Rating agencies cut CIT and credit wrappers 'AAA' or bust

CIT Group (Australia) Ltd. has $300 million of March 2011 bonds on issue in the domestic market. Its US parent, CIT Group Inc., reported a first-quarter loss of US$505 million on Thursday, twice what the market had been expecting, and announced that it would not be profitable this year. All three rating agencies promptly lowered their ratings on the group.

Pressure on asset quality and liquidity have reduced CIT's financial flexibility, said Fitch Ratings as it cut CIT's long-term issuer default rating to 'BB+' from 'BBB' and left the outlook as negative. Fitch also cut CIT's short-term IDR to 'B' from 'F2' and its individual rating to 'D' from 'C', observing that CIT's level of profitability will likely be strained in subsequent quarters, which raises concern over its ability to retain acceptable levels of capital from a regulatory perspective as well as maintaining sufficient buffers to support current rating levels.

Moody's has had CIT on review for possible downgrade since January 22. Moody's moved CIT's credit ratings a notch further into the subinvestment grade category, lowering its senior unsecured rating to 'Ba2' from 'Baa2' and its short-term rating to 'N-P' from 'P-2'. The rating outlook is negative.

Moody's currently estimates that the global default rate for speculative-grade corporates, which includes the middle market companies that CIT serves, will increase this year to nearly 15 per cent from a first quarter level of about 7 per cent.
S&P cut the ratings it assigns to the group to 'BBB-/A-3' from 'BBB/A-3' and left the ratings with a negative outlook.   

Moody's cut its ratings on American Express to 'A3/P-2' from 'A2/P-1' and lowered its long-term rating on American Express Credit Corp to 'A2' from 'A1', concluding its review for possible downgrade initiated on February 25. The outlook on the ratings is negative.

Moody's said the rating actions reflect the erosion of Amex's asset quality and weaker revenue trends stemming from the severe US economic recession and the firm's relatively high credit exposure in the states most heavily affected by home price declines. The negative outlook reflects the fact that Amex remains exposed to a more stressed economic environment than is currently expected and performance could be meaningfully affected by even higher credit costs. Moreover, Amex could be negatively affected by secular changes affecting the US credit card industry, in particular regulatory and legislative initiatives.

American Express Credit Corp. has $450 million of April 2010 and $450 million of December 2011 bonds outstanding in the domestic market.

Fitch lowered its issuer default ratings assigned to Caterpillar Inc. and Caterpillar Financial Services Corp. to 'A' from 'A+', affirmed the short-term IDRs at 'F1' and assigned a stable outlook to the ratings. Fitch only assigns a short-term IDR of F1 to Caterpillar Financial Services Australia Ltd.

Fitch said the downgrade reflects the weak global economy, which will pressure CAT's business throughout 2009 and possibly into 2010; the magnitude of CAT's expected sales decline in 2009, which is now estimated by the company to be down 32 per cent; CAT's pension deficit; and projected credit metrics that Fitch views as more appropriate for the 'A' category for CAT in the trough period of this cycle.

The stable outlook reflects Fitch's expectation that CAT will be able to remain profitable, generate free cash flow, and maintain solid liquidity in 2009 despite the rapid and substantial downturn in its business.

S&P assigns 'A/A-1' long- and short-term credit ratings to the Caterpillar group, including its Australian subsidiaries. S&P amended the outlook on the ratings to negative from stable after Caterpillar announced that 2009 sales and earnings will be weaker than previously expected as global economic conditions continue to be soft.
S&P said, "The outlook revision reflects weaker-than-expected operating performance that will stretch credit measures further than anticipated". Caterpillar Financial Australia has issued bonds in the domestic market in the past but currently only has $60 million of May 2010 FRNs outstanding.

In what appears to be an unusual move, S&P has affirmed the 'AAA' counterparty credit and financial strength ratings assigned to monoline insurer, Financial Security Assurance Inc. (FSA) and removed the ratings from CreditWatch with negative implications, where they were placed in early October last year. The move appears to be unusual because nothing has changed in the interim. S&P affirmed the ratings simply because the normal time in which CreditWatches should be resolved (three months) has already been exceeded.

FSA and its parent, Financial Security Assurance Holdings Ltd. (FSA Holdings) are still non-core subsidiaries of Dexia S.A. and while Assured Guaranty Ltd. (Assured) entered into an agreement to acquire the companies in November, it has yet to do so. S&P appears to be signalling that it expects the deal will proceed but has assigned a negative outlook to FSA's ratings, in part reflecting the possibility that it may not.
The negative outlook also reflects the damage that S&P considers to have been done to FSA's franchise by its mortgage-related losses and the risk presented in its financial products business. And for the moment, FSA's ability to raise capital and access liquidity is very strongly linked to and limited to Dexia.

S&P said it will revise the outlook to stable if Assured completes the acquisition of FSA and FSA Holdings but did not specify the likely timing of this.

However, another once-prominent monoline insurer, Financial Guaranty Insurance Co. (FGIC) appears to be close to death. S&P lowered its counterparty credit and financial strength rating to 'CC' from 'CCC', assigned a negative outlook and then withdrew the ratings. The ratings were withdrawn because S&P does not expect timely and comprehensive financial information will be available in future.

S&P said the negative outlook reflected the possibility that additional losses that may be incurred, as suggested by its RMBS and CDO of ABS loss estimate, could result in FGIC's capital and surplus falling below the minimum statutory requirement of $65 million. S&P also noted that the parent company FGIC Corp. has technically defaulted on a revolving credit agreement.

The auditor of both companies opined in recently released financial statements that there is substantial doubt regarding the companies' ability to continue as a going concern. "The issuance of this opinion results in an event of default by FGIC Corp. under the terms of the company's revolving credit agreement," said S&P.