in Europe, as local and regional governments (LRGs) try to copewith a more challenging fiscal environment. This reflects the frailty of the globaleconomic recovery and expectations that many subnationals will continue to find itdifficult to rein in operating expenditure sufficiently or quickly enough. In addition,measures to maintain capital expenditure both as anticyclical measures and as aninstrument to modernise the local economy will mean that overall expenditure willremain high.

Rating actions should begin to stabilise in 2012 as fiscal revenues begin to normalise.

On the other hand, the budgetary performance of subnationals in Europeanemerging markets economies, such as Russia and Turkey, have not been as badlyaffected, as they have traditionally reported higher operating margins andaccumulated considerable reserves from surpluses in previous years. In fact, Fitchhas taken positive rating actions in LRGs in these countries.

On the revenue side, Fitch expects fairly flat recovery of tax receipts. The globaldownturn has had a profound negative impact on tax collections. LRGs in westernEurope experienced a sharp decline in fiscal revenues during 2009 and 2010 but thedecline is expected to level off in 2011. Stillweak consumer confidence and highlevels of unemployment will particularly hit VAT and personal income tax receiptsrespectively. Propertyrelated tax revenues are also expected to be depressed bothas a result of the halt in construction activities in many countries and the continued

decline in house prices which has contributed to a contraction in the tax base.As in the past couple of years, Fitch expects the deterioration in budgetaryperformance to be most pronounced for those subnationals that also have very rigidoperating expenditure and a high proportion of current to total expenditure. ManyLRGs have been unable to cut back total expenditure sufficiently and quicklyenough to compensate for the reduction in revenues. For example, for Spanish andItalian regions which are responsible both for the delivery of education and healthcare, the combination of reduced revenues and inability to cut expenditure quicklyenough have contributed to considerable deficits. Although measures have beenintroduced to curb the rise in expenditure (with cutbacks in many nonessentialservices and in some countries cuts in public servant salaries), these have not beensufficient to compensate for the revenue loss.

The increasing budget deficits have resulted in sharp funding requirements. Withaccess to the capital markets more challenging and expensive for some LRGs,funding has needed to be obtained on a shortterm basis, thereby increasingrefinancing risks.

Outlook Trend

Negative for developedmarket subnationals Stable to positive for EM

subnationals

Key Risks Slowerthanexpected

fiscal recovery Inability to cut back

operating expendituresufficiently

Continued difficulties inaccessing longtermfinancing


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Key Risks

Uncertain timing andframework to establishfunding stability for banksand sovereigns inperipheral euro zone

Return of normalisedemployment levels may beprolonged, whichpressures already stressedretail exposures in somemarkets and restrains newbusiness activity in thecommercial sectors

Tighter regulatory regimesyet to be fully defined andbank response to such notfully developed in terms ofform and substance

Potential negative ratingsimpact on banks atSupport Rating Floors frommomentum to implementresolution legislation

Financial Institutions

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EMEA North America EM All

(% of portfolio)

Financial Institutions NegativeOutlooks

Source: Fitch

CCC &below

2% AA12%

AAA1%

BB10%

BB B29%

A34%

B12%

Financial Institutions RatingDistribution as at 31 Dec 2010

Source: Fitch

Developed Europe There are divergent trends in European banks. On balance, the credit outlook forbanks in the region is stable, but around a quarter of bank Issuer Default Ratings(IDRs) are on Negative Outlook. The unsettled situations in Ireland, Greece,Portugal and to some extent Spain are likely to dominate rating actions in early2011. Banks in these countries and troubled banks elsewhere in Europe are facingdifficulties accessing traditional sources of market funding. Banks have becomedependent on government programmes and especially on the ECB.

The financial positions of most banks in northern Europe and Italy and the largerSpanish banks are either stable or improving. Northern European banks were hit bythe crisis earlier than their southern European peers, largely because of exposuresto structured products and central and eastern Europe. Domestic European assetquality in northern Europe outside the UK and Ireland has held up relatively well.These banks probably have the worst behind them. However, generally stabilisedstandalone positions are balanced by growing political and social momentum toensure that taxpayers money is not called on next time around to support banks.

Notable progress is being made to enact bank resolution legislation. Fitch ratesaround a quarter of banks in the region at their Support Rating Floors. MostOutlooks on these ratings are Stable, reflecting the agencys view that governmentswill continue to support banks senior creditors in full at least until the bankingcrisis in Europe subsides. Implementation of resolution schemes is moving inparallel with regulatory pressure, most notably from Basel III, to strengthen capitaland liquidity buffers to ensure that the likely need for state support reduces.

