190703-Global_Financing_Conditions-結合済み.pdf

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1. Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year July 2, 2019 Key Takeaways - Given recent shifts by the Federal Reserve and European Central Bank toward more accommodative monetary policies, we believe lending conditions have improved since the start of the year, which could support bond issuance. - That said, easing monetary policy could clash with slowing global economic growth estimates, likely moderating the growth rate for global bond issuance. - The U.S.-China trade dispute has deteriorated this year, and financial markets have been exhibiting increased volatility since the imposition of increased tariffs, though at this point declines have been modest. - Other lingering geopolitical stressors include the Brexit process, which will be guided by a new British prime minister, opening the possibilities of a "reset" of negotiations or a "no-deal" Brexit. Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year July 2, 2019 GLOBAL FIXED INCOME RESEARCH Diane Vazza New York (1) 212-438-2760 diane.vazza @spglobal.com Nick W Kraemer, FRM New York (1) 212-438-1698 nick.kraemer @spglobal.com Lawrence R Witte, CFA San Francisco (1) 415-371-5037 larry.witte @spglobal.com Kirsten R Mccabe New York + 1 (212) 438 3196 kirsten.mccabe @spglobal.com www.spglobal.com/ratingsdirect July 2, 2019 1
2. Chart 1 Global new bond issuance through May 2019 totaled $2.68 trillion, down 1.05% relative to the same period of 2018. May is typically one of the stronger months of the year for bond issuance, and its total of $564 billion exceeded last May's $552.6 billion. The year-to-date decline is now mostly attributable to the pronounced drop-off in issuance for financial services (down 9%). Only U.S. public finance joins financial services in negative territory, though with a much more diminutive 0.14% decline. Offsetting these declines, international public finance issuance is up nearly 14%. Global structured finance is up about 1.3%, and industrial issuance is essentially flat through the first five months of the year. These figures include only long-term debt (maturities greater than one year) and exclude debt issued by supranational organizations. All references to investment-grade (rated 'BBB-' or higher) and speculative-grade (rated 'BB+' or lower) debt refer to those issues rated by S&P Global Ratings. S&P Global Fixed Income Research expects global bond issuance to finish 2019 1.2% higher than the 2018 total (see table 1). Our base-case assumptions for 2019 have changed somewhat, given the more accommodative monetary policies of the Federal Reserve and European Central Bank (ECB), which will likely stabilize borrowing costs for lenders. Nonetheless, these shifts were largely in response to slowing economic indicators globally, as well as increasingly volatile market reactions to lingering geopolitical stressors--both of which we believe will continue throughout 2019. Since the end of 2018, lending conditions have broadly improved. Most borrowing costs are still falling or have gyrated at lower levels than at the start of the year. Some risk aversion persists, though, as speculative-grade issuance has thus far had a higher proportion accounted for by www.spglobal.com/ratingsdirect July 2, 2019 2 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
3. higher-quality borrowers, while lower-rated yields remain volatile. Combined speculative-grade bond and leveraged loan issuance in the U.S. and Europe is running roughly 25% lower than last year ($382.8 billion versus $509.1 billion). Meanwhile, Chinese authorities have eased their deleveraging campaign in the face of a slowing economy, helping Chinese corporate issuance to grow over 25% in the first quarter. Table 1 Global Issuance Summary And Forecast (Bil. $) Industrials§ Financial services Structured finance† U.S. public finance International public finance Annual total 2009 1,705.4 1,826.1 572.0 409.7 295.7 4,808.9 2010 1,292.2 1,479.3 895.0 433.3 306.9 4,406.7 2011 1,338.9 1,330.1 942.4 287.7 336.3 4,235.4 2012 1,765.4 1,558.5 786.3 379.6 339.1 4,828.9 2013 1,888.1 1,526.8 803.5 334.1 316.3 4,868.9 2014 2,052.5 2,014.3 905.3 339.0 340.5 5,651.7 2015 2,014.1 1,736.4 905.0 397.7 448.3 5,501.5 2016 2,240.6 1,911.8 807.6 444.8 749.4 6,154.3 2017 2,280.4 2,060.2 901.8 448.6 544.3 6,235.2 2018 2,001.9 1,958.1 1,062.0 338.9 482.7 5,843.6 2018* 962.5 961.3 464.4 132.1 185.4 2,705.7 2019* 963.5 875.1 470.6 132.0 211.2 2,677.4 2019 full-year forecast (year-over-year % change) (1.2) (1.5) 1.0 3.3 20.0 1.2 *Through May 31. §Includes infrastructure. †Structured finance excludes transactions that were fully retained by the originator, domestically rated Chinese issuance, and CLO resets and refinancings. Sources: Thomson Financial, Harrison Scott, and S&P Global Fixed Income Research. Because we report our issuance figures in dollars, exchange rate fluctuations are always a consideration. Some appreciation in the U.S. currency is expected in 2019, but not to any large extent. The potential course of monetary policies from other central banks must also be considered, and emerging economies are expected to see easier monetary policies this year as a result of the Fed and ECB taking a pause in their interest rate hikes. Looking Ahead: Easier Financing Conditions Should Stabilize Bond Issuance We expect this year's overall bond issuance to increase marginally over the 2018 total, by 1.2%. Economic growth projections continue to be slowly revised downward, and potential disruptors to financial markets remain unresolved. The U.S.-China trade dispute has reignited with the U.S. increasing existing tariffs to 25% from 10%. Similarly, after an eventful first quarter marked by one failed proposal after another, the U.K. has received an extension from the European Commission to build a Brexit solution, but now faces a looming handover of the prime ministership. www.spglobal.com/ratingsdirect July 2, 2019 3 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
4. Partly in response to these geopolitical concerns, the Fed and ECB decided to postpone any rate hikes, while also offering extensions to their respective quantitative easing programs. While easing financing conditions should bolster bond issuance, slower growth and persistent geopolitical stressors remain risks. Nonetheless, easier financing has been a welcome arrival after the dismal fourth quarter. Nonfinancials are likely to post a decline For 2019, we expect total (rated and unrated) nonfinancial bond issuance to decline by as much as 3%, a slight upward revision from our forecast in January for a decline of 3%-7%. This revision reflects the positive market correction after the fourth quarter's collapse, combined with the synchronized actions of the Fed and ECB to calm markets and stoke flagging economic output and low inflation. Easing lending conditions in the U.S. are expected to lead to a slight increase in issuance this year, and thus far, the pipeline of mergers and acquisitions has been robust. Nonetheless, after subsiding earlier in the year, geopolitical headwinds have increased. S&P Global economists again lowered their GDP growth estimates in the U.S. and expect a decline in equity market performance and reduced private investment. Lending conditions have stabilized since the beginning of the year, but we do not expect them to ease any further than back to their early October levels. Issuance in Europe is still expected to decline in 2019, but to a lesser extent than expected at the end of 2018. Economic growth is expected to slow this year, but financing conditions in Europe are still quite favorable for borrowers. Lenders appear more risk averse thus far, and the rebound in speculative-grade issuance that was seen in the U.S. during the first quarter was much more moderate in Europe. S&P Global economists' projection for GDP growth in the eurozone is 1.1% in 2019, down from a 1.6% projection in the fourth quarter of 2018. Meanwhile, emerging markets are seeing a marked divergence between Chinese issuance and all other countries' issuance. Economic growth is expected to slow in China in 2019, and authorities there are likely to pause their yearslong deleveraging campaign to offset slowing growth. Easing lending conditions in the U.S. are expected to lead to a slight increase in nonfinancial issuance this year. Financial institutions are likely to see a decline as well We expect issuance among financial services companies to remain flat or even decline slightly in 2019. Market volatility appears to negatively correlate with U.S. and European financial services issuance and has been suppressing activity since the start of 2018. Actual equity volatility has been markedly higher than predicted since the start of 2018, and though currently low, it could resurface in bouts in the remainder of the year. Reserves at U.S. banks have been trending downward in recent years, which has also preceded a drop-off in issuance. While we feel lower interest rates may support issuance for nonfinancials to some extent in Europe, the ECB's extension of a third round of targeted longer-term refinancing operations will give regional banks a cheap alternative to the bond market for funding. Final details on these loans have not been hammered out yet, but the base-case expectation is now for less bond issuance by the region's banks. www.spglobal.com/ratingsdirect July 2, 2019 4 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
