U.S. Corporate Issuers: Rising Corporate Funding Costs And Market Volatility Could Not Deter Upgrades In 1Q2018

Transcription

1 U.S. Corporate Issuers: Rising Corporate Funding Costs And Market Volatility Could Not Deter Upgrades In 1Q2018 S&P Global Fixed Income Research April 2018

2 U.S. Corporate Credit Market: Rating Actions Turning More Positive; Rising Interest Rates Beginning To Lead To Higher Funding Costs U.S. corporate downgrades have slowed in the first quarter of 2018, and upgrades have increased as a share of rating actions In first quarter 2018, the number of U.S. corporate downgrades has fallen by 9% from the first quarter of 2017 to 86, while the number of upgrades has risen by 40% to 80 Sectors with the most downgrades in the quarter include: retail and restaurants, consumer products, and media and entertainment Meanwhile, the oil and gas and utilities sectors lead with the most upgrades (with 10 each) The negative bias (the proportion of ratings that have negative outlooks or are on CreditWatch with negative implications) fell to 16%, after holding steady at 17% for nine consecutive months Sectors with the highest negative bias include: oil and gas and retail and restaurants, each with a negative bias of around 27% The positive bias (the proportion of ratings that have positive outlooks or are on CreditWatch with positive implications) has held steady at 8% since the end of 2017 The U.S. trailing-12-month spec-grade default rate rose to 3.3% in March, (up from 3.0% in December), and GFIR forecasts that the U.S. trailing-12-month spec-grade default rate will fall to 2.6% in December 2018 U.S. corporate funding costs remain accommodative, but are beginning to modestly rise with interest rates As U.S. 10-Year Treasury yields have been rising, and briefly surpassed 2.9%, the investment- and speculative-grade corporate bond yields are beginning to rise, although the increase in corporate yields so far remains below that of treasuries Bond issuance volume is down in the first two months of 2018 (compared with the same period in 2017). Investment-grade issuance is down by 33% to $146 billion, while speculative-grade issuance is nearly flat at $32 billion The distress ratio, (the share of spec-grade issues with option-adjusted composite spreads of more than 1,000 basis points (bps) over U.S. Treasuries) declined slightly to 5.4% in March (from 5.9% in February), and the retail and restaurant sector continues to have the highest distress ratio (at 17%) followed by telecommunications (16%) 2

3 In 1Q2018, U.S. Corporate Upgrades Rose To Their Highest Quarterly Level Since Level 2014 The downgrade ratio fell to 52% in the first quarter of 2018, down from 65% in the fourth quarter of 2017 U.S. Corporate Quarterly Rating Actions Downgrades (LHS) Upgrades (LHS) Downgrade Ratio (RHS) (Count) (50) (100) (150) (200) (250) (300) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% (350) 0% Q Q Q Q Q Q Q Q Q Q Q Q Downgrade ratio is the number of downgrades divided by the sum of upgrades plus downgrades. Data as of Mar. 30, Note: Downgrades shown as a negative number. Source: S&P Global Fixed Income Research 3

4 Retail/Restaurant Downgrades Continue To Surpass Other Sectors Retail/Restaurants leads downgrades by sector (with 19 through the first quarter), followed by consumer products with 13. Meanwhile, the oil and gas and utilities sectors lead upgrades YTD with 10 each 2018 Q1 U.S. Corporate Rating Actions By Sector SG downgrades IG downgrades SG upgrades IG upgrades (count) (25) (20) (15) (10) (5) Retail/Restaurants Consumer Products Media & Entertainment High Technology Telecommunications Oil & Gas Metals Home/RE Health Care CP&ES Capital Goods Financial Institutions Utilities Transportation Insurance Diversified Forest Automotive *Data as of Mar. 30, Note: Downgrades shown as a negative number. CP&ES -- Chemicals, packaging, and environmental services; Home/RE -- Homebuilders/real estate companies; Forest -- Forest products and building materials; Metals -- metals, mining, and steel. Source: S&P Global Fixed Income Research 4

