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   [Finance]Finding A Bad Credit Mortgage 27482                Slide 1: (Cover Feature—Latin Finance) Vaulting the
                                                               By David Swafford With few exceptions, rating agenc
   From: alexiss                                               loathe to break with their tradition of not rating Latin c
   Views: 285 Comments: 0                                      higher than the country in which they are based. Inves
                                                               increasingly making up their own minds on credit risk
                                                               corporates through the sovereign in the secondary mar
                                                               Consider this: on March 31, Argentine oil company Y
                                                               bonds maturing in 2004 were trading at 182 basis poin
[Finance]Interest Rate Determination Three Key Factors 25757             Treasuries while Argentine sovereign bonds maturing
                                                                         were trading at 227 bps over Treasuries. Yet YPF and
From: chcheng                                                            Argentina had the same credit rating—BB/BB/B1 by S
Views: 163 Comments: 0                                                   Poor's, Duff & Phelps Rating Co. and Moody's Investo
[Finance]Interest Rate Determination Three Key Factors                   to the policy of not rating corporates higher than the co
25757                                                                    they are based. On the same day, Brazil's globai bond
                                                                         traded at 203 bps over Treasuries while Petrobras debt
                                                                         same year was trading at 137 bps over and Unibanco d
                                                                         year earlier was trading at 152 bps over. Petrobras (a q
                                                                         and Unibanco are each rated B1 by Moody’s, again co
From: carterglobal
                                                                         sovereign’s B1 rating. These scenarios underscore a gr
Views: 11 Comments: 0
                                                                         among investors, analysts, lenders and borrowers over
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                                                                         relevancy of credit ratings. While the market is hinting
Your Personal Credit:
                                                                         more companies are worthy of higher credit ratings, he
                                                                         finance charges, most firms are being held captive by
                                                                         Latin American sovereign ceilings. In YPF's case, at le
Finance                                                                  view has been vindicated. On April 22, S&P took ever
                                                                         when it announced it had concluded that sovereign ris
From: carterglobal                                                       factor affecting the ratings of issuers in some dollarize
Views: 306 Comments: 0                                                   particularly Argentina, Panama and Uruguay. "The for
Getting Money For Your Business Without Risking                          ratings that the agency assigns to private sector borrow
Your Personal Credit:                                                    countries henceforth will more fully reflect their stand                     characteristics," said S&P. But while issuers in those c
                                                                         doubt welcome that decision, it does little for capital-h
                                                                         corporations in countries like Mexico. Brazil and Vene
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                                                                         Mexico’s Transportación Marítima Mexicana. At the b
                                                                         April, TMM debt was trading through short-term sove
From: amittaiy
                                                                         "Frankly, both S&P and Moody's have told us we wou
Views: 102 Comments: 0
                                                                         rating if we weren't located in Mexico," said Pedro Me
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                                                                         investor relations at TMM. "We don’t think that’s fair
                                                                         between the official ratings and the market's assessme
Irwin/McGraw-Hill 1 Finance Companies                                    some argue, holding back private sector growth. Other
                                                                         memories of Latin America's debt debacle of the 1980
From: apinkham                                                           ignoring country risk flies in the face of history. "We h
Views: 93 Comments: 0                                                    memories," said Donald Selzer of Moody's internation
Irwin/McGraw-Hill 1 Finance Companies                                    development department. Latin American corporation
                                                                         agencies would concentrate more on their present fina
                                                                         business accomplishments and less on the past. "At lea
                                                               See all   YPF, we don't think (the sovereign ceiling) is a fair res
                                                                         Cedric Bridger, vice president at YPF. With operation
                                                                         countries, the United
                                                                         Slide 2: States and Indonesia, YPF exports 200,000 ba
                                                                         daily, worth about $1.6 billion per year—“an amount
                                                                         the service of YPF's debt,” affirmed Bridger. YPF trea
                                                                         Felices said the company was paying 150 to 200 bps a
                                                                         Treasuries for five-year bonds, compared to the 40 to 5
                                         comparable investment grade corporates pay in Chile.
