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Investors push food companies to act aggressively on deforestation

Flying Into The Danger Zone; Norwegian Air Shuttle


Street Talk Episode 39 - A New Era For Blockbuster Bank M&A

Advertising Market Growth Unable To Keep Up With Strong GDP

Street Talk Episode 38 - PG&E Bankruptcy Reveals Climate Change Risk Facing Calif. Utilities

Investors push food companies to act aggressively on deforestation

Big investors are pushing supermarket chains and food companies to be more aggressive in tackling deforestation in their supply chains in order to be less exposed to the risks of climate change, reputational damage and environmental regulations.

In July, investors managing more than $2.8 trillion in assets, including the U.K.'s Legal & General Investment Management and the Netherlands' Robeco, called on soy and meat companies to take "immediate action" to halt forest loss in Brazil's Cerrado region, which has already lost half its savanna to agriculture. A month later, more than 90 institutional investors, including the California Public Employees' Retirement System, the biggest U.S. pension fund, called on the Roundtable on Sustainable Palm Oil, or RSPO, to strengthen its standards for certifying sustainable production of palm oil, which is found in nearly half of all packaged products, from cosmetics to candy. In November, RSPO tightened its guidelines.

In September, BNP Paribas' asset management arm and 43 other investors that together manage about $6.4 trillion in assets issued a statement exhorting the cattle industry to eliminate deforestation in South American cattle production. "There are three areas of concern," said Helena Vines Fiestas, head of sustainable research and policy at BNP Paribas, in an interview with S&P Global Market Intelligence. "There is the potential financial impact on a company's bottom line," the reputation risk for consumer-facing businesses and the potential impact on local communities directly affected by deforestation.

Globally, more than 120 million hectares of forest have been lost since 1990, an area almost the size of South Africa, and commercial agriculture is responsible for nearly 70% of tropical deforestation, according to the World Economic Forum. The second-worst year for tropical tree cover loss was 2017, according to satellite-based data from the University of Maryland. Last year, 39 million acres were destroyed, equivalent to losing 40 football fields of trees every minute for an entire year. Deforestation is mainly spurred by four products: cattle, palm oil, soy and timber.

Deforestation has a double effect. When trees are cut down, they can no longer absorb CO2. In addition, burning or rotting trees release vast amounts of CO2 into the atmosphere. About 24% of global greenhouse gas emissions originate from agriculture, forestry and other land use — more than the 14% from the entire transportation sector, according to the U.S. Environmental Protection Agency.

Name and shame

For years, nonprofit entities such as the World Wide Fund for Nature, or WWF, and Greenpeace have used corporate shaming campaigns to draw attention to deforestation. Now, alerted by investors to the financial risks, food and consumer goods companies are responding. After all, their exposure is significant: about $941 billion in revenue in publicly listed companies is dependent on commodities linked to deforestation, including cattle, soy and palm oil, according to CDP, a group that collects environmental data from businesses. Of the companies that report to CDP, about 87% identify risks from deforestation and nearly a third say those risks are already having an impact.

"Especially for consumer-facing firms, deforestation can have an impact on the brand's equity and affect their reputation," said Julie Nash, director for food and capital markets at Ceres, a nonprofit group that works with investors and companies, in an interview.

SNL Image

In 2016, 27 large buyers, including Kellogg Co., Cargill Inc. and Mars, suspended procurement contracts with major palm oil producer IOI Corp. after claims that it had illegally cleared about 45 square miles of forest and peatland in Indonesia; the suspension hit IOI's bottom line. Similarly, in May, Unilever said it would suspend palm oil orders placed with Yemen-based Hayel Saeed Anam Group because of reports that two of its units were alleged to have destroyed part of the rainforest in the Indonesian province of Papua.

Mondelez International Inc., maker of Cadbury sweets and Oreo cookies, has come under significant pressure for links to palm oil suppliers that cut down Southeast Asian forests. In November, the confectionery giant said it was dropping 12 upstream suppliers "as a result of breaches." In 2017, cocoa producer United Cacao became insolvent as a result of regulatory and legal challenges arising from illegal deforestation in Peru's Loreto region.

In late 2017, reports claimed that a unit of Posco Daewoo, one of Korea's largest trading companies, had been involved in a Papua deforestation program. Soon after, the large Dutch pension fund ABP sold its shares in the parent. "Measures that our investors proposed were not picked up quickly enough" by Posco Daewoo, said ABP in a statement this June. "As a result, we no longer had confidence that the company would improve."