5. The upcoming maturity profiles of global financial institutions through 2020 also require sizable amounts of new debt for refinancing needs, particularly in China. Already, financial services issuance outside of the U.S. and Europe in 2019 is up 12% relative to the first quarter of 2018, portending growth for the annual total this year (outside of those two regions). Structured finance issuance should be flat in 2019 after a solid bump in 2018 Globally, we expect combined investor-placed securitization and covered bond issuance could be broadly flat in 2019, once again coming in at about $1 trillion, whereas issuance rose by 8% in 2018. While there is scope for further advances in some securitization sectors--such as U.S. residential mortgage-backed securities (RMBS)--others show more limited growth prospects and have seen a slow start to the year. A recent decline in the rate of underlying leveraged loan originations could be a precursor to lower issuance of collateralized loan obligations (CLOs), for example. In Europe, lingering uncertainty over implementation details of a new regulatory regime for EU securitizations has led to a significant hiatus in activity so far this year, meaning full-year volumes may struggle to post gains. While strong covered bond issuance in the first quarter has more than filled the gap so far, the ECB's recently announced relaunch of its cheap term funding scheme for euro area banks could dampen issuance prospects. Other downside risks include possible market and economic disruptions due to the U.K.'s ongoing Brexit deliberations, as well as political uncertainty in the aftermath of recent European Parliament elections. Note that in this report, our figures exclude Chinese securitization issuance rated only by domestic rating agencies, as well as global CLO resets and refinancings. Tax cuts will likely continue to suppress U.S. public finance volume U.S. municipal bond issuance in May fell below the total from the same month in 2018, bringing the total for 2019 slightly below the light activity of 2018. May was the second consecutive month of lower volume this year than in the same month of 2018. Through the first quarter of 2019, volume was 19% higher than in 2018, but the past two months have erased that advantage. On the other hand, the low volume and a healthy appetite for municipal debt have pushed yields down and boosted returns in all municipal sectors. The mix of new volume and refunding volume through May 2019 closely matched that of all of 2018, with a dearth of refunding volume. Should this pattern continue, we anticipate volume will remain well below that in the years preceding the Tax Cuts and Jobs Act (TCJA). The last round of tax reform suppressed volume in 2018, when issuance was 22% lower than in 2017. The slow first five months of 2019 suggest that the effect of the TCJA on municipal issuance will endure for the coming years, to the extent that we project 2019 volume to be marginally higher than the 2018 total, at about $350 billion. This compares to the average of approximately $400 billion from 2014-2017. International public finance is on track for a substantial increase International public finance volume remains higher through May than in 2018, and we project issuance in 2019 could exceed volume in 2018 by about 20%. Asia remains particularly busy, while Europe and Canada are also ahead of last year's pace. Despite a drop in volume in 2018, the past four years have recorded the highest volume ever for international public finance, with 2018's total being the third highest. www.spglobal.com/ratingsdirect July 2, 2019 5 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
6. U.S. Financing Conditions Appear Favorable, But Risks Are Growing Most indicators of U.S. financing conditions have remained largely within supportive territory over the past few months. That said, the lending backdrop is still not as rosy as it was two years or even one year ago (see table 2), potentially indicating an initial--albeit slight--turn in the credit cycle. Geopolitical stressors refuse to let up, and market volatility noticeably increased in May, alongside plummeting Treasury yields. Going into the month, the yield on the 10-year Treasury was 2.5%, but by the end of May, it had fallen to 2.14%. Since then, it has only fallen further, reaching 2.09% as of June 14. This quick decline in Treasuries has led to a rise in corporate bond spreads for both the investment-grade and speculative-grade asset classes, hitting 150 basis points (bps) and 421 bps, respectively, at month-end. And with the expectation for more rate cuts by the Fed, leveraged loan issuance has been declining this year. Certainly, the Fed's actions to halt interest rate increases and ease up on its balance sheet reduction will support lending conditions. But those tailwinds will likely clash this year with slowing economic growth, as well as deteriorating global geopolitical conditions. In May, the U.S.-China trade dispute took a turn for the worse as the U.S. raised its existing tariffs to 25% from 10% on $200 billion of Chinese imports. The long-anticipated G-20 meeting between Presidents Trump and Xi has only resulted in a truce for the time being. Even if we see a return to a more amicable situation, we do not generally expect a return to pre-dispute conditions. We feel it is more likely the U.S. will maintain some or all of the existing tariffs. More recently, tensions have developed between the U.S. and Iran over suspected Iranian attacks on oil tankers in the Middle East, and this situation has the potential to escalate. Oil prices rose following the attacks, though at this point it does not seem they will spike in the near term. However, if this situation worsens, it could result in higher oil prices and adverse market reactions at a time when the U.S. economy will be on less sure footing. Table 2 Indicators Of Financing Conditions: U.S. Restrictive Neutral Supportive 2019* 2018* 2017* M1 money supply (year-over-year % change) x 3.8 3.9 9.5 M2 money supply (year-over-year % change) x 4.2 3.9 6.2 Triparty repo market--size of collateral base (bil. $) x 2,287.8 1,885.1 1,848.0 Three-month nonfinancial commercial paper yields (%) x 2.41 2.03 0.97 Three-month financial commercial paper yields (%) x 2.39 2.17 1.06 10-year Treasury yields (%) x 2.14 2.83 2.21 Yield curve (10-year minus three-month) (bps) x (21) 90 123 Yield to maturity of new corporate issues rated 'BBB' (%) x 3.60 3.92 3.46 Yield to maturity of new corporate issues rated 'B' (%) x 7.65 7.67 6.95 Market volatility noticeably increased in May, alongside plummeting Treasury yields. www.spglobal.com/ratingsdirect July 2, 2019 6 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
7. Table 2 Indicators Of Financing Conditions: U.S. (cont.) Restrictive Neutral Supportive 2019* 2018* 2017* 10-year 'BBB' rated secondary market industrial yields (%) x 4.07 4.43 3.85 Five-year 'B' rated secondary market industrial yields (%) x 7.64 6.81 6.06 10-year investment-grade corporate spreads (bps) x 150.2 135.9 140.7 Five-year speculative-grade corporate spreads (bps) x 421.5 331.9 388.1 Underpriced speculative-grade corporate bond tranches, 12-month average (%) x 17.8 16.7 13.1 Fed lending survey for large and medium-size firms§ x (4.2) (11.3) (2.8) S&P Global Ratings corporate bond distress ratio (%) x 5.5 5.2 6.8 S&P LSTA Index distress ratio (%) x 3.1 2.6 3.7 New-issue first-lien covenant-lite loan volume (% of total, rolling-three-month average) x 73.7 78.7 73.1 New-issue first-lien spreads (pro rata) x 333.3 343.3 New-issue first-lien spreads (institutional) x 399.1 312.0 346.8 S&P 500 market capitalization (year-over-year % change) x 1.3 11.4 13.4 Interest burden (%)† x 10.1 11.0 11.2 *Data through May 31. §Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices for large and medium-size firms; through first-quarter 2019. †As of March 31. Bps--Basis points. Sources: IHS Global Insight, Federal Reserve Bank of New York, S&P Global Market Intelligence's Leveraged Commentary & Data, and S&P Global Fixed Income Research. With the list of geopolitical headwinds growing, the drop in Treasury yields reflects an expected flight to safety by market participants. And over the course of recent weeks, markets have quickly increased their expectations for rate cuts by the Fed this year. As of June 18, the CME FedWatch Tool reflected a two-thirds probability that the Fed's target rate will fall to 150 bps-200 bps, from the current 225 bps-250 bps range. This is perfectly logical, since only the yield on the 30-year Treasury is above the effective federal funds rate of 2.39% at the end of May; yields on all other Treasury maturity lengths (from one month to 20 years) are below this level. With many taking multiple rate cuts as a given, markets reacted very optimistically in June. That said, despite the fact that spreads widened in May, we estimate the speculative-grade spread should have finished the month nearly 100 bps higher, based on various economic and financial indicators. The implied spread has exceeded the actual in six out of the past eight months, suggesting that financial markets could be overly optimistic in the face of sustained pressures against a gradually slowing economy. www.spglobal.com/ratingsdirect July 2, 2019 7 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
