The Credit Cloud: Economic Resilience Will Propel A $14 Trillion North American Corporate Funding Need
We estimate 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.
Thanks to a rebounding U.S. housing market, lawmakers in Washington have been able to kick the debt ceiling can down the road for a bit. Almost $67 billion in dividend payments to the Treasury from mortgage giants Fannie Mae and Freddie Mac have trimmed the federal deficit (which has shrunk rapidly in recent months). This has bought Congress some time before it needs to raise the country's debt ceiling or risk having the country default on its obligations. But unless lawmakers act in the next week, which seems unlikely, the Treasury will have to resort to "extraordinary measures" to pay its bills. The debt ceiling drama comes as the U.S. economy is still feeling the reverberations from the New Year's Day fiscal cliff deal and sequestration-related cuts. But first-quarter GDP data suggest the private sector has absorbed these shocks rather well, with consumers and companies spending and investing, despite higher extra taxes and reduced federal expenditures.
The Credit Cloud: Latin America's $1.1 Trillion In Funding Requirements Are Meeting A Rising Economic Need
Despite Latin America's current nonfinancial corporate debt of $1.1 trillion--only less than 5% of the worldwide total, which we estimate will be between $49 trillion and $53 trillion for 2013-2017--regional funding requirements are on the rise. The increasing demand of a growing and young middle class, the currently large investments in the energy sector and overall infrastructure, and the ongoing consolidation of several regional industries--leading to M&A opportunities--will be some of the factors contributing to larger funding requirements in years to come. We forecast that funding needs for Brazil and Mexico, Latin America's largest economies, would reach $1.4 trillion by 2017 and will be probably be higher due to growing funding needs in other Latin American countries. We expect regional funding requirements to grow at multiple of 2x regional GDP in the next two to three years and gradually decline to 1.2x-1.5x afterwards.
Ally Financial Inc. Ratings Placed On CreditWatch Positive Following Agreement To Resolve ResCap-Related Claims
On May 14, Ally announced that it has entered into a plan support agreement with the bankruptcy estate of its former subsidiary Residential Capital LLC (ResCap) and with ResCap creditors. Although the terms of the agreed plan have not yet been announced, Ally has stated that the plan will "settle all existing and potential claims" on Ally relating to ResCap liabilities and securitization-related legal claims (other than two specific claims that are not covered by the agreement). The possible release of Ally from ResCap-related liabilities and claims would remove a significant element of financial risk and uncertainty from Ally's credit profile, and also eliminate a source of potential distraction for Ally's management. We have previously stated that we would consider raising the ratings if the company secures a release from ResCap-related claims on terms that are not unduly punitive to Ally, and assuming there have been no other offsetting developments.
India's long-term growth prospects, underpinned by its favorable demographic profile, and its high foreign exchange reserves support the ratings. The country's large fiscal deficits and debt, as well as its lower middle-income economy, constrain the ratings. We expect India's real GDP per capita growth will likely rebound to 4.6% in the current fiscal year ending March 31, 2014, from 3.6% a year ago. These are higher than those of most of its peers but substantially lower than about 6% on average over the five years up to the fiscal year ended March 2012. Although part of this slower growth is cyclical, rigidities in the labor and product markets and inadequate infrastructure constrain the country's medium-term growth prospects. Despite the initiatives from the cabinet committee on investments to cut red tape on infrastructure and power projects, that committee's success in raising investment growth remains uncertain.
Congress first chartered the Federal Home Loan Bank (FHLB) System in 1932 with the aim of improving the availability of funds to support home ownership. Since then, the FHLB has remained a reliable source of liquidity for its member institutions, including life and property/casualty insurance companies. The FHLB System, which comprises 12 banks cooperatively owned by more than 7,700 member institutions of all kinds and sizes, was particularly active during the peak of the financial crisis in 2008: It provided more than $1 trillion of liquidity to both banks and insurance companies in the U.S. Although not immune to major market dislocations, the FHLB System has proven to be a stable source of funding through good times and bad. Insurance companies typically use funding they obtain from the FHLB to support various business activities, such as acquisitions, yield enhancement, liquidity, and asset diversification, that may have possible ratings implications.
The Turkish economy saw the wind knocked out of its billowing sails in 2012, but it is making something of a comeback in 2013. We expect the real economy to expand by about 4% this year--nearly double the rate of growth of 2012, but well below what we believe were unsustainably high growth rates in 2010-2011. Trends in global trade should provide a boost to Turkey's economy, given the way the country's export market shares have evolved over the past 10 years. Meanwhile, private consumption and fixed investment are likely to bounce back this year and next, after some retrenchment in 2012. Against this positive backdrop, continued expansionary monetary policies in the G7 and especially in Japan, could present renewed challenges for the Turkish central bank: namely, strong capital inflows into the country could spark a surge in asset prices, as they have done in the past.
We affirmed the ratings and removed them from CreditWatch because we see increased likelihood that Sharp's liquidity will stabilize. Also, the company's operating performance has bottomed out and will gradually improve. The company has announced that it has received continued support from its main lenders--Mizuho Corporate Bank Ltd. and Bank of Tokyo-Mitsubishi UFJ Ltd.--on the extension of the term of their ¥360 billion existing syndicated loan agreement due June 30, 2013, with the extended term maturing March 2016. The company has also received the banks' consent on an additional ¥150 billion borrowing facility, which would be used to redeem ¥200 billion in convertible bonds that mature Sept. 30, 2013. The banks' support will provide some stability to Sharp's liquidity. As such, combined with our view that Sharp's operating performance will recover, we continue to assess the company's liquidity as "less than adequate."
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