>2010 Credit Markets Symposium

> Corporate Defaults Down Dramatically in 2010 - Test of Sustainability is the Strength of the Economic Recovery

> Negative Rating Drift has Stabilized but Debt Remains High – Lower Rated Credits and Smaller Companies Particularly Vulnerable

> Considerable Risks Remain and New Ones Continue to Emerge – Most Recent Example: Spike in Energy Costs

> Longer Term Impact of Credit Shock Still Unknown: 2001 / 2002 Downturn Led to Cash Hoarding. Will Lean Cost Structures / Persistently High Unemployment Mark this Downturn?

> Strategic Mergers, Optimal Leverage, Liquidity Further Redefined

To read the full report: CREDIT MARKETS

>Indian Infrastructure Outlook 2010 (FITCH RATINGS)

Overview
Fitch Ratings has a stable outlook for 2010 on its portfolio of rated infrastructure project debt; this represents an array of project asset classes, including roads, airport, power, water and rail. The ratings, especially for projects under construction, are at low levels. Construction delays continue to be a major irritant, with a number of factors outside the control of project sponsors (including land acquisition and regulatory approvals) negatively impacting timely completion.

In the absence of rigorous adherence to contractual provisions, project companies and sponsors have had to take on the burden of additional costs, either through the drawdown of available cash, the raising of equity, or the issuance of debt. Governmental concession‐granting authorities have also seemed willing to extend the schedule for project delivery. Banks, recognising these systemic constraints, and responding to the requests of project companies and concession‐granting authorities, seem willing to reschedule project loans, chiefly by postponing commencement of principal moratorium. This spirit of accommodation/adjustment‐ or ‘jugaad’ ‐ adopted by various project counterparties (including sponsors, bankers, contractors and the government) has prevented large‐scale rating downgrades. Nevertheless, the capacity for ‘jugaad’ is limited and in certain cases, projects remain vulnerable to specific event risks; as such, there could be selective ratings downgrades in 2010.

Fitch‐rated operating projects appear to have weathered the economic slow down without deterioration in credit profiles (beyond the initial stress scenarios). The pick‐up in user demand and revenue growth rates witnessed in recent months has contributed to Fitch’s stable outlook. The economic crisis dampened usage growth rates in the transportation sector, and some projects are struggling to achieve base case forecasts, but other operating projects are displaying resilience. Consequently, there may be select ratings upgrades for the Fitch‐rated debt of certain operating projects. Outside of Fitch’s rated universe, the agency has a largely stable outlook on the Indian infrastructure sector as a whole; this stems from the recovery following the economic slowdown witnessed in the second half in FY09. This recovery has been aided primarily by three factors: (a) renewed urgency displayed by the government to bid out new projects; (b) demand pick‐up on the back of higher GDP growth rates; and (c) favourable financial environment, including a buoyant equity market and banks awash with liquidity. All of these factors have contributed to a return of an appetite for risk on the part of the private sector.

Although achieving financial closure for greenfield projects has become a lot easier and quicker ‐ due to abundant bank liquidity in a favourable economic environment ‐ projects continue to be burdened with high interest rates, heavy gearing and medium‐term amortising loan tenors; all of which contribute to high risk profiles for such projects.

Project developers appear to be pricing some of the risk elements of past projects into their bids and return expectations for new road projects; this is a consequence of the National Highways Authority of India’ s (NHAI) inability to complete timely right of way (RoW) acquisitions or to permit partial tolling. Developers are also seeking to employ creative methods of overcoming public counterparty delays, including financing higher ROW upfront purchase prices and then filing for a concession extension after project delivery (COD).

To read the full report: INDIAN INFRASTRUCTURE

>India Edible Oil Outlook 2010 (FITCH RATINGS)

Fitch Ratings has a stable outlook on the Indian edible oil sector in 2010 — in the wake of continuing improvement in demand, driven by India’s growing per capita GDP. Those operators with conservative hedging and inventory policies, strong raw material sourcing arrangements, and geographically dispersed plants (which keep logistical costs optimal), are likely to present stable credit profiles. However, many are entering the branded edible oil segment, where margins will be lower during the entry phase due to the associated sales and marketing expenses. This will also result in higher working capital requirements. Some operators, anticipating higher prices, are believed to have built up inventories — which could constrain liquidity and have an adverse impact during any price decline. Aggressive inventory strategies would remain a rating concern.

The oil seed deficit in the Indian market is likely to continue, with the ongoing shortage in production together with strong demand growth. To meet this increased demand, the government has reduced duties on crude edible oils, a process which Fitch believes is likely to continue. The agency believes that the higher duties on refined oils (in the range of 7.3% to 7.75%) relative to crude oil (nil import duties) will continue to support the margins of edible oil refiners.

With a shift in consumption patterns in India towards the relatively cheaper palm oil, many larger operators are increasingly shifting their focus towards palm oils. Fitch expects that the larger entities such as KS Oils Limited (KSO, ‘BBB+(ind)’/Stable/‘F2+(ind)’) will eventually have the flexible capacity to process both palm and soya oils which, together with mustard oil, accounts for around 70% of Indian edible oil consumption.

