61813056 us sovereign rating downgrade implications
TRANSCRIPT
-
8/4/2019 61813056 US Sovereign Rating Downgrade Implications
1/13
overe gn a ng owngra e
Capital Markets Implications
Strictly Private and Confidential
August 7, 2011
-
8/4/2019 61813056 US Sovereign Rating Downgrade Implications
2/13
-
8/4/2019 61813056 US Sovereign Rating Downgrade Implications
3/13
-
8/4/2019 61813056 US Sovereign Rating Downgrade Implications
4/13
-
8/4/2019 61813056 US Sovereign Rating Downgrade Implications
5/13
Treasury Market Outlook (Contd.)
Historical Downgrades Muted Impact on Yields of Prior Sovereign Downgrades Previous 1-notch downgrades from AAA have caused little market
reaction historically
On April 18, S&P placed the US on negative outlook. Subsequently,rates sold off, but in the week following the announcement, the 10-year yield change was minimal
Country Ratings Change Date10s 2s/10s
1D 1W 1D 1W
Japan Aaa to Aa1 11/17/1998 2 bp 15 bp 3 bp 11 bp
+ -
Expected Investor Reactions
Recent feedback from investors is that a downgrade would notnecessarily prompt selling of Treasuries, although in a downsidescenario significant selling by one or more major market participantswould likely prompt others to follow quickly
Belgium AAA to AA+ 05/06/1998 -1 bp 2 bp 0 bp 7 bp
Italy AAA to AA 05/06/1998 -1 bp 2 bp 0 bp 5 bp
Spain AAA to AA+ 05/06/1998 -1 bp 3 bp 0 bp 6 bp
Spain AAA to AA+ 01/19/2009 1 bp 33 bp -4 bp -43 bp
The largest holders of US government debt, the foreign centralbanks, are unlikely to adjust their US Treasury holdings due tothe liquidity and depth of the US Treasury market
Insurance companies are unlikely to be forced to sell as the NAIChas recently deemphasized ratings for regulatory capitalrequirements
Spain Aaa to Aa1 09/30/2010 -7 bp -9 bp -3 bp 9 bp
Ireland AAA to AA+ 03/30/2009 7 bp -18 bp 11 bp 15 bp
Ireland Aaa to Aa1 06/02/2009 -7 bp -11 bp 3 bp -11 bp
Average 0 bp 2 bp 2 bp 0 bp
Asset managers retain significant flexibility
The Federal Reserve has issued a guideline noting no change inrisk weights for US banks
USD Considerations
Major Holders of US Treasuries
US Treasury Owner $BN
Households 959
Corporations, Businesses, GSEs, ABS Issuers & Dealers 271
Potential for knee-jerk USD weakening on the Asia open, but Citi doesnot expect this to be maintained
General move towards risk reduction could be USD positive
Foreign buyers could potentially shift their holdings away from USD
State & Local Governments 506
US Federal Reserve 1,340
Banks, S&Ls, Credit Unions, Insurance Cos. 578
Pension & Retirement Funds 826
Mutual Funds, Closed end Funds, ETFs 359through the US Treasury market, however the current risk appetiteand the status of the of the USD as the worlds reserve currency willlikely mitigate selling pressure
Less favorable capital flows could weigh on USD in the medium-term
Money-Market Funds 338
Non-US Private Investors 1,287
Non-US Central Banks & Sovereign Wealth Funds 3,158Total 9,621
4
-
8/4/2019 61813056 US Sovereign Rating Downgrade Implications
6/13
-
8/4/2019 61813056 US Sovereign Rating Downgrade Implications
7/13
Equity Capital Markets Outlook
Elevated Volatilit New Issue Pull BackIPOs Follow-Ons Convertibles
1,200
1,250
1,300
1,350
1,400
S&P500Index
15%
20%
25%
30%
35%
Volatility(%)
$25
$15
$11
$28
Proceeds($BN)
$56
$45 $45
Proceeds($BN) $13 $12
$5
$3Proceeds($BN)
Source: Factset as of 08/05/11.
Defensive Rotation Investor SelectivityMedian Follow-On File/Offer Performance
,
6/30 7/7 7/14 7/21 7/28 8/4
S&P 500 Index VIX Index
Peak(1)
Source: Dealogic. Includes U.S. domiciled offerings $25 mm.
$3
Q4
'10
Q1
'11
Q2
'11
Q3
'11
IPO Filed
Backlog
Q4
'10
Q1
'11
Q2
'11
Q3
'11
Q4
'10
Q1
'11
Q2
'11
Q3
'11
(6.0%) (6.0%) (6.1%)
7.9%
Q4 '10 Q1 '11 Q2 '11 Q3 '11
llow-On
FiletoOffer
Consumer Staples (2.5%) 1.9% (4.7%)
Telecom (2.9) (5.4) (9.2)
Utilities (3.8) 1.5 (3.8)
Information Technology (6.2) (3.2) (8.9)
Healthcare (6.8) 0.8 (9.8)
Consumer Discretionary (8.1) (2.6) (10.2)Industrials (8.3) (8.9) (18.0)
Financials(2) (9.2) (15.8) (18.0)
Investors Re-Calibrating GrowthReal GDP (QoQ at Annual Rate)
Advice To Issuers
FMaterials (9.5) (10.3) (15.5)
Energy (10.0) 0.0 (15.3)
Markets
Last weeks pressure in expectation of rating downgrade
European overhang; anticipate continued defensive rotation
Source: Factset as of 08/05/11.(1) S&P 500 peak (04/29/11). (2) I ncludes Real Estate.
