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The Downgrade Massacre Has Started

March 30, 2020

The Downgrade Massacre Has Started

Just astounding. So many downgrades in just of a couple of days. And zero upgrades. Here’s who got hit.

I get “Moody’s Daily Alert” in my inbox, which lists Moody’s ratings actions for the day. The Alerts are usually a mix of a few upgrades and a few downgrades. Many times, there are no downgrades. Earlier this year, it became obvious without counting that the downgrades were starting to outnumber the upgrades by a large margin. But this week, the three Alerts were a torrent of 69 downgrades and zero upgrades. This is something I haven’t seen since I started subscribing to this service years ago. Some of the downgrades were by multiple notches in one fell swoop.

This ratio of zero upgrades to 69 downgrades by Moody’s this week is a hair-raising deterioration of the already downgrade-heavy ratings actions so far this year. Moody’s has now downgraded over 180 companies this year, 69 of which I got in my inbox just this week!

In addition, these Alerts contained a torrent of warnings about “ratings on review for further downgrade” or “negative outlook,” meaning downgrades, or additional downgrades are to come.

The analysts at Moody’s must be working overtime putting together their downgrade reports, and they’ve fallen behind, and it’s going to take them a while to catch up. Meanwhile, they issue warnings about what they’ve got in their downgrade pipeline.

For example, this week, Moody’s downgraded Ford’s senior credit rating one notch deeper into junk (to Ba2). Ford’s corporate family rating is already Ba2. Moody’s warned that it placed the ratings under review for further downgrade. Moody’s said the ratings “reflect what is an already-stressed credit profile and a very long-term restructuring program. The company is now additionally burdened by the prospect of a severe and prolonged decline in automotive markets precipitated by the coronavirus.”

…click on the above link to read the rest of the article…

2019: Zombie Markets Before The Fall

December 28, 2018

2019: Zombie Markets Before The Fall

Francis Tattegrain La ramasseuse d’épaves (The Beachcomber) 1880

I haven’t really written about finance since April of this year, and given recent fluctuations in what people persist in calling the markets, maybe it’s time. Then again, nothing has changed since that article in April entitled This Is Not A Market. I was right then, and I still am.

[..] markets need price discovery as much as price discovery needs markets. They are two sides of the same coin. Markets are the mechanism that makes price discovery possible, and vice versa. Functioning markets, that is. Given the interdependence between the two, we must conclude that when there is no price discovery, there are no functioning markets. And a market that doesn’t function is not a market at all.

[..] we must wonder why everyone in the financial world, and the media, is still talking about ‘the markets’ (stocks, bonds et al) as if they still existed. Is it because they think there still is price discovery? Or do they think that even without price discovery, you can still have functioning markets? Or is their idea that a market is still a market even if it doesn’t function?

But perhaps that is confusing, and confusion in and of itself doesn’t lead to better understanding. So maybe I should call what there is out there today ‘zombie markets’. It doesn’t really make much difference. What murdered functioning markets is intervention by central banks, in alleged attempts to save those same markets. Cue your favorite horror movie.

Now Jerome Powell and the Fed he inherited are apparently trying to undo the misery Greenspan, Bernanke and Yellen before him wrought upon the economic system, and people, cue Trump, get into fights about that one. All the while still handing the Fed, the ECB, the BoJ, much more power than they should ever have been granted.

 …click on the above link to read the rest of the article…

Fitch Threatens US with Downgrade

August 24, 2017

Fitch Threatens US with Downgrade

Did it forget how the US government hounded Standard & Poor’s?

Bitter irony! Just yesterday, I had a conversation with Bill Tilles, and we agreed on all three points. This morning, we’re already proven wrong on one of them:

  1. A government shutdown as Congress fails to pass spending levels for fiscal 2018? Yes, it could happen.
  2. A failure to raise the debt ceiling, thus pushing the US government into default, or “selective default?” Very unlikely. Lawmakers are political animals that use charades and posturing to accomplish their goals, but they’re not stupid (we hope).
  3. A threat by US ratings agencies to slash the US credit rating due to the debt-ceiling charade and the consequences of a “selective default?” No way, we agreed. Ratings agencies learned their lesson from how the US government hounded Standard & Poor’s after its 2011 downgrade of the US.

A new day, and we’re already wrong. Standard & Poor’s may have learned its lesson. But Fitch Ratings hasn’t – though its language this morning was a lot kinder and gentler (emphasis added).

If the debt limit is not raised in a timely manner prior to the so-called “x date,” Fitch would review the US sovereign rating, with potentially negative implications. We have previously said that prioritizing debt service payments over other obligations if the limit is not raised – if legally and technically feasible – may not be compatible with ‘AAA’ status.

In the most recent letter to Congress, Treasury Secretary Steven Mnuchin said that the US would run out of money by the end of September. This can likely be stretched into October. Just this week, Senate Majority Leader Mitch McConnell swore there was “zero chance” that “we won’t raise the debt ceiling.”

