9 January 2015

Potential rating downgrade looms large for Russia

The Wall Street Journal: 09. January 2014

Friday could be a sobering day for Russian investors.
Rating agency Fitch is expected to downgrade Russia’s credit rating by one notch as part of its scheduled check on the country’s credit health. Results will be made public after the market close Friday, and analysts and investors say that a one-notch cut is the most likely announcement.
While Fitch’s move to BBB- is already mostly priced in by markets, the main risk ahead is related to Russia’s getting junked, or cut below investment grade, which would happen if another agency cuts the country’s rating as well.

Standard & Poor’s is likely to soon wrap up a downgrade review, initiated in December, and Moody’s put Russia on ‘negative outlook’ in October. (Here is a calendar of all scheduled reviews.)

Here is what analysts are saying ahead of today’s announcement:

Regis Chatellier, credit analyst at Societe Generale: “We expect a downgrade of only one notch by Fitch, so Russia should remain for now in the investment grade category. However, there could be a more significant impact on the market when S&P and Moody’s downgrade Russia, most likely below investment grade. We see this happening by March or early April. From the market perspective, we see more impact for Russian corporates and banks rather than for government bonds.”

“Russia is currently rated BBB- by S&P, but the country was put under negative watch two weeks ago, hinting a likely downgrade in the next few weeks. A downgrade from Moody’s may come pretty much at the same time: statistically, nearly 60% of the rating actions are taken within the 3 to 9 months after being placed under ‘Negative Outlook’ status. Moody’s put Russia on ‘Negative Outlook’ back in October last year.”

Piotr Matys, rates strategist at Rabobank: “The odds that Fitch might lower Russia’s BBB ratings have increased as reflected in recent sharp rise in Russia’s credit default swaps. Following the precipitous fall in oil prices, which are unlikely to recover markedly this year, Russia faces prospects of severe economic recession accompanied by double digit inflation in the first half of the year before prices moderate in the second half. Rapidly shrinking international reserves leave Russia more vulnerable at the time when the CBR will have to deal with the consequences of the full-blown currency crisis and provide local banks with financial support after the ruble plunged to an all-time low on the back of the toxic dose of Western sanctions and falling oil prices. Both S&P and Moody’s have already started preparing the ground for another downgrade.”

Per Hammarlund, strategist at SEB: “Given that Fitch will most likely keep Russia in investment grade, I think the threat of a downgrade is not the main driving force [for the market]. Given that public finances and reserves are still ok, the agency will likely point to the more general economic environment to justify what I expect to be 1 notch downgrade to BBB- with a negative outlook. I expect Fitch to point to the deteriorating economic outlook business environment, rising inflation, sanctions, and low oil prices.”

Strategists at Barclays: “Russia’s rating has moved into the spotlight as S&P put its BBB- rating on watch negative over the holiday season, and Fitch has a scheduled review of its BBB rating today. Moody’s has put ratings of a series of Russian corporates on review for possible downgrade. While it is not our base case that the Russian sovereign loses IG [investment grade] status in the very near-term which would require two of the three major rating agencies to move Russia to high yield, a number of Russian corporates face a more imminent risk of being excluded from IG benchmark indices.”

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