Markets & Finance

Making the Jump from Junk


S&P's latest list of companies and other issuers on the cusp of a ratings upgrade to investment grade

Which companies—and other credit issuers—are poised to make the leap from junk to investment-grade credit ratings? As of July 10, 2007, 29 globally rated entities showed the greatest potential to acquire "rising-star" status from Standard & Poor's Ratings Services. Potential rising stars are defined as entities that are currently rated BB+ with either a positive outlook or with ratings on CreditWatch with positive implications.

Together, these entities have $136.5 (€99.23) billion in rated debt. Of the 29 issuers most likely to benefit from potential upgrades, 16 belong to the broadly defined industrial sector; four are utilities, two are sovereigns, and one is a telecommunications entity. Financial services accounts for six, of which three are in banking and three are nonbank financial institutions.

For the leading subsectors, the geographical and industry breakdown is as follows:

Two of the four entities in the utility sector are from the U.S.; the other two are from China and Brazil. By subcategory, they are independent power producers and energy traders, and electric, multi, and gas utilities.

All three in the insurance sector are from the U.S., one each from multiline insurance, managed health care, and life and health insurance.

Two of the three consumer-products entities are from the U.S., and one is from Chile. They are from packaged foods, apparel and accessories, and tobacco subcategories.

Two of the three banking entities are from Brazil, and one is from China. They belong to banks, multisector holdings, and consumer finance subcategories.

The two sovereigns are Federative Republic of Brazil and the Kingdom of Morocco.

The remaining potential rising stars are spread over miscellaneous sectors.

Geographically, the preponderance of U.S.-based issuers continues on the current list of potential rising stars with 14 (48.2%) of the 29 issuers. This is not surprising, given the high ratings penetration in the U.S. marketplace. Europe has five (one each in France, Belgium, Italy, Austria, and Spain), and the other developed category has two (one each in Canada and Australia). Eight issuers on the list are from emerging-market countries (four from Brazil, two from China, and one each from Chile and Morocco).

In total, 13 entities are members of various Standard & Poor's equity indexes. Of the U.S. entities, three are on the S&P 500 and four are on the S&P MidCap 400. There are three on the S&P Europe 350, two on the S&P LatAm 40, and one on the S&P TSX 60.

Here is this month's list of potential rising stars:

BB+ Rated Issuers On CreditWatch With Positive Implications

Banks

CITIC Group (China)

Debt: $1,261 million

The CreditWatch action followed the recent initial public offering of China CITIC Bank and the sale of oil assets in Kazakhstan; it reflects the need for ongoing discussions with the company over the financial profile of its non-financial-services operations.

Consumer Products

Phillips-Van Heusen (PVH) (U.S.)

Debt: $550 million

Member, S&P MidCap 400

The CreditWatch action follows the company's earnings announcement for the first quarter ended May 6, 2007, reflecting a continuation of positive operating momentum witnessed in the past several quarters.

Insurance

Sierra Health Services (SIE) (U.S.)

Debt: $115 million

The CreditWatch action reflects the beneficial impact of the proposed acquisition of Sierra by UnitedHealth Group (UNH) on the former.

Oil and Gas Exploration and Production

The Williams Cos. (WMB) (U.S.)

Debt: $10,890 million

Member, S&P 500

The CreditWatch action reflects the announced sale of Williams' power business segment to Bear Stearns (BSC) and the potential, on close of the transaction, of higher ratings for Williams and its subsidiaries.

Data as of July 10, 2007. Parent companies are listed in parentheses. Sources: Standard & Poor's Global Fixed Income Research and Markit.

BB+ Rated Issuers with Positive Outlooks

Automotive

Fiat (Italy)

Debt: $4,089 million

Member, S&P Europe 350

The positive outlook reflects the company's continued improvements in profitability and cash-flow generation over the past several quarters, with an uninterrupted decline in debt.

Banks

Banco Nacional de Desenvolvimento Economico e Social (Brazil)

Debt: $1,739 million

The positive outlook reflects the consistent macroeconomic framework of the Federative Republic of Brazil.

Unibanco-Uniao de Bancos Brasileiros (Brazil)

Debt: $125 million

Member, S&P LatAm 40

The positive outlook reflects the improved creditworthiness stemming from the company's own merits and the improvements in its operating environment.

Chemicals, Packaging, and Environmental Services

Airgas (ARG) (U.S.)

Debt: $150 million

Member, S&P MidCap 400

The positive outlook reflects the company's potential to sustain cash-flow protection measures and other key ratios at or near current levels with favorable earnings prospects and good business fundamentals strengthening its prospects for credit-quality metrics.

Capital Goods

CNH Global (CNH) (U.S.)

Debt: $2,500 million

The positive outlook reflects the company's continued improvements in profitability and cash-flow generation over the past several quarters, with an uninterrupted decline in debt.

