Credit Trends in Global Markets

1
Credit Trends in Global Markets

• Barbara Ridpath, Executive Managing Director
• Ratings Services, Europe, Middle East and Africa

2
Rating quality stabilizing for European corporates
3
Rising stars surpass fallen angels
4
Leveraged finance towards peak debt multiples
Rolling-Three Month Average Pro Forma Debt/EBITDA
Ratio
Excludes Broadcasting, Cable Telecom loans
prior to 2002.
5
Hedge funds bring significant liquidity
6
Corporate bond issuance tapering off
7
Is credit risk adequately compensated?
Source Société Générale
8
Similar trends are evident in emerging markets
9
So what could go wrong?
10
Little budgetary leeway for European sovereigns

• A quick reminder
• Rating maximum AAA with the EMU zone
• Convergence of ratings for EMU Candidate
  Countries
• Local currency ratings to remain unchanged

• Recent rating actions or communications
• Change in outlook to negative on the Republic of
  Italy (AA-/A-1)
• Downgrade of the Republic of Portugal to
  AA-/Stable/A-1
• Federal Republic of Germany has fallen behind
  AAA peers in terms of fiscal and economic
  performance
• Rating upgrades dominate outside the Eurozone

11
Corporate and bank ratings a few areas of
concern, but overall stable

• Mergers Acquisitions are back banks, pharma,
  telecoms
• Anaemic consumer demand in Western Europe
• Mixed impact from high oil prices
• Cyclical sectors performing well
• High residential real estate prices
• Beginnings of a recovery in corporate investment?
• Aggressive asset and debt multiples in LBOs

12
Oil prices are hitting new highs
(/barrel, refiners acquisition price and
deflated by CPI consumer energy as percent of
disposable income)
13
High European house price inflation
Source Quarterly Review of Mortgage Markets, Q1
2005
14
Has the credit cycle peaked? (U.S.)
15
Has the credit cycle peaked? (Europe)