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Fallen Angels In Emerging And Developed Markets, Including The U.S. And Europe: The Total Rises Slightly
Publication date: 14-Apr-2012 03:55:05 HKT

The number of global fallen angels for 2012 is 11 as of April 9--one more than the previous reporting period. We define fallen angels as issuers Standard & Poor's Ratings Services downgraded to speculative grade from investment grade. Four of these are based in Portugal, including the sovereign itself. The number of potential fallen angels rose for the second consecutive month to 42, which indicates that we may see a further increase in fallen angels.

The highlights since the last report are:

  • The fallen angel count through April 9, 2012, is five less than the total for the same period in 2011.
  • The 42 potential fallen angels have $161.4 (€123.4) billion in rated debt. Potential fallen angels are issuers rated 'BBB-' with either negative outlooks or ratings on CreditWatch with negative implications.
  • The 11 fallen angels accounted for $181.7 (€138.8) billion in rated debt.
  • We added four entities to the potential fallen angels list and removed another three. All additions are based in the U.S. or Europe.
  • By region, Europe has the most potential fallen angels, with 19 as of April 9, 2012.
  • The bank sector leads the list of potential fallen angels, with 11 (see chart 4).
  • Of the companies on the potential fallen angels list, 13 are constituents of various Standard & Poor's indices.
  • ArcelorMittal was the largest potential fallen angel with $30.3 (€23.2) billion in rated debt (see tables 6).

Chart 1

Monthly Fallen Angel Activity

Standard & Poor's had downgraded a total of 11 issuers to speculative grade from investment grade as of April 9, 2012--five fewer issuers than last year. We identified seven of the 11 issuers as potential fallen angels before they were downgraded to speculative grade. We added one fallen angel since the previous report, Capstone Infrastructure Corp.

On April 5, 2012, Standard & Poor's Ratings Services lowered its long-term corporate credit rating on Capstone Infrastructure Corp. to 'BB+' from 'BBB-'. In addition, Standard & Poor's placed its ratings on the entity on Creditwatch with developing implications because of its weak liquidity. Since the company's liquidity is "less-than-adequate" according to our criteria, it cannot have a corporate credit rating higher than 'BB+'. The company has a material bank facility maturity in three months, which we believe it will be able to pay down. However, the entity could face a multinotch downgrade if it fails to do so. (For more details, see "Research Update: Capstone Infrastructure Corp. Downgraded To 'BB+' And Placed On CreditWatch Developing On Liquidity Concerns," published on April 5, 2012, on RatingsDirect.)

Table 1

Global Fallen Angels In 2012
Date Issuer To From Sector Country Debt amount (mil. $)
4/5/2012 Capstone Infrastructure Corp BB+ BBB- Utility Canada 388
3/6/2012 Edison SpA BB+ BBB- Utility Italy 2376
2/28/2012 AmerenEnergy Generating Co. (Ameren Corp.) BB BBB- Utility U.S. 825
2/27/2012 REN-Redes Energeticas Nacionais, SGPS, S.A. BB+ BBB- Utility Portugal 1266
2/16/2012 F&C Asset Management PLC BB+ BBB- Bank U.K. 431
2/15/2012 Eksportfinans ASA BB+ BBB+ Bank Norway 14446
2/1/2012 EDP - Energias de Portugal, S.A. BB+ BBB Utility Portugal 18,736
1/30/2012 Rockies Express Pipeline LLC BB BBB- Utility U.S. 3,000
1/20/2012 Portugal Telecom SGPS S.A. BB+ BBB- Telecommunications Portugal 7,396
1/13/2012 Republic of Cyprus BB+ BBB Sovereign Cyprus 14,044
1/13/2012 Republic of Portugal BB BBB- Sovereign Portugal 118,816
Data as of April 9, 2012. Source: Standard & Poor's Global Fixed Income Research.

Chart 2

Profile Of Potential Fallen Angels

As of April 9, 2012, 42 issuers with rated debt worth $161.4 (€123.4) billion were, in our view, at risk of becoming fallen angels. These entities are currently rated 'BBB-' and have either negative outlooks or ratings on CreditWatch negative. Of these, 31 have negative outlooks and 11 have ratings on CreditWatch negative. ArcelorMittal is the largest potential fallen angel with $30.3 (€23.2) billion in rated debt (see tables 6).