8. Nonfinancials dominate a strong haul Corporate bond issuance in the U.S. was $131 billion in May 2019, making it the most active month of the year by dollar volume. To date, corporate bond issuance in 2019 stands at $562 billion, roughly in line with 2018. Issuance from nonfinancials in May surpassed $88 billion, the largest monthly total since early 2018, boosted by large deals originating from the high technology, health care, and utility sectors. Just under $84 billion in nonfinancial issues was rated investment grade--about 90% of all nonfinancial issues total. The remaining $44 billion in total corporate bond volume in May came from financial institutions, and about 83% of this total was investment grade, primarily from the banking sector. May's rebound has pushed the year-to-date total to roughly $562 billion, just above last year's comparable, $561 billion. Of this total, rated issuance is up by 4.5%. Speculative-grade bond issuance is up nearly 12.5% through May (see chart 2). This is not surprising, given the Fed's evolving stance on interest rates this year. Fixed-rate bonds are thus far staging a comeback, but floating-rate leveraged loans have fallen behind, coming in at $207.7 billion, from $316.2 billion. Chart 2 Issuer diversity was consistent across most financial and nonfinancial subsectors in May. However, the single largest issuer in the U.S. in May was International Business Machines Corp. with the release of $20 billion in senior unsecured notes, spread across eight tranches, all of which maintain an 'A' rating from S&P Global Ratings. Another origination from Bristol-Myers Squibb Co. in the beginning of the month totaled $19 billion. Each of eight tranches was rated 'A+' by S&P Global Ratings and placed on CreditWatch with negative implications. The proposed notes will be used to partially fund the acquisition of Celgene Corp. www.spglobal.com/ratingsdirect July 2, 2019 8 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
9. Table 3 Largest U.S. Corporate Bond Issuers: May 2019 Issuer Sector (Mil. $) IBM Corp. High technology 19,921.2 Bristol-Myers Squibb Co. Health care 18,904.3 Fidelity National Information Services Inc. High technology 8,205.5 Waste Management Inc. Utility 3,996.0 Wells Fargo Bank N.A. Banks and brokers 3,600.0 Citibank N.A. Banks and brokers 3,000.0 American Express Co. Financial institutions 2,996.2 Bank of America Corp. Banks and brokers 2,123.8 SunTrust Bank Banks and brokers 1,999.3 Caterpillar Financial Services Corp. Capital goods 1,998.6 Mastercard Inc. Financial institutions 1,997.2 Starbucks Corp. Retail/restaurants 1,996.0 Dowdupont Inc. Chemicals, packaging, and environmental services 1,994.2 Tesla Inc. Automotive 1,840.0 NRG Energy Inc. Utility 1,832.2 *Includes issuance from Bermuda and the Cayman Islands. Source: Thomson Financial; S&P Global Fixed Income Research. Municipal volume falls to its 2018 pace The municipal volume of $27.5 billion in May was higher than April's total but significantly lower than the May 2018 total of $35.1 billion. For the year, municipal volume is essentially even with 2018, down 0.14% from last year, which posted the lowest volume in five years. The exclusion of refunding bonds from tax exemption under the TCJA has drastically changed municipal bond issuance, and the awaited rebound into normal activity has not occurred. Our issuance projection for 2019 is $350 billion. This compares to $339 billion in 2018. www.spglobal.com/ratingsdirect July 2, 2019 9 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
10. Chart 3 The rush at the end of 2017 was one of the main causes of the decline in early 2018, but S&P Global Ratings believes lower volume will continue in 2019 and beyond under the current tax code. The issuance of new-money bonds in 2018 was its highest since 2010, which may indicate greater demand for investment in roads, bridges, schools, hospitals, water systems, and other assets funded by municipal debt. Yet even with an increase in new-money proceeds of $33 billion over 2017, overall volume in 2018 fell 24% lower than in the previous year. Without a change to tax law or a significant infrastructure initiative at the federal level, state and local issuance will settle into a lower baseline than over the past two decades. Chart 4 shows the marked decrease in refunding volume in 2018 and the projected similar issuance in 2019. The 2019 total is a rough approximation based on activity through May. The first months of the year are traditionally slow for municipal issuance, so the projection for 2019 is consistent with our baseline for the year, as opposed to annualizing the first third of 2019. However, the proportion of refunding volume through May 2019 resembles that of the entirety of 2018. About 32% of 2019 volume has been for refunding or issues that combine refunding with new money--the same proportion as in 2018. If that pattern continues, U.S. public finance volume will remain nearer to 2018's total than to the totals of the previous three years. In 2017, about 55% of volume went toward refunding or combined uses. www.spglobal.com/ratingsdirect July 2, 2019 10 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
11. Chart 4 We expect volume to increase slightly in 2019, representing a downward projection from our earlier estimate of $360 billion to $375 billion. We made this adjustment following the first quarter of 2019, even though volume was higher through this period than in 2018. Despite the increase, the first-quarter activity was still lower than normal--trailing that of 2017 by 16%, for example. The unexpectedly slow first quarter of 2019 and its similar proportion of refunding activity indicate to us that 2018's volume was less of a response to the heavy volume at the end of 2017 and instead a new template for the next few years. Before 2018, the baseline of municipal issuance appeared to be about $400 billion annually, a figure that the market approached in 2015 and surpassed in 2016 and 2017. In the current legislative landscape, the new standard for municipal volume will likely settle around $350 billion. Based on volume from the last three quarters of 2018, we anticipate issuance in 2019 to settle around $350 billion, an increase of 3.5% from last year. The TCJA permanently altered the municipal market in three key respects: 1) Reducing the corporate tax rate to 21% from 35% made the tax exemption of municipal bonds less attractive for corporations; 2) the elimination of the tax exemption for advance refunding bonds cut refunding activity by more than half in 2018; and 3) the cap on the deduction for state and local taxes further impeded the issuance of bonds, whose payment source is usually revenue from taxes. S&P Global Ratings does not expect changes in the tax code to offset these provisions in the near future. Democrats have suggested raising the corporate tax rate to 25%, but no tax increases will likely pass while Republicans control the White House and the Senate. There is even less agreement among Democrats on eliminating the cap on state and local tax deductions because its impact is significantly greater in a handful of states. www.spglobal.com/ratingsdirect July 2, 2019 11 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
12. In the short term, the most significant impact of the TCJA in 2018 regarding municipal bonds was the elimination of the tax exemption on advance refunding bonds. These bonds represented $91 billion of issuance in 2017. Removing this tool brought all refunding activity in 2018 to just $59 billion, the lowest figure since 2000. Refunding exceeded $100 billion from 2012-2017. It is possible that refunding activity will return to near its former level once bonds that would have been eligible for advance refunding reach their call date. In a few years, bonds that would have been advance-refunded may be refinanced without penalty. However, the lack of advance refunding will delay issuance for refinancing into later years. The Federal Reserve reports that corporate holdings of municipal bonds declined in 2018. Nonfinancial businesses reported a decline of $3.9 billion, and private depository institutions were down $40.7 billion. Property/casualty insurers were unexpectedly higher, by $19.1 billion, perhaps because the longer term of municipal bonds, as compared with corporate debt, outweighed their lower effective yields following tax reform. Life insurers were anticipated to add to their municipal portfolios because of favorable tax treatment specific to the sector, and they in fact increased public-sector assets by $5.3 billion. The lower volume and the maturing of existing debt reduced the size of the municipal market to less than $3.1 trillion in 2018 (see chart 5). The decline last year was $53.1 billion--the second largest this century, just behind a slightly larger decrease in 2013--bringing outstanding debt to its lowest point since 2008. However, it is too early to draw conclusions about the future size of the municipal market. From 2011-2014, the market shrank $129.8 billion before leveling out around $3.1 trillion. Notably, in 2017 the market edged lower despite the second-largest volume on record. Part of that was a high amount of refunding volume that was pushed into 2017 to avoid the negative impact of tax reform on refinancing debt in 2018. The refunding debt did not increase the amount of outstanding securities. The decline in municipal volume last year was $53.1 billion--the second largest this century, just behind a slightly larger decrease in 2013. www.spglobal.com/ratingsdirect July 2, 2019 12 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
