Bank downgrades, profit warnings and asset write-downs

The rapidly deteriorating regional economy and weak outlook for thermal coal, the key output of The Griffin Coal Mining Company Pty Ltd, led Moody's Investor Service to lower the corporate family and senior unsecured ratings assigned to the company to 'B2' from 'B1'. Moody's expects further pressure will be placed on Griffin's earnings over the next 12 to 18 months.

The rating outlook is negative, capturing the execution risk the company faces, due to its delayed projects as well as the potential for further weaker off-take and sales. Griffin has issued some US$475 million of bonds in the United States.

Boral Limited has been a less than prolific issuer in the domestic corporate bond market, having only issued one, $150 million bond, which matured in August 2003. However, the company has issued US$400 million of bonds in the US s144A market and has visited the traditional private placement or Reg D market in the United States, on at least two occasions.

Boral surprised the market last week when it issued a profit warning as a result of deteriorating market conditions, cut its dividend and said it would reduce capital expenditure, as its earnings outlook deteriorates. Moody's responded by affirming the 'Baa2/P2' long- and short-term ratings assigned to the company last week, but revised the rating outlook to negative from stable.

Moody's acknowledged the initiatives taken to mitigate the negative impact on earnings but said further weakness in the operating environment over the next 12 to 18 months means that Boral may not sustain a financial profile that is consistent with its Baa2 rating.

Westfield Group has been a more active issuer in the domestic market in the past but now has only a $160 million, July 2010, bond remaining. Offshore however, it has the equivalent of more than $9 billion of bonds outstanding with all but two issues that we are aware of, issued in the US s144A market.

Westfield announced a $3 billion asset write down last week that would take year end 2008 gearing to about 40 per cent. Moody's commented that this was within tolerances for the 'A2' long-term rating assigned to the group but warned that further write downs that resulted in an increase in gearing to 45 per cent or more, among other measures, would put the rating under pressure.

Syncora Guarantee Inc., the monoline insurer previously known as XL Capital Assurance Inc., has been downgraded again by Standard & Poor's to 'CC' from 'B', with its issuer credit and financial strength ratings removed from CreditWatch with developing implications, where they were placed in November. The ratings have a negative outlook. A CreditWatch with developing implications implies the rating could move up or down within the next three months.

The downgrade is in response to Syncora's announcement that it has entered into an agreement with 17 bank counterparties to commute, terminate, amend, or restructure existing CDS and financial guarantee contracts.

Recently updated criteria require that once a distressed offer or commutation is announced, S&P lowers the issuer credit and financial strength ratings to reflect the risk of nonpayment under a financial guarantee policy. Ratings are generally lowered to 'CC' and a negative outlook assigned to reflect a possible 'SD' (selective default) rating upon completion of the commutation.

In Syncora's case, if ratings are lowered to 'SD' they could be subsequently raised if management presents a reasonably viable strategy to strengthen the company's financial position and protect policyholders.

ING Group flagged an expected 2008 loss of €1 billion last week as a result of write downs on various classes of assets. At the same time it announced that agreement had been reached for the Dutch government to assume 80 per cent of the economic risk of the group's Alt A RMBS portfolio, which has already been written down to 90 per cent of par value. This move by the Dutch government follows a €10 billion hybrid capital injection made in November.

Fitch Ratings responded by downgrading the long-term issuer default ratings assigned to the group and ING Bank N.V. to 'A+' from 'AA-' and to 'AA-' from 'AA', respectively. The rating outlook on the group remains negative while the outlook for the bank was revised to stable.

The Individual rating assigned to the bank was affirmed at 'B' with a Support rating of '1' while the Support Rating Floor was revised upwards to 'A+' from 'A-'. (For an explanation of Individual and Support ratings and the Support Rating Floor, please refer to last week's commentary.)

Fitch said the rating actions reflect the deteriorating Dutch and global economic environments and their unfavourable impact on ING Group's balance sheet, profitability and prospects. The revision of ING Bank's Support Rating Floor reflects the significant support received from the Dutch government, which is expected to raise ING Bank's Tier 1 capital ratio to 9.5 per cent. The bank's operating profit is expected to remain under pressure in 2009.

