notches, although in some instances the rating change reached 17 notches. While most of these pools have paid down significantly, higher losses are still expected on the remaining loans due to weak housing and macroeconomic conditions.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
RESEARCH HIGHLIGHTS Corporates
Notable research published the week ending 4 March 2011
US Medical Products and Device Sector to Maintain Margins but Challenges Abound US For-Profit Hospitals: Profitability to Remain Healthy Despite Pressures Our two broad industry reports outline how US for-profit hospital operators and medical products and device companies will continue to see their revenues stressed by soft volume trends as well as pricing pressures over the next 12 to 18 months. But profitability should remain healthy in both sectors owing, in part, to cost-containment efforts. The credit outlooks for both sectors remain stable through mid-2012, but growing uncertainty surrounding pricing and demand result in a negative bias on both outlooks. For example, these headwinds and additional investment in growth initiatives may make it difficult for hospitals to maintain their current margins. Our SGL Monitor FLASH Higher oil prices run the risk of raising costs for many businesses and consumers, yet these pressures haven¡¯t triggered immediate liquidity concerns for most speculative-grade debt issuers. More widespread turmoil in the Middle East could push energy prices higher. If sustained, this could squeeze consumer spending and the economy and pressure speculative-grade liquidity (SGL) ratings by crimping cash flow or access to credit markets. Also, six companies received SGL downgrades in February for a variety of reasons including approaching revolver maturities, covenant compliance, acquisitions, and cash flow pressure. Leveraged Finance Industry Updates: Surface Transportation and Airlines The trucking sector is stabilizing and pricing is gaining traction. However, the recovery for trucking is coming later in the cycle than normal. Railroads did better than the trucking industry early in the economic recovery, taking freight volume more quickly and more efficiently. Now, trucking volumes have stabilized. Shippers¡¯ expenditures are outpacing unit shipments, indicating they are willing to pay up for freight-hauling services. We anticipate that they will maintain profitability in 2011, although at lower levels than in 2010. The outlook for airlines remains stable. High-Yield Covenant Update: Sponsored Bond Deals Dominate, Retailers In Particular Sponsored deals have dominated the high-yield market in the last two weeks ¨C including issuance by four retailers (all rated in the Caa category). The deals have offered either ¡°moderately loose¡± privateequity structures or even stronger-than-general market structural protections when compared to other recent sponsored deals. In only a few instances have we found carve-outs (restricted payments, investments and debt) to significantly exceed the 2010 market norm.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
RESEARCH HIGHLIGHTS
Notable research published the week ending 4 March 2011
European Newsprint Manufacturers: Double-digit Price Increases in 2011 are Insufficient to Restore the Sector's Long-term Profitability Agreed-upon increases in European newsprint prices of around 20% in 2011 will be insufficient to return European manufacturers to long-term profitability. Although the price hike will produce a short-term earnings uplift, we foresee no immediate ratings impact, given the ongoing challenges the industry faces and certain issuer-specific constraints. For the proposed price hikes to have the desired long-term effect on profitability, they need to be accompanied by further industry measures designed to realign capacity with declines in demand. European Building Materials Companies: Volumes Recover but Pricing, Social Unrest Could Taint the Picture The basis for our change in the outlook to stable is that demand for building materials appears to have stabilised at a low level in the fourth quarter of last year. We expect volumes to gradually improve in 2011, primarily supported by a recovery in residential construction. However, the recovery in volumes is somewhat skewed by weak comparatives with 2010, which was marked by an extreme winter in Western Europe and spring floods in Eastern Europe. Commercial construction and overall demand in some European countries is also likely to remain under pressure. The negative bias on the stable outlook is mainly based on the uneven recovery in demand that is likely across EMEA in 2011. Dry-Bulk Shipping: Oversupply May Impair Performance in 2011-2012, but 2013 Could Offer a Recovery In 2010, global GDP growth helped boost dry-bulk seaborne trade by 11%. We expect the dry-bulk shipping market to grow at a more moderate pace of 6-7% in 2011, although this would be a robust growth rate from a historical perspective. However, oversupply will continue to pose problems. The current drybulk order book represents about 54% of the tonnage on the water.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
RESEARCH HIGHLIGHTS Financial Institutions
Notable research published the week ending 4 March 2011
US Life Insurers' 4Q10 Results Mixed, but Continue to Stabilize Fourth-quarter 2010 results of US publicly traded life insurers confirmed the general improvement in the companies¡¯ financial performance. Although 4Q10 net income was down on a sequential quarterover-quarter basis, this was due largely to non-economic derivative losses related to variable annuities. Operating earnings for the quarter were flat, indicating that improvement likely will be slow and uneven. 4Q10 Quarterly Update ¨C Asset Managers Asset managers¡¯ strong recovery from the financial crisis of 2007-2009 continued in the quarter with aggregate quarterly EBITDA surpassing 4Q07 peak levels and revenues increasing by more than 70% from their low in 1Q09. In a reversal of the risk aversion observed in the first half of the year, investors shifted allocations from low-margin fixed-income funds to higher margin equity funds. Domestic equity markets rallied in the fourth quarter as the Federal Reserve announced its quantitative easing measures and economic conditions improved.
