Standard & Poor’s Ratings Services estimates North American nonfinancial corporations’ financing needs over the next five years (2013-2017) at $13.5 trillion to $14.3 trillion, with two-thirds to be applied toward refinancing and the remainder toward new investment. The U.S. makes up the lion’s share of this North American debt need, accounting for more than 90% of the total pie. Last year was a record setting year for the U.S. credit markets, while in Canada, private nonfinancial corporations’ debt financing increased, but remained well below its 2007 pre-recession peak.

As far as the U.S. is concerned, we expect that companies will largely use $3.4 trillion to $4.2 trillion of new debt financing for capital expenditures–and, to a lesser extent, shareholder returns and mergers and acquisitions (M&A)–as they continue to make up for underinvestment since the Great Recession.

Liquidity is currently strong among U.S. corporations, but we expect companies to fund a meaningful portion of their needs with debt, considering currently attractive credit market conditions and the high percentage of cash sitting overseas, which we believe is unlikely to be brought back home any time soon, considering the cost of repatriation.

Financing such a large sum is not without risk. Companies’ high demand for debt capital could force lenders to ration credit. U.S. policymakers may be constrained if faced with another economic downturn given the extraordinary use of their fiscal and monetary arsenals to support growth already. Still, our base-case assumption is that banks and capital markets will largely be able to meet borrowers’ financing needs–in part because accommodative monetary policy will continue to be effective, but also because of the general resilience of the U.S. economy.

For details, see The Credit Cloud: Economic Resilience Will Propel A $14 Trillion North American Corporate Funding Need

Excerpted from UNITED STATES: Skills mismatch feeds jobless recovery

While the continuing slow, steady improvement in the job market will gratify the administration and the Federal Reserve, this trend has masked the emergence of a new marginalised ‘underclass’ of 4.6 million workers unemployed for at least six months. As a percentage of the workforce, this exceeds the level of long-term unemployment during post-recession recoveries over the past 70 years, and could serve as a long-term drag on growth.

The negative impact of long-term unemployment is likely to endure, slowing growth over time.

More than any other period in the past century, the current job market most resembles the mid-1930s, when renewed economic growth did not produce rapid reductions in unemployment. This is, in part, due to skills mismatch, and, in part, due to skill attenuation — two factors that help produce worker marginalisation.

Even as overall joblessness declines, the number of long-term unemployed is likely to continue rising for much of this year. Young workers will be the worst affected; research shows that an extended period of unemployment early in life will have a very negative impact on these individuals’ long-term earnings prospects and tax contributions, inhibiting US growth and fiscal consolidation efforts over time.

Technorati Tags: unemployment, US-economy

Credit quality for the U.S. health insurance sector is strong with limited potential for change in the next 12 months based on sector fundamentals.

In Standard & Poor’s Ratings Services’ opinion, most rated health insurers remain generally sound financially as they position themselves for reform-driven change in the marketplace.

Overall, we believe our current ratings reflect the sector’s capacity to withstand a period of moderate strain that may emerge in connection with cyclical factors and health care reform.

Our opinion of the sector’s credit quality is that underlying business conditions (such as growth and retention opportunities and access to capital) are very good, and health insurers’ financial fundamentals remain relatively strong. Industry risk remains high but has moderated somewhat.

For details, see Industry Economic And Ratings Outlook: U.S. Health Insurers’ Credit Quality Is Strong As The Sector Prepares For Reform

Technorati Tags: healthcare providers, healthcare reform, Obamacare

Excerpted from The End Of A Beautiful Relationship? U.S. Fiscal Federalism, State Credit Quality, And Changing Times

For some individual U.S. states, the economic contraction was even more pronounced than it was for some of the 17-member eurozone nations. As with the eurozone nations, U.S. states participate in a single currency area, largely depriving them of any monetary based policy responses to economic contractions (such as pursuing an export-led recovery through currency devaluation).

So, how can it be that, whereas seven (41%) of eurozone sovereign ratings are ‘BBB+’ or lower, no U.S. state fell to below ‘A-’ during or after the Great Recession?

We attribute much of the state sector’s above-average creditworthiness to countercyclical federal fiscal policies that involve reduced federal tax liabilities and large scale outlays during economic downturns. Some federal tax and spending changes occur automatically and some as a matter of discretionary fiscal policy. These changes mitigate the budget impact of recessions for states. From a global perspective, such federal fiscal actions are unique because they serve as a source of broad economic support without encroaching too much on states’ fundamental sovereignty.

