The increased sensitivity to perceived changes (or not) in monetary policy could likely signal that the extended period of easy borrowing conditions and high demand for speculative-grade debt may be coming to a close, according to a new report from Standard & Poor’s Global Fixed Income Research.
For nearly 12 months, U.S. speculative-grade corporations have been enjoying record-low borrowing costs. This has largely resulted from the lack of meaningful returns in other debt markets, particularly U.S. Treasuries, which saw record-low yields during the summer of 2012.
“On the flip side, investors’ hunt for yield has led to a substantial increase in the amount of risk in the corporate debt markets recently, evidenced by the ultra-low yields, record-high issuance levels, a resurgence of collateralized debt issuance, and relaxed lending conditions,” said Diane Vazza, head of Standard & Poor’s Global Fixed Income Research. “These trends are not just limited to bonds–they also extend into leveraged loans, particularly those with ‘light’ covenants.”
Speculative-grade default rates have remained muted roughly since September 2011, but we expect the default rate to increase to 3.3% by March 31, 2014.
“The default rate could climb higher if yields continue to increase at the pace that they have been during the last 30 days,” said Ms. Vazza. “On the flip side, if the unemployment rate stays high and the Fed decides to continue the QE3 program, investor demand for speculative-grade debt will likely increase from the weak levels we’d seen in the first half of June.” Either way, participants in the market for speculative-grade debt have been very reactive to economic data releases during the last few weeks, most evident through the recent volatility in speculative-grade bond returns.
For details, purchase the full report Credit Trends: The Speculative-Grade Market Appears Poised For A Sell-Off (2105 words)
Moody’s Investors Service recently released their ninth annual report detailing and exploring sovereign bond issuer’s default and rating experiences and history from 1983 through 2012. Conclusions include that sovereign default rates have been modestly lower than those for corporate issuers, and that Moody’s sovereign ratings have been as powerful as corporate ratings in differentiating defaulters from non-defaulters.
Broadly speaking, this report elucidates trends in credit quality, historical sovereign defaults, sovereign cumulative default rates, recovery rates of defaulted sovereign issuers, rating performance measures, and more. Moody’s also discusses the losses that investors incurred this year from country defaults, (i.e. a 70% loss from a EUR197 billion debt exchange that occurred this year in Greece) and circumstances surrounding individual sovereign bond defaults from 1998 to present.
Moody’s comprehensive report is around 60 pages long, contains 24,800 words, twelve exhibits, four appendixes, and complete credit ratings on 119 countries; the related Excel spreadsheet supplies all of the information listed above in a editable, usable format. These two reports are a valuable tool for everyone from the first time analyst to the industry expert.
Purchase Moody’s report here.
Purchase the accompanying Excel spreadsheet here.
From Standard & Poor’s Ratings Services
The combination of lower returns on investment for investors and higher borrowing costs for nonfinancial issuers has not curbed investor demand for speculative debt. In fact, just the opposite has occurred: the count of speculative-grade new issuance reached a 12-month high in May, according to a new report from Standard & Poor’s.
U.S. Treasury and industrial bond yields have been ticking upward since the beginning of May, even though they are still at “ultra-low” levels historically.
“This movement roughly coincides with the Federal Reserve’s (Fed’s) recent announcement of its intent to wind down its policy of buying $85 billion in monthly mortgage debt,” said Diane Vazza, head of Standard & Poor’s Global Fixed Income Research. “Not surprisingly, industrial bond returns have been seeing a downward trend of noteworthy levels over the same time.”
U.S. speculative-grade industrial bond yields have been falling at a consistent pace during the last 10 months, reaching record lows as investors seek returns after the U.S. Treasury yields hit an all-time low on July 25, 2012. This trend held up until roughly May 6, when both the five-year Treasury yield and the five-year speculative-grade industrial bond yield began to rise markedly.
Over the course of May, the yield on the five-year Treasuries rose 40 basis points (bps) to 1.05% as of May 31. Meanwhile, the yield on speculative-grade nonfinancial bonds rated ‘BB+’ widened by 67 bps, and the yield on those rated ‘BB/BB-’ and ‘B-’ rose 41 bps and 46 bps, respectively. “However, the increase in Treasury yields is more substantial in a relative sense, and it has resulted in a decrease in the spreads on five-year speculative-grade bonds,” said Ms. Vazza. “As a result, speculative-grade industrial debt has remained all the more attractive to investors, despite speculation about when this run in profitability will end.”
For details see The Federal Reserve’s Recent Statement Prompts A Change Of Course For Debt Markets, which examines whether the boom will bust when the Fed’s bond buying program ends.
Standard and Poor’s Capital IQ Global Markets Intelligence group uses a BP Vol. Comparison, OAS Comparison, Interest Coverage Ratio, and a myriad of other metrics to evaluate Moody’s 5.5% senior unsecured bond, maturing September 1, 2020. S&P believes that this bond offers good risk-adjusted returns relative to other comparable bonds. Their probability of default (PD) is currently at 0.017%, which is considerably better than the 0.06% average attained by the remainder of the diversified financial sector and sub-sector.