But Fitch adds that Congressional posturing alone could cause a downgrade – the same reason S&P downgraded the US during the debt ceiling fight in 2011. Fitch:

…click on the above link to read the rest of the article…

S&P Just Downgraded 10 Of The Biggest US Energy Companies

February 2, 2016

S&P Just Downgraded 10 Of The Biggest US Energy Companies

Just 10 days after “Moody’s Put Over Half A Trillion Dollars In Energy Debt On Downgrade Review“, moments ago S&P decided it wanted to be first out of the gate with a wholesale downgarde of the US energy companies, and announced that it was taking rating actions on 20 investment-grade companies, including 10 downgrades.

The full release is below:

Standard & Poor’s Ratings Services said today that it has taken rating actions on 20 investment-grade U.S. oil and gas exploration and production (E&P) companies after completing a review. The review followed the recent revision of our hydrocarbon price assumptions (see “S&P Lowers its Hydrocarbon Price Assumptions On Market Oversupply; Recovery Price Deck Assumptions Also Lowered,” published Jan. 12, 2016).

While oil prices deteriorated over the past 15 months, the U.S.-based investment-grade companies we rate had been largely immune to downgrades. However, given the magnitude of the recent reductions in our price deck, most of the investment-grade companies were affected during this review. We expect that many of these companies will continue to lower capital spending and focus on efficiencies and drilling core properties. However, these actions, for the most part, are insufficient to stem the meaningful deterioration expected in
credit measures over the next few years.

A list of rating actions on the affected companies follows.

DOWNGRADES

Chevron Corp. Corporate Credit Rating Lowered To AA-/Stable/A-1+ From AA/Negative/A-1+ 

The downgrade reflects our expectation that in the context of lower oil and  gas prices and refining margins, the company’s credit measures will be below our expectations for the ‘AA’ rating over the next two years. We anticipate Chevron will significantly outspend internally generated cash flow to fund major project capital spending and dividends this year and generate little cash available for debt reduction over the following two years.

…click on the above link to read the rest of the article…

It’s Just Not Saudi Arabia’s Year: First Oil Prices, Now This…

November 4, 2015

It’s Just Not Saudi Arabia’s Year: First Oil Prices, Now This…

Last week, in the latest sign of Saudi Arabia’s deteriorating financial condition, S&P downgraded the kingdom to AA- negative citing “lower for longer” crude and the attendant ballooning fiscal deficit.

To be sure, we’ve covered the story extensively and it was almost exactly one year ago that we flagged the quiet death of the petrodollar and explained the significance to a market that hadn’t yet woken up to just what it means when, thanks to plunging crude prices, producing nations cease to be net exporters of capital.

With more than $650 billion in SAMA reserves, Riyadh does have a sizeable cushion. However, there are a number of factors (in addition to low oil prices) that are weighing heavily including, i) financing the war in Yemen, ii) maintaining the lifestyle of everyday Saudis, and iii) preserving the riyal peg. Here’s a look at the breakdown of government expenditures:

When you mix heavy outlays with declining revenue, it means dipping into the warchest…

Here’s a bit of color from Deutsche Bank which helps to explain what we mean by “the cost of preserving the societal status quo”:

 

The largest energy subsidy beneficiary is the end-consumer in the form of fuel (petrol) subsidies. Bringing up the price of petrol to levels in the UAE, which earlier this year eliminated the petrol subsidy, could provide the government with USD27bn incremental revenues, or 20% of the budget deficit. However, this is a highly unlikely scenario given the demographic differential between KSA and UAE and the socio-economic impact that such an outcome (blended prices rising from USD0.11/l to USD0.5/l) could have within the country.


The Saudi government could look to increase electricity tariffs. This would be a challenge for residential consumption (51% of aggregate consumption) given the political/social impact, though it would present the highest incremental revenue benefit. 

…click on the above link to read the rest of the article…

Once Burned, Twice Shy? Utica Shale Touted to Investors As Shale Drillers Continue Posting Losses

August 3, 2015

Once Burned, Twice Shy? Utica Shale Touted to Investors As Shale Drillers Continue Posting Losses

For the past several weeks, the drilling industry — hammered by bad financial results — has begun promoting its next big thing: the Utica shale, generating the sort of headlines you might have seen five years ago, when the shale drilling rush was gaining speed. “Utica Shale Holds 20 Times More Gas Than Previous Estimates”, read one headline. “Utica Bigger Than Marcellus”, proclaimed another.

The reason for the excitement was a study, published by West Virginia University, that concluded the Utica contains more shale gas than many estimates for the Marcellus shale, a staggering 782 trillion cubic feet.

“This is a landmark study that demonstrates the vast potential of the Utica as a resource to complement – and go beyond – what the Marcellus has already proven to be,” Brian Anderson, director of West Virginia University’s Energy Institute, told the Associated Press.

But those considering investments based on the Utica’s potential may want to pause and consider the shale industry’s long history of circulating impressive predictions, later quietly downgraded, while spending far more than they earn.

“The industry has not been generating enough money to cover its capital spending and dividends,” Fidelity Investments energy fund manager John Dowd told Barrons.

Indeed, while it is clear that the shale drilling rush has produced large amounts of oil and gas, (alongside wastewater and other environmental impacts), the financial prosperity promised by its backers has not seemed to materialize.

Burning Through Cash

Companies like Chesapeake Energy, the nation’s second largest producer of natural gas and one of the most aggressive advocates of the shale rush nationwide, have been hammered hard by low oil prices and high costs in 2015.

…click on the above link to read the rest of the article…

 

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