Since our last report, we added four entities to the list of potential fallen angels and removed three. We removed Accor S.A. and Southern Union Co. after Standard & Poor's assigned these entities stable outlooks. We removed Banca Civica S.A. after it was placed on CreditWatch with positive implications. We added four issuers to the list after Standard & Poor's assigned them either a negative outlook or placed them on CreditWatch with negative implications.

Although fallen angels are relatively rare in any single year (constituting only 1.98% of the total number of investment-grade entities, on average, from 1981 to 2009), the performance of entities in these categories usually has market significance. The cumulative share of bonds in these threshold categories to the total outstanding is often substantial, both by the number of issuers and the amount of debt affected. (For more information, see "Crossover Credits: A 24-Year Study Of Fallen Angel Rating Behavior," published March 22, 2005.)

Negative outlooks and CreditWatch negative placements are good leading indicators of downgrades. Standard & Poor's Global Fixed Income Research published a long-term study that corroborates this (see "CreditWatch And Rating Outlooks Provide Powerful Warning Signals," published Aug. 7, 2007). CreditWatch status and outlooks are strong predictors of rating actions in the aggregate and when broken out by rating category, region, or sector. For example, the study showed that Standard & Poor's eventually lowered 57% of all 'BBB' ratings ('BBB+', 'BBB', and 'BBB-') on CreditWatch negative and 26% of all 'BBB' ratings with negative outlooks.

Chart 3

The bank sector leads the list of potential fallen angels, with 11 (see chart 4). Eight of these issuers are based in either Spain or Italy. The consumer products sector has the next highest number of potential fallen angels with five.

By region, Europe leads with 19 entities, or 45.2% of all potential fallen angels. The U.S. has the next highest number of potential fallen angels at 11, or 26.2% of all potential fallen angels. All four additions to the potential fallen angels list are based in the U.S. or Europe.

Chart 4

Fallen Angel Spreads

U.S. corporate bond yields change by rating category, and borrowing costs increase noticeably when moving down the ratings scale to 'BB' from 'BBB' (see chart 5). For issuers in the 'BBB' rating category, bond spreads ranged from 163 basis points (bps) to 257 bps greater than the benchmark five-year Treasury yield during the 12 months ended April 9, 2012. For issuers in the 'BB' rating category ('BB+', 'BB', and 'BB-'), borrowing spreads ranged from 338 bps to 576 bps more than Treasuries. The 'BB' spreads are both higher and span a wider range than the 'BBB' spreads.

Chart 5

Movements in the credit derivatives market generally suggest higher risk. All four companies on the potential fallen angels list with available credit default swaps data display noticeably higher credit default swaps (CDS) premiums than the reference CDX investment-grade index (CDX.NA.IG). The CDX investment-grade index decreased to 103 bps as of April 9, 2012. Meanwhile, the CDS spreads on these four potential fallen angels ranged from 187 bps to 408 bps. Two of the four companies' spreads exceeded the high-volatility (CDX.NA.IG.HVOL) index, which was trading at 202 bps. The speculative-grade index (CDX.NA.HY) was trading at 593 bps during the same period. When comparing the potential fallen angels' spreads with their sectors' CDS spreads, the same is true. As of April 9, 2012, the CDX consumer index was trading at 87 bps, energy at 104 bps, financials at 129 bps, industrials at 93 bps, and telecommunications, media, and technology at 118 bps. Each of these four potential fallen angels has a CDS spread that is higher than its sector's spread (see table 2).

Table 2

Movements In Credit Default Swaps (CDS) Pricing Among Potential Fallen Angels
--% change from--
Entity Country Subsector Five-year CDC speads as of April 9, 2012 (bps) 30 days ago Beginning of 2011 A year ago
Noble Group Ltd. Hong Kong Consumer products 408 4.08 (25.00) 131.82
Energy Transfer Partners LP U.S. Utility 236 8.76 (10.27) 105.22
Clariant AG Switzerland Chemical, packaging, and environmental services 192 2.67 (36.21) 64.10
Transocean Inc. U.S. Oil and gas exploration and productions 187 6.25 (46.42) 74.77
Data as of April 9, 2012. Sources: Standard & Poor's Global Fixed Income Research and Markit Group Ltd. (the data do not constitute investment advice and cannot be relied on to make investment decisions).

