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How Eurozone
sovereign
downgrades could
impact corporate1
ratings
John Hatton, Group Credit Officer
EMEA Corporates
October 2012
(1) Non-financial Corporates
EZ sovereign downgrades - corporate ratings
What are drivers for corporate ratings to be affected
• Sovereign-linked credits
• Few in EMEA due to state-aid rules, privatisation and competitive markets
• Stand-alone profiles, can be rated above the Sovereign
• Economic environment already included in company performance
• Liquidity and access to capital
• Prospective, precedent, of state interference
• Geographical diversification
• Stand-alone credits capped by Sovereign-related considerations
• +6 notches implied cap for lower likelihood of Transfer and Convertibility (T&C) in Eurozone Member States
(see How Sovereign Ratings Relate to other Asset Class Ratings in the Eurozone dd October 2012).
• Lower Country Ceiling for individual country – T&C / redenomination risk
• Liquidity contagion (disorderly sovereign restructuring)
www.fitchratings.com
16/07/2015
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Existing Portfolio
Implications of Sharp Deterioration in Eurozone Sovereign Ratingsa
Likely Maximum Foreign Currency IDR for Corporates Which are…
Sovereign FC
IDR
A+
Primarily Domestic  Level of Diversification  Globally Diversified
Potentially no impact
A-
A+
BBB
A-
BB+
BBB
BB-
BBB-
B+
BB+
B-
BB
CCC
BB
RD
BB


Potentially no impact
Potentially no impact




AA
A+
ABBB+a


BBB-a
BBB-a


BBB-a
a
While in practice, the rating of a corporate which is not able to swiftly avoid redenomination risk in a worst case scenario is
unlikely to exceed the sovereign rating by much more than six notches, the contours of such sovereign downgrade actions (eg, the
approach of a reprofiling of sovereign debt maturities) may indicate that transfer and convertibility risk remains very limited, and
could indicate a wider gap for globally diversified corporates than the six notches indicated here Source: Fitch
Corporate Headroom Below Ceilings
Each Marker Represents a Corporate IDR
Spanish Corps
Italian Corps
Portuguese Corps
Spanish "Cap"
Italian "Cap"
Portuguese "Cap"
AAA
• Scale of corporate rating
movements has been consistent
with a “normal” recessionary
period, rather than any material
linkage to the region’s sovereign
ratings
• EZ corporates’ ratings within
implied cap of +6 notches from
sovereign ratings (Spain ‘BBB’,
Italy ‘A-’, and Portugal ‘BB+’)
AA
A
BBB
BB
Spain
Italy
Portugal
B
Source: Fitch
www.fitchratings.com
16/07/2015
3
What are the Drivers or Warning Signs?
• Stand-alone credits above the Sovereign
• Economic environment already included in company performance
Mobile Service Revenue and GDP
(GDP %)
North GDP
South GDP
North Revenue (RHS)
South Revenue (RHS)
(Rev %)
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
-12%
4%
2%
0%
-2%
-4%
-6%
-8%
Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212
Source: Fitch; employment figures from Eurostat
• Generally, our forecasts and ratings reflect protracted anaemic economic recovery prospects
• Unlikely prospective, and no past precedent, areas of state interference
• Utilities – interference in independence of regulatory tariff setting.
• Tax
• Liquidity and access to capital
• Contagion from local banking system
www.fitchratings.com
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Liquidity and Access to Capital
Portugal
CDS Prices
EDP
PT
Portugal
bps
1600
1400
1200
1000
800
600
400
200
0
1-11
Spain
Repsol
Iberdrola
Telefonica
Spain
CDS Prices
bps
700
600
500
400
300
200
100
3-11
5-11
7-11
9-11
11-11 1-12
3-12
5-12
7-12
9-12
Source: Bloomberg
0
1-11
3-11
5-11
7-11
9-11 11-11 1-12
3-12
5-12
7-12
9-12
Source: Bloomberg
Italy
CDS Prices
Eni
Enel
TI
Italy
• Periphery corporates have accessed bonds
totalling USD51bn of EMEA total USD402bn
YTD
bps
600
500
400
300
200
100
0
1-11
3-11
5-11
7-11
9-11
11-11
1-12
3-12
5-12
7-12
9-12
Source: Bloomberg
www.fitchratings.com
• Sovereign rating to ‘BBB’ and below can reflect,
inter alia, its market access and official
programme requirements
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What are the Drivers or Warning Signs?
• Stand-alone credits above the Sovereign
Selected Issuers – Revenue Diversification
• Economic environment already
Entity
included in company performance Greece
OTE
Sector
Current rating
Domestic Revenuesª
Telecom
‘B-’, Watch Negative