North America The financial performance of US banks should continue to show improvement,adding a stronger foundation to a stable rating outlook. Concerns still persistrelated to unsettled conditions in residential real estate and funding and liquiditymarkets which, while improving, remain below historical norms. Fitch believes thebanks possess the financial resources to withstand further deterioration in realestate. Challenges to meet new standards set by financial reform legislation will besignificant for many banks and choices made to respond to the new landscape willbe important in determining the new financial performance norms for US banks.

Emerging Markets The rating outlook for emerging market (EM) banks remains a bright spot on the

global banking landscape. Challenges and concerns centre on areas such as the EMoperations of banks based in developed markets that may be overly reliant on theformer as a source of growth and profits. Also, eastern Europe may feel increaseddrag from problems in the euro zone.

Outlook Trend Peripheral euro zone

banks and Spanish cajasunder most direct andimmediate pressure

Other major marketsexpected to maintain slowtrek to stability, with riskof multinotch downgrades


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InsuranceOutlooks on insurance ratings have stabilised over recent quarters as asset risk isincreasingly captured within the current rating levels. In recent stress tests relatedto sovereign asset exposure, issuers rated by Fitch demonstrated resilience toextreme scenarios.

Since mid2008, the global portfolio has experienced heavy downgrade activity, ledby the US life insurance sector. The agency has downgraded 36 out of 55 ratedgroups one or more times since September 2008, most by one or two notches. Thepercentage of Negative Outlooks dropped further in early 2011 as nine US healthinsurance groups were affirmed and moved to Stable Outlook following analysisrelated to healthcare reform risk. Insurers are also contending with a variety ofcomplex regulatory issues, including the introduction of Solvency II.

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EMEA North America All(% of portfolio)

Insurance Negative Outlooks

Source: Fitch

AA12%

AAA1%

BB3%

BBB40%

A43%

B1%

Insurance Rating Distribution

as at 31 Dec 2010

Source: Fitch

Life Improvement in asset values and financial market liquidity has led to a significantdrop in unrealised investment losses. Total asset losses since the beginning of thecredit crisis are now expected to approach but remain within Fitchs stress analysis.Favourable 2010 earnings trends are expected to continue into this year, but willlag precrisis levels due to lower interest rates and steps taken to reduceinvestment portfolio risk. Other positive steps taken include lessening reliance oninstitutional funding sources and revamping risk mitigation programmes. The USsectors large inforce variable annuity business is likely to be a nearterm drag onprofitability. In Europe, the main challenge for life insurers is coping with the lowinterest rate environment, given the levels of guaranteed crediting rates.

NonLife While profit fundamentals and traditional cyclical factors are less favourable thanin recent years, they are adequately captured in current ratings. Investment marketrecovery and improved underwriting performance have returned capital to precrisis levels, following material reductions in 2008. In many European countries, theweak premium rate environment for motor insurance continues to be a drag onearnings. Issuers are seeking to address this issue through widespread premium rateincreases, but tangible earnings improvement is unlikely to occur until late2011/2012. In the US, these challenges include expected premium declines due toprice competition, high runrate accident year loss ratios and low investment yields.

Reinsurance Good earnings stability and strong capital are unlikely to be impeded by keychallenges, subject to normal catastrophe experience. Reinsurers proved to be oneof the most resilient of all insurance sectors during the financial crisis. However,that resilience has resulted in more competitive conditions. Pressures are mountingfrom softening premium rates, reduced demand and lowinterest rates.

Outlook Trend

Continued stabilisationexpected in 2011, albeitpotentially at slower pacethan recent quarters

Key Risks Commercial real estate

asset losses Interest rate risk Nonlife pricing and

reserving


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CorporatesCorporate credit trends in 2011 should remain on the same trajectory as in 2010,with modest economic growth, improving operating profiles and good liquidityoffsetting a number of stillweak macroeconomic factors.

As the risk of a doubledip recession recedes, companyspecific event risk will actas the primary catalyst for downgrades. Downgrades are expected to occur largelyfrom selfinflicted shareholderfriendly actions or at the initiation of externalactivists/acquirers. Although the pendulum will continue to swing away fromdebtholders to shareholders, dividends and share repurchases will be largelysourced from existing cash and excess cash flow rather than from releveraging.

Global macro concerns remain tangible enough that most corporate issues remaincautious in their outlooks on spending and investment. Companies with emergingmarket exposure continue to see growth from this portfolio. Overall, few companiessee boom times ahead.