Moody's responded by downgrading the long-term senior debt ratings assigned to the group and the bank to 'A1' from 'Aa3' and to 'Aa3' from 'Aa2', respectively and left the ratings with stable outlooks. The bank financial strength rating was lowered to 'C+' from 'B-' and left with a negative outlook.

The downgrade of ING Bank's BFSR reflects Moody's expectation that the bank's profitability will remain constrained, with loan quality deteriorating at a faster pace than previously expected; and additional write downs are likely to emerge on the bank's structured finance assets, according to Moody's stress tests. Those potential losses could further impact profitability and deplete capital in the short term.

As has been the pattern for fourth quarter bank reporting so far, S&P affirmed its long- and short-term ratings on the group and bank at 'AA-/A-1+' and 'AA/A-1+', respectively. The outlook on the ratings is negative.

S&P noted that the group is following a broad program of derisking, select asset disposal, and deleveraging at the bank. In addition, the group aims to cut €1 billion of costs in 2009, equivalent to about 6.5 per cent of the 2008 cost base, primarily from headcount reduction, and head office and marketing savings. This should help protect the bottom line. A €450 million net restructuring charge will be booked in the first half of 2009.

ING Bank (Australia) has been one of the more prolific issuers in the domestic corporate bond market, since first issuing in April 2002. It currently has more than $6.2 billion of bonds outstanding.

Moody's announced on Friday that it has, for business reasons, withdrawn the debt and deposit ratings of 'A1/P1' and BFSR of 'C+' on ING Bank (Australia) but bonds issued by the bank from ING Group's global issuance program will continue to be rated 'Aa3' with a stable outlook.

Fitch downgraded the long-term issuer default rating assigned to Barclays Bank Plc to 'AA-' from 'AA' and revised the outlook to stable from negative. At the same time the individual rating of 'B' assigned to the bank was placed on Rating Watch Negative. This rating action follows Barclay's recent acquisition of parts of Lehman Bros investment banking operations and Barclay's announcement last week that credit market charges and write downs had increased to £8 billion for the full 2008 year.

Fitch has taken the view that the investment banking operations and ambitions of the bank's Barclays Capital unit expose the bank to greater risks and earnings volatility than is appropriate for a 'AA' rating over the long term. The rating actions also consider the adverse implications for asset quality of the sharp deterioration in the economic outlook for core geographies, notably the United Kingdom. Fitch expects to resolve the RWN on the individual rating either before or shortly after the time of Barclays Plc's interim results announcement in early August.

Fitch also noted that the fourth quarter loss incurred by Goldman Sachs Group Inc. underscores the group's vulnerability to current market stresses. During the period, the equity and credit markets experienced extreme volatility, illiquidity and asset price depreciation, resulting in negative net revenues in Fixed Income, Currencies and Commodities and Principal Investments. Going forward, sales and hedges will be tools likely to be employed to reduce exposures to high risk or illiquid assets. However, Fitch anticipates that weak investor appetite, tight liquidity and imperfect, costly hedges may limit the potential success of these strategies.  

As a result, Fitch lowered the long-term issuer default and senior debt ratings assigned to the group to 'A+' from 'AA-' and the individual rating to 'B/C' from 'B'. The outlook on the ratings is stable.

Fitch will monitor Goldman's transition to a bank holding company and assess any changes in its business platform, funding profile or risk appetite. Fitch believes US financial institutions, in general, will be subject to increased oversight and regulation. However, Goldman must acclimatise to the altered competitive landscape as well as adapt to this evolving regulatory environment as a recently converted bank holding company.

General Electric's 'Aaa' rating from Moody's, along with that of General Electric Capital Corporation, is under threat: Moody's has placed the ratings on review for possible downgrade. The review is in response to heightened uncertainty over GECC's asset quality and earnings performance in future periods. General Electric Capital Services, the immediate parent of GECC, recorded a fourth quarter pre-tax loss of US$1.5 billion on higher credit and other charges and increased its estimate of credit losses for 2009.

During its review, Moody's will consider potential ongoing challenges to, and increasing volatility in, GECS' earnings in an exceptionally difficult operating environment. Given this uncertainty around earnings, Moody's will also reassess GECS's ability to restore its dividend to GE to historic levels in the intermediate term.