CreditSights Risk Products: Credit Risks and Opportunities IACPM Fall Conference, November 2016

Transcription

1 CreditSights Risk Products: Credit Risks and Opportunities IACPM Fall Conference, November 2016 Jim Sullivan +1 (212)

2 CreditSights: Fundamental Research and Risk Products CreditSights fundamental research is carried out by almost 90 analysts covering nearly 1,100 credits in North America, Europe and the Asia-Pacific region. CreditSights also provides quantitative credit risk tools to our clients via CreditSights Risk Products. BondScore, our short-term default risk product, and Ratings, our medium-term ratings product comprise our model suite. The combination of qualitative fundamental analysis from our analyst team and quantitative credit risk models makes CreditSights a compelling proposition. Our analysts are continually involved in the development and enhancement of our credit risk models, and provide ongoing support through commentary and analysis. 2

3 CreditSights Risk Products: Default Risk and Ratings Models Our default risk and rating models blend together fundamental and equity market factors. Equity market factors are the main drivers of short-term default risk, while fundamental factors are the main determinants of our quantitative ratings. 3

4 CreditSights Ratings Risk Products: Latest Enhancements Bulk (Excel-based) private company scoring now available Coverage of over 250 Asia-Pacific corporates now available in flat files; arriving on website by end-2016 Enhanced relative value indicators being developed Web-based aggregate data visualizer coming 1H

5 US HY Default Rates Have Stabilized For Now 56 issuers have defaulted in 2016 across US HY bond markets. There was a small decline from 7.26% in August to 7.22% in September. While commodity-sector default rates reached 22.5% in September, the ex-commodity default rate was just 3.1%. Issuer-Weighted LTM Default Rates Sources: CreditSights Risk Products, BAML. Commodities includes Oil & Gas, Metals and Mining 5

6 The Impact of Distressed Exchanges Of the 56 defaults in 2016, 26 took the form of a distressed debt exchange that led to a material loss to bondholders. The ex-distressed default rate was 3.8% in September, nearly half the overall US HY default rate (which includes distressed exchanges). Issuer-Weighted LTM Default Rates Sources: CreditSights Risk Products, BAML. Commodities includes Oil & Gas, Metals and Mining 6

7 US Investment Grade Fundamental Trends Across US IG corporates leverage has risen steadily, but commodities sectors have seen especially steep increases. The increase in leverage across commodities sectors has been driven by a steep decline in earnings growth. Net Debt to EBITDA EBITDA YoY Growth Note: Fundamental metrics are equally weighted average values across 58 commodity and 338 non-commodity US IG issuers. 7 Sources: CreditSights Risk Products, FactSet, Company Reports. Commodities includes Oil & Gas and Metals & Mining.

8 US Investment Grade Rating Trends CreditSights began lowering its ratings on IG commodity issuers in the summer of Average ratings of IG non-commodity sectors have been stable to improving over the same period. Commodity Sectors Non-Commodity Sectors Note: Equally weighted average ratings across 58 commodity and 338 non-commodity US IG issuers. Source: CreditSights Risk Products. 8

9 US Fallen Angels: Predictive Power with Risk Products In January 2016, Risk Products identified 18 US IG issuers covered by CreditSights Ratings (CSR) with significant risk of falling to HY. 17 of those 18 US IG issuers covered by CreditSights Ratings (CSR) have fallen to high yield in 2016, representing a total of $70.3 bn in debt; $65.5 bn was from commodity issuers. 17 of 18 Fallen Angels Predicted, of 18 Fallen Angels Predicted, 2016 Ticker Com pany Nam e Ticker Com pany Nam e COSCN Canadian Oil Sands VALEBZ Vale CLR Continental Resources DO Diamond Offshore Drilling MUR Murphy Oil ESV Ensco Plc SWN Southwestern Energy NBR Nabors Industries COFP Casino NE Noble Corp. ENLK EnLink Midstream RDC Rowan Cos. AALLN Anglo American SPN Superior Energy Services FCX Freeport-McMoRan CRS Carpenter Technology KCN Kinross Gold Source: CreditSights Risk Products, BAML 9

10 US Fallen Angels: Who s Next? In August, we identified 24 low-bbb US issuers at risk of being downgraded to high yield, a total of $146 bn of debt; over $123 bn is from the Energy sector. Of this $123 bn, the E&P and Pipeline/MLP sectors account for $29.7 bn and $91 bn respectively, i.e. 98% of the total. The ongoing rally in Energy spreads prompted us to take a closer look at the performance of these sectors. Nascent improvement in these companies fundamental profiles reflected in signals generated in our CS Ratings model temper our view of potential fallen angels across these sectors. 10