Source: Dealogic. Includes U.S. domiciled offerings $25 mm.
3.7%
1.7%
2.6%
3.1%
2.3%
1.5%
Issuance Observe markets and launch on stable footing; windows open and close rapidly
Choose underwriters with global differentiated distribution capabilities
IPOs
Flexibility on size and price range - fine tune prior to launch
Assess opportunity for pre-sounding including cornerstone/anchor investments
Follow-Ons
6
Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11
Minimize market exposure and launch smaller - increase through oversubscription
Equity Linked
Convertible market underpenetrated
Sell equity at premium; replacement to widening fixed income rates
Share re-purchase strategies (open market / ASR / levered)Source: Citi Research.
-
8/4/2019 61813056 US Sovereign Rating Downgrade Implications
8/13
-
8/4/2019 61813056 US Sovereign Rating Downgrade Implications
9/13
-
8/4/2019 61813056 US Sovereign Rating Downgrade Implications
10/13
ppen x
-
8/4/2019 61813056 US Sovereign Rating Downgrade Implications
11/13
S&Ps U.S. Public Debt Projections
S&P generated US public debt projections for the coming decade across three scenarios, with resulting debt-to-GDP ratios for each scenario as
Base Case Scenario Upside Scenario Downside Scenario
Macro assumptions were based on the US congressional baseline economic assumptions
S&Ps Assumptions 2.1 trillion of the spendingreductions are implemented
2001 and 2003 tax cuts, due toexpire in 2012, remain in place
GDP growth of 3%, CPI at 2%
2.1 trillion of the spendingreductions are implemented
2001 and 2003 tax cuts for highearners lapse from 2013 onwards
GDP growth of 3%, CPI at 2%
1.2 trillion in second round ofspending cuts does not occur as
planned 2001 and 2003 tax cuts, due to
expire in 2012, remain in place
50-75 bps rise in funding costs (i.e.10-year bond yields) 2013 onwards
GDP growth of 2.5%, CPI at 1.5%
Debt / GDP
2011 74% 74% 74%
2021 85%(1) 78% 101%
Rating Outcome AA+ with negative long-term outlook AA+ with stable long-term outlook AA long-term rating
(1) On Friday the US Treasury posted on its blog (http://www.treasury.gov/connect/blog/Pages/Just-the-Facts-SPs-2-Trillion-Mistake.aspx) that the debt-to-GDP ratio in this scenario should be 79% rather than85%, as S&P misread congressional baseline economic assumptions. This discrepancy apparently generated a $2 trillion difference in the calculated debt-to-GDP ratio9
-
8/4/2019 61813056 US Sovereign Rating Downgrade Implications
12/13
Different Concerns: Public vs Private Financial InstitutionsFinancial Institutions & Insurance
U.S. banks held $1.77 trillion of securities issued or guaranteed
Fannie & Freddie, GSEsand LiquidityGuarantee Programs
Supported entities would benegatively impacted
No im act ex ected where
by the U.S. treasury as of 3/31/11
Creates risk of meaningful unrealized losses if prices decline would impact recovery in the banking sector
Potential disruption of Repo market (U.S. Treasuries are arimar source of collateral
Banks, TIAA, USAA,and IndependentFinancial Institutions
ratings are based on stand-alone basis
Sovereign ratingdowngrade could buildnegative pressure on higher
AAA rated insurance companies have strong levels of capital &
liquidity and are not linked to government support
Money Market Funds under $1.3 trillion exposure to governmentsecurities risk breaking the buck only under significantredem tion activit tail-end risk
U.S. Public Finance
rated banks
U.S. Non Financial Corporates
AAA corporations resilient to a 1-2 notch sovereign downgrade(ADP, ExxonMobil, Johnson & Johnson, and Microsoft)
Rating resiliency based on:
Revenues derived from non-government sources withsignificant international component
Munis & LocalGovernments
No automatic rating impact, butissuers would be capped at 1-2notches above sovereign
Robust internal cash flow generation
Funding not highly reliant on government or domestic banks Credit EnhancedMortgage BackedSecurities/Bonds
Impacted by the rating level ofthe credit enhancementprovider (which could bedowngraded)
10
Federal RevenueAnticipation Funds
Debt not explicitly supported bya State could be impacted
-
8/4/2019 61813056 US Sovereign Rating Downgrade Implications
13/13