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Standard & Poor’s Corporate Ratings Methodology and Rating Trends
Presentation à l’AF2I
Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright © 2011 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.
Oct. 24, 2012
Blaise Ganguin, Practice Leader EMEA Corporates
Patrice Cochelin, Analytical Manager EMEA Telecoms & Technology
Our Presence
2.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
Mexico City, Mexico
U.S.:Multiple Offices
Toronto, Canada
India:
Moscow, Russia
Madrid, Spain
Paris, France
London, U.K.
Stockholm, Sweden
Tokyo, Japan
Seoul, South Korea
Milan, Italy
Frankfurt, Germany
Global Footprint: 32 Locations, 23 with Rating Serv ices Analytical Staff
China Multiple Offices
Dubai, UAE
Kuala Lumpur, Malaysia
Tel Aviv, Israel
Istanbul, Turkey*
Taipei, Taiwan
• Beijing• Hangzhou• Hong Kong • Shanghai
Warsaw, Poland
3.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
Buenos Aires, Argentina
Santiago, ChileAffiliate: Feller Rate
Sao Paulo, Brazil
India: Multiple Offices
Johannesburg, South Africa
MelbourneSydney
Jakarta, IndonesiaAffiliate: PEFINDO
Singapore
Kuala Lumpur, MalaysiaAffiliate: RAM
*Business Development office, opened September 2011
• Boston, MA• Centennial, CO• Chicago, IL• Dallas, TX• New York, NY• San Francisco, CA• Washington, DC
• Ahmedabad• Bangalore• Chennai• Hyderabad• Kolkata• Mumbai• New Delhi• Pune
Australia:Multiple Offices
In Europe we operate from 7 locations (Total Rating Employees)
47786
4427
4.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
104
3934
5.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
Ratings Definitions
6.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
What a credit rating is and what it is not
What it is:
� Forward-looking opinions about relative credit risk, i.e., the creditworthiness of an entity or its securities that …
� … strive to be globally comparable across sectors
And what it is not:
� Investment advice, a recommendation to purchase, sell or hold securities, or a comment as to market price or suitability for an investor
� a measure of liquidity or market value
� a way of defining “good” or “bad”
7.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
� Incorporate views on relative likelihood of default that …
� refer to the timely payment of interest and principal and …
� … are applied to entities and securities
For S&P Ratings Services Internal Use Only
� a way of defining “good” or “bad” companies, or a direct assessment of corporate governance
� an audit of the company or its auditors
� a guarantee of credit quality or of future credit risk
Long-Term Ratings
The ABC Of Our Rating Scale
Global Corporate Ratings Distribution
8.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
Global Corporate Average Cumulative Default Rates 1 981-2010
20%
40%
60%
Over 5 years, the global corporate default rate for investment grade companies was 1%, compared with 17% for speculative grade com panies
9.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
9.
12 3 4 5
6 7 8 9 10 11 12 13 14 15
AAAAAA
BBBBBBCCC/C 0%
20%
Years
Source: Standard & Poor's Global Fixed Income Research
IG
NIG
Ratings Direction: Ratings Are Actively Monitored
Outlook• Given to all long term
Issuer ratings• Assesses the potential
direction of a rating over the next 2 years (for investment grade credits)
• Given to all long term Issuer ratings
• Assesses the potential direction of a rating over the next 2 years (for investment grade credits)
CreditWatch•Possible near-term change (usually within 90 days)•Focuses on identifiable events and/or short-term trends that deviate from
•Possible near-term change (usually within 90 days)•Focuses on identifiable events and/or short-term trends that deviate from
10.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
investment grade credits) or over 1 year (for speculative grade credits)
• 4 Options: Positive, Negative, Stable, Developing
• Not necessarily a precursor to a rating change or Creditwatch
investment grade credits) or over 1 year (for speculative grade credits)
• 4 Options: Positive, Negative, Stable, Developing
• Not necessarily a precursor to a rating change or Creditwatch
trends that deviate from expectations•Additional information necessary•3 options :
•Positive•Negative•Developing
trends that deviate from expectations•Additional information necessary•3 options :
•Positive•Negative•Developing
Issue Ratings
Issuer Rating
� Capacity and willingness of a
corporation/group to meet financial
commitments
� Our opinion of risk of default
Recovery Rating
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� Estimate of nominal recovery of
principal
� Our opinion of risk of loss given
default
Issue Rating
� Combination of risk of default and
loss given default
Corporate Rating Methodology
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Analytical Framework: Corporate Issuers
RATING
Business Risk
• Country Risk
• Industry Characteristics
• Company / Competitive Position
• Profitability / Peer Group Comparison
• Management & Strategy
Excellent
Strong
Satisfactory
Fair
Weak
Vulnerable
13.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
RATING
FinancialRisk
• Accounting
• Governance, Risk Tolerance, Financial Policy
• Cash Flow Adequacy
• Capital Structure, Asset Protection
• Liquidity / Short Term Factors
Minimal
Modest
Intermediate
Significant
Aggressive
Highly Leveraged
Relationship Between Business And Financial Risk Pr ofiles
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The ratings indicated in each cell of the matrix are the midpoints of a range of likely rating possibilities. This range would ordinarily span one notch above and below the indicated rating.
