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Sector Review:
Asia-Pacific Credit Trends 2014: Australia's Miners Curb Investments, But Other Sectors Are Slow To Fill The Gap
Primary Credit Analyst: Anthony J Flintoff, Melbourne (61) 3-9631-2038; [email protected]
Table Of Contents
Sector Outlook Key Risks And Trends Ask The Analyst Related Research
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
DECEMBER 10, 2013 1
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Sector Review:
Asia-Pacific Credit Trends 2014: Australia's Miners Curb Investments, But Other Sectors Are Slow To Fill The Gap
(Editor's Note: This article is part of a series on the credit trends of Asia-Pacific's corporate sectors for 2014. The series responds to analytical queries received recently on a sector or a specific issuer in that sector.)
Sector Outlook
Standard & Poor's Ratings Services expects a largely stable credit outlook for rated Australian corporate issuers in 2014 with an easing negative bias. The steady ratings trajectory continues the moderating bias in net negative outlooks of the ratings pool over the past four years, after peaking during the Lehman crisis in 2008. Although Australia's mining investment is waning, other business sectors are likely to pick up the slack, at a gradual pace. We therefore forecast Australia's economy will expand at a faster clip in calendar years 2014 and 2015 (2.6% and 3% respectively from 2.5% in 2013), after stepping down a gear this year. The mild upward economic trend will support the credit quality of Australian corporates.
Table 1
Australian Corporate Sector Outlook For 2014
Business conditions Business outlook Financial trend Sector outlook Satisfactory Stable Higher Stable-to-negative
Key Risks And Trends
Key external downside risks include a possible market disruption arising from a replay of U.S. debt ceiling issues, a reversal on Europe's economic recovery, or a sharp brake on China's economic fortunes. On the domestic front, a spike in imports and plunge in mining production could derail our expectations of a slightly rising path for Australia's economy. For the mining sector in particular, a significant fall in iron ore prices for a prolonged period is a critical risk. Iron ore production underpins a large portion of the sector's earnings, and its current prices are performing relatively better than other commodities.
Ask The Analyst
What are the prospects of Australia's corporates managing their refinancing burden?
Over the past two-to-three years, speculative-grade corporate issuers in Australia are increasingly tapping offshore capital markets. These issuers are attracted to better terms offered by capital markets for their bonds than comparable
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DECEMBER 10, 2013 2
1225805 | 300510290
Sector Review: Asia-Pacific Credit Trends 2014: Australia's Miners Curb Investments, But Other Sectors Are Slow To Fill The Gap
bank debt, despite the companies' lower credit quality. Some companies took advantage of favorable market conditions in early 2013 to lengthen the maturity of their debt book, and after a lull mid-year, the latter part of 2013 has also seen many corporates access capital markets. A noticeable trend has been the lengthening tenor of bonds issued in the domestic market, with seven years being a sweet spot recently. Overall though, bank funding is still a traditional funding source for corporate issuers. We believe the four major banks in the region have capacity to absorb more debt and borrowers remain prudent. Examples of Australian issuers tapping nonbank markets in 2013 include: Alinta Energy Finance Pty Ltd., Hoyts Group Holdings LLC, Nine Entertainment Co. Holdings Ltd., Pact Group Industries Pty Ltd., Spotless Group Ltd., and St Barbara Ltd. In total, Australian and New Zealand companies (excluding banks, insurers, and government entities) rated by Standard & Poor's carry more than A$347 billion of debt at June 2013, up 11% from A$311 billion at June 2012. Consequently, we believe the refinancing task is manageable for corporate Australia. Since the turmoil in financial markets in 2007 and 2008, rated companies in Australia have generally bolstered their balance sheets and carried higher levels of liquidity—placing them in good stead to meet the refinancing task.
What impact will China's flat growth in 2014 have on Australia's resource sector?