13. Chart 5 Perhaps instructive to the current circumstances, the market reached its peak in 2010 after the Build America Bond (BAB) program spurred high issuance in 2009 and 2010. BAB was a response to the financial crisis and spurred public-sector funding for infrastructure. In the third year of the Trump Administration, there is no momentum for a national infrastructure initiative. The only discussion that has received fleeting attention concerns tax credits to create incentives for jurisdictions to partner with private entities in infrastructure financing. This method would rely less on bond financing, which has been the traditional method of investing in infrastructure. Tax credits would also flow only to profitable revenue-generating projects, leaving out roads and bridges without tolls, schools, public safety facilities, and most public-sector capital assets. The limit of $10,000 on federal tax return deductions for state and local taxes (SALT) is the other main impact of the TCJA on municipal finance. Opposition to the SALT deduction limit is highest in a handful of states like California and New York, where housing costs and taxes are high. S&P Global Ratings lists four states with at least nine counties possibly adversely affected by the SALT cap, along with 17 states with at least 16 counties that might benefit from the change. Given this balance of positively affected states, the cap on SALT deductions may be the most permanent provision of the TCJA affecting municipal bonds. The SALT cap hasn't noticeably manifested yet, but long-term effects could include financial stress on state and local entities and an additional hindrance to the issuance of bonds, debt service on which is usually paid for from SALT. However, an unintended effect of the SALT deduction cap is the enhanced appeal of municipal www.spglobal.com/ratingsdirect July 2, 2019 13 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
14. bonds in an environment of relative scarcity. Since retail investors in states with high taxes face limits to the deduction on those taxes, many taxpayers appear more eager to gain tax-exempt income from municipal bond interest. Mutual funds are reporting high inflows into municipal bond funds, and issuers are paying lower yields as a result. This in turn is leading to higher returns on municipal bond indices. The lower supply of municipal debt is probably also leading to lower yields. Investors push yields lower as they purchase municipal bonds for tax benefits or other purposes. A smaller supply of debt increases the downward pressure even more. The S&P Municipal Bond Index yield fell to 2.35% at the end of May from 2.72% at the end of 2018. The rapid decline of municipal yields has surpassed that of U.S. Treasuries, whose supply is increasing to feed the country's growing debt. Outstanding federal government debt rose to nearly $17.9 trillion at the end of 2018, from $16 trillion at the end of 2016. While Treasury yields remain low, they have not dropped as quickly as municipal yields, resulting in a reversal of the lower of the two rates. The yield on 10-year U.S. Treasury notes was 2.14% at the end of May, down from 2.69% at the end of 2018. Notably, the municipal index yield, at 2.12%, is now lower than the U.S. Treasury yield, whereas at the end of 2018, the Treasury yield was the lower of the two. A key distinction between the declining yields for municipal debt and federal debt is that the former are propelled by a lack of supply, while the latter stem from concerns over the prospects for slower economic growth in the U.S. and internationally. In fact, through February, municipal and Treasury yields were diverging, with municipal rates steadily declining and Treasury yields doing the opposite. Only the more recent decline in U.S. Treasury yields, brought on by investors seeking security in a volatile market, has brought the Treasury yield into its current parity with municipal bonds. Municipal returns were positive in May for the fourth month in a row. The return on the S&P Municipal Bond Index through May was 4.49%, an extremely strong performance considering that the index returned 1.35% for all of 2018. All sectors have generated at least 4% returns in 2019, with health care and transportation returns each topping 5%. The Metropolitan Transportation Authority of New York City issued the largest transaction in May, for $1 billion. Perhaps the most interesting large issue of the month was for Metro City-Oregon, which ranked fourth in terms of size. Issues in Oregon rarely make the top 10, and this one has several unusual characteristics. The purpose of the issue is to finance affordable rental housing for Portland-area households earning 80% or less of the medium income adjusted for family size. The payment source for the bonds is property taxes. This differs from virtually all housing bonds in several ways. The repayment source of affordable housing is almost always revenue generated from rents, mortgages, or subsidies associated with the dwellings or the resident of the units. Furthermore, housing bonds for rental units typically finance an individual development or several properties with a defined number of units. This transaction projects to finance up to 3,900 homes in the Portland area (see table 4). Table 4 Largest U.S. Municipal Issues: May 2019 Issuer (Mil. $) Date Metropolitan Transportation Authority, N.Y. 1,000.0 5/16/2019 Allegheny County Hospital Development Authority, Pa. 726.7 5/15/2019 Richland County S.D. 707.0 5/13/2019 The lower supply of municipal debt is probably also leading to lower yields. www.spglobal.com/ratingsdirect July 2, 2019 14 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
15. Table 4 Largest U.S. Municipal Issues: May 2019 (cont.) Issuer (Mil. $) Date Metro City-Oregon (Portland area) 652.8 5/1/2019 Public Energy Facilities Authority (PEFA) Inc., Ia. 614.5 5/22/2019 North Carolina 600.0 5/23/2019 Los Angeles 594.6 5/7/2019 Virginia College Building Authority 513.2 5/15/2019 Miami-Dade County, Fla. 494.9 5/10/2019 Arkansas Development Finance Authority 487.0 5/21/2019 Sources: Thomson Financial and S&P Global Fixed Income Research. Texas issued more than any state in May, with $3.3 billion, increasing its 2019 total to $13.7 billion, similar to its pace at this time in 2018. Among the top three states, California and Texas are somewhat ahead of last year, though New York volume is significantly lower. Florida is well ahead of last year, and four other states are surpassing 2018 by 10% or higher. However, entities in these states issue significantly less than those in the top three (see table 5). Table 5 Top 10 States By Bond Sales: May 2019 --2019-- --2018-- State Rank Volume (mil. $) Rank Volume (mil. $) Change from previous period (%) California 1 21,564.8 1 20,651.7 4.4 Texas 2 13,693.6 3 13,286.9 3.1 New York 3 12,848.5 2 15,745.4 (18.4) Florida 4 7,242.4 12 3,132.9 131.2 Pennsylvania 5 5,370.1 4 7,380.9 (27.2) Massachusetts 6 5,249.8 6 3,969.1 32.3 Illinois 7 4,010.1 7 3,635.5 10.3 Wisconsin 8 3,752.3 16 2,459.5 52.6 Michigan 9 3,617.7 22 2,106.4 71.7 Ohio 10 3,502.7 8 3,607.4 (2.9) Sources: Thomson Financial and S&P Global Fixed Income Research. Structured finance issuance holds a steady pace Structured finance issuance in May totaled $47.45 billion, nearly the same amount as in April ($47.2 billion). This brings the year-to-date total to $210.2 billion, which is down 4% from $219.1 billion last year (see chart 6). www.spglobal.com/ratingsdirect July 2, 2019 15 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
16. Most sectors are struggling to meet 2018's comparables thus far. The asset-backed securities (ABS) and structured credit subsectors are off by 16.2% and 12.4%, respectively. Commercial mortgage-backed securities saw their strongest monthly total since April 2015, pushing their 2019 total up by 2.6% through May, but prior to last month's strong reading, the sector was down roughly 17.5% against 2018. The RMBS sector has been a bright spot this year, exhibiting significant year-over-year growth of over 57% through May. Ultimately, we expect U.S. structured finance volumes could still end the year broadly flat, with continued growth in the RMBS sector likely offset by contraction in other areas. Chart 6 By asset class, the CLO sector posted the highest volume in 2018, at over $138 billion, although issuance slowed toward the end of the year. In a legal victory for the industry, U.S. rules on risk retention were disapplied for most leveraged loan CLOs early in 2018, improving transaction economics for managers and spurring the return of smaller players in particular. Issuance thus far in 2019 has fallen to $49.5 billion, from $56.5 billion through May 2018. This is to be expected, since leveraged loan issuance has also fallen over the past five months. That said, U.S. CLO issuance had come under threat recently from the prospect of similar risk retention rules being introduced in Japan. Japanese bank investors have recently been significant buyers of senior CLO tranches in both the U.S and Europe, and the draft version of the new rules looked set to add to their regulatory capital charges on securitization exposures unless the originator retained some of the credit risk. However, the final rules--which came into force from end-March--effectively carve out transactions where the investor can show that the underlying collateral was acquired in the open market rather than being originated directly. This should exempt most U.S. CLOs from the new risk retention requirements. Underlying leveraged loan issuance is a leading indicator of CLO volumes, and the 12-month rolling rate of U.S. loan originations has declined by about 22% since last October as the Fed has not so gradually moved to a rate-cutting stance. More generally, the leveraged loan sector has www.spglobal.com/ratingsdirect July 2, 2019 16 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