The ratings indicated in each cell of the matrix are the midpoints of a range of likely rating possibilities. This range would ordinarily span one notch above and below the indicated rating.
Linking of Business Risk to Financial Risk
Investment Grade Ratings
Investment Grade Ratings
High Yield Ratings
High Yield Ratings
Business anchors rating outcome, with financial risk shading up or
Financial factors
key determinant
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shading up or down
key determinant
Relative Weights of Business and Financial Factors Vary Through Spectrum
Rating Government-Related Entities (GREs)
1 - GRE's stand-alone credit profile (SACP)
2 - Opinion of the likelihood of extraordinary government support
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3 - SACP vs. Government's rating
GRE rating
Adjustments to Financial Statements
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Why We Adjust Financial Statements: Three Key Objec tives
• Transparency – To provide issuers, market participants and regulators with full access on financial data, adjustments and ratios which underpin our rating decisions.
• Consistency – To set up a common, unique framework to perform credit analysis across various GAAPs and accounting options.
18.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
credit analysis across various GAAPs and accounting options.
• Comparability – To enable comparisons across corporates, while financing modes and accounting choices frequently differ.
Why We Adjust Financial Statements: Limitations
• Adjusted figures do not supersede unadjusted ones
• Adjustments often need to change to adapt to evolving realities
• Financial adjustments are used to assess probability of default, not recovery expectations
19.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
• We do not question the validity of companies’ financial reporting under applicable GAAPs, nor the audit process
Adjusting Financial Statements: France Telecom Examp le
As of Dec. 31, 2011. € Mil. DebtShareholders'
equity Revenues EBITDAOperating
incomeInterest
expense
Cash flow from
operationsDividends
paid
Reported 41,931.0 27,573.0 45,277.0 15,674.0 7,948.0 2,066.0 12,879.0 4,386.0 S&P adjustments
Operating leases 5,430.6 -- -- 265.7 265.7 265.7 1,012.8 --
Debt-like hybrids 210.0 (210.0) -- -- -- -- -- --Postretirement benefit obligations 1,219.2 -- -- (24.0) (24.0) 30.0 (53.0) --Surplus cash and near cash investments (7,544.0) -- -- -- -- -- -- --Share-based compensation expense -- -- -- 21.0 -- -- -- --Deconsolidation / Consolidation 525.0 -- -- 673.3 673.3 -- -- --
Asset retirement obligations 421.9 -- -- -- -- -- -- --
20.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
Reclassification of working-capital cash flow changes -- -- -- -- -- -- (369.0) --
Minority interests -- 2,019.0 -- -- -- -- -- --
Debt - Other (2,756.0) -- -- -- -- -- -- --EBITDA - Gain/(Loss) on disposals of PP&E -- -- -- (246.0) (246.0) -- -- --
EBITDA - Other -- -- -- (680.0) (680.0) -- -- --
EBIT - Other -- -- -- -- (97.0) -- -- --
Total adjustments (2,493.4) 1,809.0 0.0 10.0 (108.0) 295.7 590.7 0.0 Standard & Poor's adjusted
amounts Debt Equity Revenues EBITDA EBIT
Interest expense
Funds from operations
Dividends paid
Adjusted 39,437.6 29,382.0 45,277.0 15,684.0 7,840.0 2,361.7 13,469.7 4,386.0
Rating Trends
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European Economic Outlook• The outlook for Europe continues to worsen - we now expect zero GDP growth for
the eurozone in 2013.