Australia's resources sector fortunes will soften in 2014 as we expect China to expand at 7.4%, about the same pace in 2013. The relatively flat growth, and China's greater emphasis on consumption-led growth, will curtail a strong surge in minerals. But the country is still shipping record amounts of iron ore to China so far this year as completed projects ramp up production. This next stage of the mining cycle will buoy Australia's economy to a certain extent as investment in nonmining sectors gears up. Nevertheless, Australian miners are already preparing for a period of soft sector conditions. They have slashed costs, deferred projects or adjusted mine plans, and curbed their expansion over the past year, albeit some at a faster pace than others. We believe Australia's mining investment has peaked. We took several negative rating actions during the past 12 months, as the weakening environment took its toll. A sharper slowdown in China than our base case will pull down commodity prices significantly. The impact on Australian miners' U.S.-dollar denominated revenues would be limited though, if the local currency depreciates in such a scenario. Marginal miners and metal producers, in particular, would suffer deteriorating credit quality. On the other hand, those that are diversified in terms of product and end-markets or are in the first-quartile cost position should ride out the depressed conditions better.
Is private-sector involvement in new infrastructure declining in Australia, particularly in light of the New South Wales state government's intention to fund recent road projects?
Greenfield road projects in Australia have had a relatively poor track record in recent years. Four of the most recent projects defaulted shortly after opening, primarily because of traffic being materially lower than expected. As a result, debt investors are very reluctant to participate in new greenfield projects, which significantly restricted the use of concessions that incorporate traffic risk. However, there is strong evidence that investors are still keen to finance mature assets given the predictability of cash
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DECEMBER 10, 2013 3
1225805 | 300510290
Sector Review: Asia-Pacific Credit Trends 2014: Australia's Miners Curb Investments, But Other Sectors Are Slow To Fill The Gap
flows. The New South Wales (NSW) government intends to fund a series of road projects in Sydney on balance sheet. The structure envisaged primarily seeks to put in place temporary funding to cover the construction period until such time as the traffic stabilizes. Once this is achieved, the government intends to issue debt that will be supported solely by toll road revenue, with no recourse to the government. In our view, this long-term financing will have similar characteristics with traditional project finance structures and will likely attract interest from investors already participating in this sector. However, the NSW government faces the initial challenging task of developing the new assets. We believe the state government will ultimately continue to rely on private-sector involvement in operating and funding that sector.
What is the impact of the new Australian government's NBN policy on the Telstra rating?
We expect that the new Coalition government's National Broadband Network (NBN) proposal, if it proceeds as planned, to stiffen competition in the Australian fixed-line market. The proposal remains subject to agreement with Telstra, but once agreed to, the new government's fiber-to-node plan should be significantly faster to implement than the existing fiber-to-the-home proposal. This offers potential risk to Telstra's business risk profile over the medium-to-long term as a result of increased fixed-line competition. However, we expect a number of factors will support Telstra's near-term credit quality. First, we consider that a key success factor for telecom operators over the medium-to-long term will be their capacity to offer high-quality "triple play" bundled service offerings (i.e. fixed-line, mobile, and pay TV services); Telstra remains very well positioned given its market-leading mobile network and 50% share of the dominant pay TV operator in Australia. Second, we expect Telstra will receive substantial financial compensation under any NBN transaction, which should provide it with significant financial capacity for investing in marketing to customers migrating to the NBN. In addition, the compensation will enable the company to continue to make market-leading investments in mobile and data-management networks and services, and other growth opportunities.
Related Research
Articles in the Asia-Pacific Credit Trends 2014 series: • Mining Companies' Credit Metrics Will Mend Slowly; Oil And Gas Firms Foresee Higher Demand, Dec. 4, 2013 • Korea's Corporates Will Struggle With Softer Demand At Home And From Abroad, Dec. 4, 2013 • Transportation Infrastructure Faces Policy Uncertainty; Utilities Deal With High Energy Costs And Green Power," Dec. 3, 2013 • Still Robust Domestic Growth and Steady Financial Profiles Underpin Our Mostly Stable Outlook On Indonesia's Corporate Sector, Oct. 30, 2013 • Middle Classes Fuel Consumer Products; Retail To Keep Doing It Hard; Gaming On A Roll, Oct. 30, 2013 • Real Estate Developers Wrestle With Regulatory Curbs; REITs Hunt For M&As, Oct. 29, 2013 • Tech Firms Focusing On Asia And Smart Devices Will Outperform, Oct. 28, 2013 • Telcos Look To The Cloud In Search Of Growth, Oct. 27, 2013
Standard & Poor's (Australia) Pty. Ltd. holds Australian financial services licence number 337565 under the Corporations Act 2001. Standard & Poor's credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).