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EMEA North America EM All

(% of portfolio)

Corporate Negative Outlooks

Source: Fitch

CCC &below

1%AA3%

BB17%

B BB

41%

A24%

B14%

Corporates Rating Distributionas at 31 Dec 2010

Source: Fitch

EMEA Macroeconomic uncertainty includes the spending cuts being undertaken by manyEuropean governments these will not have an effect until well into 2011 orpossibly 2012, and ongoing sovereign debt concerns provide further risks. Risksarising from companies own actions, such as M&A, share buybacks and increasedcapex are highest in pharmaceuticals, mining and, to a lesser extent, telecoms.

US Margin expansion will be more limited than the gains seen in 2010 due to higher raw

material costs, costcreep from the draconian cost cuts taken at the depth of thecredit crisis, and a moderation of the inventory restocking gains achieved in early2010. 2011 may provide some indication of whether there is pentup demand amongUS consumers that were forced to deleverage during the crisis, or whether a newfrugality mindset is taking hold ie, higher savings and lower spending thatcould have longerterm demand and growth implications.

High Yield Booming appetite for HY debt in the capital markets during 2010 has helped reducethe refinancing risk in this segment globally. In Europe, Fitch anticipates continuingsupply in the absence of speculative grade loan markets as banks and CLOs remainconstrained with legacy exposures and costs associated with regulatory capital andfunding. In the US, modest GDP growth, improving corporate fundamentals and alower trending default rate is expected to continue to drive strong issuance. Bondforloan takeouts are expected to continue to drive a majority of refinancingvolume, in particular secured bond volume, in 2011.

Outlook Trend EMEA outlooks stabilising

and turning mildly positivein 2011

US: radual im rovement

Key Risks The temptations of

corporates holding cash Financial market crisis

impact on confidence andliquidity

Opportunities and threatsof a fragile recovery


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Global Infrastructure and Project FinanceThe dominant trend for energy infrastructure globally in 2011 is stable because, ingeneral, energy infrastructure assets are well insulated from the uncertainties ofthe global economic outlook. This follows a stabilisation of Outlooks in 2010following significant downgrades in 20082009. The outlook for transportationinfrastructure assets varies across the globe; it is stablenegative in the US andEMEA and stable in AsiaPacific and Latin America. The negative trend inwesternEurope is concentrated in the whole business securitisation portfolio, whereNegative Outlooks increased in 2010 after 2009 Negative Rating Watches wereresolved by downgrades with credits remaining on Negative Outlook.

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NA WE EM All

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Source: Fitch

Infrastructure and Project FinanceNegative Outlooks

B3%

A35%

BBB24%

BB8%

AAA5%

AA24%

CCC &below

1%

Infrastructure and Project Finance Rating Distribution as at31 Dec 2010

Source: Fitch

North America and Latin America US energy and industrial credits that rely substantially on power purchase agreementsare relatively insulated from demand and price changes in the energy market.However, merchant power facilities that are not fully contracted and continue to beexposed to low gas prices and low dispatch remain on Negative Outlook.

Performance of transportation assets are highly correlated to changes in the macroenvironment and also regional pressures. The decline in demand at transportationfacilities subsided in late 2010, and demand is increasing in many cases. Creditsremaining on Negative Outlook in the transportation sector are predominantly thosewith a debt structure requiring increased volumes and/or tariffs to maintain aleverage profile consistent with the rating.

Latin American economies have overall recovered quickly. Transportation creditshave stabilised, with many experiencing growth. Power credits typically benefitfrom power purchase agreements and favourable regulatory schemes insulatingthem more from price and demand shifts and continue to perform as expected.

EMEA Transportation is the sector with greatest exposure to economic conditions and ithas experienced significant reductions in air, port and road traffic since 2008. Welllocated and mature European road networks located in countries with a high degreeof economic resilience, have stable outlooks while standalone concessions or thoseemploying an aggressive financing strategy have negative outlooks. Large hubairports with proven demand history and supportive regulation will performsignificantly better than smaller, regional or niche facilities.

The large oil and gas projects in Fitchs portfolio (notably liquefied natural gas andoil production) tend to be mega scale projects initiated at times of much lower oilprices. They have breakeven levels in the USD20/ to USD30/barrel range and aretherefore very resilient to commodity price movements. Renewable power projectscontinue to be tested by resource (wind) availability in certain cases.

Key Risks Tepid economic growth Cost and availability of

refinancing Fuel prices

Outlook Trend Generally stable energy

and social infrastructure Stable to negative for

transportation and wholebusiness securitisations


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Structured FinanceThe general trend in structured finance is for continued outlook stabilisation.