Business And Financial Risk Among Potential Fallen Angels

Of the 42 global potential fallen angels as of April 9, 2012, 23 nonfinancial entities have business and financial risk scores based on Standard & Poor's latest available issuer rankings. Standard & Poor's ranks companies with the same rating and outlook according to an opinion of credit quality based on business risks for investment-grade-rated companies and on financial risks for speculative-grade-rated companies. Factors such as country risk, industry statistics, company position, and profitability/peer group comparison support the business risk assessments. Factors such as accounting, governance/risk tolerance, cash flow adequacy, capital structure/asset protection, and liquidity/short-term events support the financial risk assessments.

Standard & Poor's categorizes corporate business risk profiles as excellent, strong, satisfactory, weak, or vulnerable. Financial risk profiles are categorized as minimal, modest, intermediate, aggressive, or highly leveraged. Both qualifications refer to the companies' status-quo characteristics without taking into account any extraordinary state support. (For further details of our classification of business and financial risk, refer to the Related Criteria And Research section.)

Of the 23 nonfinancial entities for which business risk and financial risk assessments are available, nine have satisfactory business risk and intermediate financial risk (see table 3).

Table 3

Distribution Of Risk Assessments For Nonfinancial Potential Fallen Angels
--Financial risk profile--
Business risk profile Minimal Modest Moderate Intermediate Aggressive Significant Highly leveraged
Excellent
Strong 1 1
Fair 1 3
Satisfactory 1 9 7
Weak
Vulnerable
Note: We do not include finance companies, insurance companies, or sovereigns. Data as of April 9, 2012. Source: Standard & Poor's Global Fixed Income Research.

Table 4

Leading Global Corporate Fallen Angels By Debt Volume In Each Year (1997–2012)
Date Company To From Subsector Country Debt amount (mil. $)
1997 Korea Development Bank BBB- B+ Bank Korea 13,791
1998 SB Treasury Co. LLC BBB- BB+ Finance companies Japan 1,800
1999 Lyondell Chemical Company BBB+ BB Chemicals, packaging, and environmental services U.S. 4,775
2000 Nissan Motor Co. Ltd. BBB- BB+ Automotive Japan 6,169
2001 Enron Corp. BBB- B- Utility U.S. 13,623
2002 WorldCom Inc. BB BBB Utility U.S. 30,000
2003 Parmalat Finanziaria SpA BBB- B+ Consumer products Italy 7,177
2004 AT&T Corp. BBB BB+ Telecommunications U.S. 17,010
2005 General Motors Corp. BB BBB- Bank U.S. 291,800
2006 Harrah's Entertainment Inc. BBB- BB+ Media and entertainment U.S. 10,800
2007 Residential Capital, LLC (General Motors Corp.) BBB- BB+ Finance companies U.S. 16,632
2008 Lehman Brothers Holdings Inc. SD A Finance companies U.S. 79,455
2009 CIT Group, Inc. BB- BBB- Automotive U.S. 38,191
2010 Alpha Bank A.E.* BBB BB Bank Greece 29,217
2011 Tokyo Electric Power Co. Inc.* BBB B+ Utility Japan 64,994
2012 EDP - Energias de Portugal, S.A. BBB BB+ Utility Portugal 18,736
*Ratings may not depict current rating of issuer. Data as of April 9, 2012. Source: Standard & Poor's Global Fixed Income Research.