                                         million issue, that extra 100 bps translates into an addi
                                         per year in financing costs—enough to have a real com
                                         on two otherwise similar competitors. As a consequen
                                         decision, YPF was immediately upgraded to investme
                                         )—two notches above Argentina's BB rating. An elate
                                         "Major investment banks have already told us this wil
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                                         positive influence on our financing costs." Contrast th
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                                         Venezuelan oil firm PDVSA, a company not affected
                                         decision. PDVSA, which generates 80% of the country
m: adib80
                                         flows, has hired Morgan Stanley to present its case to
ws: 143         From: adib80
                                         higher-than-sovereign rating. The firm's supporters arg
mments: 0       Views: 83
                                         when Venezuela imposed exchange controls in 1994 f
                Comments: 0
                                         collapse of its banking sector, PDVSA’s ability to pay
                                         creditors wasn't impeded. "If the government decided
                                         PDVSA’s debt, we would find embargoes of our oil ev
                                         world," said Oscar Garcia Mendoza, president of Banc
                                         Crédito. "Practically speaking, the government cannot
                                         country would shut down." Do Investors Care? Across
                                         become a case of de jure vs. de facto credit risk—wha
 ys 10308921    DRC mining code          agencies prescribe versus how investors perceive cred
                                         to many traders and analysts, the discrepancies betwee
m: adib80       From: adib80             and investment realities exist because investors in Lati
ws: 225         Views: 76                become substantially more sophisticated in the last thr
mments: 0       Comments: 0              have a global market developing,” said Simon Noble,
                                         Latin American capital markets at JP Morgan. “It’s too
                               See all   that it’s already there, but you're starting to hear peopl
                                         what I follow and I want to buy it around the world. I'l
                                         company first and the country second.’” “I don’t care
                                         sovereign ceiling),” said Rodrigo Briones, a fund man
                                         Morgan Grenfell in New York. “We don't pay any atte
                                         agencies should rate the companies for their own credi
                                         based on the sovereign's creditworthiness.” Instead, B
                                         liquidity, cash flow, risk and credit analysis on a comp
                                         basis. Conceptually, he follows a model developed by
                                         University professor Edward Altman. That model, the
                                         been enhanced by Salomon Brothers with Altman’s as
                                         a scoring system for emerging markets corporate bond
                                         model) which assesses relative value among emerging
                                         corporate credits. Relative value-looking at difference
                                         bonds with similar credit risks—can be more valuable
                                         ratings. “I think yield spreads of certain emerging mar
                                         issues are mispriced,” agreed Gustavo Dominguez, he
                                         emerging markets proprietary trading at Chase Manha
                                         room for more accurate pricing of the different types o
                                         in corporate yield spreads, especially with regard to th
rating's overwhelming influence on corporate ratings a
spreads.” Discrepancies Fuel Debate The issue takes o
dimension when you consider that while Coca-Cola Fe
the few Latin corporates to have received a higher rati
sovereign on a non-structured deal—thanks mainly to
Coca-Cola Co.—Telecom Argentina and Telefónica d
Slide 3: Argentina hadn't managed to do the same unti
decision, despite their relationships with big multinatio
the region like Telefónica de España and Italy's Stet. G
links are to European companies, S&P had opened itse
accusations that it was partial to those Latin companie
corporations. The debate is aggravated when a relative
company in a weaker country receives a lower rating t
relatively weak company in a stronger country. "Inves
companies in Brazil is much larger than investor appet
in Argentina," explained Luiz Murat, CFO of São Pau
Concordia. Sadia is a food processor with annual sales
annual exports of $500 million. Murat maintains that B
comparatively lower sovereign rating has held the com
Regional comparisons of sovereign ratings also feed th
Although the rating agencies apply the same criteria u
are odd cases. China, for example, is rated A3 by Moo
the strongest economy in Latin America today, is rated
curious contrast is the investment grade rating Moody
Russia, while Brazil and Argentina remain sub-investm
relative ranking of sovereigns is sometimes puzzling,"
Blemaster, managing director for Latin America at Me
beginnings of the current predicament can be traced ba
crisis of the early 1980s, when debt moratoriums were
Latin America as governments one after another defau
schedules and froze foreign exchange reserves. Effecti
corporates could not meet their foreign currency oblig
experience tempered the credit rating agencies, especi
which is known for its conservative approach to rating
issuers. The result: Latin corporations that do not have
substantial dollar flows, and in some cases even those
been bound to the sovereign ceiling ever since. "You h