5 Negative-Bias Has Declined Over The Past Year Suggesting A Less Negative Tilt To Rating Actions Over the past 12 months, the speculative-grade negative bias fallen to 18% from 20%, as the investment-grade negative bias has ranged from 11% to 13% Negative bias Average negative bias Positive bias Average positive bias U.S. Investment-Grade Corporate Ratings Bias U.S. Speculative-Grade Corporate Bias Negative bias Avg Neg Bias Positive bias Avg Pos Bias Data as of Mar. 31, Negative bias is the proportion of ratings that have negative outlooks or are on CreditWatch with negative implications. Positive bias is the proportion of ratings that have positive outlooks or are on CreditWatch with positive implications. Shaded areas are periods of recession as defined by the National Bureau of Economic Research. Source: S&P Global Fixed Income Research 5

6 Downgrade Potential Remains Highest For The Oil & Gas And Retail Sectors U.S. Corporate Bias Distribution By Sector Negative bias Stable bias Positive bias Oil & Gas Retail/Restaurants Telecommunications Consumer Products Capital Goods Media & Entertainment Financial Institutions Metals, Mining & Steel Utilities Health Care CP&ES High Technology Transportation Aerospace & Defense Insurance Forest Home/RE Automotive The oil and gas sector has a negative bias of 27% This negative bias has fallen from 37% at the end of October The retail and restaurant sector also has a negative bias of 27% This negative bias has declined from 36% at the end of October Data as Mar. 30, CP&ES = chemicals, packaging, & environmental services; Forest = forest products and building materials; Source: S&P Global Fixed Income Research. 6

7 Default Rate Expected To Fall To 2.6% By 4Q2018 S&P Global Fixed Income Research forecasts the U.S. trailing-12-month speculative-grade default rate will fall to 2.6% by December 2018 (with 46 defaults), down from 3.0% in December 2017 (with 53 defaults) 14 U.S. Trailing 12-Month Speculative-Grade Default Rate And December 2018 Forecast U.S. Speculative-Grade Default Rate (actual) Base Forecast (2.6%) Pessimistic (3.8%) Optimistic (2.2%) Data as of Dec. 31, 2017 in forecast. Default rates are updated with data as of Jan. 31, Shaded areas are periods of recession as defined by the National Bureau of Economic Research (NBER). Source: S&P Global Fixed Income Research; S&P Global Market Intelligence s CreditPro 7

8 U.S. Corporate Defaults Total 18 In 2018 (Through March) The retail and restaurant sector leads with four defaults, followed by oil and gas with three defaults. Looking forward, the consumer products, retail and restaurants, and oil and gas sectors have the highest number of weakest links, which are companies viewed as being at elevated risk of default (Count) U.S. Corporate Defaults By Sector (Count) Weakest Links By Sector Weakest Links are issuers rated B- or lower with either a negative outlook CreditWatch. Defaults data as of Mar. 31, Weakest links data as of Mar. 20, CP&ES -- Chemicals, packaging, and environmental services; Home/RE -- Homebuilders/real estate companies; Metals Metals, mining, and steel; Forest -- Forest products and building materials; Financial Institutions includes banks, brokerages, finance cos, mortgage institutions and S&L. Source: S&P Global Fixed Income Research 8

9 Retail / Restaurants Sector Leads Corporate Distress Ratio The distress ratio declined to 5.4% in March (falling for the third consecutive month) from 6.5% in January. The retail and restaurants sector leads with the highest distress ratio (17%), followed by telecommunications (15.5%) U.S. Distressed Credit Ratio U.S. Corporate Distress Ratio By Sector S&P Global Ratings' U.S. distress ratio S&P/LSTA Leveraged Loan Index distress ratio Data: Mar. 16, The loan distress ratio are as of the end of the month. S&P Global Ratings' distress ratio is defined as the number of speculative-grade issues with option-adjusted spreads above 1,000 basis points divided by the total number of speculative-grade issues. The loan distressed ratio is defined as the percentage of performing loans trading below 80 cents on the dollar. CP&ES -- Chemicals, packaging, and environmental services; Home/RE -- Homebuilders/real estate companies; Metals Metals, mining, and steel; Forest -- Forest products and building materials; Financial Institutions includes, finance cos, mortgage institutions and S&L (Note: excludes sectors with less than three distressed issues). Sources: S&P Global Fixed Income Research and S&Ps LCD. 9