11 US BBB Energy Fundamental Trends While E&P leverage continues to rise, leverage for Pipeline/MLP issuers has been stable over the past year. EBITDA growth may be bottoming out for E&P, and has not been negative for Pipeline/MLP issuers since January Net Debt to EBITDA EBITDA YoY Growth Note: Fundamental metrics are equally weighted averages across 12 E&P issuers and 23 Pipeline/MLP issuers. Sources: CreditSights Risk Products, FactSet, Company Reports. 11

12 US BBB Energy Equity Trends Market leverage has declined rapidly since the end of Idiosyncratic equity volatility is also falling, although 2015 s high volatility is still influencing the numbers. Market Leverage Idiosyncratic Volatility Note: Fundamental metrics are equally weighted averages across 12 E&P issuers and 23 Pipeline/MLP issuers. Sources: CreditSights Risk Products, FactSet, Company Reports. 12

13 Risk Products Downgrade Signals We can drill down to the low-bbb issuers in each sector to survey the short-term signals from Risk Products the CSR Outlook and Credit Risk Trend. Apart from MPLX, all issuers have either stable or improving short-term signals. CSR and BondScore Signals for low -BBB Pipeline/MLP Issuers Ticker Nam e CSR Notches Difference CSR 1-Yr Trend CSR Outlook 6-Mth Credit Risk Trend WPZ Williams B2-5 Strong Deterioration Positive Moderate Improvement PAA Plains All American B1-4 Strong Deterioration Stable Stable ETP Energy Transfer BB3-3 Strong Deterioration Stable Stable MPLX MPLX BB3-3 Strong Deterioration Stable Moderate Deterioration EEP Enbridge Energy BB2-2 Moderate Deterioration Stable Stable KMI Kinder Morgan BB2-2 Strong Deterioration Stable Stable TCP TC Pipelines BB2-2 Moderate Improvement Stable Stable WES Western Gas BB2-2 Strong Deterioration Stable Stable ENBL Enable Midstream BB1-1 Moderate Deterioration Stable Stable PSXP Phillips 66 BB1-1 Stable Stable Stable BWP Boardw alk Pipeline BBB3 0 Stable Stable Moderate Improvement BPL Buckeye BBB2 1 Stable Stable Stable EQM EQT Midstream BBB2 1 Stable Stable Stable Source: CreditSights Risk Products 13

14 Risk Products Downgrade Signals Across the eight low-bbb E&P issuers covered by Risk Products, Anadarko is the only downgrade candidate with a negative short-term signal. CSR and BondScore Signals for low -BBB E&P Issuers Ticker Name CSR Notches Difference CSR 1-Yr Trend CSR Outlook DVN Devon Energy BB3-3 Strong Deterioration Stable Stable 6-Mth Credit Risk Trend ECACN EnCana B2-3 Strong Deterioration Positive Moderate Improvement APC Anadarko BB2-2 Strong Deterioration Negative Stable MRO Marathon Oil BB2-2 Strong Deterioration Stable Stable NBL Noble Energy BB1-1 Moderate Deterioration Positive Moderate Improvement XEC Cimarex Energy BBB3 0 Stable Negative Stable EQT EQT BBB3 0 Stable Stable Stable PXD Pioneer Natural BBB2 1 Stable Positive Moderate Improvement Source: CreditSights Risk Products 14

15 CreditSights Risk Products: NA HY Energy Focus > CS Ratings Comparing the average CreditSights Rating across all NA HY issuers to NA ex-energy HY & NA energy-only companies shows stabilization - but no improvement across NA HY energy issuers. Both the ex-energy and overall NA HY universe have seen a one-notch uptick in average CSR this year. Source: CreditSights Risk Products 15 15

16 CreditSights Risk Products: NA HY Energy Focus > 1-Yr PDs Comparing the average 1-Yr PD (Credit Risk Estimate or CRE) across all NA HY issuers to NA ex-energy HY & NA energy-only companies shows strong improvement across NA HY energy issuers. This implies that CS Ratings are likely to improve once the fundamental picture improves. Source: CreditSights Risk Products 16 16

17 CreditSights Risk Products: NA HY Energy Focus > Int. Coverage Comparing the average interest coverage across all NA HY issuers to NA ex-energy HY & NA energy-only companies shows a key metric that is still deteriorating. This should improve once earnings rebound and debt levels stabilize, and will be a key driver of improving CS Ratings across the group. Source: CreditSights Risk Products 17 17