Table 5

Issuers Rated 'BBB-' With Ratings On CreditWatch With Negative Implications
Subsector Issuer Country Debt amount (mil. $) Index Business risk Financial risk Rationale
Bank Banca Popolare di Milano SCRL* Italy 4,734 The CreditWatch negative placement is a result of the larger-than-expected net losses of €614 million the bank posted on March 27, 2012. It also reflects the possibility of a downgrade by one notch if the bank fails to maintain adequate capital according to Standard & Poor's criteria in the coming two years.
Bank Banco de Sabadell S.A.§ Spain 5,285 S&P Europe 350 The CreditWatch negative placement reflects Standard & Poor's view that the acquisition and integration of Caja de Ahorros del Mediterráneo S.A. could have a negative effect on Sabadell's stand-alone creditworthiness.
Bank Banco Popular Espanol, S.A.§ Spain 5,621 S&P Europe 350 The CreditWatch status reflects our view that the acquisition and integration of Banco Pastor S.A. could have a negative effect on the bank's financial profile. The downgrades of Spain and Standard & Poor's revised BICRA of the country affected the ratings on Banco Pastor.
Brokerage GFI Group Inc. U.S. 250 The CreditWatch placement reflects our view that GFI and other brokers that rely on institutional sales and trading are likely to face a prolonged period of weak profitability because of ongoing weakness in the financial markets as a result of Europe's financial crisis.
Chemicals, packaging, and environmental services Westlake Chemical Corp. U.S. 250 Fair Intermediate The CreditWatch placement reflects the increased likelihood that Standard & Poor's will lower ratings on Westlake and its debt issues following its proposed acquisition of Georgia Gulf, acquiring all of Georgia Gulf Corp.'s outstanding shares for roughly $1.1 billion in cash, which would increase the company's debt leverage.
Financial institutions Grupo de Inversiones Suramericana S.A. Colombia 300 Satisfactory Intermediate The CreditWatch placement follows the announcement that Gruposura has reached an agreement to acquire the pension, insurance, and investment funds operations of ING Insurance International B.V., a subsidiary of ING Group N.V. in Chile, Mexico, Peru, Uruguay, and Colombia for about $3.8 billion, subject to regulatory approval.
Forest products and building materials Cimpor Cimentos de Portugal, S.G.P.S., S.A.† Portugal 629 The CreditWatch placement reflects the likelihood that Standard & Poor's will align its ratings on Cimpor with those on Brazilian holding company Camargo Correa S.A. if the takeover is successful, because Camargo Correa has a weaker credit quality than Cimphor.
Forest products and building materials Italcementi SpA (Italmobiliare SpA)§ Italy 1,937 Satisfactory Significant The negative CreditWatch placement reflects the possibility that Standard & Poor's will downgrade Italcementi one notch. In our view, the group's earnings will be low in 2012, and credit metrics will likely remain below those we deem commensurate with a 'BBB-' rating.
Insurance Groupama S.A. France 2,946 The CreditWatch placement reflects Standard & Poor's view that Groupama's recently published financial results further highlight the company's vulnerability to volatile market conditions and the execution risks associated with management's plan to strengthen the group's financial profile.
Retail/restaurants Best Buy Co. Inc.†§ U.S. 1,903 S&P 500 Satisfactory Moderate The CreditWatch negative placement reflects Best Buy Co.'s restructuring of operations, which fell short in addressing problems the entity is facing in its current business model. However, the CreditWatch will be resolved after Standard & Poor's has a discussion with management regarding its business strategy, cost reduction and growth plans, and the implications of those plans on the company's financial risk, policies, and credit metrics. The assessment will focus on the secular changes in the industry and Best Buy Co.'s ability to adapt its business model.
Utility ENN Energy Holdings Ltd. China 750 Satisfactory Intermediate The CreditWatch placement shows Standard & Poor's concerns about ENN's financial risk profile. In our view, the risk profile could weaken following the company's offer to acquire all outstanding shares and cancel all outstanding options of China Gas Holdings Ltd. ENN, as part of a consortium, has made a cash offer to acquire China Gas.
*Change from negative outlook to CreditWatch negative or vice versa. §Standard & Poor's equity-based index constituent. †Issue added to the list since the March 15, 2012, commentary. Data as of April 9, 2012. Source: Standard & Poor’s Global Fixed Income Research.