• The growth gap between north and south remains acut e and we expect even deeper contractions in Italy and Spain than we anti cipated a month ago.
• Germany remains the bright point, but even here the re is pressure and we have trimmed our 2013 GDP forecast to +1.2% from +1.4%.
• If there is some good news it is that we view the E CB’s OMT scheme as a bold measure that should lessen the likelihood of a euro breakup.
22.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
Base Case : The Eurozone’s New Recession—Confirmed
While the European economic
outlook remains somewhat
uneven across countries, in
most economies it generally
remains dominated by the
deleveraging process occurring
almost simultaneously in the
public sector, the private
sector, and the financial sector.
Meanwhile, softness in
emerging markets now appears
more protracted than we
23.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
more protracted than we
initially anticipated.
Those factors lead us to
forecast another year of very
weak growth in 2013 in France
and in the
U.K., and further declines in
output in Italy and Spain.
Recession Deepening in GIPS; Unemployment Pressured
Real GDP (%yy)
Source: Eurostat, Thomson Reuters Datastream Sep 2012
-8
-6
-4
-2
0
2
4
6
06 07 08 09 10 11 12
Germany France Italy Spain
Unemployment rates (%)
Source: Eurostat, Thomson Reuters Datastream Sep 2012
4
8
12
16
20
24
28
06 07 08 09 10 11 12
Germany France Italy Spain
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• Eurozone bordering recession.
• Q2 GDP -0.2% qq; -0.5% yy
• Investment (-0.8% qq); consumer exp. (-0.2% qq); net exports (+0.2% qq)
• Outlook: weak periphery and falling net exports to weigh on Q3 growth
• Eurozone unemployment reached a record 11.3% in July; 2.4m jobs lost since Apr 2011
• High cost of redundancy suggests hidden unemployment is high, negatively impacting productivity
Source: Eurostat, Thomson Reuters Datastream Sep 2012 Source: Eurostat, Thomson Reuters Datastream Sep 2012
Eurozone PMI in Recession; German Confidence ErodesConsumer Confidence Survey (Balance SA)
Source: Eurostat Sep 2012
-50
-40
-30
-20
-10
0
10
20
06 07 08 09 10 11 12
Germany France UK Italy
Manufacturing Purchasing Managers Index
Source: Markit Sep 2012
30
35
40
45
50
55
60
65
70
06 07 08 09 10 11 12
Germany France UK Italy
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• Eurozone Aug. manuf. PMI < 50 for 1yr
• New orders fallen for 13mths – some early cycle weakness in cap goods
• Outlook – weak: tight fiscal policy, rising unemployment, falling disposable incomes
• Support – lower commodity prices / € ?
• Eurozone July consumer confidence -24.6, weakest since June 09
• Even in Germany, consumers retrench as sovereign crisis escalates
• Outlook – weak: France ~€33bn austerity budget 26 Sept. is more bad news
Source: Eurostat Sep 2012Source: Markit Sep 2012
0 0 0
2
0
7
2
0
21
5
3 3
1 12
43 3
1 1 1
45
1
4
0
10
76
4 43
6
3
5
12
4 4
6
2
9
1213
65
65 5
6
0
5
2
4 4
8 8
3
6
3 3
0
1
5
3
0 0
4
21
4
1
32
0
3
65
4 4
2
8
3
Investment Grade
EMEA – Monthly Upgrades and Downgrades Since 2009Upgrades
Downgrades
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1 2 2 13
6
23
1
5
2 1
43
2
64 4 4
2
5
10
7
4
910
65 4
75
3
76 6
3
65 4
8 8
6
10
20
11
1415 15
4 42
10
7
0
7
2 24
24
23 3
2
6
2
5
10
68
4 5 4 56
13 12
9
6
34
13 13Speculative Grade
IG and SG Upgrades and Downgrades: Corporates, excluding Financial and InsuranceIncludes downgrades to default and includes upgrades from defaultSource: Core Report Creation Date: 7/24/2012.