propensity of the government and certain individuals w
governments," said Selzer at Moody's. "If there is a hi
exchange controls) happening in a given country, then
likelihood that it will happen again." That reasoning, h
sit well with corporate leaders in Latin America. Said
"We think it's a very unfair way of looking at it. Once
drunkard, it's very difficult to convince people you'll r
Clemente del Valle, Colombia's head of public finance
agency, he says, shouldn't place such importance on p
situation we had in the 1980s is different from the situ
today," said del Valle. Not only are governments much
in managing fiscal affairs, but the private sector is assu
the debt for projects that were once the exclusive dom
Slide 4: Roberto Dañino, an international lawyer at W
Pickering in Washington, DC points out that today's d
being outpaced by export growth, and that corporate b
made to finance expansion, not to cover balance of pay
"For those reasons, I'm reasonably optimistic that we w
another massive crisis." Differing Methodologies Moo
position with respect to Latin issuers is derived from i
investors. Vincent Truglia, managing director of sover
Moody's, says the agency is very focused on the inves
individual issuers may suffer from our credit ratings is
S&P, which is known for seeking a balance between in
issuers, was the first rating agency to give a Latin com
rating than its sovereign on a non-structured issue. In M
broke with tradition and boosted Panamerican Beverag
million yankee issue, led by Lazard Frères, to BBB- fr
had assigned Panama, where Panamco is registered. T
the agency did it again, assigning a BB+ rating to Coc
Morgan-led $200 million yankee, one notch above the
Mexico. Moody's followed suit on Panamco but hasn't
Femsa above the sovereign. However, at the end of M
Pepsi-Gemex's $160 million issue managed by Merrill
above the sovereign. For Panamco, S&P analyzed the
individual operations in Mexico, Brazil and Colombia
them as a whole. "We based the rating on the diversity
the relative strengths of each operation, and the particu
its operations in (Colombia)," said Laura Feinland Kat
ratings director for Latin America. "Basically we decid
Panamco could not access dollars from either Brazil o
strength of its Colombian operations was such that it c
Colombia's debt obligations as well as that of the hold
was a decision that came after over a year of negotiatin
CFO Ernesto Alcalde, even though it was rated above
the company is still underrated. "We tried to get a ratin
Colombia's," he said, 'but it wasn't possible. In all thes
are companies that deserve to be rated above the sover
Cola Femsa, S&P was influenced by the strength of th
system. It also looked at the anchor bottler's strategic i
the fact that Coca-Cola owns 30% of the company. Ev
were to suffer another terrible crisis and impose excha
S&P believes the connection to the multinational is str
there could be some support from Coca-Cola in helpin
said Katz. The Coca-Cola Co. would not comment on
in the event the bottler could not meet its debt paymen
said it would assume debt payments for its bottlers. Fo
the pressure to clearly define its criteria for rating com
sovereign ceiling has increased. But that kind of clarif
transparency will not come easy to any rating agency.
agencies don't want to come out with a list of criteria b
qualitative issue," said JP Morgan's Noble. For examp
source said the Coke bottlers are exceptions to the rule
said other companies will surely follow the trend. S&P
Exceptions S&P extended the controversy even furthe
dollarization decision. David T. Beers, a managing dir
ratings at S&P, said the agency had contemplated the
Slide 5: issue for at least a year prior to its decision. H
that it was controversial, but said S&P based its decisi
effective dollarization of the economies under question
viewed the sovereign ceiling as some doctrine of faith
Almighty," he said. In Argentina, the dollar has subsum
large financial transactions thanks to the Convertibility
allowed for the agency's change of heart. "Just as we'v
nuanced view of sovereign credit risk in our criteria fo
finance credit rating," said Beers, "we're extending it t
in some dollarized countries where we think the histor
between the sovereign's foreign currency debt rating a
equivalent to the transfer exchange control risk no lon
same degree." S&P's decision has done little to change
position. "We don't agree with the view that companie
would be more likely to survive a crisis than the gover
said David Levey, managing director of sovereign cred
"Argentina remains exposed to a balance of payments
of investor confidence. We think there are a lot of goo
theoretical reasons for the sovereign ceiling on foreign
ratings." Duff & Phelps, which leads the field in assign
sovereign ratings to structured transactions, remains co
non-structured deals. "It's a big jump from BB to BBB
Roberts, group vice president at Duff & Phelps. "S&P
be very broad sweeping." Roberts noted his principal c
liquidity that's available at the moment when a govern
"It has less to do with the concept of dollarization or c
it does with companies having to pay in dollars in the
dollars in Argentina." John Welch, chief economist fo
Paribas, welcomes the adjustment on non-bank corpor
so sure its a good idea for banks. "It makes a lot of sen
like YPF, Telecom and Telefónica," he said. “But it's d
understand how banks should be rated higher than the
case in point is Argentina's Banco Francés, which is o
upgraded to BBB- by S&P's recent decision. Accordin
Francés has half a billion dollars on deposit and half a
debt. If the government freezes its assets, how will the
obligations? YPF's access to dollars from its exports, a
structure of the telecommunications sector, cover the r
company and Telecom and Telefónica. But the banks
case entirely. Turning to Structured Finance The desir
ratings and attract a broader investor base has led man
corporates, especially exporters that generate hard cur
to turn to structured deals. Those deals securitize forei
other sources of income to offset the risk that their gov
limit the access to hard currency needed to pay their ex
"The notion of low sovereign ceilings has forced issue
non-convertibility risk," explained Amy Falls, an eme
analyst at Morgan Stanley. "What we've had to develo
these ceilings are issues structured to protect investors
convertibility risk." Last year's total amount of structu
issuance came close to $10 billion, according to S&P.