17. also begun to attract scrutiny from central banks and supranational watchdogs concerned about falling credit standards, with potential implications for financial stability when the credit cycle turns. For these reasons, CLO issuance volumes will likely moderate further in 2019. We note that our CLO issuance figures here do not include additional U.S. CLO pricings that take the form of resets and refinancings of legacy transactions. These amounted to $141 billion in 2018. Significant spread tightening on CLO liabilities over the past few years has motivated CLO collateral managers to refinance transactions that they structured when spreads were higher, calling the outstanding securities and reissuing debt with lower coupons. However, there is a declining stock of outstanding transactions for which refinancing makes economic sense, given that CLO liability spreads have recently been widening, and refinancing and reset activity has already declined significantly in 2019. In fact, only $14.6 billion of such transactions closed through May, down from $54.9 billion in the equivalent period in 2018. In many other sectors--including those backed by lending to consumers--the path of underlying credit growth will likely help determine the scale of securitization issuance. Volume in the ABS sector grew modestly in 2018 but was down roughly 16% year to date at the end of May 2019. Thus far, all subsectors within ABS have seen year-to-date declines, with the exception of transactions backed by auto loans, which saw an increase of over 9% through May, largely supported by the particularly strong issuance total in May of $111.8 billion--the largest monthly total since January 2018. Although U.S. new-auto sales could decline slightly in 2019, we still expect modest growth in auto ABS issuance for the year as a whole as loan originations increase due to higher used-vehicle demand and rising prices. However, auto manufacturers are among the securitization originators most likely to see disruption from any trade policy tensions between the U.S. and other countries. RMBS in the U.S. has been growing noticeably since mid-2018 and hit $8.2 billion in May. This brings the 2019 year-to-date total to $42.2 billion, a sizable increase from $26.8 billion at the same time last year. While still an order of magnitude lower than precrisis norms, U.S. nonagency RMBS issuance has generally been strongly rising recently. In 2018, the sector posted its highest volume since 2007, and though volatile from month to month, 2019 is easily on track to eclipse last year's total. Growth has come not only from traditional subsectors, but also from areas such as credit risk transfer and nonqualified mortgage transactions. After many years following the subprime crisis during which the majority of U.S. mortgage loans were funded via government-sponsored enterprises, there is now a growing appetite for distributing residential mortgage risk once again through private-label securitizations. Growth in mortgages with lower down payments has also been rising in recent months, both among agencies (Fannie Mae, Freddie Mac) and nonagencies. In 2019, continued readoption of securitization as a funding tool among mortgage lenders could lead to further growth in RMBS issuance, particularly in the nonqualified mortgage segment. CLO issuance volumes will likely moderate further this year. The ECB Joins The Fed In A Dovish Tone, Supporting European Financing Conditions Amid Growing Concerns Since the start of 2019, the ECB has held interest rates at historical lows, and has now signaled that it may even provide increased stimulus as soon as at its July meeting. The ECB is in some ways forced to follow the Fed in moving toward a more accommodative stance, to keep the euro's foreign exchange rate against the dollar, as well as to support the region's exports' relative costs at a time of increasing trade tensions. Fundamentally, the ECB is facing the same economic headwinds as the Fed: a slowing global economy and low inflation readings alongside lower inflation expectations. www.spglobal.com/ratingsdirect July 2, 2019 17 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
18. As a result of this looser stance by the central bank, financing conditions in Europe have generally stabilized after ending 2018 with some volatility and contractions in bond and loan issuance. Sovereign bond yields among many European nations now carry negative yields. Italy is still a source of potential political stress given its budget issues, yet even its yields are falling. Broadly speaking, lower sovereign yields should lower the ceiling on private-sector borrowing costs in the near term. Trade disruptions have had ramifications not limited to the U.S. and China. Both countries are currently in talks with the EU as well, and both sides are preparing tariffs motivated by airline subsidies. The U.S. has also discussed tariffs on critically sensitive areas such as autos and agricultural products. The European economy is already feeling the effect on exports. Relative to the U.S. and China, Europe is both more reliant on and more open to global trade. The Brexit process remains a source of uncertainty, and the potential for a hard departure is considered to be rising, given the recent resignation of Prime Minister Theresa May and the increasing likelihood of Boris Johnson becoming her successor. Johnson has stated he will hold to the current Oct. 31 departure date regardless of whether a deal between the European Commission (EC) and the U.K. is reached. In turn, the EC has said that the deal it reached with May is final and that it will not negotiate a new one. Typically, the U.K. leads corporate bond issuance within Europe, but thus far in 2019, it has slipped behind France. Much of this decline in the U.K. owes to a nearly 35% reduction in issuance among British financial institutions. However, French corporates are currently highly leveraged, calling into question whether their current pace of issuance is sustainable for much longer. In summary, financing conditions in Europe should be favorable for borrowers (see table 6). That said, caution appears to remain, at least against riskier borrowers. In the U.S., higher yields are demanded from speculative-grade issuers, but once met, those deals are generally well received. In Europe, it appears that yields on new speculative-grade corporate issues remain generally low, but these deals are being met with more trepidation and a higher percentage that are ultimately underpriced. Nonetheless, distress in the leveraged loan market remains muted, and covenant-lite loans now account for nearly all new leveraged loans. Meanwhile, yields on investment-grade debt have fallen below where they were last year and in 2017, to under 1.9% for 'A' rated deals. Table 6 Indicators Of Financing Conditions: Europe Restrictive Neutral Supportive 2019* 2018* 2017* Three-month euro-dollar deposit rates (%) x 2.55 2.38 1.15 ECB lending survey of large companies§ x (4.62) (4.61) (1.24) Yield to maturity of new corporate issues rated 'A' (%) x 1.12 2.48 2.01 Yield to maturity of new corporate issues rated 'B' (%) x 6.96 7.09 5.64 European high-yield option-adjusted spread (%)† x 4.32 3.70 3.03 Underpriced speculative-grade corporate bond tranches, 12-month average (%) x 28.0 22.3 26.6 Major government interest rates on 10-year debt x Brexit remains a source of uncertainty, and the potential for a hard departure is considered to be rising. www.spglobal.com/ratingsdirect July 2, 2019 18 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
19. Table 6 Indicators Of Financing Conditions: Europe (cont.) Restrictive Neutral Supportive 2019* 2018* 2017* S&P LCD European Leveraged Loan Index distress ratio (%) x 1.71 0.75 2.55 Rolling-three-month average of all new-issue spreads: RC/TLA (Euribor +, bps) x 345.0 350.0 Rolling-three-month average of all new-issue spreads: TLB/TLC (Euribor +, bps) x 401.6 359.6 360.6 Cov-lite institutional volume: share of institutional debt (%, rolling-three-month average) x 91.3 87.0 72.3 *Data through May 31. §European Central Bank Euro Area Bank Lending Survey for large firms; first-quarter 2019. †Federal Reserve Bank of St. Louis. Bps--Basis points. Sources: IHS Global Insight, ECB, S&P Global Market Intelligence's Leveraged Commentary & Data, and S&P Global Fixed Income Research. The most recent ECB Bank Lending Survey, released in April, showed that European bank lending standards for loans and credit lines to large enterprises remained in easing territory in the first quarter, alongside stable loan demand. The first quarter's net easing reading of -4.62 marks the 21st straight quarter of net loosening for large firms and was more favorable than the prior quarter's expectations after the market turmoil experienced at the end of 2018. Survey respondents reported the net easing of standards was largely influenced by competitive pressures, particularly from other banks. Net demand for loans to enterprises saw no change between the fourth quarter of 2018 and the first quarter of 2019. Driving loan demand in the first quarter was the low general level of interest rates, fixed investment, and, to a lesser extent, inventories and working capital, mergers and acquisitions, and debt refinancing and restructuring. Looking ahead, banks interviewed for the survey expected lending standards on loans to enterprises to loosen slightly in the second quarter, with loan demand modestly increasing. Corporate bond issuance rebounds Issuance is typically higher in May, and this appeared to be true in 2019. Corporate bond issuance in Europe bounced back in May, bringing over $102 billion in new volume, about 60% of which was investment grade. So far in 2019, $548 billion has been issued, compared to $592 billion year to date in 2018. Financial institutions in May contributed $63 billion--in line with monthly totals so far this year--about 68% of which was investment grade, while another 8% was speculative grade. Among nonfinancials, bond volume was $40 billion, with just 46% falling into the investment-grade category, while 21% was speculative grade. The bank subsector issued $31 billion in new bonds in May, making it the highest-issuing subsector within financial services. Following banks, the financial institutions subsector released $8 billion in new notes, the highest monthly total for the subsector since 2017. Among nonfinancial issuers, the telecommunications subsector reported about $7 billion in new volume, followed by oil and gas with $6 billion and homebuilders and real estate companies with $4 billion. www.spglobal.com/ratingsdirect July 2, 2019 19 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
