Global Credit Risk Outlook
reduced from 'Red' to 'Orange'

«When the Night is darkest the Dawn is nearest.»

Visual Finance today revised its Credit Risk Outlook from the highest Credit Risk Level ‘Red’ (March 31st, 2006 until February 24th, 2009) down to ‘Orange’. We were among the very few researchers worldwide that have warned investors at an early stage of the crisis. Meanwhile the inherent investment risks have become visible for everyone. We assume that the end of the financial market turmoil is within reach and that the economy could recover noticeably by the end of 2009: This is the result of our In-depth study of the most severe financial disasters in the last 170 years and our assessment of the present meltdown. According to our scenario the peak of corporate defaults i.e. insolvencies will be reached within the next 18 months. For the time being the appropriate design of an intelligent credit strategy will be the most important key driver to investment success. For more details please read the information below.

In Visual Finance’s view the financial market crisis & economic slump will recover by the end of 2009. Even if we cannot see or feel the end of the crisis yet, there is a massive economic readjustment process (corporate reshaping) already under way. Visual Finance has well ahead of the present recession raised its Global Credit Risk Outlook in March 2006 to the highest Risk Level and held it there throughout the entire crisis, the most severe since the Great Depression.

We are pleased to inform you, that we have eased our Global Credit Risk Outlook today from ‘Red’ to ‘Orange’. Our reassessment of credit risk is based on a set of three main factors:

• Our in-depth analysis of historical markets crashes and financial crisis

• Our judgment about the actual stage in the the economic cycle

• Our identification of very interesting investment opportunities across almost all market segments & instruments

Decisive extraordinary efforts will step-by-step help to stimulate the economy by attracting buyers into the market places: That could lead to, what Visual Finance calls, an almost ‘Spontaneous Recovery’.

• Governments → creating stimulus packages

• Central banks → offering liquidity & lowering key interest rates to all-time lows

• Corporates → designing survival strategies while offering good products and services

• ‘Markets' → through a process of temporarily falling prices of goods and services (incl. commodities)

But all the assistances mentioned cannot stop at the beginning the corporate default rates (rate of insolvencies) from rising further over the next months during the period of corporate reorganization (downsizing), which is accompanied by an extreme risk aversion of private and institutional investors.

The global credit rating trend remains negative and we do not expect a trend reversal in the near term: Many corporate credit profiles will stay vulnerable for a while. It will take nearly two years for rating upgrades to outstrip rating downgrades again. In particular Visual Finance predicts huge debt restructuring programs in number & size
(example: Corporate Bond Default ISLANDSBANKI PDF). As a consequence we will carefully study the behavior of debtors along the sophisticated way of corporate transformation.

The almost unprecedented situation may require relief from all corporate stakeholders. The decision whether it makes sense or not to make concessions in contracts to secure a sustainable survival must be felt on a case-by-case basis by the stakeholder groups involved. The fruits of reorganization and New Deals will tighten the record high credit spreads over a time period of 18 months. Furthermore, we expect the number and volume of corporate finance transactions to increase substantially, especially for mergers, acquisitions, spin-offs, capital increases and bond issuances (more time is needed for a demand-driven rise in IPOs).

The stock market valuation is now moderate with price-earning-ratios at around 10x for many major stock markets. Visual Finance has identified some excellent corporate recovery situations i.e. turnaround stories with some extremely attractive stock & bond price valuations. In our recovery forecast scenario the government bond yields will rise substantially over a medium-term horizon, while, as mentioned before, the credit spreads of corporate bonds will fall from these not sustainable high levels. Some global imbalances are to persist while others will be diminished by the crisis.

A secular credit risk migration from corporates to governments (sovereigns/states/locals) is foreseeable in many countries when taken into consideration the flurry of government bailouts and the severity of the economic downturn. The growing budget deficits and the rising debt burdens will constitute a heavy burden for (the next) generations.

Photo Island by Ruedi Giezendanner, Winterthur

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