7th Annual Credit Markets Symposium – Finding the Right Balance
Changes in Wholesale Lending: 2007 versus 2013
Jay Dhru
Sr. Managing Director
Global Corporate Ratings
April 19, 2013
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Copyright © 2013 by Standard & Poor’s Financial Services LLC. All rights reserved.
Market Conditions for U.S. Corporate Ratings
Positive Factors:
Risks and Challenges:
• Investor “thirst for yield” & low interest
rates are spurring corporate borrowing,
• Low U.S. consumer confidence is undermining
hiring and slowing economic growth - we place
the likelihood of a recession at 15% to 20%,
• Low yields on treasuries and stock market
uncertainty make corporate bonds & loans
relatively attractive,
• High yield market continues to be
receptive to new issuance in 2012),
• Barring major economic setbacks, we
expect a continuation of strong high yield
issuance in 2013,
• Corporate balance sheets and liquidity
have improved markedly since the crisis,
• Corporate profit margins and productivity
have recovered but further gains will be
challenging in a low growth environment,
• Default rates remain at low levels although
trending up marginally, and
• Fed implements third phase of
Quantitative Easing
• High structural unemployment and
underemployment are also weakening demand,
• European recession combined with a
sovereign debt crisis and decelerating growth
from China, all contribute to stronger head
winds on U.S. & global GDP growth prospects,
• Corporate earnings: Is there a potential for a
material margin squeeze given decreasing
economic and revenue growth prospects?
• Risks from automatic budget cuts (Fiscal Cliff)
and 2013 fiscal austerity,
• Effect of rising dollar on export competiveness,
• Negative effect from volatile commodity prices,
• Dodd-Frank Wall Street Reform & Consumer
Protection Act, and
• Resurgence of more liberal credit standards
(i.e. ‘covenant light’) which could have adverse
implications in the future
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2.
United States – Annual Upgrades and Downgrades Since 2009
Upgrades
Investment Grade
Downgrades
Downgrade : Upgrade Ratio
67
67
3.02 x
49
88
1.04x
1.07x
0.96x
2010
2011
YTD 2012
47
70
72
2009
130
2009
2010
2011
YTD 2012
Downgrade : Upgrade Ratio
327
3.03 x
280
232
183
1.34x*
0.62x
204
240
0.86x
245
2009
2010
2011
*Note: 2.06x during last 6 months
Speculative Grade
704
IG and SG Upgrades and Downgrades: US Corporates, excluding Financial and Insurance
Includes downgrades to default and includes upgrades from default
Source: Global Ratings Reporting Group using QDA. Report Creation Date : 11/16/2012.
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3.
YTD 2012
Record Amount of Cash Hoarded on Balance Sheets
• Fed Reserve Report: $1.82T of non-financial corporate cash at YE‘12
• ~5.5% increase from 2011; 12%+ increase from 2006
• ~28% increase from Great Recession in 2008
• S&P Rated: ~$1.27T of cash held by non-financial corporate issuers at YE’12
• Ratio of Cash to Total Assets is higher than historical levels
• Near 7% range from 2006 – 2008
• Peaked at over 9% in 2010 but remains elevated
S&P Rated
Federal Reserve
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4.
Cash Not Evenly Distributed Among Ratings
• Greater Growth Among Investment Grade
• ~9% CAGR from 2006 – 2012
• Consistent Cash Flow through recession and higher offshore cash
• ‘A’ rated category and above (10% of issues)  60% of $1.27 Trillion
• Spec Grade Growth Is Lagging
• ~2.5% CAGR from 2006 – 2012
• Greater revenue declines and lower CFO generation through recession
• Higher domestic cash balance which can be distributed to sponsors & shareholders
• Held for liquidity concerns; Maturities concentrated at “B” and lower ratings.
• “B” rated category and below (46% of issues)  only 10.5% of $1.27 Trillion
~9%
CAGR
~2.5%
CAGR
2012 (E)
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5.
Cash Not Evenly Distributed Among All Rated Issuers
• Top 25 Largest Cash Holders account for 40% of Cash
• 1.5% of Total Rated Corporate Issuers
• Top 50 Account for about 52% of Total Pie, out of 1700 issuers.