18 CreditSights Risk Products: Latest CSR Performance Back-Test Across 430 agency composite rating (ACR) actions between 1 Aug 2015 and 31 Jul 2016, the CSR was a leading indicator 81% of the time, with a lead time of approximately 30 weeks. Using an absolute difference of two or more notches, CSRs led ACRs 91% of the time. Downgrades outpaced upgrades by over 3 to out of 26 fallen angels were successfully identified by the model

19 CreditSights Risk Products: Latest CRE Default Review The BondScore 6 Credit Risk Estimate (CRE) did a great job of predicting 2016 defaulters a year in advance, with a 90+% accuracy ratio among public defaulters. All but one defaulting companies showed a High or Very High Credit Risk Level one year before defaulting. Source: CreditSights Risk Products BondScore 2016 Public Non-Financial Defaults Com pany CRE CRL Midstates Petroleum 26.2% Very High Lightstream Resources 25.0% Very High Forbes Energy Services 24.2% Very High Basic Energy Services 24.0% Very HIgh American Apparel 20.4% Very High CHC Group 19.6% Very High Halcyon Resources 19.0% Very HIgh Venoco 17.6% Very High Triangle Petroleum Corp. 14.9% Very High Foresight Energy LP 14.8% Very High Bonanza Creek Energy 13.6% Very High Swift Energy 13.6% Very High Penn Virginia Corp. 12.8% Very High Noranda Aluminum 12.6% Very High Arch Coal 11.5% Very High Bill Barrett 10.0% High Magnum Hunter Resources 9.2% HIgh SandRidge Energy 9.0% High SFX Entertainment 7.6% HIgh BreitBurn Energy Partners 7.1% High Peobody Energy 6.4% High Ultra Petroleum 3.6% HIgh Horsehead Holding Co. 1.8% Moderate CREs as of 12 months prior to default date 19

20 CreditSights Risk Products: Default Forecast Approach We estimate the default risk of each bond market index by combining three approaches: 1. For nearly 2/3 of US HY issuers and ½ of EU HY issuers, we use our BondScore default risk model; 2. For issuers not currently scored by our models, we create scenario default probabilities based on bond ratings and prices. Market Leverage Equity Volatility Index Outperformance Bond Rating & Price Scenarios; HY Index OAS Implied Market Leverage Earnings Volatility Earnings Growth Cash / Current Liabilities Fundamental Ratios 20

21 CreditSights Risk Products: 2016 Default Review & Outlook We revised our 2016 default forecast for US HY upward in early July, from 5.5% to a range of 6% to 6.5%. Our forecasted range of 2.5% to 3% for EU HY remained unchanged. Serial defaulters, driven by initial distressed exchanges, have increased the LTM default rates we calculate. US HY debt-weighted default rates will be significantly lower than 5.6% by September The trend of lower default rates will continue as new defaults are outnumbered by older defaults that drop from the LTM calculation, as the US HY commodities default rate could begin to fall during 4Q16. Our default risk models are also pointing towards much lower forward default rates; we think that US HY debt-weighted default rates could fall to as low as 3.5% to 4% by September We estimate that debt-weighted euro HY default rates could fall to the 2.5% to 3% range by September

22 Using Risk Products as a Tool for Sector Allocation Risk Products can be used to signal deteriorating credit quality, either at the issuer or sector level. We are currently investigating whether Risk Products can also be used to signal attractive buying opportunities. One potential signal is the ratio of spread to five-year default risk. A simple investment grade buy and hold strategy that overweights bonds with a high ratio and underweights bonds with a low ratio can deliver outperformance relative to an IG benchmark portfolio Source: CreditSights Risk Products 22

23 Using Risk Products as a Tool for Sector Allocation The outperformance can also be achieved with lower overall default risk. Sources: CreditSights Risk Products, BAML C0A0 Index 23

24 CreditSights Risk Products Copyright 2016 CreditSights Analytics, LLC. All rights reserved. Reproduction of this report, even for internal distribution, is strictly prohibited. The information in this report has been compiled from sources believed to be reliable, but neither its accuracy and completeness, nor the opinions based thereon, are guaranteed. CreditSights Analytics products are not recommendations or opinions that are intended to substitute for an investor s independent assessment of whether to buy, sell or hold any financial products. If you have any questions regarding the contents of this report, contact CreditSights at in the United States or in Europe. BondScore and CreditSights Ratings are offered by CreditSights Analytics, LLC, an affiliate of CreditSights, Inc. CreditSights Limited is authorized and regulated by The Financial Services Authority. This product is not intended for use in the UK by Private Customers, as defined by the Financial Services Authority.