20. Chart 7 The largest deal by volume from Europe in May was from BP Capital Markets for just under $4 billion, consisting of guaranteed medium-term notes, all of which were rated 'A-' by S&P Global Ratings. The second-largest deal of the month came from financial institution HSBC Holdings PLC and also totaled about $4 billion. Table 7 Largest European Corporate Bond Issuers: May 2019 Issuer Country Sector (Mil. $) BP Capital Markets PLC U.K. Oil and gas 3,980.1 HSBC Holdings PLC U.K. Banks and brokers 3,949.1 Altice Luxembourg S.A. Luxembourg Media and entertainment 3,168.0 Telenor ASA Norway Telecommunications 2,784.7 Vodafone Group PLC U.K. Telecommunications 2,769.2 Iho Verwaltungs Gmbh Germany Automotive 2,290.4 Becton Dickinson Euro Finance Luxembourg Financial institutions 2,230.4 Dexia Credit Local S.A. France Banks and brokers 2,228.6 Total Capital International France Financial institutions 2,082.8 Standard Chartered PLC U.K. Banks and brokers 2,000.0 Huarong Finance 2019 Co. Ltd. British Virgin Islands (U.K.) Financial institutions 1,896.4 Eg Global Finance PLC U.K. Banks and brokers 1,834.1 Societe Generale S.A. France Banks and brokers 1,674.9 Nederlandse Waterschapsbank Netherlands Financial institutions 1,664.2 www.spglobal.com/ratingsdirect July 2, 2019 20 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
21. Table 7 Largest European Corporate Bond Issuers: May 2019 (cont.) Issuer Country Sector (Mil. $) Lloyds Bank PLC U.K. Banks and brokers 1,626.6 Sources: Thomson Financial and S&P Global Fixed Income Research. Covered bonds continue to dominate structured issuance Investor-placed European structured finance issuance--including both securitizations and covered bonds--is up across the board through the first five months of 2019, coming in 4.21% higher at about $183.7 billion. All of this year's increase has been attributable to covered bonds, after issuance dynamics changed in the first quarter, with increases in covered bonds and a decline in securitizations (see chart 8). Chart 8 The prospect of normalizing monetary policy may have helped spur covered bond issuance early in 2019. Some issuers returned to the sector for the first time in several years, with their borrowings under cheap, crisis-era funding schemes from central banks set to mature from mid-2020. However, the ECB's early March announcement of a new round of long-term refinancing operations means banks will have a new source of low-cost term funding available to them from September. The detailed terms of the new scheme are not yet clear, and some banks may anyway opt to gradually return to debt markets as they plan for the eventual run-off of this official sector term funding. That said, the new central bank scheme will likely dampen covered bond issuance prospects later in the year if the economics are competitive. www.spglobal.com/ratingsdirect July 2, 2019 21 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
22. The same thinking could apply to securitization issuance, with a return of bank originators now likely to be postponed or less pronounced. In addition, the likelihood that European policy rates will now stay lower for longer could postpone the potential positive effect of rising rates on investor demand for floating-rate European securitization paper. These more recent negatives for supply add to existing pressures that saw securitization issuance stall almost entirely in the first few weeks of 2019, as lingering uncertainties over a new regulatory regime for European deals--which became effective at the start of the year--led originators to pause. As well as introducing preferential treatment for "simple, transparent, and standardized" (STS) transactions, the EU's new Securitization Regulation also revamps rules regarding risk retention, investor due diligence, and disclosures, which apply to all securitizations. However, even though the new rules are already in effect, drafts of various technical standards that clarify the implementation may not be finalized until third-quarter 2019 at the earliest, given that the European Parliament's five-year cycle is about to end. The resulting uncertainty, and the threat of significant sanctions for noncompliance, means that many originators have been reluctant to come to market until there is greater clarity. However, some European securitization issuance did begin to trickle through from February, initially mostly in the CLO sector. While the prolonged delay may continue to hamper issuance, other aspects of the new regulatory framework's infrastructure are beginning to come online--such as authorized certification agents for the STS label--which should increasingly help to unblock supply. There have now been a handful of transactions claiming compliance with the STS label's criteria, building confidence in the new framework among market participants. There are some caveats regarding the scale of European structured finance issuance growth in 2018, given exchange rate effects. During the first half of 2018, the euro was significantly up year over year against the U.S. dollar, at times by as much as 15%. With around three-quarters of European structured finance issuance denominated in euros, this helped inflate the 2017-2018 issuance growth rates that we present here, which are based on volumes translated into U.S. dollars at exchange rates prevailing at the time of issuance. However, over the past year, the euro has broadly weakened and is now over 10% below the highs of early 2018. If exchange rates remain at these levels or the euro weakens further, these factors could act as headwinds for our reported dollar-equivalent issuance growth rates through 2019. Our issuance figures in this report do not include European CLO refinancings and resets, which accounted for about $25 billion in 2018. As in the U.S., we expect wider CLO liability spreads to lead to less refinancing and reset activity in 2019. Trade Tensions And Regional Stress Keep Emerging Market Issuance Subdued Offsetting lingering concerns over the effects of the U.S.-China trade standoff, emerging markets got a boost from the Fed and ECB as both central banks decided to hold off on any rate hikes this year, while also slowing or extending elements of their quantitative easing programs from recent years. Lower (or at least not rising) interest rates in developed economies should help put the brakes on their currencies appreciating, and emerging economies could see capital inflows and lower inflation as a result. Potentially working against these positive developments, the International Monetary Fund recently lowered its global GDP forecast for 2019 to 3.3% (from 3.5% in January and 3.7% in October). This was the result of three distinct stressors: increased trade tensions and tariffs between the U.S. and China, a decline in business confidence, and tightening financial conditions. www.spglobal.com/ratingsdirect July 2, 2019 22 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
23. Similarly, S&P Global economists in Asia-Pacific have slightly lowered their regional GDP expectations for 2019 once again, citing a slowing export cycle in the region, which will likely persist even if a short-term U.S.-China trade deal is reached. The IIF Lending Conditions Survey falls short of a neutral reading In the first quarter of 2019, the Institute of International Finance (IIF) Lending Conditions Survey for emerging markets improved but still fell short of the neutral reading of 50, reflecting deteriorating lending conditions (see chart 9). This index is a diffusion index, meaning readings below 50 indicate a tightening of bank lending conditions and those above 50 imply loosening conditions. The overall reading of 49.4 is up from 48.1 in the fourth quarter and was only held down by the poor showing in the Middle East and African region (46.5). Emerging Europe and emerging Asia both broke past 50--albeit by less than one point each--indicating slightly favorable overall lending conditions. For the second quarter, lending conditions are expected to improve into loosening territory, with generalized improvement across all subregions, though not in every aspect. Chart 9 After widespread restrictive conditions across nearly all emerging market subregions in the past few quarters, the first quarter displayed a roughly 50/50 split between restrictive conditions (in Latin America and the Africa and Middle East region) and looser conditions (in emerging Europe and emerging Asia) (see chart 10). Once again, trade finance remains strong in all emerging subregions (both domestic and international). Conversely, nonperforming loans remain an issue in most regions outside of emerging Asia. www.spglobal.com/ratingsdirect July 2, 2019 23 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