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DECEMBER 10, 2013 4
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Copyright © 2013 by Standard & Poor's Financial Services LLC. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription) and www.spcapitaliq.com (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
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Asia-Pacific Credit Trends 2014: Australia's Miners Curb Investments, But Other Sectors Are Slow To Fill The Gap
Primary Credit Analyst: Anthony J Flintoff, Melbourne (61) 3-9631-2038; [email protected]
Table Of Contents
Sector Outlook Key Risks And Trends Ask The Analyst Related Research
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
DECEMBER 10, 2013 1
1225805 | 300510290
Sector Review:
Asia-Pacific Credit Trends 2014: Australia's Miners Curb Investments, But Other Sectors Are Slow To Fill The Gap
(Editor's Note: This article is part of a series on the credit trends of Asia-Pacific's corporate sectors for 2014. The series responds to analytical queries received recently on a sector or a specific issuer in that sector.)
Sector Outlook
Standard & Poor's Ratings Services expects a largely stable credit outlook for rated Australian corporate issuers in 2014 with an easing negative bias. The steady ratings trajectory continues the moderating bias in net negative outlooks of the ratings pool over the past four years, after peaking during the Lehman crisis in 2008. Although Australia's mining investment is waning, other business sectors are likely to pick up the slack, at a gradual pace. We therefore forecast Australia's economy will expand at a faster clip in calendar years 2014 and 2015 (2.6% and 3% respectively from 2.5% in 2013), after stepping down a gear this year. The mild upward economic trend will support the credit quality of Australian corporates.
Table 1
Australian Corporate Sector Outlook For 2014
Business conditions Business outlook Financial trend Sector outlook Satisfactory Stable Higher Stable-to-negative
Key Risks And Trends
Key external downside risks include a possible market disruption arising from a replay of U.S. debt ceiling issues, a reversal on Europe's economic recovery, or a sharp brake on China's economic fortunes. On the domestic front, a spike in imports and plunge in mining production could derail our expectations of a slightly rising path for Australia's economy. For the mining sector in particular, a significant fall in iron ore prices for a prolonged period is a critical risk. Iron ore production underpins a large portion of the sector's earnings, and its current prices are performing relatively better than other commodities.
Ask The Analyst
What are the prospects of Australia's corporates managing their refinancing burden?
Over the past two-to-three years, speculative-grade corporate issuers in Australia are increasingly tapping offshore capital markets. These issuers are attracted to better terms offered by capital markets for their bonds than comparable
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
DECEMBER 10, 2013 2
1225805 | 300510290
Sector Review: Asia-Pacific Credit Trends 2014: Australia's Miners Curb Investments, But Other Sectors Are Slow To Fill The Gap
bank debt, despite the companies' lower credit quality. Some companies took advantage of favorable market conditions in early 2013 to lengthen the maturity of their debt book, and after a lull mid-year, the latter part of 2013 has also seen many corporates access capital markets. A noticeable trend has been the lengthening tenor of bonds issued in the domestic market, with seven years being a sweet spot recently. Overall though, bank funding is still a traditional funding source for corporate issuers. We believe the four major banks in the region have capacity to absorb more debt and borrowers remain prudent. Examples of Australian issuers tapping nonbank markets in 2013 include: Alinta Energy Finance Pty Ltd., Hoyts Group Holdings LLC, Nine Entertainment Co. Holdings Ltd., Pact Group Industries Pty Ltd., Spotless Group Ltd., and St Barbara Ltd. In total, Australian and New Zealand companies (excluding banks, insurers, and government entities) rated by Standard & Poor's carry more than A$347 billion of debt at June 2013, up 11% from A$311 billion at June 2012. Consequently, we believe the refinancing task is manageable for corporate Australia. Since the turmoil in financial markets in 2007 and 2008, rated companies in Australia have generally bolstered their balance sheets and carried higher levels of liquidity—placing them in good stead to meet the refinancing task.
What impact will China's flat growth in 2014 have on Australia's resource sector?
Australia's resources sector fortunes will soften in 2014 as we expect China to expand at 7.4%, about the same pace in 2013. The relatively flat growth, and China's greater emphasis on consumption-led growth, will curtail a strong surge in minerals. But the country is still shipping record amounts of iron ore to China so far this year as completed projects ramp up production. This next stage of the mining cycle will buoy Australia's economy to a certain extent as investment in nonmining sectors gears up. Nevertheless, Australian miners are already preparing for a period of soft sector conditions. They have slashed costs, deferred projects or adjusted mine plans, and curbed their expansion over the past year, albeit some at a faster pace than others. We believe Australia's mining investment has peaked. We took several negative rating actions during the past 12 months, as the weakening environment took its toll. A sharper slowdown in China than our base case will pull down commodity prices significantly. The impact on Australian miners' U.S.-dollar denominated revenues would be limited though, if the local currency depreciates in such a scenario. Marginal miners and metal producers, in particular, would suffer deteriorating credit quality. On the other hand, those that are diversified in terms of product and end-markets or are in the first-quartile cost position should ride out the depressed conditions better.
