Ups and downs

Credit ratings agency Standard and Poor’s just came out with a list of entities and sectors at risk of potential downgrade.

Telecommunications and media and entertainment, according to the report, appeared the most vulnerable to deterioration in credit quality. In fact, many of the entities at risk of potential downgrades were in the consumer discretionary domain (automotive, media and entertainment, consumer products, and retail/restaurants) where pressures have been building (owing to greater consumer indebtedness, growing uncertainty about the housing outlook, and high energy prices), S&P said in a report.

Only one company from the Philippines made it to the list — Manila Electric Co. or Meralco which currently has a rating of B-Negative.

Among those rated worldwide, telecommunications companies accounted for the biggest chunk (around 34 percent) of potential downgrades, followed by media and entertainment, automotive, health care, consumer products, retail/restaurants, high technology, to name a few. On the bottom of the list is homebuilders/real estate companies. Second and third from the bottom are sovereigns and diversified companies.

In telecommunications, 61 percent are located in the United States, where the telco sector is heavily affected by rising competition among key sectors, particularly between local telephone and cable operators. Continued access line erosion from wireless substitution, augmented by mounting competitive pressure from cable telephony, remains the overriding concern for wireline telecom players, S&P noted.

The negative bias in media and entertainment was also concentrated in the US, which accounted for 78 percent of all entities at risk of potential downgrade. S&P says the outlook for the US media and entertainment industry is less optimistic than it was previously, with traditional advertising representing an area of slower growth in 2006, and with negative surprises possibly neutralizing the expected boost from local elections and online advertising growth.

Publishing and printing was among the more vulnerable subcategories, the former owing to anemic ad spending and the latter continuing to confront many of the same credit quality challenges it faced in 2005, namely, challenging pricing conditions, high levels of competition and slower-than-GDP growth levels.

In non-advertising-related sectors, pressure continues. Movie producers and exhibitors are pushed for a year of stronger releases after domestic box office finished lower in 2005. For the Hollywood studios, DVD sales growth is slowing, and the huge-volume titles in release are raising inventory risk. The music industry is still under siege from piracy, and industry legal efforts have not turned the tide of shrinking CD sales.

Within the automotive sector, 80 percent of entities that are at risk are located in the US. More than half of the entities on the list belonged to the auto parts and equipment subcategory. After facing challenging business conditions for the past two years, the US auto supplier sector is now dominated by low-rated, distressed companies. A combination of vehicle production cuts, high raw-material costs, unfavorable product mix shifts, and ongoing pricing pressure from a weakened customer base has caused most auto suppliers’ earnings and cash flow to decline dramatically.

A string of companies have been forced to file for Chapter 11 bankruptcy protection, including several large ones with leading market shares. The market shares of Ford Motor Co. and General Motors Co. have continued their long decline so far during 2006. Despite concerted efforts to diversify their customer base, most North American auto suppliers will remain overly dependent on these two automakers, at least for the next several years, according to the S&P report.

In another report, S&P listed down entities and sectors for potential upgrades. Financials were well placed for potential upgrades, with banks and insurance displaying a high percentage of issuers listed with a positive bias, as were sovereigns. Savings and loans institutions accounted for a whopping 60 percent of all rated with brokerage a far second at around 24 percent.

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