Such efforts have had a tangible impact. In Indonesia, for example, primary forest loss fell 60% in 2017, according to the World Resources Institute. The majority of global palm oil production today is covered by some form of no-deforestation commitment. However, because palm oil supply chains are so entangled and complex, the policies are often not fully implemented, according to an analysis published in the journal Global Environmental Change in May.

There are other barriers. In 2017, less than a quarter of the 838 companies CDP approached on behalf of investors responded to the request for information about their exposure to deforestation-related risk. Global Canopy, a nonprofit organization, recently tracked deforestation commitments across 250 major companies. It said that as of late 2017, only 16% had an overarching no-deforestation policy, and about 40% had a forest policy for one, but not all, of the commodities in their supply chains. "The main surprise is that cattle hasn't had that much attention," said Sarah Rogerson, researcher at Global Canopy, in an interview.

Beef production is the world's leading driver of tropical deforestation, responsible for 65% of gross deforestation from 2001 to 2009, according to Ceres. This occurs primarily in Brazil and other parts of South America through the conversion of forest to pasture and from growing soy for cattle feed. Deforestation remains a major concern in the Amazon and increasingly in the Cerrado, a wooded grassland covering 20% of Brazil.

Chinese companies buy 80% of Brazil's entire soy exports, mainly to feed chickens, pigs and fish, but deforestation is often not on their agenda. "It's hard to engage with these companies," said Danielle Carreira, a senior manager at Principles for Responsible Investment, a nonprofit group, in an interview. "They respond to regulators, not shareholders."

U.S. food companies also have some catching up to do. "The U.S. lags behind Europe, but it's changing, especially when it comes to deforestation and the production of soy," said Robert-Alexandre Poujade, an analyst focused on environmental, social and governance issues at BNP Paribas' asset management business, which has €557 billion under management. BNP Paribas recently hired a U.S. head of corporate stewardship to engage more thoroughly with American companies.

Money talks

Shareholders are stepping up their efforts where they can. In December 2017, Boston-based Green Century Capital Management Inc., with $550 million of assets under management, filed a shareholder resolution with major U.S. agribusiness Bunge Ltd. seeking commitments that extended to both illegal and legal deforestation across Bunge's global supply chain for soybeans. In addition, Green Century asked Bunge to develop a process to ensure that soy suppliers in South America were compliant and to lay out steps to deal with any noncompliance.

"In the Cerrado, deforestation has caught the attention of NGOs, so Bunge is in the position of being targeted by activists," said Leslie Samuelrich, president of Green Century, in an interview. "They are a publicly traded company, so that puts them at reputational risk." Bunge also faces operational risks. "As deforestation drives climate change and changes weather patterns, soy production can be affected in the short and long term," Samuelrich added. "It's in their interest to not have an unstable climate." Bunge gave Green Century the commitments they sought, and in April 2018 the fund withdrew its shareholder resolution.

Among major companies, Unilever PLC and Nestlé SA have been especially aggressive on deforestation. In the last two years, Nestlé reshuffled 10% of its global palm oil supply chain in response to suppliers that were linked to deforestation or that refused to change their practices. The Swiss food giant has dropped 10 such suppliers from its supply chain. In addition, the company says 80% of its soybean volume is now deforestation-free. "By 2020, I have no doubt that it will be entirely covered," said Benjamin Ware, global head of responsible sourcing at Nestlé, in an interview.

Earlier this year, Nestlé deployed a satellite-based monitoring system called Starling to keep an eye on its global palm oil supply chain. From March 2019, anyone will be able to access a "transparency dashboard" on Nestlé's website. It includes a world map that allows a user to zoom in and see where palm-oil products originate from and whether they are certified deforestation-free. Nestlé said it intends to later expand the dashboard to soy, coffee and other products.

In 2010, Nestlé made a public commitment that it would end deforestation in its supply chain by 2020. Will it get there? "By January of next year, we'll be at 75%," said Ware. "We will do our best to reach 100% of our target."

Credit Analysis
Flying Into The Danger Zone; Norwegian Air Shuttle


This analysis was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global. This is not investment advice or a stock suggestion.

Feb. 13 2019 — The headwinds are picking up for Norwegian Air Shuttle ASA (“Norwegian”), the eighth largest airline in Europe. The carrier has been battling with rising fuels costs, increased competition from legacy carriers, and persistent aircraft operational issues. Norwegian’s problems are a continuation of what have been turbulent months for budget airlines in Europe resulting in a collapse of Primera Air, based in Denmark, near-default of WOW air, Iceland’s budget carrier, and most recently bankruptcy of Germania.