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Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410

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EMEA North America All(% of portfolio)

Structured Finance NegativeOutlooks

AAA27%

A12%

BBB15%

CCC &below12%

B12%

BB10% AA

12%

Structured Finance RatingDistribution as at 31 Dec 2010

The data in the chart reflects numbers of tranches giving bias to thinner subordinated tranches at the expense ofthicker senior tranches. Subordinated tranches are more likely to have negative outlooks, while senior ones are morelikely to have a stable outlook. Further, senior tranches are usually paid down first which will increase theproportion of subordinated tranches. Ratings which have moved into distressed categories are not assigned outlooks.This also impacts the relative proportions of outlooks.Source: Fitch

US Slowly recovering economic conditions in the US will support gradual improvementin asset performance in the coming quarters, and the rating outlook for structuredfinance overall is stable. However, the profile of Outlooks as depicted in the abovegraph, which is based on the number of classes, appears negative due to the

tendency of more numerous thinner subordinated classes (representing a smallershare of the capital structure) to have a Negative Outlook compared to thickersenior classes, as well as the large volume of RMBS tranches in the dataset.

Improvements will be limited, however, given the low rate of GDP growth andpersistent high unemployment. Also, access to capital remains constrained for somesectors, as US financial markets have not structurally adjusted to broad changes inregulatory requirements and accounting rules introduced in 2010. Finally, thelegacy of overleveraged real estate financed during the peak 20052008 periodcontinues to be a source of stress in related sectors, and an impediment to strongereconomic recovery.

The Outlook for ABS ratings continues to be Stable, with a few exceptions. Positivemomentum in asset performance trends is expected to continue for credit card andauto ABS sectors, despite pressure on consumers from high unemployment levels.New issuance continues particularly in autorelated asset classes and recenttransactions have been characterised by more disciplined loan origination practicesand higher credit enhancement levels. Privatesector student loan transactionsremain an area of relative weakness, with generally Negative rating Outlooks.

Rating Outlooks of RMBS reflect expectations of a further 10% decline in housingprices nationally before stabilising. The large shadow inventory of distressed andunsold properties, combined with lengthening loan resolution timelines, willcontinue to pressure performance. Fitchs Outlook for prime, AltA and subprimeRMBS ratings remains primarily Negative. However, the magnitude and severity ofnegative rating actions in 2011 are expected to decline substantially, comparedwith prior years levels. The impact of negative equity on borrower performanceremains a key variable in 2011.CMBS rating Outlooks reflect an expectation of further increases in loandelinquency rates in 2011, as high leverage and weak assetspecific attributes

Outlook Trend

Negative for US RMBS,predominantly stable forEMEA RMBS

Stable for the mostseniorCMBS classes, less so forsubordinated

Global ABS generallystable

Key Risks Higher unemployment

than anticipated, risk ofdouble dip recession

Impact of negative equityon residential mortgageborrowers

Impact of austeritymeasures on performance


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pressure loan performance. At the same time, however, commercial propertymarket fundamentals have shown signs of stabilisation, and this is expected tocontinue. The gradual return of liquidity to the CMBS market is a further positive

development. Fitch expects greater rating stability in 2011, particularly forinvestmentgrade CMBS, once a current review of 20062008 transactions iscompleted.

In structured credit, asset performance in corporate loan transactions has benefitedfrom a resurgence of liquidity to the HY loan sector, which has offset negativeeffects of weak economic growth. Rating Outlooks for high investment grade classesof middlemarket and highyield corporate loan transactions continue to be Stable.Ratings on trust preferred CDOs, which incorporate prospective stress to bank trustpreferred obligations, continue to have a Negative Outlook due to volatilityassociated with distress in regional banks.

EMEA Sovereign event risk continues to be an area of concern within the euro zone,particularly for Greece, Ireland and Portugal. Indeed, the downgrade of IrelandsLongTerm IDR from A+ to BBB+ in December 2010 led to the imposition of arating cap of AA on all structured finance transactions and the subsequentdowngrade of several transactions. However, Outlooks generally across EMEAtransactions have continued to show a stabilising trend, driven by anticipatedperformance improvement across several sectors.

Continued stabilisation of performance has been seen across several jurisdictions inRMBS and the outlook for the sector overall is stable. The reduction in arrears,defaults and loss levels in 2010 is expected to be maintained in the coming yearacross UK, Dutch and German prime RMBS. While delinquencies rose steeply overthe last two years in Spain, they have shown signs of stabilisation, a trend thatFitch expects to continue in 2011. However, concerns remain for Ireland, Greeceand Portugal and some UK nonperforming transactions, particularly thoseconcentrated on peak 2006/2007 vintages.

