CROSS-SECTORSECTOR COMMENT 24 May 2016ContactsBenjamin S. Garber 1.212.553.4732 Asst Dir-Economist benjamin.garber@moodys.comABOUT CAPITAL MARKETS RESEARCHAnalyses from Moodys Capital Markets Research, Inc. (CMR) focus on explaining signals from the credit and equity markets. The publications address whether market signals, in the opinion of the groups analysts, accurately reflect the risks and investment opportunities associated with issuers and sectors. CMR research thus complements the fundamentally-oriented research offered by Moodys Investors Service (MIS), the rating agency.CMR is part of Moodys Analytics, which is one of the two operating businesses of Moodys Corporation. Moodys Analytics (including CMR) is legally and organizationally separated from Moodys Investors Service and operates on an arms length basis from the ratings business. CMR does not provide investment advisory services or products.View the CMR FAQ Contact the CMR team Follow us on TwitterMoodys Analytics markets and distributes all Moodys Capital Markets Research, Inc. materials. Moodys Capital Markets Research,Inc. is a subsidiary of Moodys Corporation. Moodys Analytics does not provide investment advisory services or products.For further detail, please see the last page.Market CommentInnovation and Global Brands Create Wide Gaps in Credit Quality Corporate profits and sales have become increasingly concentrated among giant multinational firms. This trend has driven wide gaps in credit risk between a few large firms and all other competitors in a given sector. The most extreme disparities in risk of default among US sectors are observed where firms have used innovative products and portfolios of powerful brands to grab high market shares. Such firms have reinforced their high grade credit status with the help of mergers as opposed to capital-heavy investment, and will continue to do so.Firms need more than high revenues to boost credit quality Globally, 10% of all public companies account for 80% of all profits . Firms that capture exceptional totals of profits and sales are naturally perceived to have less credit risk than other firms. Using Moodys Analytics CreditEdge service, we analyzed 97 US corporate and financial sectors representing over 3,200 firms to observe the contrasts in default risk among high and lower revenue firms. By converting Expected Default Frequency (EDFTM) measures into implied credit ratings on Moodys scale, we have found rating gaps of as large as 14 notches between the top four revenue firms and all others in a sector (Figure 1). For example, in the Pharmaceutical Preparation Manufacturing sector the four largest revenue firmsled by Johnson&Johnsonhave a median implied-rating of Aa3, which is 13 notches higher than the Caa1 median implied-rating of the remaining companies in the sector.MOODY'S ANALYTICS CROSS-SECTOR2 24 May 2016 Market Comment: Innovation and Global Brands Create Wide Gaps in Credit ...