about one-fifth of total Latin American bond issuance
Phelps has rated many export-receivable securitization
companies above the, sovereign ceiling. Among these
Mexico's $600 million export trust placed by ING Bar
and rated BBB; Alcoa Alumínio's $400 million secure
by Citibank Securities and rated BBB; and Telmex's $
receivables trust placed by BT Securities Corp. and ra
Slide 6: Future-flow securitization involving banks is
mechanism that is increasingly being used, most comm
processing credit card vouchers. William T. Hayes, vic
international structured finance ratings at Duff & Phel
Mexican banks have been the most active issuers. The
Finance Corp. is serving up another type of structured
asset securitization program. Through an A, B and C l
corporate borrowers, it establishes an offshore trust, se
has it rated. By retaining a portion of the loans on its o
IFC has been able to raise the ratings of several Latin
their respective sovereign ceilings. Rating agencies co
governments will repay the IFC loans even in times of
makes exception for dollarized economies When Stan
announced its new policy which allows the agency to
credit ratings above the sovereign ceiling in dollarized
emerging markets, the impact was immediate for certa
corporates. The rating agency defines dollarized as tho
where large financial transactions are carried out in do
strong currency in lieu of the local currency. In Latin A
impact was primarily felt in Argentina, where several
been trading through the sovereign ceiling on a regula
ratings for some issues were raised as many as two no
Argentina’s sovereign rating. The decision will also af
Panama and Uruguay. Select issues from the following
as of the announcement: Banks Banco Río de la Plata
del Rio de la Plata Banco de Galicia y Buenos Aires C
Mercado de Valores de Buenos Aires Corporates Astr
Pérez Companc Transportadora de Gas del Norte Tran
Gas del Sur Telefónica de Argentina Telecom Argenti
Anonima Maxus Energy From BB BB BB BB BB Fro
in introducing this program is to allow well known La
with a solid track record to have access to the long-ter
capital markets at more reasonable terms than they cou
their own," said Eric Cruikshank, a senior investment
Brazil's Sadia is one Latin issuer that recently particip
program, with a $200 million issue led by ING Baring
Murat says the issue was the first 12-year tenor for a B
and is the first time that a Brazilian company has recei
investment-grade rating (BBB- by both S&P and Duff
significantly above Brazil's rating of B+ at the time).
Slide 7: Broadening the Investor Base The advantage
ratings is not only achieving lower finance costs but al
broader investment base. Investment grade ratings attr
European insurance companies and pension funds to e
issues. Atlanta-based ING Investment Management m
investment funds for LNG Insurance in the Americas.
single largest investor in IFC securitizations. "Insuranc
very concerned about their own credit ratings," said C
president at ING Investment. 'If they are holding too h
below investment grade, their ratings will go down. Th
yields paid on products sold as an insurance company
related to your credit quality. Hence, we have stringen
restrictions." Through a structured deal, Lyons says, a
company may be able to purchase up to three times th
it otherwise could if the corporate rating were below in
In the past two years, ING Investment has invested rou
million in the emerging markets, 90% of which went t
issuers using structured deals. Change Comes Slowly
sympathetic-and notwithstanding S&P's dollarization
and analysts conclude that the sovereign ceiling serves
necessary purpose. "If you start plunking down ratings
that make people think they're dealing with investmen
Noble, "you run the risk of creating your own problem
Added Falls of Morgan Stanley: "We could argue all d
which companies ought to be rated higher than the cei
is sovereign ceilings capture a real risk. The markets a
                                                                                              sophisticated now, and the ratings are having to evolve
                                                                                              deserve to be compensated for the fact that, if the conv
                                                                                              were suspended, for six months you may not get a pay
                                                                                              bonds." Banco Venezolano de Crédito's García Mendo
                                                                                              favor of corporate ratings respecting the sovereign cei
                                                                                              agencies have a strong basis for looking at it that way.
                                                                                              should be performing better, but they aren't yet," he sa
                                                                                              the biggest disequilibriums in Latin America today." C
                                                                                              Valle would rather see sovereigns work hard to raise t
                                                                                              than allow companies to easily break the low ceilings.
                                                                                              to improve the access to the capital markets and the co
                                                                                              for our issuers,” he said. For now, in most countries at
                                                                                              sovereign ceiling seems intact, with exceptions few an
                                                                                              "We have been working for two years trying to have (
                                                                                              make an exception for YPF, because the market has al
                                                                                              exception,' said Bridger, "but it's not an easy issue."

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e have been working for two years trying to have (
                                                             make an exception for YPF, because the market has al
                                                             exception,' said Bridger, "but it's not an easy issue."

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