Over the past five years, the rapid increase in natural gas, natural gas liquids, and crude oil production from onshore domestic shale formations has affected a broad range of U.S. industries in major, but disparate, ways. The boom has been positive for revenue, costs, and credit quality in many sectors, while materially hurting others. The shale energy boom is becoming an increasingly important pillar of U.S. economic growth, along with the housing recovery. We expect the direct economic benefits of this growth to be particularly strong in the regional economies where the drilling is occurring. The rapid rise in domestic oil and gas production represents a major reversal from the trend in declining output that the country had experienced for several decades before the mid 2000s--a period in which the U.S. had come to increasingly rely on imports.
The Egyptian government is facing an increasingly difficult set of economic circumstances. Since the popular uprising of 2011, economic growth has been weak and the Central Bank of Egypt (CBE) has seen a sharp drop in its foreign exchange reserves. In addition, we forecast a general government deficit of 11% of GDP in 2013, which highlights the government's substantial financing needs. Domestic banks continue to be the main investor in government securities, but the government is increasingly resorting to greater financing from the CBE. The depreciating exchange rate, together with increasing central bank financing of the government, is likely to lift inflation above already relatively high levels. Strong inflation growth through an erosion of real incomes would reduce the already low standard of living for the majority of the population. It is also likely to add to the existing high levels of political discontent.
North American transportation companies have a broadly stable outlook, despite sluggish U.S., Canadian, and global economies and reduced U.S. federal government spending following "sequestration" cuts. Our outlook for business conditions and rating quality in the sector is broadly neutral for 2013, although the different subsectors--which range from airlines to tankers to trucking companies--vary in their sensitivity to economic conditions and their balance of supply and demand. The package of federal spending cuts (sequestration) that began at the end of March appears thus far to have had limited effect on the U.S. economic recovery. Still, the economy should remain sluggish this year, which will likely mean continued slow revenue growth for most transportation sectors.
Our outlook on our rated universe of European real estate companies remains stable, despite weak GDP prospects, continuing high unemployment, and subdued mortgage lending in Western Europe. This outlook is supported by stable levels of letting activity in the past 18 months, continuing reinvestment opportunities for the well-established companies, and the recent influx of capital-market funding into real estate corporate finance. These trends are likely to continue in the next 12 months. We also believe that the European real estate sector is likely to see more companies in the 'BB' rating category coming to the capital markets for the first time, as they reduce their reliance on bank lending.
J.C. Penney Corp. Inc. Term Loan Rating Lowered To 'B-', Recovery Revised To '2' On Upsizing; Other Ratings Affirmed
The rating on Penney reflects our assessment that the company's business risk profile is "vulnerable" and its financial risk profile is "highly leveraged." Our business risk assessment incorporates our analysis that the department store industry is highly competitive, with large, well-established participants. Based on this environment, further performance difficulties may cause the company to lose market share to other players, such as Macy's, Kohl's Corp., Sears, other department stores, or off-price retailers. There could be further meaningful changes over the next few months as the new CEO reassesses the "shops," promotional, and marketing strategies that contributed to Penney's poor performance over the past year.
Although we expect tepid economic expansion and sustained high unemployment, such conditions should not affect Whole Foods' performance because the natural and organic segment industry is growing considerably faster than the food retail industry as a whole. Furthermore, the company's pricing, promotional, and merchandising strategies have driven customer transactions and loyalty. Consequently, the company is now less vulnerable to downturns in consumer spending. Results for the company's second quarter (ended April 14, 2013) were slightly better than our expectations and meaningfully better than traditional grocery store peers. Whole Foods' recent sales performance is the result of its more aggressive marketing and pricing strategies.
The speculative-grade rating on P.F. Chang's reflects its "highly leveraged" financial risk profile as a result of the Centerbridge leveraged buyout. It also incorporates our "vulnerable" assessment of the company's business risk profile, reflecting its singular focus on Asian cuisine and concentration in California, Arizona, Florida, and Texas. P.F. Chang's continues to post negative comparable sales, with a 2.8% decline at Bistro and 1.6% decline at Pei Wei in the first quarter of 2013. This, coupled with operational inefficiencies at lower-margin Pei Wei restaurants and higher expense related to the LBO, has driven the company's EBITDA margin down 240 basis points (bps) to 9.3%.
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