DAVID STAPLES, MANAGING DIRECTOR, EMEA CORPORATES SOUMMO MUKHERJEE, VP SENIOR ANALYST EMEA CORPORATES
Industry analysis
Key trend in the industry Macroeconomic scenarios Competitive position and market share trend Political and regulatory environment Cyclical vs. stable demand
Rating
Strategy and Management
Growth prospective and assumptions Financial policy and targets Shareholders returns Management team experience
Corporate governance
Meaning of rating
Rating Expected loss
Issuer rating
For Investment Grade Normally in line with debt instruments ratings
For Sub-IG
Normally in line with Probability of Default Ratings (PDR) Used as a base for notching of different classes of debt
Aiding tools
Industry rating methodology
Overall assessment
Analyst expertise Industry outlook Adjusted Financial ratios (MFM) Liquidity Risk Assessment Peer group Loss Given Default Track record and ability to execute Corporate Governance assessment
Industry analysis
Financials
Mix of qualitative and quantitative skills to judge soft and hard data
South African Corporate Ratings 5
Independent opinion
Prime-1
Prime-2 Prime-3
Global consistency
Not Prime
Independent opinion
National comparability
Baa1 Baa2
Baa3
A2.za/A3.za
A3.za/Baa1.za Baa1.za/Baa2.za Baa2.za/Baa3.za Ba1.za/Ba2.za Ba2.za/Ba3.za Ba3.za/B1.za B2.za/B3.za/Caa1.za Caa1.za/Caa2.za
P-1.za/P-2.za
P-1.za/P-2.za P-2.za/P-3.za P-2.za/P-3.za NP.za NP.za NP.za NP.za NP.za
Caa3
Ca
Caa3.za
Ca.za
NP.za
NP.za
Lease accounting
Pensions accounting No global standard for the same transactions in certain areas (i.e. Treatment of R&D costs)
10
What is Debt?
On Balance Sheet Debt, i.e. Borrowings We tend to focus on gross debt (i.e. excluding cash) but give some credit for cash balances in excess of working cash BUT ALSO Leases Pension obligations Different rules for different GAAPs Some other off-balance sheet obligations Environmental Legal Put Options Guarantees
11
12
Cash Flows to Debt Cash Flow from Operations (CFO) = Funds From operation +/- Working Capital Changes Retained Cash Flow (RCF) = FFO (before working capital) Dividends Free Cash Flow (FCF) = CFO Dividends Capex
13
14
15
16
External
Committed bank facilities Availability Quality (facility attributes: MAC, covenants, maturity date, triggers) Quantity Trade credit
Uses
Operations, Working capital, Capital expenditures, Debt payments (P&I), Dividends, Share repurchases, Contingencies
17
18
19
Size matters as a driver of scale, lower fixed costs, marketing strength, diversification
20
21
- For packaged goods companies exposure to private labels is a negative in particular on some European markets where private labels represent significant market shares
22
23
24
25
26
27
28
Notching Framework:
Notching Framework:
How do we arrive at our guidelines for notching?
29
What is Notching?
Notching refers to the relative ratings assigned to different obligations of an economic unit. Relative seniority and security of corporate obligations
Notching for Differences in Priority of Claims and Integration of the Preferred Stock Rating Scale, November 2000 Summary Guidance for Notching Secured Bonds, Subordinated Bonds, and Preferred Stocks of Corporate Issuers, September 2001
30
Notching Guidelines
Senior Secured debt should be rated one-notch higher than unsecured debt. Secured bank loans may merit a rating two or more notches above senior unsecured debt. Subordinated debt should be rated one-notch lower than senior unsecured debt. No distinction between Senior and Junior Sub Debt.
Wider notching differentials for issuers that carry corporate family rating (CFR) or senior unsecured ratings of Ba3 or lower.