In the Issuer Analysis and Credit Metrics section, S&P pinpoints some potential factors that drive Moody’s success. They attribute strong brand name recognition as a force powerful enough to ensure that Moody’s credit measures will remain stable, “despite volatile financial markets and economic growth trends.” Similarly, they believe that Moody’s will be able to avoid the elevated legal risk for companies within the ratings industry, even though S&P themselves weren’t able to. In order to further the comparison, S&P’s total debt and revenue is also compared to those of Moody’s.
S&P’s comprehensive report is around 2,200 words long; it contains twelve charts, three tables, numerous ratios, and complete bond descriptions; it is a valuable tool for everyone from the first time investor to the industry expert.
Interested? Purchase this report on Moody’s Corp’s Senior Unsecured Bonds.
From Fitch Ratings
U.S. state fiscal year 2014 budgets anticipate continued economic and revenue recovery despite uncertainty about federal government funding and healthcare reform, according to a new Fitch Ratings report.
State tax collections have grown for twelve straight quarters based on Census Bureau data through December 2012, with Fitch observing continued growth since then. Although the pace of growth has slowed since 2011, fiscal 2013 results so far are generally in line with, or exceeding, budget expectations.
Most state budgets assume sustained, slow economic and revenue gains for the current and coming fiscal years.
While budgets have, for the most part, been devoid of surprises, a key uncertainty for state budget-makers is action at the federal government level. On the revenue side, taxpayer activity to accelerate income into calendar 2012 to avoid federal tax increases has resulted in very strong current-year income tax results in some states that make forecasting more challenging and raise the risk of underperformance in the coming year.
Conversely, the end of the federal payroll tax holiday is reportedly one factor in sluggish sales tax growth experienced by many states over the past several months.
On the spending side, sequestration is having a limited effect on economic performance and the finances of states, which in most cases are choosing not to replace funding for federal programs.
However, Fitch believes that states remain significantly exposed to the possibility of future federal funding cuts. Cuts would be most challenging if they affected Medicaid, which accounts for the majority of federal aid to the states and so far has been protected from automatic cuts.
More immediate uncertainty is presented by federal healthcare reform, the major provisions of which will take effect in fiscal 2014. This affects all states, regardless of whether they are choosing to expand Medicaid.
For details, see the Fitch special report US Public Finance Credit View
An increasing number of investors in European fixed income markets expect fundamental credit conditions will deteriorate across sectors, according to a Fitch Ratings survey.
The more circumspect sentiment was most notable for the sovereign segment, where the proportion of survey respondents anticipating worsening conditions more than doubled to 55%, from 24% in the last survey.
The gloomier outlook appears to reflect rising recession fears and low inflation expectations.
Nevertheless, the insatiable hunger for high yield (HY) continues, stoked by continued ultra-easy monetary policy. 27% of respondents voted HY their most favoured investment choice, down from 29% in the last quarter, but still clearly ahead of runners-up emerging-market (EM) corporates and banks. Investors expect the appetite for yield to be met by willing issuers in the HY and EM corporate segments; the only sectors which a majority of investors believe will see increasing issuance in the next 12 months. The HY issuance boom has been supported by historically low default rates.
Fitch conducted the Q213 survey between 3 April and 7 May. It represents the views of managers of an estimated EUR8.6trn of fixed-income assets. The full survey report is available here.
From Standard & Poor’s Ratings Services
Standard & Poor’s Ratings Services estimates North American nonfinancial corporations’ financing needs over the next five years (2013-2017) at $13.5 trillion to $14.3 trillion, with two-thirds to be applied toward refinancing and the remainder toward new investment. The U.S. makes up the lion’s share of this North American debt need, accounting for more than 90% of the total pie. Last year was a record setting year for the U.S. credit markets, while in Canada, private nonfinancial corporations’ debt financing increased, but remained well below its 2007 pre-recession peak.
As far as the U.S. is concerned, we expect that companies will largely use $3.4 trillion to $4.2 trillion of new debt financing for capital expenditures–and, to a lesser extent, shareholder returns and mergers and acquisitions (M&A)–as they continue to make up for underinvestment since the Great Recession.
Liquidity is currently strong among U.S. corporations, but we expect companies to fund a meaningful portion of their needs with debt, considering currently attractive credit market conditions and the high percentage of cash sitting overseas, which we believe is unlikely to be brought back home any time soon, considering the cost of repatriation.
Financing such a large sum is not without risk. Companies’ high demand for debt capital could force lenders to ration credit. U.S. policymakers may be constrained if faced with another economic downturn given the extraordinary use of their fiscal and monetary arsenals to support growth already. Still, our base-case assumption is that banks and capital markets will largely be able to meet borrowers’ financing needs–in part because accommodative monetary policy will continue to be effective, but also because of the general resilience of the U.S. economy.