Table 6

Issuers Rated 'BBB-' With Negative Outlooks
Subsector Issuer Country Debt amount (mil. $) Index Business risk Financial risk Rationale
Aerospace and defense Finmeccanica SpA* Italy 8,482 S&P Europe 350 Satisfactory Significant The negative outlook reflects Standard & Poor's view of the risk that Finmeccanica's operational performance and credit ratios may fall below forecasts in the base-case scenario. The financial risk profile of Finmeccanica SpA has deteriorated as a result of lower earnings and restructuring measures in some of its divisions. The outlook also incorporates execution risks associated with Finmeccanica's disposal program.
Bank Arab Tunisian Bank (Arab Bank Group) Tunisia 33 The negative outlook reflects Standard & Poor's view that ATB's asset quality could weaken in the next 12-24 months owing to Tunisia's deteriorating economic conditions, which would result in weaker capital generation and earnings for ATB.
Bank Banca Carige SpA Italy 2,296 The negative outlook on Banca Carige reflects the possibility that Standard & Poor's could lower the ratings if domestic economic conditions and the banking industry deteriorate further. In addition, if the company's capitalization and asset quality in 2012 further worsen from our current baseline scenario, Standard & Poor's would consider lowering the rating.
Bank Banca Popolare di Vicenza ScpA Italy 5,938 The negative outlook on the long-term rating on Banca Popolare di Vicenza ScpA reflects our view that the deteriorating economic and competitive environment in Italy could affect the company's asset quality and capital. As per Standard & Poor's baseline scenario, BPVi's nonperforming assets would increase at a higher rate in 2012 and 2013 than in 2011. It is expected that net inflows of NPAs will remain below the sector average of 2.5% of customer loans in 2012.
Bank Banco Popolare Societa Cooperativa SCRL* Italy 21,465 S&P Europe 350 The negative outlooks on Banco Popolare and its core subsidiaries reflect the possibility that Standard & Poor's could lower the ratings if the rating on the Republic of Italy is lowered. Standard & Poor's could lower the ratings on Banco Popolare if domestic economic and banking industry conditions weaken further. This might weaken the bank's capital and earnings and asset quality beyond Standard & Poor's baseline expectation.
Bank Bankia S.A. (Caja de Ahorros y Monte de Piedad de Madrid) Spain 10,673 The negative outlook on the long-term ratings on Bankia and BFA reflects the possibility that Standard & Poor's could lower the ratings if the sovereign rating on the Kingdom of Spain is lowered.
Bank KBC Bank Ireland PLC (KBC Group N.V.) Ireland 124 The negative outlook reflects our view of KBCI's stand-alone credit profile. The outlook also reflects the risk that KBCI's capital and earnings could decline as a result of the continued deterioration in the bank's asset quality, which reflects the weak Irish economy.
Bank Veneto Banca S.C.P.A. Italy 2,322 The negative outlook reflects our view that Veneto Banca's capital and earnings might not be adequate because of deterioration in Italy's economic and banking industry conditions. The negative outlook also reflects our concern that management will be unable to strengthen capital. The increased operational complexity of Veneto Banca following its acquisitions in the past years makes its business and risk position more vulnerable to deterioration in the Italian economy.
Bank Zions Bancorp.* U.S. 3,420 S&P 500 The outlook is negative given current economic conditions and our ongoing concern regarding Zion's various loan and illiquid securities exposures. On Dec. 6, 2011, Standard & Poor's affirmed the 'BBB-' ratings on Zions Bancorp. following a full review of the company under the revised bank criteria.
Capital goods Invensys PLC* U.K. 635 S&P Europe 350 Satisfactory Intermediate The negative outlook reflects the fact that Standard & Poor's could lower the ratings if Invensys fails to restore profitability in the near term, leading the funds from operations-to-debt ratio to fall to lower than 30% in financial 2013. Invensys PLC recently announced that it expects cost overruns in its operating management and rail divisions to dampen its financial 2012 earnings.
Consumer products Molson Coors Brewing Co.§* U.S. 2,204 S&P 500 Satisfactory Significant The outlook revision on Molson Coors reflects the announcement of a definitive agreement to acquire StarBev L.P. for €2.65 billion, which will be largely financed by debt. We expect this to significantly increase leverages and weaken the company's financial ratios.
Consumer products Noble Group Ltd. Hong Kong 2,350 Satisfactory Intermediate The negative outlook reflects the possibility that Noble's financial strength, particularly its leverage, does not recover to what we expect for the current rating by the end of 2012. It reflects the uncertainties that still prevail in its expected financial recovery. However, Standard & Poor's may revise the outlook to stable if the company improves its leverage and sustains profitability, wherein its ratio of FFO to adjusted debt is above 20% and debt to capitalization below 45%.