In fact, U.S.-style federalism involves a high degree of fiscal independence for states — latitude that could theoretically allow for widespread mismanagement. And there is variation in credit quality among the states. But the range of ratings for U.S. states is both tighter and higher (spanning from ‘AAA’ to ‘A-’) than that found in most other sectors. In addition, the gradual upward migration of state ratings through the years reflects the trend among the states toward stronger financial management policies and practices. And while federalism in the U.S. context tends to encourage fiscal discipline, it does little to compel it. The variation in credit quality among states reflects this fact.

Recent developments, such as implementation of the sequestration cuts in March, signal the possibility that policymakers could scale back somewhat the federal government’s role in the economy.

In our view, unless Congress changes the structure of the federal spending cuts under the Budget Control Act of 2011 (BCA), it could slow the rate of GDP growth through the next decade.

But we do not believe that incrementally less federal support for the economy poses a major threat to state credit quality. More important is the underlying institutional framework that makes up the federal-state fiscal relationship, in particular, countercyclical federal tax and spending policies. Even with the BCA in effect, this distinguishing feature of U.S. fiscal federalism remains intact.

Technorati Tags: municipal-bonds, states

From Industry Report Card: The Media And Entertainment Industry Is Casting For Green Shoots

We expect core ad spending to grow at or slightly less than the rate of GDP, in a convergence of several trends. Print-based advertising is likely to continue to contract while online ad revenue continues to grow at a pace well ahead of GDP.

We think that in 2015, total online including search will surpass national TV (including broadcast networks, national spot, syndication, and cable networks).

Proliferation of online ad inventory–in particular discount “remnant” inventory sold on ad networks–hampers pricing across all online advertising–even prime inventory. It constrains pricing in TV, and it has a deflationary effect on print. We think that the larger online gets, the greater the pricing drag may be on total ad spending growth. Certainly, low-cost, highly measurable advertising brings efficiencies to small and large marketers. But in aggregate, we think these trends are likely to preclude a return to total ad spending growth in the solid mid-single-digit percent range (or higher) that we witnessed in the 1980s and 1990s.

Although Standard & Poor’s believes economic growth will gain a more solid footing in 2013, ad spending–historically highly correlated with the economy–is only showing scattered signs of improvement thus far. Our economic forecast assumes that key economic data begin to improve from the March trend. In the meantime, we believe the strongest growth will be in Internet display advertising, Internet search, and cable networks. Key factors that could affect media and entertainment companies include:

• An economic recovery that could pick up in 2013, despite still-high unemployment;
• Investor and marketer worries over European and U.S. budget deficits, and the continuing U.S. debt ceiling drama;
• Dependence of ad spending on stable GDP growth and consumer spending;
• Vulnerability of non-advertising-driven subsectors to any adverse shift in consumer spending; and
• Severe leveraging in several subsectors, which many companies may be unable to withstand.

For details by media sector, see the full Industry Report Card

Technorati Tags: advertising, broadcasting, cable, internet, internet-advertising, magazines, media and entertainment, movies, newspapers, radio

The top 10 US tech companies will account for 84% of the sector’s dividends this year, with Apple, Microsoft and Intel expected to comprise 54% of the total. Apple will account for 48% of the sector’s dividend growth, while Microsoft and Cisco combined will account for another 16%.

In addition, more Moody’s-rated technology companies are paying dividends. The number had increased to 31 at the end of 2012, from 29 in 2011 and 20 in 2007.

We believe the increasing number of dividend-paying tech companies reflects the strength of these firms’ business models, management confidence in cash flow generation prospects and, in some cases, pressure to return capital to shareholders.

Rising dividend payments won’t affect companies’ credit ratings, Moody’s notes. Although technology firms have been implementing and raising dividends slightly ahead of growth in cash flow generation, dividend payments relative to cash flow average a low 20%, compared with 50% for non-tech industries.

And Moody’s expects that most dividend-paying tech companies will keep payout ratios below 30% due to tax-inefficient access to overseas liquidity, operational requirements and company-specific strategic considerations. Many technology firms keep the bulk of their cash overseas and if this were used to pay common dividends, they would be subject to US repatriation taxes.

Overall, US tech companies are well positioned to support dividend payments in the event of economic downturn, Lane says. “Stable cash flows and strong liquidity should enable the dividend-payers to weather potential financial or geopolitical shocks to the global economy.”

For details, see US Technology Industry: Dividend Payments to Continue Climbing, but Payout Ratios to Remain Low.

Technorati Tags: Apple, Dividends, intel, Microsoft, technology

At this stage, however, a more than one-third chance remains that we will lower our ‘AA-’ long-term sovereign ratings on the nation.

The continuing prospect of a downgrade arises from risks associated with recent government initiatives and uncertainty of their success. Japanese Prime Minister Shinzo Abe’s plan to lift Japan out of deflation and spur economic expansion–known as “Abenomics”–has three pillars: bold monetary easing, fiscal efforts to spur growth, and a strategy to induce private sector investment. Of the three engines that Mr. Abe foresees reinvigorating the nation’s economy, so far only one, monetary easing, has kicked into full gear. The others remain idle.