31
LGD Ratings
32
LGD Framework is designed to provide robust estimates of family-wide and obligation-specific recovery rates LGD Model blends the expected liability structure at default with a model of uncertainty to produce LGD estimates
33
34
35
2.93%
35%
45%
55%
65%
15%
25%
75%
85%
95%
5%
9.57%
35%
45%
55%
65%
15%
25%
75%
85%
95%
5%
5.45%
35%
45%
55%
65%
15%
25%
75%
85%
95%
5%
39
Rating
LGD1 LGD2 LGD3 LGD4
LGD Range
0% - <10% 10% - <30% 30% - <50% 50% - <70%
LGD5
LGD6
70% - <90%
90% - 100%
40
41
42
Rating Timetable
New ratings have been delivered in as little as a few days or weeks following appointment; however the norm for investment grade issuers is around 6-10 weeks from appointment, assuming high quality information flow Issuer and advisers often prepare rating information packs with background and important information Moodys analysts meet management following receipt of background pack for formal presentation Moodys reviews information and interacts with issuer/adviser to request further information or clarify points Moodys holds rating committee meeting Rating disclosed to management on confidential basis Rating outcome can be appealed if new information is available If rating is accepted for publication, rating is publicly disseminated though press release and accompanying research, always with issuers ability to review
43
Public statement can be in the form of a press release, new issue or new issuer report or other broad-based electronic media transmission
Public statement is sent to the issuer in advance of public dissemination to ensure accuracy and that no confidential information has inadvertently been included
Following publication of the rating, the analyst is available to investors and other users of the rating to comment on Moodys rating decision
Issuer always has right not to accept a new rating and in such cases it is not made public by Moodys, but it is not able to be used by the issuer
44
Monitoring Moodys Ratings: Meeting Schedule and Rating Review, Outlook and Action
After the initial rating decision, ratings are monitored continuously Issuers determine whether, and how often, they want to meet with the analyst, but meeting schedules do not determine the timing of rating reviews. Normally, issuer meetings are conducted on an annual basis. Events in the market place may put positive or negative pressure on an issuers rating, ultimately resulting in a rating action for: Upgrade Downgrade Confirmation Rating Review and/or a Rating Outlook may precede a Rating Action
45
1 3rd
2 10th
3 17th
4 24th
5 1st
6 8th
7 15th
8 22nd
9 29th
10 5th
Initial discussion with Moodys Sign & return to Moodys a Rating Application Form Schedule date for Rating Meeting
M 7 14 21 28
T 1 8 15 22 29
Month W 2 9 16 23 30
2 2010 T F 3 4 10 11 17 18 24 25 31
S 5 12 19 26
S 6 13 20 27
M 4 11 18 25
T 5 12 19 26
Month 3 2010 W T F 1 6 7 8 13 14 15 20 21 22 27 28 29
S 2 9 16 23 30
S 3 10 17 24
46
David Staples Managing Director EMEA Corporates +971 (4) 237-9562 David.Staples@moodys.com Soummo Mukherjee Vice-President Senior Analyst EMEA Corporates +27 11 217 5477 Soummo.Mukherjee@moodys.com
2011 Moodys Investors Service, Inc. and/or its licensors and affiliates (collectively, MOODYS). All rights reserved. CREDIT RATINGS ARE MOODY'S INVESTORS SERVICE, INC.'S (MIS) CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MIS DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS DO NOT CONSTITUTE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS ARE NOT RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. CREDIT RATINGS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MIS ISSUES ITS CREDIT RATINGS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODYS PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODYS from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided AS IS without warranty of any kind. Except as expressly stated otherwise, MOODYS has not verified, audited or validated independently any information received in the rating process, nor will it do so. Under no circumstances shall MOODYS have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODYS or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODYS is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained herein must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODYS IN ANY FORM OR MANNER WHATSOEVER.
MIS, a wholly-owned credit rating agency subsidiary of Moodys Corporation (MCO), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MISs ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading Shareholder Relations Corporate Governance Director and Shareholder Affiliation Policy.
Any publication into Australia of this document is by MOODYS affiliate, Moodys Investors Service Pty Limited ABN 61 003 399 657, which holds Australian Financial Services License no. 336969. This document is intended to be provided only to wholesale clients within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODYS that you are, or are accessing the document as a representative of, a wholesale client and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to retail clients within the meaning of section 761G of the Corporations Act 2001.
48