EMEA- Rating Distributions
60
80
100
120
No.
of I
ssue
rsEurope, Middle East, Africa
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Company Counts: U.S. Corporates, excluding Financial and InsuranceRatings Distribution – March 31st 2009 versus June 30th 2012Source: Global Ratings Reporting Group: Report Creation Date: 7/24/2012
AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- CC SD D
Mar 31st 2009 2 3 5 17 17 34 57 76 51 55 36 30 23 25 17 9 9 2 0 4 1 0
June 30th 2012 1 1 5 18 17 36 50 81 79 73 57 64 58 91 106 53 15 6 1 5 2 2
0
20
40
No.
of I
ssue
rs
European Corporate Defaults on the Rise
• Speculative grade default rate (LTM) could reach 6.3% by June 2013
• Event risk remains significant, with a 40% chance of o ur downside scenario occurring, resulting in 8.1% LTM speculative grade default rate
28.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
March 31 st, 2009 June 30th, 2012
EMEA – CreditWatch and Outlook Distributions
0%
12% 4%
0%
6%0%
Investment Grade - 312
Developing
Negative
Positive
0%
11%3%
0%
4% 0%
Investment Grade - 361
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Note: U.S. Corporates ex-Financials.CreditWatch Distributions – March 31st 2009 versus June 30th 2012Source: Global Ratings Reporting Group: Report Creation Date: 7/24/2012
78%
Stable
WatchDev
WatchNeg
WatchPos82%
March 31 st, 2009 June 30 th, 2012
EMEA – CreditWatch and Outlook Distributions
1%
26%
1%
8%
0%
Speculative Grade - 155
Developing
Negative
Positive
0%
19%
4%
0%3%
1%
Speculative Grade - 456
30.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
Note: U.S. Corporates ex-Financials.CreditWatch Distributions – March 31st 2009 versus June 30th 2012Source: Global Ratings Reporting Group: Report Creation Date: 7/24/2012
6%
58%
Positive
Stable
WatchDev
WatchNeg
WatchPos
4%
73%
EMEA Industrials EBITDA Margins – 2011 vs. 2007
19.4
20.2
5
10
15
20
25
30
35
40
45
50
EB
ITD
A M
arg
in (x)
31.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
Source: Standard & Poor’s as of 10/26/2011, Note: S&P Adjusted EBITDA, 2011 data last reported rolling twelve months, 2007 and 2011 statistics cover the same companies“EBITDA Margin” = (Operating profits before interest income, interest expense, income taxes, depreciation, amortization and asset impairment.) / (Revenues)
0
Real E
state
Infr
ast
ruct
ure
Tel
eco
m
Health
care
Util
itie
s
Oil
& G
as
Medi
a &
Ent
ert
ain
ment
Meta
ls &
Min
ing
Hig
h T
ech
nolo
gy
Con
sum
er
Pro
du
cts
Che
mic
als
Tra
nsp
orta
tion
For
est
Pro
ds/
Bu
ildin
g M
ats
Capi
tal G
oods
Aut
os &
Tru
cks
Rest
au
rant
s &
Reta
il
Aero
space
& D
efe
nse
Div
ers
ified
Ind
ustr
ies
2011 2007 2011 Median 2007 Median
EMEA Industrials EBITDA Interest Coverage – 2011 vs. 2007
5.3
5.3
2
4
6
8
10
12E
BIT
DA
Inte
rest
Co
vera
ge (x)
32.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
0
Oil
& G
as
Che
mic
als
Capi
tal G
oods
Aut
os &
Tru
cks
Con
sum
er
Pro
du
cts
Health
care
Meta
ls &
Min
ing
Hig
h T
ech
nolo
gy
Tel
eco
m
Util
itie
s
Medi
a &
Ent
ert
ain
ment
Aero
space
& D
efe
nse
Infr
ast
ruct
ure
Rest
au
rant
s &
Reta
il
For
est
Pro
ds/
Bu
ildin
g M
ats
Tra
nsp
orta
tion
Div
ers
ified
Ind
ustr
ies
Real E
state
2011 2007 2011 Median 2007 Median
