April 19 (The following statement was released by the rating agency)
Fitch Ratings highlights in a new report that the market typically rates well-performing
companies higher and worse-performing names lower than Fitch, with CDS-implied ratings (CDS IRs)
being more volatile than Fitch's Issuer Default Ratings (IDRs). CDS IRs are more affected by
market overreaction and the impact of changing market sentiment. The impact is more
severe for small firms than for large ones.
CDS IRs are also higher at the extremes of the rating scale compared with IDRs
by an average of one notch at end-2012, although this differential slightly
converged compared with early 2011 when the difference was two notches. IDRs are
centred around an average rating of 'BBB'/'BBB+' with a bell-shaped distribution
around this mean, whilst CDS IRs for the same sample of names are more evenly
distributed throughout the rating scale.
However, the market punishes peripheral corporates, as it is less forgiving of
companies operating in the periphery of the eurozone - given current uncertainty
regarding its unified future and weak market outlooks. Corporate CDS spreads
continue to trade wide of weaker peripheral sovereign spreads. Utilities
companies Portugal Telecom SGPS SA (BBB/Negative) and EDP-Energias de Portugal,
S.A. (BBB-/Negative) have differences of six and five notches respectively,
while Spanish telecoms giant, Telefonica SA's (BBB+/Negative) CDS IR is four
notches below its IDR.
Notable sector disparities exist, with pharmaceutical and beverage companies
benefitting from less perceived market volatility and stable cash flows, driving
higher CDS IRs relative to Fitch IDRs in these sectors - by an average of three
rating levels. By contrast, Fitch takes a slightly more pessimistic view on the
pharmaceutical sector on the back of an impending patent cliff and expected
favourable shareholder remuneration practices over the medium term.
Technology and metal and mining firms such as Motorola Solutions Inc,
(BBB/Stable), Pitney Bowes Inc (BBB-/Negative), BHP Billiton Plc/Limited
(A+/Stable) and Vale S.A. (BBB+/Stable) have lower CDS IRs than their
fundamentals suggest - at an average CDS IR one notch below the average IDR.
This is a function of cyclical commodity prices for metals and mining firms
driving greater volatility in CDS prices and Fitch's through-the-cycle rating
The full report, ''CDS Implied Ratings Versus Fitch Fundamentals" is available
at fitchratings.com or by clicking on the link below.
Link to Fitch Ratings' Report: CDS Implied Ratings Versus Fitch Fundamentals