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How Eurozone sovereign downgrades could impact corporate 1 ratings

How Eurozone sovereign downgrades could impact corporate 1 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

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How Eurozone sovereign downgrades could impact corporate 1 ratings

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  1. How Eurozone sovereign downgrades could impact corporate1 ratings John Hatton, Group Credit Officer EMEA Corporates October 2012 (1) Non-financial Corporates

  2. 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)

  3. Existing Portfolio • 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+’)

  4. What are the Drivers or Warning Signs? • Stand-alone credits above the Sovereign • Economic environment already included in company performance • 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

  5. Liquidity and Access to Capital • Periphery corporates have accessed bonds totalling USD51bn of EMEA total USD402bn YTD • Sovereign rating to ‘BBB’ and below can reflect, inter alia, its market access and official programme requirements

  6. What are the Drivers or Warning Signs? • Stand-alone credits above the Sovereign • Economic environment already included in company performance • Unlikely prospective, and no past precedent, of state interference • Liquidity and access to capital • Geographical diversification • By revenue and profits

  7. 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

  8. Related Research 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 All relevant Fitch research can be found on our website www.fitchratings.com under the appropriate sector headings 8

  9. 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 thetime 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 notaddress 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 ofFitch Ratings. The agency does not provide investment advice of any sort. Ratings are nota 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. Disclaimer

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