Source: Standard & Poor’s as of 10/26/2011, Note: S&P Adjusted EBITDA, 2011 data last reported rolling twelve months, 2007 and 2011 statistics cover the same companies“EBITDA Interest Coverage” = (Operating profits before interest income, interest expense, income taxes, depreciation, amortization and asset impairment. Excludes undistributed equity earnings of affiliates.) / (The gross amount of interest incurred (including amounts capitalized), adjusted for charges related to items that we add to debt; no subtraction of interest income. )
EMEA Industrials Debt Leverage – 2011 vs. 2007
3.0
2.7
0
2
4
6
8
10
Oil
& G
as
Che
mic
als
Aut
os &
Tru
cks
Hig
h T
ech
nolo
gy
Capi
tal G
oods
Con
sum
er
Pro
du
cts
Meta
ls &
Min
ing
Health
care
Rest
au
rant
s &
Reta
il
Tel
eco
m
Medi
a &
Ent
ert
ain
ment
For
est
Pro
ds/
Bu
ildin
g M
ats
Infr
ast
ruct
ure
Util
itie
s
Aero
space
& D
efe
nse
Tra
nsp
orta
tion
Div
ers
ified
Ind
ustr
ies
Real E
state
Deb
t/E
BIT
DA
(x)
33.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
Source: Standard & Poor’s as of 10/26/2011. Note: S&P Adjusted Debt and EBITDA, 2011 data last reported rolling twelve months, 2007 and 2011 statistics cover the same companies“Debt Leverage” = (Total short- and long-term borrowings of the company (including maturities), adjusted by adding a variety of on- and off-balance sheet financing arrangements pursuant to our adjustment methodology, and subtracting surplus cash, where applicable) / (Operating profits before interest income, interest expense, income taxes, depreciation, amortization and asset impairment.)
Oil
& G
as
Che
mic
als
Aut
os &
Tru
cks
Hig
h T
ech
nolo
gy
Capi
tal G
oods
Con
sum
er
Pro
du
cts
Meta
ls &
Min
ing
Health
care
Rest
au
rant
s &
Reta
il
Tel
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m
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a &
Ent
ert
ain
ment
For
est
Pro
ds/
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ildin
g M
ats
Infr
ast
ruct
ure
Util
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s
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space
& D
efe
nse
Tra
nsp
orta
tion
Div
ers
ified
Ind
ustr
ies
Real E
state
2011 2007 2011 Median 2007 Median
EMEA Corporate IG Issuance Picking Up Despite Volat ility
60
80
100
120
140
160€
billi
on
100
150
200
250
bps
34.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
0
20
40
60
Q1
2006
Q2
2006
Q3
2006
Q4
2006
Q1
2007
Q2
2007
Q3
2007
Q4
2007
Q1
2008
Q2
2008
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2009
Q4
2009
Q1
2010
Q2
2010
Q3
2010
Q4
2010
Q1
2011
Q2
2011
Q3
2011
Q4
2011
Q1
2012
Q2
2012
0
50
EU-30 Emerging Markets iTtraxx 5yr Corp CDS (rhs)
Source: Dealogic, iTraxx – June 30th, 2012
Execution Challenging for EMEA HY Corporate Issuers
10
15
20
25
€ bi
llion
300
400
500
600
700
800
900
1000
bps
35.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
0
5
Q1
2006
Q2
2006
Q3
2006
Q4
2006
Q1
2007
Q2
2007
Q3
2007
Q4
2007
Q1
2008
Q2
2008
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2009
Q4
2009
Q1
2010
Q2
2010
Q3
2010
Q4
2010
Q1
2011
Q2
2011
Q3
2011
Q4
2011
Q1
2012
Q2
2012
0
100
200
300
EU-30 Emerging Markets iTraxx Crossover Index (rhs)
Source: Dealogic, iTraxx – June 30th, 2012
Total Debt Maturities- Europe (Number of Issue’s & $ Billion Amount)
200
250
300
350
400
450
500
No.