2012
Top 10 Rated Issuers
• Microsoft
• Google
• Cisco
• Oracle
• Pfizer
• GM
• Ford
• Amgen
• Chevron
• J&J
$68.1B
$48.1B
$46.4B
$33.7B
$32.7B
$26.1B
$24.4B
$24.1B
$21.9B
$21.1B
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6.
Cash Not Evenly Distributed Among All Industries
• Two Industries Hold Nearly 45% Of The Cash
1. Technology accounts for about 28% (over $350B)


Greater exposure to non-US earnings
Treasurers’ reticence to repatriate overseas cash
2. Health Care at 15% (nearly $200B)
• Improvement in Auto Sector Fundamentals Supports 7% Share of Cash
2012
2012
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7.
How Did The Cash Balance Grow?
• Under Investment by $175B Since The Recession
• Capex fell 21% through the Recession; Revenue declined 13%
• Capex declines in 2009 and 2010 outpaced those of revenue declines
• Capex spend as a % of revenues fell from 7.5% to 6.6% from 2008 to 2010
• Capex growth did not exceed revenue growth until 2011
• Capex % spend finally returned to 2008 level in 2012
7.6
12% Decline
YE’12 (E)
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8.
Capex Decline More Pronounced in Spec Grade
• Spec Grade Issuers underinvested about 20% of normal Capex
• Some rebound of late, but still not fully recovered
• Investment Grade Issuers underinvested by only 4%
7.6 7.6
2012 (E)
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9.
Europe – More Caution, More Cash Pressure, Investing Elsewhere
Europe Debt 1000 –Operating Cash
Growth
Europe Debt 1000 - Cash & ST investments
(Real terms)
(Nominal)
Cash & equivalents and short-term investments, inflation-adjusted present value
Euros, Billion
1100
1000
900
Cash from operations - annual growth (%)
Year-on-year (%)
European nonfinancial companies
have a Trillion Euro
cash pile...
...but downward
pressure on
operating cash flow
15
10
800
5
700
0
600
-5
500
-10
400
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2011
Cash Balances By European Industry
Cash & ST Investments, LTM
Avg, 2001-2011
Industries with cash
may not spend it
given long lead times
for investment and
overcapacity...
U
Ca t ilit
pi ies
ta
Tr l Gd
an s
sp
or
Au t
to
En s
M ergy
at
e
Te rials
lec
om
s
Fo F
od BT
Re
Te P t ail
ch ha
Ha rm
rd a
w
Co are
ns
Co Du
ns r
Sv
c
M s
Co
ed
m
ia
m
& Sem
Pr
of is
S
So vcs
ft w
He R ar
e e
Hh alt h t ail
ld car ing
& eE
Pe q
rs pt
Pr
od
s
Euros, Billion
160
140
120
100
80
60
40
20
0
2002
LTM
2003
2004
2005
2006
2007
2009
2010
2011
LTM
Proportion of Capex Spent Outside Europe
Proportion of capital expenditure spent outside of Europe (%)
Share of total capex
(%)
45%
...and a large and
rising share of capex
40%
is spent outside of
40%
Europe
36%
36%
42%
35%
30%
28%
25%
20%
2008
2009
2010
Source: S&P Capital IQ, S&P Ratings calculations. All data refer to a bespoke index, Europe Debt 1000. The index represents the largest 1000
companies in Europe (both publically-listed and private companies with public debt) in terms of total debt and is rebalance annually.
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10.
2008
2011
LTM
Asia-Pacific: Cash Balances Ease As Concerns Fall
• Cash balances as percentage of assets for rated corporates in
Asia-Pacific:
– Increased to conservative levels after the global financial crisis broke.
– But eased over the past two years as liquidity concerns dissipate.
© Standard & Poor’s. 2012e is a sample estimate, actual figures may differ.
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11.
Underinvestment Led To Higher Cash Balances…BUT
It preserved liquidity only in the short term
It artificially inflated overall corporate liquidity
Exposes competitive disadvantage
•
•
•
•
Product innovation
Manufacturing
Operating equipment maintenance
Technology
Will shrink profitability
Diminish ability to borrow
Impact credit quality
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12.
Is The Cash Burning a Hole in Corporate Pockets?
• M&A is on the rise
• Share buy backs on the rise
• Little cost cutting left
You cannot grow by shrinking
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13.
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