Strabag (Austria)

Debt: $136 million

The positive outlook reflects the possibility that the rating on Strabag could be raised in the medium term if the group's future corporate governance practices, financial policies—in particular its dividend policy—and strategic ambitions become more predictable and less opportunistically driven.

Consumer Products

Empresas Iansa (Chile)

Debt: $100 million

The positive outlook reflects the expectation that the current rating could be raised within the next 12 to 18 months if the company were to consolidate its moderate financial profile.

Reynolds American (RAI) (U.S.)

Debt: $7,401 million

Member, S&P 500

The positive outlook reflects the company's improved operating performance following the acquisition of Conwood in May, 2006, continued margin expansion, moderating shipment and market-share declines, and more favorable legal environment.

Diversified

Trinity Industries (TRN) (U.S.)

Debt: $750 million

Member, S&P MidCap 400

The positive outlook reflects the company's satisfactory business risk profile and favorable market conditions.

Health Care

Ansell Ltd. (Australia)

Debt: $179 million

The positive outlook reflects Ansell's conservative balance-sheet structure and strong free cash-flow generation that positions the group to pursue growth objectives and temper the impact of the competitive environment and volatile raw material prices.

Charles River Laboratories International (CRL) (U.S.)

Debt: $300 million

Member, S&P MidCap 400

The positive outlook reflects the expectation that the company will maintain a fairly conservative financial policy.

High Technology

Cap Gemini (France)

Debt: $1,222 million

Member, S&P Europe 350

The positive outlook recognizes the possibility of an upgrade if the company is able to maintain the improvements it has made in its margins and free cash flow in 2007 and thereafter.

Home/Real Estate

Ventas (VTR) (U.S.)

Debt: $1,580 million

The positive outlook reflects the company's strides toward diversifying its tenant base and facility type, while reducing its exposure to government reimbursement, healthy overall rent coverage, with particular improvement at facilities operated by its second-largest tenant.

Insurance

Hanover Insurance Group (THG) (U.S.)

Debt: $500 million

The positive outlook reflects improving core underwriting results, a changing business mix with better growth prospects, and stronger capitalization.

Unum Group (UNM) (U.S.)

Debt: $3,750 million

Member, S&P 500

The positive outlook reflects the increased diversity and quality of consolidated earnings of subsidiaries, improved holding-company financial flexibility, debt leverage, and interest coverage.

Media and Entertainment

Sol Melia (Spain)

Debt: $350 million

The positive outlook reflects company's improved financial profile in recent years and favorable prospects for further growth.

Oil and Gas Exploration and Production

Tesoro (TSO) (U.S.)

Debt: $2,065 million

The positive outlook reflects the potential for positive rating actions over the medium term if the company can continue to de-leverage and successfully integrate the Wilmington refinery, acquired by Tesoro.

Retail/Restaurants

Delhaize Group (DEG) (Belgium)

Debt: $4,150 million

Member, S&P Europe 350

The positive outlook reflects the expectation that the company will be able to maintain adequate credit ratios despite the challenging climate for supermarkets in the U.S.

Sovereign

Federative Republic of Brazil

Debt: $75,408 million

The positive outlook reflects that the ratings on Brazil could be raised over the medium term with continued trend improvement in underlying fiscal and external fundamentals associated with pragmatic policy implementation.

Kingdom of Morocco

Debt: $11,404 million

The positive outlook reflects Morocco's improved economic growth prospects coupled with the regular strengthening of the country's external and fiscal indicators.

Telecommunications

Shaw Communications (SJR) (Canada)

Debt: $2,905 million

Member, S&P TSX 60

The positive outlook reflects expectation for continued improvement in Shaw's financial risk profile.

Utilities

Avista (AVA) (U.S.)

Debt: $926 million

The positive outlook reflects Avista's expected reduction in consolidated business risks and improved business profile score on selling off its energy and trading operations.

Eletrobras—Centrais Eletricas Brasileiras (Brazil)

Debt: $300 million

Member, S&P LatAm 40

The positive outlook mirrors the outlook on the sovereign credit rating for the Federative Republic of Brazil and reflects the expectation that Eletrobras will continue to play an essential role in Brazil's electricity sector.

IPALCO Enterprises (AES (AES)) (U.S.)

Debt: $1,444 million

The positive outlook reflects expectations for gradual financial improvement to levels commensurate with solid investment-grade cash-flow measures.

Towngas China (China)

Debt: $250 million

The positive outlook reflects expectations that the company will benefit from Hong Kong & China Gas's support when pursuing acquisitions in China and that it will be able to improve its internal controls and risk-management practices.

Data as of July 10, 2007. Parent companies are listed in parentheses. Sources: Standard & Poor's Global Fixed Income Research and Markit.


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