For details, see The Credit Cloud: Economic Resilience Will Propel A $14 Trillion North American Corporate Funding Need
From Standard & Poor’s Ratings Services
Credit quality for the U.S. health insurance sector is strong with limited potential for change in the next 12 months based on sector fundamentals.
In Standard & Poor’s Ratings Services’ opinion, most rated health insurers remain generally sound financially as they position themselves for reform-driven change in the marketplace.
Overall, we believe our current ratings reflect the sector’s capacity to withstand a period of moderate strain that may emerge in connection with cyclical factors and health care reform.
Our opinion of the sector’s credit quality is that underlying business conditions (such as growth and retention opportunities and access to capital) are very good, and health insurers’ financial fundamentals remain relatively strong. Industry risk remains high but has moderated somewhat.
For details, see Industry Economic And Ratings Outlook: U.S. Health Insurers’ Credit Quality Is Strong As The Sector Prepares For Reform
Standard & Poor’s examines why the credit quality of US states has fared better than that of Euro member states during the “Great Recession.”
Excerpted from The End Of A Beautiful Relationship? U.S. Fiscal Federalism, State Credit Quality, And Changing Times
For some individual U.S. states, the economic contraction was even more pronounced than it was for some of the 17-member eurozone nations. As with the eurozone nations, U.S. states participate in a single currency area, largely depriving them of any monetary based policy responses to economic contractions (such as pursuing an export-led recovery through currency devaluation).
So, how can it be that, whereas seven (41%) of eurozone sovereign ratings are ‘BBB+’ or lower, no U.S. state fell to below ‘A-’ during or after the Great Recession?
We attribute much of the state sector’s above-average creditworthiness to countercyclical federal fiscal policies that involve reduced federal tax liabilities and large scale outlays during economic downturns. Some federal tax and spending changes occur automatically and some as a matter of discretionary fiscal policy. These changes mitigate the budget impact of recessions for states. From a global perspective, such federal fiscal actions are unique because they serve as a source of broad economic support without encroaching too much on states’ fundamental sovereignty.
In fact, U.S.-style federalism involves a high degree of fiscal independence for states — latitude that could theoretically allow for widespread mismanagement. And there is variation in credit quality among the states. But the range of ratings for U.S. states is both tighter and higher (spanning from ‘AAA’ to ‘A-’) than that found in most other sectors. In addition, the gradual upward migration of state ratings through the years reflects the trend among the states toward stronger financial management policies and practices. And while federalism in the U.S. context tends to encourage fiscal discipline, it does little to compel it. The variation in credit quality among states reflects this fact.
Recent developments, such as implementation of the sequestration cuts in March, signal the possibility that policymakers could scale back somewhat the federal government’s role in the economy.
In our view, unless Congress changes the structure of the federal spending cuts under the Budget Control Act of 2011 (BCA), it could slow the rate of GDP growth through the next decade.
But we do not believe that incrementally less federal support for the economy poses a major threat to state credit quality. More important is the underlying institutional framework that makes up the federal-state fiscal relationship, in particular, countercyclical federal tax and spending policies. Even with the BCA in effect, this distinguishing feature of U.S. fiscal federalism remains intact.
Online ad spending will surpass national TV in 2015, according to Standard and Poor’s.
From Industry Report Card: The Media And Entertainment Industry Is Casting For Green Shoots
We expect core ad spending to grow at or slightly less than the rate of GDP, in a convergence of several trends. Print-based advertising is likely to continue to contract while online ad revenue continues to grow at a pace well ahead of GDP.
We think that in 2015, total online including search will surpass national TV (including broadcast networks, national spot, syndication, and cable networks).
Proliferation of online ad inventory–in particular discount “remnant” inventory sold on ad networks–hampers pricing across all online advertising–even prime inventory. It constrains pricing in TV, and it has a deflationary effect on print. We think that the larger online gets, the greater the pricing drag may be on total ad spending growth. Certainly, low-cost, highly measurable advertising brings efficiencies to small and large marketers. But in aggregate, we think these trends are likely to preclude a return to total ad spending growth in the solid mid-single-digit percent range (or higher) that we witnessed in the 1980s and 1990s.
Although Standard & Poor’s believes economic growth will gain a more solid footing in 2013, ad spending–historically highly correlated with the economy–is only showing scattered signs of improvement thus far. Our economic forecast assumes that key economic data begin to improve from the March trend. In the meantime, we believe the strongest growth will be in Internet display advertising, Internet search, and cable networks. Key factors that could affect media and entertainment companies include:
- An economic recovery that could pick up in 2013, despite still-high unemployment;
- Investor and marketer worries over European and U.S. budget deficits, and the continuing U.S. debt ceiling drama;
- Dependence of ad spending on stable GDP growth and consumer spending;
- Vulnerability of non-advertising-driven subsectors to any adverse shift in consumer spending; and
- Severe leveraging in several subsectors, which many companies may be unable to withstand.
For details by media sector, see the full Industry Report Card