Consumer products Ralcorp Holdings Inc.†* U.S. 750 S&P Mid-cap 400 Satisfactory Significant Ralcorp Holdings Inc. completed its spin-off of Post Holdings Inc. and received a dividend for $900 million, the majority of which was used for debt repayment in March of 2012. Given the debt reduction and our expectation that Ralcorp will reduce leverage to under 3x within 24 months, Standard & Poor's affirmed the 'BBB-' corporate credit rating on Ralcorp. We also affirmed our 'BBB-' issue-level ratings and removing all ratings from CreditWatch.
Consumer products Sigma Alimentos, S.A. de C.V. Mexico 700 Satisfactory Intermediate The negative outlook reflects Standard & Poor's view that Sigma's improved financial ratios may be offset by more volatility of the Mexican peso, affecting profitability. The company could also delay its expected debt prepayments and take longer than anticipated to deleverage, keeping its adjusted debt to EBITDA at about 2.8x through 2012. A negative rating action is possible if Sigma's EBITDA margins deteriorate in the coming quarters, leading to an adjusted total debt to EBITDA of higher than 3.0x.
Consumer products Universal Corp.* U.S. 530 S&P Mid-cap 400 Satisfactory Intermediate The outlook is negative, reflecting Standard & Poor's expectation that the company's operating income could decline and margins could tighten over the next two years under more difficult market conditions.
Chemicals, packaging, and environmental services Clariant AG* Switzerland 2,313 S&P Europe 350 Satisfactory Significant The negative outlook on Clariant reflects our view that future deleveraging is likely to be delayed until 2013 as a result of the deteriorating chemical business over the past two quarters and the anticipated mild recession in Europe in the first half of 2012. We anticipate that near-term adjusted FFO-to-debt ratios are likely to be closer to 20%, compared with the 30% that we view as consistent with the ratings. Standard & Poor's assessment of Clariant's financial risk profile as "significant" chiefly reflects the issuer's deteriorated credit ratios following the Süd-Chemie acquisition.
Health care Charles River Laboratories International Inc.* U.S. 953 S&P Mid-cap 400 Fair Intermediate The negative outlook reflects Standard & Poor's belief that, besides the contract research organization segment showing signs of stabilizing, the pharmaceutical industry has not recovered as quickly as expected. The company entered into a new $150 million senior secured term loan due 2015 to help fund the share repurchase. Financial metrics weakened after the company issued a $150 million term loan, used in part to fund a share repurchase. As of June 30, 2011, adjusted leverage was 3.3x, and funds from operations to total debt was about 22%, reflecting a weaker performance during the downturn.
High technology Nokia Corp. Finland 3,791 Fair Intermediate The negative outlook reflects the possibility of a downgrade in the next two years if the operating margins of Nokia's Devices & Services division remain in the low-to-mid single-digits or if the company's net cash position declines to below €2 billion. The negative outlook also reflects inadequate visibility on future revenues, given that the volume and price mix in the Smartphone subdivision is difficult to anticipate. These two factors will significantly affect company revenue, profitability, and cash flow.
Insurance Sagicor Life Inc. Barbados 150 The negative outlook incorporates Standard & Poor's expectation that further pressure could fall on Sagicor's operating performance, based on the still-challenging economic conditions in the Caribbean and volatility from the catastrophic exposures the group covers. The outlook also reflects our expectation that Sagicor's operating performance and capital will remain weak.
Metals, mining, and steel ArcelorMittal* Luxembourg 30,286 S&P Europe 350 Satisfactory Intermediate The negative outlook reflects the possibility of a downgrade in the next six to 12 months if the group is unable to improve its ratio of FFO to debt to about 25%, which is what Standard & Poor's considers commensurate with the rating. In our view, the probability of deleveraging in the near term has decreased given the uncertain macroeconomic conditions in Europe and the U.S.
Metals, mining, and steel Usinas Siderurgicas de Minas Gerais S.A. (Usiminas) Brazil 400 Satisfactory Intermediate The negative outlook reflects Standard & Poor's view that Usiminas is facing longer-term struggles to improve its cash flow metrics consistently. The negative outlook implies that Standard & Poor's could downgrade Usiminas if it fails to improve its operating profitability. According to Standard & Poor's base-case projection, total debt to EBITDA should gradually improve to less than 4.0x (from current 8.0x) and FFO to adjusted debt to 20% (from current 10%) by the end of 2013.