The number of Negative Outlooks across CMBS decreased through 2010, followingsignificant downgrade actions over the preceding several months. The decrease isalso driven partly by downgrades to distressed levels where Outlooks are no longerapplied. The sector remains divided across Europe between prime markets, whichhave shown signs of recovery, and nonprime markets, which remain depressed.Refinance risk remains significant for the peak in maturities in 2013, givencontinued moribund lending in the sector.

Within the ABS sector, concerns remain for the Spanish consumer transactions;while delinquencies have begun to stabilise, the trend might be reversed by sluggisheconomic recovery and longterm unemployment. However, previous rating actionhas reflected these risks and further negative action should therefore be limited.Further rating action may also be seen across the Greek consumer assets as theimpact of the fiscal tightening programme takes effect. UK credit card transactionsare showing improved performance following an earlier significant deteriorationand German auto transactions continued to exhibit stable trends.

Fitch expects continued stability in structured credit senior note ratings, drivenmainly by an expected improvement in the performance of SME CDOs. This reflectsthe benefit of transaction deleveraging and improved recovery expectations.Refinancing risk is still a concern for leveraged loan CLOs which outweighs positivetrends in performance.


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Appendix : Select Related ResearchSovereign Sovereign Review and Outlook: Contrasting Credit Outlook (December 2010)Global Economic Outlook: No Major Surprises in Global Recovery (December 2010)Contagion, Support and Eurozone Sovereign Ratings (December 2010)

Public Finance Keys to Uncovering General Government Bond ProjectRelated Default Risks (Essentiality, Affordability,and Feasibility) (December 2010)High Demand/Diminished Supply (Changing Dynamics of Bank Facilities Market Heighten the Risk Profilefor Some Municipal Borrowers) (December 2010)U.S. State and Local Government Bond Credit Quality: More Sparks than Fire (November 2010)Commentary on California Nonprofit Hospitals (October 2010)Impact of Commercial Real Estate on Municipal Credit (August 2010)

Financial Institutions 2011 Outlook: US Banks (January 2011)2011 Outlook Emerging Market Banks: Different Crises Different Recoveries (December 2010)

Major Japanese Banks: H1FYE11 Review (December 2010)Resolution Regimes and the Future of Bank Support (December 2010)Global Bank Rating Trends Q310 (December 2010)CDS Spreads and Default Risk (U.S. BrokerDealers) (November 2010)

Insurance 2011 Outlook: U.S. Property/Casualty Insurance (December 2010)UK NonLife Insurance: Profitable Underwriting Remains Key to Strong Earnings (October 2010)Italian Insurance Outlook (October 2010)French Insurance Outlook (October 2010Japanese Life Insurance Sector: Calm After the Storm (September 2010)Global Reinsurance Review and Outlook (September 2010)

Corporates European Leveraged Credit 2010 Review (January 2011)

2011 Outlook: US Corporate Credit (January 2011)U.S. Leveraged Finance Stats Quarterly ThirdQuarter 2010 (December 2010)2011 Outlook: EMEA Corporates (December 2010)No Bubble in Corporate Bonds: Cash Pile Pressures Rise, Continued Caution Expected (November 2010)High M&A Risk in Western Europe Telecoms Sector (November 2010)EMEA Corporate Capital Expenditure: Emerging Markets Lead Return to Growth in 2010 (October 2010)

Global Infrastructure and Project Finance Energy Infrastructure Outlook 2011 (December 2010)Rating Criteria for Airports (November 2010)Brazilian Infrastructure Sector: Balancing Opportunity and Risk (November 2010)Rating Indian BOTAnnuity Road Project Bonds (October 2010)

Structured Finance EMEA Structured Finance Snapshot October 2010 (October 2010)Sovereign Risk Inseparable from Eurozone Securitisation Ratings (September 2010)European CMBS Loan Maturity Bulletin January 2011 (January 2011)Credit Card Movers & Shakers (UK) Q310 Performance (December 2010)US Structured Finance 2011 Outlook: Turning the Corner (December 2010)Originator Support for Spanish Structured Finance Transactions (November 2010)US Structured Finance Snapshot: October 2010 (October 2010)Auto ABS Losses in Reverse (November 2010)U.S. Credit Card ABS Tear Sheet (December 2010)U.S. RMBS: Still Under A Shadow (November 2010)

Credit Market Research European Senior Fixed Income Investor Survey Q410 (December 2010)Global Corporate Rating Activity Update Third Quarter 2010 (December 2010)US Corporate Bond Market: A Review of Third Quarter 2010 Rating and Issuance Activity (October 2010)US High Yield Default Update (October 2010)

Macro Credit Research The Impact of a China Slowdown on Global Credit Quality (November 2010)
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Documents

Global Credit Outlook