Of I
ssue
s/U
S$
in B
illio
ns
36.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
0
50
100
150
Issues Amount Issues Amount Issues Amount Issues Amount Iss ues Amount Issues Amount
2012 2013 2014 2015 2016 2017
No.
Of I
ssue
s/U
S$
in B
illio
ns
Investment Grade Speculative Grade
Standard & Poor’s Rated Debt (Includes Bonds & Loans)July 1st, 2012Note : “Speculative Grade” category includes Defaulted ratings “D”
Total Debt Maturities- Middle East (Number of Issue’s & $ Billion Amount)
30
40
50
60
No.
Of I
ssue
s/U
S$
In B
illio
ns
37.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
0
10
20
Issues Amount Issues Amount Issues Amount Issues Amount Iss ues Amount Issues Amount
2012 2013 2014 2015 2016 2017
No.
Of I
ssue
s/U
S$
In B
illio
ns
Investment Grade Speculative Grade
Standard & Poor’s Rated Debt (Includes Bonds & Loans)July 1st, 2012Note : “Speculative Grade” category includes Defaulted ratings “D”
Industry Specific Maturities– Europe (By Issue Amount)
0
50
100
150
200
250
300
350
UT
ILIT
Y
TE
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OM
MU
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July 1st, 2012
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39.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
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41.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
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July 1st, 2012
Appendix
Useful links and research
42.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
Useful links and research
S&P Useful LinksDefault Studies, Credit & Economic Trends:
http://www.standardandpoors.com/ratings/gfir/en/eu
Global Leveraged Finance & Recovery Ratings:
http://www.standardandpoors.com/ratings/recovery-ra tings/en/eu/index.html
Understanding Ratings:
http://www.understandingratings.com
Bank Ratings Framework:
http://www.standardandpoors.com/AI4FI
European Sovereign Ratings and Related Material
http://www.standardandpoors.com/ratings/sovereign-a ctions/en/us
CreditMatters TV:
http://video.standardandpoors.com/
43.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
http://video.standardandpoors.com/
Standard & Poor’s Sector Books (EMEA):
CreditMatters Interact – A Page for all Digital Book Links
http://www.standardandpoors.com/interact
Industry Risk Analysis
44.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
Our 2008-2010 Key Industrial Financial Ratios – Long Term
Adjusted Key Industrial Financial Ratios, Long-Term Debt--Europe, Middle East, Africa
Median three-year (2008 to 2010) averages
AA A BBB BB B
EBITDA margin (%) 24.9 16.6 15.5 17.6 16.3
Return on capital (%) 20.0 15.3 11.2 9.3 6.7
EBIT interest coverage (x) 15.7 7.0 3.9 3.1 1.0
EBITDA interest coverage (x) 18.5 9.5 5.7 4.6 2.0
45.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
Source: 24° August, 2011: 2010 Adjusted Key U.S. An d European Industrial And Utility Financial Ratios, Table 3
EBITDA interest coverage (x) 18.5 9.5 5.7 4.6 2.0
FFO/debt (%) 83.4 45.7 32.3 22.7 10.5
Free oper. cash flow/debt (%) 57.8 23.2 16.0 7.1 1.3
Disc. cash flow/debt (%) 30.5 12.5 8.0 3.4 0.8
Debt/EBITDA (x) 0.9 1.6 2.6 3.2 5.8
Debt/debt plus equity (%) 25.7 33.8 44.4 51.9 75.8
No. of companies 8 55 104 58 55
Corporate: “Issuer Ranking”
• The “Issuer Ranking Report” is produced by industry and ranks all the rated companies from strongest to weakest based on rating andoutlook.
• Companies with the same rating and outlook are further ranked by our opinion of credit
46.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
Source: “Issuer Ranking: Global Automakers, Strongest To Weakest 20-Jul-2011
ranked by our opinion of credit quality basedprimarily on our view of business risks for investment-grade companies and primarily on financial risks for speculative-grade companies.