With the increased consumption of palm oil, some companies like KSO and Ruchi Soya Ltd have plans to set up palm plantations in South‐East Asia, for backward integration. Although this exposes them to execution risk during the implementation phase, this should on completion support margin stability for these
firms.

Fitch expects tightly balanced global demand/supply dynamics for palm oil, as incremental production is expected to be lower than demand growth — with prices likely to remain at current levels (in the region of USD700/tonne). With other edible oils typically moving in tandem, Fitch expects the prices of other key oils
like soya and mustard to also remain firm.

Integrated players which are present primarily in smaller oils like mustard, ground nuts, coconut, and, to a lesser extent, soya, will continue to exhibit relatively stable margins. With the relative shortage of mustard seed production during Q110, mustard seed prices have remained firm — which Fitch expects to continue over 2010. The agency believes that for larger players, this additional cost could be partly offset by an increased proportion of higher‐margin branded products and growing demand.

Stable Credit Profiles
Fitch expects revenue growth across the industry. Although increased branded sales from large companies could lead to wider margins, the positive impact could be partly offset by the corresponding higher inventory and receivables due to the Market sources indicate that there could be an increase in inventory levels across
the sector in anticipation of further price increases; although, as these inventories are sold during the year to meet demand, they could revert to “normal” levels during 2010. Commodity and currency hedging policies remain critical given the previous volatility. The industry has traditionally required substantial investments
in working capital; although with the expectation of stable prices and strong demand growth, further liquidity pressures appear unlikely — barring any sharp build‐ups in inventory in expectation of future price movements. Fitch expects any negative surprises to primarily come from working capital fluctuations.

The agency also notes that large players like KSO, Ruchi Soya and Liberty Oil Mills (‘BBB‐(ind)’/Stable/‘F3’) have either recently completed — or are expanding — their refining capacity in order to meet the growing demand. However, the impact on credit profiles would depend on the relative scale of these expansions and
funding patterns. KSO has funded a large part of its expansions using equity infusions, and has completed its entire domestic refining capacity expansion in the third quarter of financial year 2010 (Q3FY10).

With players like Ruchi Soya and KSO investing in backward integration in palm plantations, Fitch expects a substantial rise in the share of palm oil in Indian consumption. On completion of these initiatives over the medium‐term, Fitch expects these companies to benefit from the added margins, as well as higher resilience to any future price volatility. However, in the interim, they remain exposed to execution risk to an extent.

Global Palm Oil Production
Market estimates indicate Malaysian crude palm oil (CPO) production in 2010 at similar levels as 2009, in the region of 17–18 million tonnes (mt), although adverse weather conditions like El Nino could curtail production in H210. Furthermore, the Malaysian government‐backed replanting programme could further lower production by up to 0.5mt in 2010. Yet, with the palm trees recovering from bad weather, yields are expected to improve in 2010.

In Indonesia, CPO production is expected to be marginally higher than in 2009 (around 20mt). However, with global palm oil demand rising faster than supply — primarily driven by India and China, which have significant edible oil deficits — palm oil prices are likely to remain firm in 2010. Palm oil prices have been rangebound at between MYR2,200 and MYR2,600 since mid‐2009. However, seasonal variations will continue, eg in H210 during the soya harvest season. Fitch notes that soya and palm oil prices have traditionally moved in tandem, with soya trading at a premium to palm.

Raw Material Dynamics
Indian oil seed production is expected to remain largely stable during 2010 for key oil seeds such as mustard and soya. Whilst mustard seed production could be slightly lower than in 2009, demand growth has driven mustard prices substantially higher. Fitch believes that the bulk of the impact will be felt by the unbranded segment, which may find it challenging to pass on the price increases to consumers — in light of the relatively lower palm oil prices. However, branded players will retain a cushion due to brand premiums.

Industry estimates indicate that the soya crop is likely to marginally grow from 2009’s levels, although prices should remain the same. Many firms are preferring to refine crude soya oil rather than using their soya crushing capacity due to the nil import duties on crude soya oil. This would continue as long as there is no change in the current duty structure.

To read the full report: EDIBLE OIL

>STRUCTURED FINANCE (FITCH RATINGS)

Indian ABS Performance Report: July 2009

Summary
This report provides analysis on the performance of the 21 Indian ABS transactions currently under surveillance. The key performance trends for each individual asset type are highlighted and detailed performance data for each Fitch‐rated transaction are provided. The ongoing analysis of the performance of these transactions forms an essential part of Fitch’s rating process. Fitch Ratings’ surveillance team analyses both the structure and the receivables’ performance to evaluate the transaction in comparison to the agency’s initial expectations and to
determine future trends.