24. Chart 10 Chinese issuance has a strong showing despite trade tensions The trade dispute between the U.S. and China took a decidedly negative turn in May. While in the midst of negotiations, the U.S. raised its existing 10% tariffs on $200 billion of Chinese imports to 25% and threatened to extend tariffs to all imports from China. China responded by raising rates on its existing tariffs on U.S. goods. As expected, markets initially reacted negatively, but some tentative calm resumed as representatives from both sides maintained that despite the increases, negotiations remained constructive. May proved to be another month of healthy issuance from China, with $67 billion in new volume, up from $58 billion in May 2018. Corporate issuance out of China has remained resilient in the face of deteriorating trade negotiations, expanding in the year to date to $438 billion, a 27% increase relative to the comparable 2018 total. Financial institutions contributed about 54% of new volume in May, led by banks and brokers. Nonfinancial institutions added the remaining 46%, led by homebuilders and real estate companies. www.spglobal.com/ratingsdirect July 2, 2019 24 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
25. Chart 11 Latin American issuance retreats as headwinds persist For the fourth quarter in a row, S&P Global economists reduced their baseline economic forecasts for the Latin America region in 2019, as evolving political dynamics in the two largest regional economies--Brazil and Mexico--both weigh on and offer some potential for economic output. Global growth concerns have increased somewhat and currently present downside risk. That said, no recession is currently expected, but expectations for real GDP growth have been lowered to 1.3% from 1.7% for Latin America as a whole in 2019 (see "Despite Looser Global Monetary Conditions, Growth In Latin America Will Remain Sluggish," April 4, 2019). Steady headwinds have clearly cut into corporate bond issuance in the region, resulting in the fewest new issues coming to market since the height of the global financial crisis, in the fourth quarter of 2008. Corporate bond issuance in Latin America steadily grew in 2017 after declines in previous years. This momentum--especially in Brazil--generally continued through the first half of 2018, but the overall trend took a turn once 2019 began (see chart 12). Following a resilient April, corporate bond issuance in Latin America fell back to just $4 billion in May, the second-lowest total for any month so far in 2019. Mexico had the highest total of the month, adding $2 billion, followed by Brazil, Chile, and Argentina with $1.5 billion, $600 billion, and $4.2 billion, respectively. www.spglobal.com/ratingsdirect July 2, 2019 25 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
26. Chart 12 Bond issuance for all emerging markets in May was just $74 billion, the second-lowest total for any month so far in 2019. To date, new bond volume has reached $551 billion, about 2% above the comparable 2018 total. The majority of new volume in May came from financial institutions. Table 8 Largest Emerging Markets Corporate Bond Issuers: May 2019 Issuer Country Sector (Mil. $) China Minsheng Banking Co. Ltd. China Banks and brokers 5,799.4 Central Huijin Investment Ltd. China Banks and brokers 2,890.9 AIIB China Banks and brokers 2,493.0 State Power Investment Corp. Ltd. China Utility 2,310.7 Shenwan Hongyuan Securities Co. Ltd. China Banks and brokers 1,797.3 MGM China Holdings Ltd. China Media and entertainment 1,500.0 Bank of Hangzhou Co. Ltd. China Banks and brokers 1,449.3 Bank of Qingdao Co. Ltd. China Banks and brokers 1,161.6 China Gezhouba Group Co. Ltd. China Homebuilders/real estate companies 1,091.0 China State Shipbuilding Corp. Ltd. China Capital goods 1,014.5 Tianjin City Constr Invest China Homebuilders/real estate companies 1,014.4 Gold Fields Ltd. South Africa Metals, mining, and steel 1,000.0 Rongshi International Finance Ltd. China Financial institutions 996.5 China Southern Power Grid Co. Ltd. China Utility 942.6 True Corp. PCL Thailand Telecommunications 786.7 Sources: Thomson Financial and S&P Global Fixed Income Research. www.spglobal.com/ratingsdirect July 2, 2019 26 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
27. International Public Finance May marked the lowest monthly total for international public finance volume in 2019, making it the second straight month to establish a low for the year. Volume is now just 14% higher than last year's total. Europe leads the percentage change increase at 41% higher, but the larger Asia-Pacific region is up by only 10%. Canada's issuance is 2% higher than in 2018. Data on non-U.S. public finance volume are not reliable for determining the true size of borrowing, but the numbers can highlight major trends. The past four years have recorded the highest volume ever in international public finance, averaging $552 billion annually. We expect volume in 2019 to surpass the average and reach about $580 billion, which would be an increase of 20% from 2018. Other Global Structured Finance Combining covered bond and securitization volumes, overall structured finance issuance outside the U.S. and Europe posted double-digit growth rates in 2018. Most structured finance issuance activity in these other regions is in Australia, Canada, and Japan. While issuance in Asia-Pacific was up by only 6%, Canadian covered bond volumes surged to $33 billion from only $15 billion a year earlier. Overall, structured finance issuance outside the U.S. and Europe reached $180 billion in 2018, up nearly 20% year over year. Issuance volume has picked up again in 2019, with $76.6 billion of issuance outside the U.S. and Europe, up roughly 11% compared with the equivalent period of 2018. Through May 2018, comparable issuance was up 10% over 2017 levels. The largest gains thus far in 2019 have come from Australia and Japan, though securitization out of China that is rated by nondomestic rating agencies has also grown strongly thus far in 2019. Our figures exclude Chinese securitization issuance rated only by domestic rating agencies, which has boomed in recent years to almost $300 billion in annual issuance. However, as the Chinese securitization sector develops, the volume of internationally rated issuance is expanding and could grow further in 2019. We anticipate that structured finance issuance outside the U.S. and Europe will continue to grow modestly in 2019. Related Research - Despite Looser Global Monetary Conditions, Growth In Latin America Will Remain Sluggish, April 4, 2019 - U.S. GDP Growth Hits A Soft Patch--Not Quicksand, April 4, 2019 - Asia-Pacific Quarterly Forecasts: Tougher Trade Winds Through 2019, April 2, 2019 - The European Economy Lurches Ahead--In The Slow Lane, March 28, 2019 - U.S. Refinancing Study--$4.64 Trillion Of Rated Corporate Debt Is Scheduled To Mature Through 2023, Feb. 15, 2019 - European Refinancing Study--€3.5 Trillion Of Rated Companies' Debt Is Scheduled To Mature By End-2023, Feb. 7, 2019 - Global Refinancing Study--Rated Corporate Debt Maturing Through 2023 Nears $11 Trillion, Feb. 5, 2019 www.spglobal.com/ratingsdirect July 2, 2019 27 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
28. This report does not constitute a rating action. www.spglobal.com/ratingsdirect July 2, 2019 28 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year
29. www.spglobal.com/ratingsdirect July 2, 2019 29 Credit Trends: Global Financing Conditions: Bond Issuance Grew Modestly In May But Remains Down Year Over Year STANDARD & POOR’S, S&P and RATINGSDIRECT are registered trademarks of Standard & Poor’s Financial Services LLC. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses. 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). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Copyright © 2019 by Standard & Poor’s Financial Services LLC. All rights reserved.
30. Profiling Global Corporate Credit Quality Diane Vazza Managing Director Global Fixed Income Research INTERNAL USE ONLY CFA Tokyo July 8, 2019
31. Risk and Opportunities In Global Credit Markets 2 INTERNAL USE ONLY
32. Accommodative monetary policies will likely stabilize borrowing costs for lenders, boosting global new bond issuance in 2019 though slowing economic indicators and volatile market reactions will likely continue 3 INTERNAL USE ONLY Industrials¶ Financial Services Structured Finance** U.S. Public Finance International Public Finance Annual Total 2009 1,707.1 1,825.1 572.0 409.7 295.7 4,809.6 2010 1,296.0 1,475.0 895.0 433.3 306.9 4,406.2 2011 1,339.8 1,329.6 942.4 287.7 336.3 4,235.8 2012 1,767.5 1,558.6 786.3 379.6 339.1 4,831.1 2013 1,891.4 1,523.5 803.5 334.1 316.3 4,868.8 2014 2,053.6 2,013.1 905.3 339.0 340.5 5,651.6 2015 2,011.4 1,735.4 905.0 397.7 449.2 5,498.6 2016 2,241.6 1,910.0 807.6 444.8 750.7 6,154.7 2017 2,280.4 2,057.8 901.8 448.6 544.1 6,232.7 2018 1,992.8 1,958.2 1,062.6 338.9 483.6 5,836.0 2018* 561.6 575.2 273.2 65.6 81.9 1,557.5 2019* 550.7 526.2 269.2 75.0 147.3 1,568.4 2019 Full-Year Forecast, % chg, YoY -1.2% -1.5% 1.0% 3.3% 20.0% 1.2% *Through Mar. 31. ¶Includes infrastructure. **Note: Structured finance excludes transactions that were fully retained by the originator, domestically-rated Chinese issuance, and CLO resets and refinancings. Source: Thomson Financial; Harrison Scott; S&P Global Fixed Income Research.
33. Asia-Pacific's Cumulative New Corporate Bond Issuance So Far In 2019 Ranks The Highest In The Past Six Years; Asia-Pacific Accounts For Over 1/3 Of Global Corporate Bond Issuance So Far In 2019 4 INTERNAL USE ONLY Data as of June 24, 2019. Asia-Pacific – China, Japan, New Zealand, Australia. Emerging Markets- EEMEA- Easter Europe, Middle East and Africa, Latin America. Sources: S&P Global Fixed Income Research and S&P Global Market Intelligence’s CreditPro® & Thompson Financial. Data as of May 31, 2019. Asia-Pacific – China, Japan, New Zealand, Australia. Sources: S&P Global Fixed Income Research and S&P Global Market Intelligence’s CreditPro®.