The Bank of Japan’s (BOJ) monetary policy committee aims to achieve 2% growth in the Consumer Price Index within two years by doubling its monetary base with a twofold increase in outright purchases of Japanese government bonds (JGBs) and a doubling of its total assets by the end of 2014.

The BOJ announcement has already triggered a depreciation of the yen’s value against other major currencies, propelled stock market indices to an almost five-year high, and lowered yields on JGBs to all-time lows. The yield on 10-year JGBs fell to 0.315% on April 5, immediately after new BOJ Governor Haruhiko Kuroda unveiled details of the new monetary policy, which included more comprehensive measures to increase liquidity and greater BOJ demand for government bonds than the market expected. However the yield momentarily rebounded to 0.62% the same day, indicating market nervousness about the historic low yield and future upside risks. Since then the yield has hovered around 0.6%, still low considering the risk of higher inflation and interest
rates.

Market participants seem to think monetary easing is an opportunity to buy government bonds because BOJ purchases will spur demand in the immediate future, while an inversion of bond yields, together with inflation, will take time to emerge.

For more see the full report No Risk, No Gain: Japan’s Credit Quality Hinges On Its Bold Strategy To Reignite Growth $$

Technorati Tags: japan, sovereign-debt

Competitive global pressures are leading to a commonality in certain key aspects of insurance regulation — as some regulators seek to avoid disadvantaging their country’s companies in global markets. However, the regulatory regime for insurers remains heterogeneous in comparison with the regulatory regime for banks and securities houses (see Basel ‘flexibilisation’ may be reversed ).

With more differentiated regulatory regimes across economies, multinational insurance companies have a powerful incentive to relocate to jurisdictions that reduce regulatory costs.

Recent International Association of Insurance Supervisors (IAIS) proposals concerning the criteria for identifying global systemically important insurance companies, which centre on the methodology for identifying these firms, are often seen as the start of a more global regulatory framework for the industry.

The methodology would involve three steps — collecting data, assessing it and implementing a process of supervisory judgment and validation. Once an insurance company has been identified as a globally systemically important institution, the national regulator is expected to work on a plan with it for reducing its systemic risk via a number of channels, such as higher capital requirements in order to increase its loss-absorbing capacity.

Despite the drive to promote a global regulatory framework for insurers, actual oversight and implementation continues to be at the national or regional levels — as happens with banking, despite Basel III. Moreover, the absence of an institution such as the Bank of International Settlements (BIS) means that the IAIS proposals are even more open to wide interpretation than the Basel III rules.

For details, see: Uneven insurance regulation fuels risks $$

Technorati Tags: Basel III, financial-regulation, Insurance, Solvency II

Why is this time different? The most critical indicator is home prices, which increased 6.8% nationally in 2012 and which Standard & Poor’s expects to grow by another 8% in 2013–after having plunged more than 30% during the housing meltdown.

Robust sales activity, falling but still elevated delinquency and foreclosure sales, and higher homebuilding and housing stock prices are also key indicators that the sector is rebounding.

Shadow inventory (including seriously distressed properties, properties in foreclosure or owned by banks, but not yet on the market) is diminishing because of rising home prices, which are also pushing about 2 million more homeowners into positive equity positions. Price-to-rent and price-to-income ratios indicate fair-to-under valuation, meaning it’s still a good time to buy homes because affordability is high and homeownership is cheaper than renting.

Despite improving housing indicators, a full recovery will still take time before imbalances–both regionally and nationally–are corrected. One such imbalance is the gap between new and existing median home prices, which stands at 40%. In the long run, we would need to see existing median home prices rise to be consistent with historical 20% levels.

For details see U.S. Housing Recovery Is Taking Hold, But Analysts Say Challenges Remain

Technorati Tags: housing

Merger and acquisitions among small drug producers is the most common way specialty pharmaceutical manufacturers build scale. On occasion, small specialty drug firms take advantage of major consolidation between larger drug firms by purchasing divested marketed products required by antitrust authorities.

In a new special report Specialty Pharmaceuticals Snapshot: Key High Yield Consolidator Trends and Targets, Fitch Ratings examined the specialty pharmaceutical segment for corporate consolidation opportunities that could address current needs of three key high-yield drug makers – Valeant Pharmaceuticals International Inc., Endo Health Solutions Inc., and Warner Chilcott Plc.

The three specialty pharmaceutical companies have different business development approaches, yet all potentially moderated by debt incurrence covenants in secured bank facilities.

Technorati Tags: Endo Health Solutions, Pharmaceuticals, specialty pharmaceuticals, Valeant Pharmaceuticals, Warner Chilcott