S&P Reports on Australia-N.Z Markets

April 14, 2005

A report from Standard & Poor’s concludes that the “Australian and New Zealand markets continued to perform favorably during the first quarter of 2005, driven by a continuation of stable economic conditions and healthy corporate balance sheets, flowing through from the end of 2004.”

S&P added, however, that “despite a benign credit environment, deteriorating market conditions will be likely triggers for credit quality changes in the near term.

“In the past 12 months, favorable economic conditions have shored up the cash and balance-sheet positions of many corporates. Mergers and acquisitions (M&A) will continue to dominate credit quality over the short-term, as companies consider using their balance-sheet positions to grow their business or, alternatively, to focus on capital management.”

S&P said that its “ratings actions on Australian and New Zealand entities revealed some signs of change in the credit cycle, with downgrades slightly exceeding upgrades for the first time in more than 12 months. M&A within the corporate sector dominated downgrade actions, although improved operating performance have driven ratings upgrades within the financial services sectors. These trends are expected to continue during the next three months, although the effects of changing economic fundamentals, such as increasing interest rates, oil prices, and labor costs, will add pressures to some industrial sectors.” It also noted that the last time downgrades exceeded upgrades was at the end of 2003.

Summarizing its ratings outlook, S&P noted that “at the end of the third quarter, the majority, 91 percent, of companies rated by Standard & Poor’s in Australia and New Zealand remained on a stable outlook. The balance comprised 5 percent on a negative outlook, and 4 percent were on a positive outlook.

“Entities on a negative outlook were based within the ‘AA’ and ‘A’ ratings categories, and entities on a positive outlook were spread across the ‘A’ and ‘BBB’ ratings categories. Entities with negative outlook ratings were spread proportionally across the financial services and corporate sectors.”

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