US Public Finance Protracted US Government Shutdown Would Have Negative Credit Impact on Selected Municipal Bonds, But Defaults Unlikely While Congress appears to have reached a temporary agreement to avert a US government shutdown this week, the risk of a shutdown may persist for some time. A brief shutdown due to a budget impasse lasting under 30 days would have minimal-to-no credit impact on municipal debt. However, the remote risk of a shutdown lasting over 30 days would be credit negative for municipal bonds already under significant credit pressure, although defaults would remain highly unlikely. Federal Government Shutdown Could Affect District of Columbia Operations; Debt Service not Affected While it could temporarily disrupt certain operations of the District of Columbia and those of the District of Columbia Water and Sewer Authority, we do not expect any interruption in debt service payments or an impact on credit standing.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
RESEARCH HIGHLIGHTS
Notable research published the week ending 4 March 2011
US Municipal Variable Rate Market: Review of 2010 Market Trends and Expected Developments in 2011 Despite record-setting overall municipal bond issuance volume in 2010, variable rate demand bond (VRDB) issuance declined sharply for the second consecutive year, falling to approximately $30 billion, the lowest volume in more than a decade. Barring significant changes in market conditions, we expect VRDBs will continue to be a significant component of municipal capital structures with outstanding balances remaining near current levels Public Universities May Turn to Financial Exigency to Reduce Operating Costs A declaration of a ¡°financial exigency¡± would allow US colleges and universities to lay off tenured faculty, reaping savings in salary and benefits, potentially strengthening an institution¡¯s credit standing. If the practice becomes a trend (Nevada¡¯s state university system is now considering financial exigency), the competitive risks to reputation would likely lessen over time. However, if the practice does not become more prevalent, it could backfire in terms of perception on the few universities that take the step.
Infrastructure US Power Project Outlook 2011: Offtake Contracts Provide Stability While Merchant Generators Face Severe Challenges The outlook for fully contracted US power projects remains stable due to good operating performance, stable or robust credit metrics, and properly structured offtake contracts with creditworthy offtakers. Well-structured offtake contracts continue to shield projects through the down market cycle and represent a key anchor for the stable outlook for fully contracted power projects. Overall counterparty credit quality also remains stable and mostly investment grade. In contrast, the rating agency¡¯s outlook for merchant power projects is negative given depressed industry fundamentals, including highly challenging market conditions, expiring hedges, and increasing refinancing risk starting in 2012.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
RESEARCH HIGHLIGHTS Sovereign
Notable research published the week ending 4 March 2011
India's budget announcement is credit supportive, fiscal consolidation remains on track India¡¯s fiscal consolidation remains on track and will sustain a faster de-leveraging of government debt than was originally envisaged as the budget places the central government¡¯s deficit at 4.9% of GDP in the upcoming fiscal year. This is slightly lower than the revised estimate of 5.3% for the current fiscal year. State level deficits are also expected to decline to 2% of GDP after peaking at 3.3% in FYE03/10.
Structured Finance Global Structured Finance Operational Risk Guidelines: Our Approach to Analyzing Performance Disruption Risk The methodology outlines how we analyze operational risk in structured finance transactions, focusing on performance disruption risk and impact on Aaa-rated securities. Performance disruption is the risk of a payment disruption on the notes due to non-performance of a servicer, cash manager, or trustee attributable to a disruption in their operations. As a result of the new methodology, we placed 220 tranches from 134 European transactions (78 RMBS, 26 ABS, 29 CMBS and one structured credit transaction) on review for downgrade. Three US small business loan ABS were also placed on downgrade review. Most tranches placed on review are Aaa. Twenty-three tranches from 11 Ford auto loan ABS transactions were placed on review for upgrade. All affected transactions were completed from 2007 to 2010. The actions reflect lower lifetime loss expectations as well as a build-up in credit enhancement relative to remaining losses due to the non-declining reserve accounts and sequential payment structure of the transactions.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
EDITORS News & Analysis: Jay Sherman, Elisa Herr, and Shem Pennant Rating Changes & Research Highlights: Joe Cullen Final Production: Andre Varella
PRODUCTION ASSOCIATE David Dombrovskis
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