10 U.S. Corporate Debt Maturities Scheduled To Rise Through 2022 U.S. companies have $4.4 trillion in rated debt maturing through 2022, annual maturities rise to a peak of $1.04 trillion in that year U.S. Corporate Rated Debt Maturing By Year (Investment- and Speculative-Grade) (Bil. $) Investment grade Speculative grade Note: Data as of Dec. 31, Includes bonds, loans, and revolving credit facilities that are rated by S&P Global Ratings from financial and nonfinancial issuers. Source: S&P Global Fixed Income Research 10

11 Speculative-Grade Companies Reducing Near-Term Maturities U.S. nonfinancial companies have reduced the amount of speculative-grade debt maturing in by 40% since last December. As companies have extended maturities to later years, the amount of debt scheduled to mature in 2022 has risen by 28% U.S. Speculative-Grade Nonfinancial Corporate Maturity Wall (Bil. $) As of 12/30/2016 As of 12/31/ Includes bonds, loans, and revolving credit facilities that are rated by S&P Global Ratings from nonfinancial issuers. Source: S&P Global Fixed Income Research 11

12 Bond Spreads Beginning To Widen Corporate composite credit spreads widened modestly in the first quarter by rating category reversing a contraction in spreads in the first few weeks of the year S&P Global Ratings U.S. Corporate Composite Spreads (bps) 1400 AA A BBB BB B CCC and below (bps) Change In Spread Since 12/31/17 AA A BBB BB B CCC and below (10) 800 (20) (30) 600 (40) (50) 400 (60) (70) 200 (80) 0 1/1/2018 1/8/2018 1/15/2018 1/22/2018 1/29/2018 2/5/2018 2/12/2018 2/19/2018 2/26/2018 3/5/2018 3/12/2018 3/19/2018 3/26/2018 Data as of Mar. 31, Note: Investment-grade spreads based on bond composite with a 10 year maturity; speculative-grade with a five-year maturity. Source: S&P Global Fixed Income Research; Thomson Reuters 12

13 Rising Treasury Yields Beginning To Lead to Higher Corporate Bond Yields Since Sep. 5, 2017, the 10-Year Treasury Yield is up 68 bps, the investment-grade corporate composite yield is up 58 bps, and the speculative-grade yield is up 27 bps S&P Global Ratings U.S. Investment- And Speculative-Grade Yields vs. 10-Year Treasury Treasury 10 Yr Yield Investment grade yield Speculative grade yield (bps) Treasury 10 Yr Inv Grade Spec Grade /5/ /5/ /5/ /5/2017 1/5/2018 2/5/2018 3/5/ Data as of Mar. 30, Note: Investment-grade yields based on bond composite with a 10 year maturity; speculative-grade with a five-year maturity. Source: S&P Global Fixed Income Research; Thomson Reuters 13

14 Corporate Bond Issuance Is Off To A Slower Start In 2018 (Bil. $) 450 Quarterly U.S. Corporate Rated Bond Issuance CCC/C B BB BBB A AA AAA 50 0 Q Q Q Q Q Q Q Q Q1 2017*Q1 2018* Data as of Feb. 28, Source: Thomson Financial and S&P Global Fixed Income Research 14

15 Mutual Funds And Foreign Residents Hold An Growing Share Of Corporate Bonds More than half of U.S. corporate and foreign bonds are now held by mutual funds and foreign residents, and this share has risen from 32% at the end of 2008 Holders Of U.S. Corporate And Foreign Bonds ($ bln) 4,500 Mutual funds Households Rest of World Insurance Government Banks/Brokers/Dealers Pensions and Retirement funds Other Financial Institutions 4,000 3,500 3,000 2,500 2,000 1,500 1, Note: Data as of Dec. 31, Includes corporate bonds from U.S. issuers held by foreign residents, and foreign issues held by U.S. residents. Mutual funds includes money market funds and exchange traded funds. Pension and retirement funds include public and private funds. Source: Federal Reserve Statistical Release: Z.1 Financial Accounts Of The United States 15