Oil and gas exploration and production Transocean Inc. U.S. 9,500 Strong Significant The negative outlook reflects Standard & Poor's view of the uncertainties surrounding the company's Macondo-related liability exposures and the prospects for continued weak profitability over the next 12 months. Transocean has completed the acquisition of Aker Drilling ASA through the combination of cash and assumed debt, which has weakened the company's financial profile at a time of soft operating performance. The acquisition will likely delay the improvement of credit protection measures.
Retail/restaurants Co-operative Group Ltd. U.K. 1,270 Satisfactory Significant The negative outlook reflects our view that the proposed acquisition of Lloyds Banking Group PLC, if it materializes, may put a strain on the Co-operative's balance sheet and pose integration and operational risks in the context of challenging conditions for U.K. retail/restaurateurs. Co-operative has entered into exclusive talks as the preferred bidder for 632 branches of Lloyds.
Retail/restaurants RONA Inc. Canada 574 Satisfactory Intermediate The negative outlook reflects our view that weak market conditions will make it difficult for RONA to return to leverage figures below Standard & Poor's key 3x threshold in the near term.
Sovereign Barbados Barbados 1,448 The negative outlook reflects the fact that Standard & Poor's may lower the ratings on Barbados over the next year if the government's fiscal policies fail to address the rising debt or if Barbados' economic recovery is delayed. Global events are weakening Barbados' economic recovery, and high fiscal pressures may hinder Barbados' medium-term growth. The outlook reflects the lackluster growth and insufficient fiscal adjustment we expect in the next 12 months, which would create a higher debt burden that would limit fiscal flexibility.
Sovereign Republic of Croatia Croatia 9,501 The negative outlook reflects the likelihood of another downgrade in the next two years if fiscal consolidation is slower than we project, structural reforms fail to bolster economic growth and fiscal trajectories, or external liquidity worsens. On July 8, 2011, our outlook remained negative, reflecting our view of the downside risks to economic performance absent more substantial fiscal and structural reforms, including preelection spending.
Sovereign Republic of Tunisia Tunisia 3,823 The negative outlook on the ratings on Tunisia reflects Standard & Poor's view that downside risks to the rating will persist at least until the constitutional assembly elections are held, and the economy recovers. Risks remain, such as: uncertainties about medium-term policy formulation and implementation; weaker fiscal policies; and the weak banking system. On Nov. 1, 2011, Standard & Poor's said that the outcome of the election for the constitutional assembly in the Republic of Tunisia has no immediate effect on the sovereign rating on Tunisia, and on the rating on the Central Bank of Tunisia.
Telecommunications Telephone and Data Systems Inc.§ U.S. 1,521 Fair Modest The negative outlook reflects the risk of competitive pressure, which could intensify, resulting in increased subscriber losses and depressed wireless EBITDA service margins. TDS's strategy still focuses on providing superior service to its customer, which has led to huge investments that can depress the free operating cash flow in near future.
Transportation Copenhagen Airports Denmark ApS (Copenhagen Airports Denmark Holdings ApS) Denmark 300 The negative outlook reflects Standard & Poor's view that improvement to the group's credit metrics could be limited in the near term as a result of the softer economic outlook for 2012.
Utility Colbún S.A. Chile 500 Satisfactory Significant The outlook primarily reflects Colbún's weakening financial performance as a result of a severe, prolonged drought. In addition, the delay in the start-up of its 342-megawatt (MW) coal-fired plant Santa Maria, greater commercial commitments, and high fuel and energy spot prices undermined the company's performance in the 12-months ended June 2011. The negative outlook reflects the possibility that Standard & Poor's could lower the rating if Colbún's credit measures and cash flow generation don't start to improve during the next three quarters to levels more in line with the company's financial risk profile.
Utility Energy Transfer Partners LP U.S. 8,550 Strong Aggressive The negative rating outlook on ETP reflects Standard & Poor's expectations that the acquisition of assets will increase company's business risk profile and worsen its debt leverage measures. On Jan. 9, 2012, ETP announced a pending issuance of $2 billion of senior unsecured notes.
*Standard & Poor's equity-based index constituent. §Issuer added to the list since the March 15, 2012, commentary. †Change from negative outlook to CreditWatch or vice versa. Data as of April 9, 2012. Source: Standard & Poor’s Global Fixed Income Research.

Related Criteria And Research

Global Fixed Income Research:Diane Vazza, Managing Director, New York (1) 212-438-2760;
diane_vazza@standardandpoors.com
Gregg R Moskowitz, Associate, New York (1) 212-438-1838;
gregg_moskowitz@standardandpoors.com
Research Contributor:Abhik Debnath, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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