S&P Survey of Australia NZ Market Notes M&A Activity; Rating Changes

January 16, 2006

Standard & Poor’s Ratings Services has issued a report which notes: “Rating actions picked up noticeably in Australia and New Zealand in 2005, as merger and acquisition (M&A) activity intensified and issuers increased their appetite for financial risk.”

S&P said that over the past year “positive credit conditions helped underpin another strong year for rated companies as strong profit growth and balance-sheet de-leveraging continued in 2005. However, it became apparent through the year that other factors came into play to influence the creditworthiness of issuers.”

“The number of rating actions, both up and down, lifted with increased M&A activity,” noted Philip Bayley, director of capital markets at S&P. “Balance-sheet de-leveraging also started to give way to increasing financial-risk appetite, driving a number of downgrade actions,” he added

S&P also indicated: “The number of upgrades compared with downgrades remained positive in 2005, although a standout feature of the year was the substantial increase in the number of negative rating actions. There were 27 upgrades and 19 downgrades in 2005, giving a downgrade-to-upgrade ratio of 0.70 to 1. The 2004 year was much quieter with only five downgrades and 19 upgrades, resulting in a record low downgrade ratio of 0.26 to 1.”

“Nevertheless, the proportion of downgrades to upgrades in 2005 remained at historically low levels, representing the third-best result since Standard & Poor’s began measuring rating activity in Australia and New Zealand in 1996.

“Through year-end 2005, there were four ‘rising stars’ in Australia and New Zealand and four ‘fallen angels.’ This contrasts with an absence of both in 2004. A rising star is an issuer whose credit rating has been upgraded to investment grade (‘BBB-‘ and above) from noninvestment grade (‘BB+’ and below), while a ‘fallen angel’ is the opposite.”

Commenting on the prospects for the two countries insurance industries, S&P credit analyst Michael Vine noted: “Industry fundamentals remained strong for both the life and non-life insurance sectors through 2005. Although the non-life premium rate cycle has declined from its peak in mid-2004, results in 2005 were strong, and the high level of global catastrophe, including Hurricane Katrina, had little impact on the local market. Rating action or outlook change was largely from overseas parent company action.”

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