When we pull back the curtain and review the creditworthiness of European airlines to explore further some of the causes for Norwegian’s turbulent period, we see Norwegian’s business strategy and financial structure have made the carrier highly exposed. Coupled with the traditionally slow winter season, the airline may have to navigate through the storm clouds forming on the horizon.

A View From Above

S&P Global Market Intelligence has developed CreditModelTM Corporates 2.6 (CM2.6), a statistical model trained on credit ratings from our sister division, S&P Global Ratings. The model combines multiple financial ratios to generate a quantitative credit score and offers an automated solution to efficiently assess the credit risk of both public and private companies globally.1 Within CreditModel, the airline industry is treated as a separate global sub-model to better encompass the unique characteristics of this industry.

Figure 1 shows the overview of S&P Global Market Intelligence credit scores obtained using CreditModel for European airlines. Norwegian’s weak position translate into the weakest credit score among its competitors. The implied ‘ccc+’ credit score suggests that Norwegian is vulnerable to adverse business, financial, or economic conditions, and its financial commitments appear to be unsustainable in the long term. In addition to Norwegian, Flybe and Croatian Airlines rank among the riskiest carriers in Europe and share a similar credit risk assessment. The airlines with the best credit scores are also Europe’s biggest airlines (Lufthansa, Ryanair, International Airlines Group (IAG), and easyJet). The exception among the top five European airlines is Air France-KLM, which is crippled by labour disputes and its inability to reshape operations and improve performance.

Figure 1: Credit Risk Radar of European Airspace
Overview of credit scores for European airlines

Source: S&P Global Market Intelligence. For illustrative purposes only.
Note: IAG operates under the British Airways, Iberia, Vueling, LEVEL, IAG Cargo, Avios, and Aer Lingus brands. (January 3, 2019)

S&P Global Market Intelligence’s sister division, S&P Global Ratings, issued an industry outlook for airlines in 2019 noting that the industry is poised for stability.2 It stated the global air traffic remains strong and is growing above its average rate at more than 6% annually. The report also cited rising interest rates dampening market liquidity while increasing the cost of debt refinancing and aircraft leases. Oil prices are expected to settle, and any further gradual increases in oil prices are expected to be compensated by rising airfares and fees. The most significant risks for airlines are geopolitical. Potential downside scenarios include a crisis in the Middle East or other disruptions in oil, causing oil prices to spike. The possibility of trade wars and uncertainty surrounding the Brexit withdrawal agreement represent additional sources of potential disruption or weakening in travel demand.

Flying into the danger zone

Although Norwegian has so far dismissed any notion of financial distress as speculation, it has simultaneously implemented a series of changes to prevent further turbulence.3 The airline announced a $230mm cost-saving program that included discontinuing selected routes, refinancing new aircraft deliveries, divesting a portion of the existing fleet, and offering promotional fares to passengers to shore up liquidity.

In Figure 2, we rank Norwegian’s financial ratios within the global airline industry and benchmark them against a selected set of competitor European budget carriers (Ryanair, easyJet, and Wizz Air). Through this chart, we can conclude that Norwegian’s underlying problems are persistent and the company’s financial results are weak. Norwegian’s business model of rapid growth and a debt-heavy capital structure have resulted in severe stress for its financials. Norwegian ranks among the bottom 10% of the worst airlines in the industry on debt coverage ratios, margins, and profitability. This is in sharp contrast to other European budget carriers, which are often ranked among the best in the industry. On the flip side, Norwegian’s high level of owned assets represents its strong suit and gives the carrier some flexibility to adjust its operations and improve performance in the future.

Figure 2: Flying at Low Altitude
Norwegian’s financial ratios are among the worst in the industry

Source: S&P Global Market Intelligence. For illustrative purposes only. (January 3, 2019)
Note: Presented financial ratios are used in CreditModelTM Corporates 2.6 (Airlines) to generate quantitative credit score in Figure 1.

Faster, Higher, Farther

Norwegian has undergone a rapid expansion in recent years, introducing new routes and flying over longer distances. Between 2008 and 2018, the carrier quadrupled its fleet from 40 to 164 planes.4 This enabled it to fly more passengers and become the third largest budget airline in Europe, behind Ryanair and easyJet. However, unlike its low-cost rivals, Norwegian ventured into budget long-haul flights. After establishing its new base at London Gatwick, it started operating services to the U.S., South-East Asia, and South America.