16 U.S. Corporate Debt Remains Below Pre-Crisis Peak In 2008 Financial companies have reduced their amount of debt (relative to GDP), falling to 36% of GDP from a peak of 69% in Meanwhile, the amount of nonfinancial corporate debt is back up to 45% of GDP. U.S. Financial And Nonfinancial Corporate Debt To GDP 120 Nonfinancial corporate debt / GDP Financial Corporate Debt (Ex GSE) / GDP Note: Data as of Dec. 31, Debt relative to nominal GDP. Debt from financial companies excludes Agency- and GSE-backed securities. Source: Federal Reserve Statistical Release: Z.1 Financial Accounts Of The United States 16

17 Investment-Grade Corporate Bond Returns Dropped In The First Quarter As Treasury Yields Surged Investment-grade returns turned negative (on a total return basis) in 2018, with a loss of 2.0% through March. The transportation and health care sectors led the decline 14.0 Investment Grade Total Return (Quarterly) U.S. Investment Grade Corporate Composite Total Returns By Sector Return 12/29/2017 Thru 3/30/ Q_2011 2Q_2011 3Q_2011 4Q_2011 1Q_2012 2Q_2012 3Q_2012 4Q_2012 1Q_2013 2Q_2013 3Q_2013 4Q_2013 1Q_2014 2Q_2014 3Q_2014 4Q_2014 1Q_2015 2Q_2015 3Q_2015 4Q_2015 1Q_2016 2Q_2016 3Q_2016 4Q_2016 1Q_2017 2Q_2017 3Q_2017 4Q_2017 4Q_2017 1Q_2018 Transportation Health Care Insurance Utility Aerospace and Defense Automotive Consumer Products CP&ES Retail and Restaurants Capital Goods Forest Metals, Mining and Steel Telecommunications High Technology Media and Entertainment Home/RE Bank and Brokerage Oil and Gas Financial Institutions Data as of Mar. 31, CP&ES -- Chemicals, packaging, and environmental services; Home/RE -- Homebuilders/real estate companies; Forest -- Forest products and building materials. Source: S&P Global Fixed Income Research..

18 Speculative-Grade Returns Turned Slightly Negative Amidst Rising Volatility Speculative-grade returns turned negative (on a total return basis) in 2018, with a loss of 0.5% in the first quarter, as losses in the homebuilder and real estate sector were offset by gains from the financial institutions and media and entertainment sectors Speculative Grade Total Return (Quarterly) 1Q_2011 2Q_2011 3Q_2011 4Q_2011 1Q_2012 2Q_2012 3Q_2012 4Q_2012 1Q_2013 2Q_2013 3Q_2013 4Q_2013 1Q_2014 2Q_2014 3Q_2014 4Q_2014 1Q_2015 2Q_2015 3Q_2015 4Q_2015 1Q_2016 2Q_2016 3Q_2016 4Q_2016 1Q_2017 2Q_2017 3Q_2017 4Q_2017 4Q_2017 1Q_2018 U.S. Speculative Grade Corporate Composite Total Returns By Sector Home/RE Forest Automotive Bank and Brokerage CP&ES Consumer Products Utility Insurance Oil and Gas Transportation Telecommunications Metals, Mining and Steel High Technology Capital Goods Health Care Retail and Restaurants Aerospace and Defense Media and Entertainment Financial Institutions Return 12/29/2017 Thru 3/30/ Data as of Mar. 31, CP&ES -- Chemicals, packaging, and environmental services; Home/RE -- Homebuilders/real estate companies; Forest -- Forest products and building materials. Source: S&P Global Fixed Income Research.