As anticipated in the Fitch Outlook report entitled “Indian Structured Finance report‐2008 Review and 2009 Outlook”, dated 4 February 2009, the performance of most asset classes has deteriorated. In particular, performance measures, such as current collection efficiency and overdue collection efficiency, have worsened. Fitch notes that the relative decline in overdue collection efficiency has been higher than the decline in current collection efficiency. However, given the level of amortisation and available credit enhancement cover ‐ in the range of 4x and 6x ‐ the ratings Outlook for the majority of the rated series is Stable.

Performance by Asset Class

Commercial Vehicle Loans
Fitch currently monitors the performance of 15 ABS transactions backed by commercial vehicle (CV) loans. The collection efficiency of CV loans has shown a declining trend since July 2008. The performance of heavy commercial vehicle (HCV) and medium heavy commercial Vehicle (MHCV) loans has been more susceptible to the recent downturn than other sub‐categories of CV, such as light commercial vehicles (LCV) and tractors.

Retail Auto
Fitch currently monitors the performance of three ABS transactions backed by auto loans (see pages 29 to 34). All three transactions had amortised significantly by Q308, to the extent that the deterioration in current collection efficiency of these transactions has been limited; in contrast, the overdue collection efficiency has deteriorated very significantly and is currently around 6.0%.

To see full report: STRUCTURED FINANCE

>Global Bank Rating Trends Q109 (Fitch Ratings)

Introduction
This publication continues the series dating from the beginning of 2006, and presents data for the four quarters up to and including Q109. Data from Q105 are included in earlier publications. New charts showing the distribution across rating categories are also included in this publication.

Global Overview
Significant economic pressures continue, particularly in some emerging markets, although the crisis conditions following the bankruptcy of Lehman Brothers on 15 September 2008 have abated. This is partly due to the liquidity and capital support from the governments and the acquisitions of weaker banks by stronger banks. In addition to their willingness, the ability of sovereigns to continue to support their banking systems has received increased focus recently. Fitch Ratings forecasts that the real economies of many developed economies will contract significantly in 2009. Fitch also forecasts world GDP will decline by 2.7% this year, although growth in the BRICs (Brazil, Russia, India and China) is expected to remain positive at 3.2%.

Elsewhere in emerging markets, there has been increased attention on banking operations in eastern Europe, and several eastern European countries have received IMF assistance.
Negative rating actions in Q109 remained high, although the number was lower than the peak in Q408. Fitch took 188 negative rating actions in Q109, compared with 266 in Q408. The reduction was mainly caused by less negative rating actions in emerging markets in Q109, while negative rating actions in developed markets remained high. In contrast, there were no positive actions in emerging markets and only a small number of positive actions in developed markets in Q109. This resulted in the worst ratio of negative to positive actions since the series began in Q105 (−12.5).

There is also substantial negativity in the Outlooks assigned to banks’ Long‐Term Issuer Default Ratings (IDRs) globally in Q109. The number of global Negative Outlooks has exceeded the number of Positive Outlooks since end‐Q208. The global ratio of Negative to Positive Outlooks deteriorated significantly, to −16.2 at end‐ Q109 from −9.6 at end‐Q408 (see Chart 1). By end‐Q109, the ratio stood at −11.3 in developed markets (end‐Q408: −6.2) and −24.0 in emerging markets (end‐Q408: −15.0). Significant differences remain among regions in both developed and emerging markets. In developed markets, this ratio varied from −3.7 in the developed Americas to −25.0 in developed Europe. In emerging markets, the ratio at end‐Q109 ranged from −2.4 in the emerging Americas to −75.0 in emerging Europe.

The percentage of Fitch’s global bank ratings universe with Stable Outlooks continued to decline moderately (see Table 1). However, the majority of ratings (66.1%) had Stable Outlooks at
end‐Q109. Most of the remaining banks had Negative Outlooks at end‐Q109 (24.1%). In addition, 1.5% of bank ratings were on Positive Outlook.

The negativity in Fitch’s bank ratings suggests the negative trend will continue. This is somewhat mitigated by Fitch’s view on sovereign support within the banking sector (see “Updated Support Rating Floors for Major Banks in High‐Grade Sovereigns”, dated 9 April 2009). Fitch’s Support Rating Floors in many developed markets remain at relatively high levels and therefore limit downgrades in Long‐ Term IDRs.

Trends in Rating Outlooks and Watches

Developed Markets
Although 68.6% of bank ratings in developed markets still had Stable Outlooks at end‐Q109, the proportion of Negative Outlooks increased to 19.5% (end‐Q408: 16.6%). There was an increase in Negative Outlooks in developed Asia during Q109. However, the largest numbers of Negative Outlooks at end‐Q109 were in developed Europe (50) and the developed Americas (22), with no change in the number from end‐Q408. The ratios of Negative to Positive Outlooks have deteriorated significantly in the developed markets overall and particularly in developed Europe and developed Asia (see Chart 2). In addition, there were 38 Negative Watches in developed markets at end‐ Q109.

To see full report: GLOBAL BANKS