Is private-sector involvement in new infrastructure declining in Australia, particularly in light of the New South Wales state government's intention to fund recent road projects?
Greenfield road projects in Australia have had a relatively poor track record in recent years. Four of the most recent projects defaulted shortly after opening, primarily because of traffic being materially lower than expected. As a result, debt investors are very reluctant to participate in new greenfield projects, which significantly restricted the use of concessions that incorporate traffic risk. However, there is strong evidence that investors are still keen to finance mature assets given the predictability of cash
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
DECEMBER 10, 2013 3
1225805 | 300510290
Sector Review: Asia-Pacific Credit Trends 2014: Australia's Miners Curb Investments, But Other Sectors Are Slow To Fill The Gap
flows. The New South Wales (NSW) government intends to fund a series of road projects in Sydney on balance sheet. The structure envisaged primarily seeks to put in place temporary funding to cover the construction period until such time as the traffic stabilizes. Once this is achieved, the government intends to issue debt that will be supported solely by toll road revenue, with no recourse to the government. In our view, this long-term financing will have similar characteristics with traditional project finance structures and will likely attract interest from investors already participating in this sector. However, the NSW government faces the initial challenging task of developing the new assets. We believe the state government will ultimately continue to rely on private-sector involvement in operating and funding that sector.
What is the impact of the new Australian government's NBN policy on the Telstra rating?
We expect that the new Coalition government's National Broadband Network (NBN) proposal, if it proceeds as planned, to stiffen competition in the Australian fixed-line market. The proposal remains subject to agreement with Telstra, but once agreed to, the new government's fiber-to-node plan should be significantly faster to implement than the existing fiber-to-the-home proposal. This offers potential risk to Telstra's business risk profile over the medium-to-long term as a result of increased fixed-line competition. However, we expect a number of factors will support Telstra's near-term credit quality. First, we consider that a key success factor for telecom operators over the medium-to-long term will be their capacity to offer high-quality "triple play" bundled service offerings (i.e. fixed-line, mobile, and pay TV services); Telstra remains very well positioned given its market-leading mobile network and 50% share of the dominant pay TV operator in Australia. Second, we expect Telstra will receive substantial financial compensation under any NBN transaction, which should provide it with significant financial capacity for investing in marketing to customers migrating to the NBN. In addition, the compensation will enable the company to continue to make market-leading investments in mobile and data-management networks and services, and other growth opportunities.
Related Research
Articles in the Asia-Pacific Credit Trends 2014 series: • Mining Companies' Credit Metrics Will Mend Slowly; Oil And Gas Firms Foresee Higher Demand, Dec. 4, 2013 • Korea's Corporates Will Struggle With Softer Demand At Home And From Abroad, Dec. 4, 2013 • Transportation Infrastructure Faces Policy Uncertainty; Utilities Deal With High Energy Costs And Green Power," Dec. 3, 2013 • Still Robust Domestic Growth and Steady Financial Profiles Underpin Our Mostly Stable Outlook On Indonesia's Corporate Sector, Oct. 30, 2013 • Middle Classes Fuel Consumer Products; Retail To Keep Doing It Hard; Gaming On A Roll, Oct. 30, 2013 • Real Estate Developers Wrestle With Regulatory Curbs; REITs Hunt For M&As, Oct. 29, 2013 • Tech Firms Focusing On Asia And Smart Devices Will Outperform, Oct. 28, 2013 • Telcos Look To The Cloud In Search Of Growth, Oct. 27, 2013
Standard & Poor's (Australia) Pty. Ltd. holds Australian financial services licence number 337565 under the Corporations Act 2001. Standard & Poor's credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
DECEMBER 10, 2013 4
1225805 | 300510290
Copyright © 2013 by Standard & Poor's Financial Services LLC. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription) and www.spcapitaliq.com (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
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