Corporates: Recovery Report for Sub-investment Grad e Issuers• Standard & Poor’s Recovery Analysis provides a benchmark for an investor to use to form an opinion of an asset’s LGD. Together with the ICR, they provide the two elements of expected loss.
• Countries are classified into three categories, placing the most creditor-friendly insolvency regimes in Group A and the least creditor-friendly environments in Group C.
• Our classification determines jurisdiction-specific adjustments to our recovery ratings--namely, the capping of recovery ratings in countries where we expect creditor recoveries to be negatively affected by the particulars of the insolvency regimes.
Company XYZ Hypothetical Data Stressed Valuation
47.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
Source: Example of a Source: Example of a Recovery Report
Source: Source: Jurisdiction specific adjustments – June 26, 2009
Simulated default assumptions Simplified waterfall
Year of default 2011 Gross enterprise value at default €120 mil.
2010 EBITDA €35 mil. Administrative costs €8 mil.
EBITDA decline to default 40% Net enterprise value €112 mil.
EBITDA at default €21mil. Priority claims €23 mil.
Implied enterprise value/EBITDA multiple 5.5x Net value available to creditors €89 mil.
LIBOR/margin rise Senior secured debt €121 mil.
Recovery expectation 70%-90%
Secured debt €39 mil.
Recovery expectation 0%-10%
C&G Cross Sector: “Industry Report Card”
• The industry report card is produced for all corporate sectors covered by Standard & Poor's, as well as the sovereign and the public finance sectors. It highlights the key trends of main issuers by industry.
48.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
Source: Source: Industry Report Card:Industry Report Card: EMEA Metals And Mining Maintains A Stable Credit EMEA Metals And Mining Maintains A Stable Credit Outlook, But Risks LoomOutlook, But Risks Loom SepSeptember 19tember 19thth 20112011
Source:Source:Industry Report Card:Industry Report Card: The European Real Estate Rating Outlook Is Stable, Despite Rental The European Real Estate Rating Outlook Is Stable, Despite Rental Incomes Lagging Higher Market ValuationsIncomes Lagging Higher Market Valuations 0606--SepSep--20112011
Appendix
Criteria
49.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
Criteria
Short-Term Ratings
50.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
Methodology: Short-Term/Long-Term Ratings Linkage C riteria For Corporate And Sovereign Issuers, 15-May-2012
Issue Ratings: Potential Outcomes
Issue-Specific Ratings can differ from the corporate credit rating (CCR) → notchingIssue-Specific Ratings can differ from the corporate credit rating (CCR) → notching
Investment grade issuer:
� Junior debt (structurally and/or contractually subordinated) limited to 1 notch downgrade from CCR.
� If priority liabilities > 20% of total assets, lower priority debt rated 1 notch lower.
Speculative grade issuer:
� Issue ratings can differ by up to 3 notches from CCR.
� S&P performs a separate recovery analysis → scenario driven analysis, which helps to estimate recovery prospects of the debt under a hypothetical payment default.
� Notching of the debt is then dependent on recovery expectations.
51.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
Standard & Poor’s Recovery Rating * Indicative Recovery Expectations
Loan or Issue Notching from CCR **
1+ Highest expectation of full recovery 100% +3 notches
1 Strong expectation of full recovery 90-100% +2 notches
2 Substantial recovery 70-90% +1 notch
3 Meaningful recovery 50-70% 0 (Un-notched)
4 Average recovery 30-50% 0 (Un-notched)
5 Modest recovery 10-30% -1 notch
6 Negligible recovery 0-10% -2 notch
Nonsovereign Ratings That Exceed EMU Sovereign Ratin gsUnder our criteria, a nonsovereign corporate or government issuer‘s country risk exposure depends on the issuer‘s sector sensitivity to country risk as well as the degree of its exposure to the country.
52.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
Source: „Nonsovereign Ratings That Exceed EMU Sovereign Rati ngs: Methodology And Assumptions“, 14 June2011.
The Maximum Rating Differential is a function of our assessment of the issuer ortransaction‘s Country Exposure and the Sovereign Rating range (i.e. InvestmentGrade, High Speculative Grade or Low Speculative Grade).
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