Utility
‘BBB+’, Negative Outlook

Utility
Utility
Utility
Oil & Gas
Industrial
Industrial
Telecom
Utility
Telecom
‘A’, Negative Watch
‘BB-‘, Watch Positive
‘BBB+‘, Watch Negative
‘A+’, Stable Outlook
‘BB’, Negative Outlook
‘BBB-‘, Negative Outlook
‘BBB’, Negative Outlook
‘A’, Negative Outlook
‘BB’, Negative Outlook









Telecom
Utility
‘BBB’, Negative Outlook
‘BBB-’, Negative Outlook


Infrastructure
Cable
Utility
Utility
Utility
Industrial
Utility
Oil & Gas
Telecom
‘B+’, Stable Outlook
‘B’, Positive Outlook
‘A-’, Stable Outlook
‘BBB+‘, Watch Negative
‘BBB+‘, Watch Negative
‘BB-‘, Stable Outlook
‘A-’, Negative Outlook
‘BBB-’, Negative Outlook
‘BBB+’, Negative Outlook









Ireland
• Unlikely prospective, and no past
precedent, of state interference
• Liquidity and access to capital
• Geographical diversification
• By revenue and profits
Electricity Supply Board
Italy
Acea SpA
Edison SpA
Enel SpA
Eni SpA
Fiat SpA
Finmeccanica SpA
Telecom Italia SpA
Terna SpA
Wind Telecomunicazioni SpA
Portugal
Portugal Telecom
EDP – Energias de Portugal SA
Spain
Abengoa
Cableuropa SA
Enagas SA
Gas Natural SDG SA
Iberdrola SA
Obrascon Huarte Lain SA
Red Electrica Corporacion
Repsol SA b
Telefonica SA
www.fitchratings.com
16/07/2015
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What are the Warning Signs?
Warning Signs: Sovereign Interference and Contamination
• Redenomination (fall in Country Ceiling – existing example of Greece ‘B-’)
• Unknown scope and effectiveness of (unlawful) capital control mechanisms, if introduced
• Nationalisation
• viewed as unlikely scenario
• Liquidity Contagion
• banking system, dis-orderly sovereign restructuring
Real World Actions / War Game Scenarios:
• Accessing and refinancing in bond market. Not over-reliant upon domestic banking system linked to sov.
• Reducing capex and dividend outflows. Not depositing surplus cash with local banking system.
• IPO subsidiary, thereby accessing local money or closer to investor base (Telefonica, OHL)
• Re-domicile – Coca-Cola Hellenic relocate from Greece to Switzerland,. FAGE Greece to Luxembourg
• Re-list in another jurisdiction – CRH plc
www.fitchratings.com
16/07/2015
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Related Research
All relevant Fitch research can be found on our website www.fitchratings.com under the
appropriate sector headings
The Future of the Eurozone – The Impact on Corporates
Scenario: A Euro Redenomination and Corporate Ratings
Corporates in the Eurozone Periphery Updated Issuer-Level Forecasts, May 2012
Scenario: Eurozone Shock Case for EMEA Corporates
Scenario: Eurozone Corporate Shock Case – FAQ
Scenario: Eurozone Corporate ‘War Game’ Exercise
www.fitchratings.com
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Disclaimer
Fitch Ratings’ credit ratings rely on factual information received from issuers and other sources.
Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings
are inherently forward-looking, embody assumptions and predictions that by their nature cannot be
verified as facts, and can be affected by future events or conditions that were not anticipated at the
time a rating was issued or affirmed.
The information in this presentation is provided “as is” without any representation or warranty.
A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not
address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned.
A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its
agents in connection with a sale of securities.
Ratings may be changed or withdrawn at any time for any reason in the sole discretion of
Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not
a recommendation to buy, sell, or hold any security.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE
LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.
www.fitchratings.com
16/07/2015
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