As a result of this expansion, Norwegian’s capacity as measured by available seat kilometres (ASK) and traffic as measured by revenue passenger kilometres (RPK) grew nine-fold between 2008 and 2018, as depicted in Figure 3. By offering deeply discounted fares, the carrier was able to attract more passengers and significantly grow its revenues, which were expected to reach $5bn in 2018. However, to be able to support this rapid growth, Norwegian accumulated a significant amount of debt and highly increased its financial leverage. This rising debt is putting Norwegian under pressure to secure enough liquidity to repay maturing debt obligations.

Figure 3: Shooting for the Stars
Norwegian’s rapid growth propelled by debt

Source: S&P Global Market Intelligence. All figures are converted into U.S. dollars using historic exchange rates. Figures for 2018 are estimated based on annualized YTD 2018 figures. For illustrative purposes only. (January 3, 2019)

Norwegian’s strategy to outpace growing debt obligations by driving revenue growth is coming under pressure. The data tells us that expansion to the long-haul market and the undercutting of competitors to gain market share proved to be costly and negatively impacted Norwegian’s bottom line. Operational performance, measured as unit revenue (passenger revenue per ASK) and yield (passenger revenue per RPK), have been slipping continuously since 2008, as depicted in Figure 4. Negative free operating cash flow required Norwegian to continuously find new sources of capital to finance its operations, and profitability suffered. The carrier was able to ride a tailwind of low oil prices and cheap financing for a while, however, the winds seem to be turning.

Figure 4: Gravitational Pull
Slipping operational and financial performance

Source: S&P Global Market Intelligence, Norwegian Air Shuttle ASA: “Annual Report 2017”, Norwegian Air Shuttle ASA: “Interim report - Third quarter 2018”. Figures for 2018 are estimated based on annualized YTD 2018 figures. For illustrative purposes only. (January 3, 2019)

Norwegian’s plan to outrun a looming mountain of debt obligations is resulting in a turbulent flight. While growing its top line, the carrier has been unable to convert increased capacity and traffic into consistent profit. With a stable industry outlook and cost-cutting measures in place, Norwegian lives to fly another day. However, any additional operational issues or adverse macroeconomic developments could send Norwegian deep into the danger zone.

Learn more about S&P Global Market Intelligence’s Credit Analytics models.
Learn more about S&P Global Market Intelligence’s RatingsDirect®.

S&P Global Market Intelligence leverages leading experience in developing credit risk models to achieve a high level of accuracy and robust out-of-sample model performance. The integration of Credit Analytics’ models into the S&P Capital IQ platform enables users to access a global pre-scored database with more than 45,000 public companies and almost 700,000 private companies, obtain credit scores for single or multiple companies, and perform scenario analysis.

S&P Global Market Intelligence’s RatingsDirect® product is the official desktop source for S&P Global Ratings’ credit ratings and research. S&P Global Ratings’ research cited in this blog is available on RatingsDirect®.

1 S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD credit model scores from the credit ratings issued by S&P Global Ratings.
2 S&P Global Ratings: “Industry Top Trends 2019: Transportation”, November 14, 2018.
3 Norwegian Air Shuttle ASA, “Update from Norwegian Air Shuttle ASA”, press release, December 24, 2018 (accessed January 3, 2019),
4 Norwegian Air Shuttle ASA: “Investor Presentation Norwegian Air Shuttle”, September 2018.

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Listen: Street Talk Episode 39 - A New Era For Blockbuster Bank M&A

Feb. 08 2019 — The days of large bank buyers pursuing deals to plant a flag in a new market might be gone with acquirers now seeing deals as a way to support investments in technology. BB&T touted that prospect when discussing its landmark merger of equals with SunTrust. In the episode, we spoke with S&P Global Market Intelligence colleagues Zach Fox and Joe Mantone about the drivers of BB&T/SunTrust merger, how much i-banks advising on the deal stand to earn and the prospect of other similarly sized transactions emerging in the future.

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No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P).

Technology, Media & Telecom
Advertising Market Growth Unable To Keep Up With Strong GDP

Feb. 07 2019 — Cable and broadcast are losing their dominance in the viewing world. As more eyeballs migrate to online and mobile viewing, major media companies are struggling to adopt a common measurement system. Their goal is to track and consolidate the leaked viewers who have been switching first from analog, with a full ad load, to DVR, which lets them skip ads, and now to digital with limited or no advertising.

Click here for advertising market projections in Excel format.

The business models of the online services differ, with the majority of viewers still watching ads, albeit in much smaller pods. Others have voted with their wallets, paying a premium to view content on Hulu and other platforms without any advertising at all. Hulu with ads is only $5.99, while the subscription without ads is twice the price at $11.99. Clearly, viewers are willing to pay a premium for the privilege of not having to watch ads.

Although the broadcast networks have been somewhat flat for some time, the cable network industry has only recently had to cope with the reality that its heyday is over. After decades of showing strong single- or double-digit growth, cable networks have seen growth slow over the past five years to a range of just 3% to negative 1%.

A number of issues have been impacting cable networks, most notably cord cutting and cord shaving, with companies that are big in the children's market suffering disproportionately. Viacom Inc. was the first to show significant weakness: Gross ad revenue at its behemoth Nickelodeon peaked at nearly $1.3 billion in 2010 and 2011, then dropped to $1.10 billion in 2012. Nickelodeon's average 24-hour rating slipped from 1.44 in 2011 to 1.13 in 2012.

The company recovered slightly to a 1.2 rating in 2013 but has struggled significantly since then, with its overall rating at just 0.74 in 2017.

Parent company Viacom posted zero to negative ad revenue growth from the second quarter of 2014 all the way through the third quarter of 2018, an unprecedented negative run.

By contrast, the other cable network owners posted mixed results, but none have been as consistently negative as Viacom. The timing of big sporting events, especially the Olympics, contributes to much of the volatility at the various networks.

Broadcast and cable combined, including both local and national spots, increased ad revenue market share from 24% in 1988 to 32% in 2018. This was a strong showing given that cable alone rose from a less than 2% share in 1988 to almost 15% in 2018.

Overall, the ad market has continued to grow, mostly due to the popularity of digital spots. However, growth in the U.S. advertising market has been unable to maintain its historical trend of growing in lockstep with the gross domestic product, equating to approximately 2% of GDP.

Its share of GDP was generally in that range until the Great Recession, which pushed that metric from 1.8% in 2007 to 1.6% in 2008 and to 1.4% in 2009. In 2017, we estimate this fell as low as 1.2% with no sign that it can recover to the 2.0% range.

Although the growth of digital has been positive for the ad industry, there have been many less encouraging stories, particularly related to print, which shrank from 67.4% of the market in 1988 to just 41.1% in 2018.

Even after this dramatic shift over several decades left print with a much smaller base, all forms of print continue to struggle. Although the numbers below for the print sector do not include their digital operations, few companies have been able to offset the decline in traditional media with online initiatives.

Much of their revenue has been devoured by the usual internet giants such as Alphabet Inc.'s Google LLC and Facebook Inc. Even companies with disruptive business models targeting the younger generation, such as VICE Media LLC, have struggled.

We do not expect this to change much in our five-year outlook, although digital is certainly entering a mature phase. In 2023, we expect satellite radio to be growing the fastest, albeit from a much smaller base, and digital — although still in the No. 2 spot — is expected to grow at only 4.1% per year, down significantly from the 10.9% growth rate we expect for 2019.

Print is expected to continue to struggle, with Yellow Pages hit the hardest, declining at more than 16% per year. We do not expect most of these paper directories to survive over the long term, with the exception of those with very narrow niche audiences, such as small directories delivered to hotels in resort towns.

Digital has had remarkable progress, with a CAGR of 16.8% from $22.65 billion in 2009 to $91.89 billion in 2018. In sharp contrast, direct mail, the largest ad category in 2009, shrank from $44.50 billion in 2009 to $37.50 billion in 2018. The CAGR of decline has been modest at negative 1.9%.

Direct mail is now in third place with market share of 14.7% in 2018 versus 22.3% in 2009, behind digital at 35.9% and cable TV at 14.8%. The biggest slides occurred in Yellow Pages, which have fallen at a CAGR of negative 19.7% from a 5.5% share in 2009 to less than 1% in 2018; and daily newspapers, which contracted at a negative 11.8% CAGR from 12.4% in 2009 to 4.0% in 2018.

For a lengthy analysis which also includes an analysis of performance of the local ad market versus national, refer to the Economics of Advertising, or Click here.

Economics of Advertising is a regular feature from Kagan, a group within S&P Global Market Intelligence's TMT offering, providing exclusive research and commentary.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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Listen: Street Talk Episode 38 - PG&E Bankruptcy Reveals Climate Change Risk Facing Calif. Utilities

Feb. 06 2019 — The PG&E Corp. bankruptcy shows that financial backers of California utilities need to consider the risks associated with climate change but that exposure might be unique to entities operating in the state. In the episode, Regulatory Research Associates analysts Dan Lowrey and Dennis Sperduto discuss the next steps in PG&E's bankruptcy process, the future of its power purchase agreements and the risks that climate change can bring to backing utilities.

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No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P).