34. Spreads remain low by historical standards but have widened considerably since December, especially for riskier consumer and energy sectors 5 INTERNAL USE ONLY
35. 6 INTERNAL USE ONLY Ratings are expected to remain stable in the short-to-medium term with limited downgrade and upgrade prospects… Negative Bias By Region-- Downgrade Potential Positive Bias By Region-- Upgrade Potential Rating Actions In Q1 2019 *Excludes entities with no rated debt under the global rating scale. EM includes emerging Asia, Latin American and EEMEA--Eastern Europe, Middle East, and Africa. Asia-Pacific includes Japan, China, New Zealand, Australia. Data as of March 31, 2019. Source: S&P Global Fixed Income Research. Global U.S. Europe Asia-Pacific EM (ex. Asia) Downgrades (issuer count) 173 114 26 13 10 Debt volume (bil. US$) 485.86 $ 314.12 $ 76.14 $ 65.47 $ 16.65 $ Upgrades (issuer count) 67 40 16 1 6 Debt volume (bil. US$) 436.06 $ 231.42 $ 142.08 $ 7.49 $ 12.73 $ Other Developed, 7% Europe, 10% Emerging Markets, 6% U.S., 6% APAC, 6% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Recession Recession Note: shaded areas indicate U.S. recessions. APAC includes Asia (including Japan), Australia, and New Zealand. Data as of Mar ch 31, 2019. Source : S&P Global Fixed Income Research. Europe, 13% Other Developed, 13% Emerging Markets, 14% APAC, 9% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Recession Recession Note: shaded areas indicate U.S. recessions. APAC includes Asia (including Japan), Australia, and New Zealand. Data as of March 31, 2019. Source : S&P Global Fixed Income Research. Recession Recession Note: shaded areas indicate U.S. recessions. APAC includes Asia (including Japan), Australia, and New Zealand. Data as of March 31, 2019. Source : S&P Global Fixed Income Research. U.S.17%
36. 7 INTERNAL USE ONLY … but at a lower rated base across most industries; when current, benign conditions eventually wane, lower ratings will signal higher downgrade risks
37. 8 INTERNAL USE ONLY Ratings are mostly stable across industries globally but certain risks remain Consumer, oil and gas, and aerospace and defense lead downgrade potential; upgrade prospects limited but positive metals prices support metals, mining, and steel upgrade potential
38. 9 INTERNAL USE ONLY Ratings generally deteriorated across regions and industries; investors’ comfort in risk assets may yield more ratings volatility Japan Median Ratings Financials A Financial Institutions A Insurance A+ NonFinancials A Aerospace/Automotive/Capital Goods/Metal A Consumer/Service Sector A Energy and Natural Resources A Health Care/Chemicals BBB+ High Tech/Computers/Office Equipment BBB+ Leisure Time/Media BBB- Real Estate A Telecommunications AA- Transportation AA- Utility A Japanese Corporate Median Ratings Data as of Dec, 31st. EEMEA- Easter Europe, Middle East and Africa. Sources: Other Developed- Japan, Canada, New Zealand, Australia. S&P Global Fixed Income Research and S&P Global Market Intelligence’s CreditPro®. Data as of Mar. 31, 2019. Source: S&P Global Fixed Income Research; S&P Global Market Intelligence CreditPro®. Global scale Japanese corporate ratings
39. Comparative Ratings Performance: Global and Japanese Corporate Issuers 10 INTERNAL USE ONLY
40. Japanese Ratings Generally Display Lower Downgrade And Default Rates* 11 Data as of Apr. 30, 2019. Source: S&P Global Fixed Income Research; S&P Global Market Intelligence's CreditPro®. INTERNAL USE ONLY *But much higher withdrawal rates from ‘BBB’ and Lower One-Year Average Transition Matrices Rating AAA AA A BBB BB B CCC/C D NR AAA 86.99445 9.11975 0.52868 0.05287 0.07930 0.02643 0.05287 0.00000 3.14565 AA 0.50375 87.06407 7.85327 0.49083 0.05167 0.06458 0.01937 0.01937 3.93309 A 0.02702 1.69148 88.17315 5.15820 0.28642 0.11889 0.01621 0.05674 4.47189 BBB 0.00535 0.09361 3.41544 86.03867 3.61604 0.46003 0.10698 0.16582 6.09805 BB 0.01190 0.02776 0.11501 4.82649 77.50545 6.65080 0.55126 0.64644 9.66488 B 0.00000 0.02259 0.07746 0.17106 4.92528 74.54088 4.42178 3.44060 12.40035 CCC/C 0.00000 0.00000 0.11198 0.19597 0.58791 13.18589 43.50504 26.90370 15.50952 Global Rating AAA AA A BBB BB B CCC/C D NR AAA 85.63536 12.15470 0.55249 0.00000 0.00000 0.00000 0.00000 0.00000 1.65746 AA 0.35294 88.47059 7.64706 0.00000 0.00000 0.11765 0.00000 0.00000 3.41176 A 0.00000 0.74221 91.04404 2.57298 0.04948 0.04948 0.00000 0.00000 5.54181 BBB 0.00000 0.00000 7.72676 76.81971 2.12766 0.11198 0.00000 0.22396 12.98992 BB 0.00000 0.00000 0.00000 10.92715 68.21192 1.98675 0.33113 0.00000 18.54305 B 0.00000 0.00000 0.00000 0.00000 16.66667 54.76190 2.38095 8.33333 17.85714 CCC/C 0.00000 0.00000 0.00000 0.00000 11.76471 17.64706 17.64706 17.64706 35.29412 Japan
41. Japanese Ratings Generally Display Lower Downgrade And Default Rates* 12 Data as of Apr. 30, 2019. Source: S&P Global Fixed Income Research; S&P Global Market Intelligence's CreditPro®. INTERNAL USE ONLY *But much higher withdrawal rates from ‘BBB’ and Lower Three-Year Average Transition Matrices Rating AAA AA A BBB BB B CCC/C D NR AAA 65.39894 22.20745 2.34043 0.31915 0.18617 0.07979 0.10638 0.13298 9.22872 AA 1.18092 66.47547 18.38181 2.01768 0.34415 0.21594 0.02699 0.12147 11.23558 A 0.05545 3.96288 69.33291 11.55597 1.22855 0.42605 0.09046 0.23929 13.10844 BBB 0.01776 0.26935 8.30842 65.13838 7.00311 1.56874 0.28415 0.83765 16.57244 BB 0.00886 0.05317 0.48294 10.98804 47.56314 11.40452 1.22286 3.78378 24.49269 B 0.00367 0.02570 0.19456 0.72685 10.01065 41.62476 4.68779 12.33435 30.39169 CCC/C 0.00000 0.00000 0.12759 0.60606 1.59490 17.22488 10.11164 41.02073 29.31419 Global Rating AAA AA A BBB BB B CCC/C D NR AAA 62.98343 31.49171 3.31492 0.00000 0.00000 0.00000 0.00000 0.00000 2.20994 AA 0.73350 67.72616 20.17115 0.24450 0.00000 0.36675 0.00000 0.00000 10.75795 A 0.00000 1.67879 73.75490 6.99496 0.11192 0.22384 0.00000 0.00000 17.23559 BBB 0.00000 0.00000 18.77880 38.94009 3.80184 0.23041 0.11521 0.80645 37.32719 BB 0.00000 0.00000 0.34247 17.80822 24.65753 2.39726 1.02740 1.36986 52.39726 B 0.00000 0.00000 0.00000 6.17284 14.81481 20.98765 1.23457 17.28395 39.50617 CCC/C 0.00000 0.00000 0.00000 0.00000 25.00000 6.25000 0.00000 18.75000 50.00000 Japan
42. The High-Yield Market’s Ability To Absorb ‘BBB’ Ratings 13 INTERNAL USE ONLY
43. 14 Globally, The Amount Of Corporate Debt Rated ‘BBB’ Dwarfs The Entirety of Speculative Grade BBB- BBB BBB+ 0.0 1000.0 2000.0 3000.0 4000.0 5000.0 6000.0 7000.0 8000.0 AAA AA A BBB BB B CCC/C (Bil. $) Chart shows the face value of global corporate debt rated by S&P Global Ratings. Includes bonds, loans, and revolvers from financial and nonfinancial corporates. Data as of 1/1/2019. Source: S&P Global Fixed Income Global Corporate Debt Rated ‘BBB’ Exceeds $7 Trillion
44. ‘BBB’ Growth Makes It The Largest Investment-Grade Category 15 From Underdog To Top Dog Note: Chart shows the break out of initial ratings for those issuers that are currently rated in the 'BBB' category. Source: S&P Global Market Intelligence’s CreditPro; S&P Global Fixed Income Research 0.0 10.0 20.0 30.0 40.0 50.0 60.0 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 'BBB' Category Now Accounts For The Majority Of Investment Grade Ratings Globally AAA/AA A BBB (% of IG) Issuer count 1991 2018 AAA/AA 601 333 A 626 1402 BBB 391 1881 Chart shows ratings as a percentage of the number of investment-grade issuer globally. Source: S&P Global Fixed Income Research; S&P Global Market Intelligence's CreditPro® AAA 1% AA 5% A 19% BBB 60% BB 11% B 3% CCC/CC 1% Where Did The 'BBB's Come From? 25% of current 'BBB' issuers were downgraded into the category Chart shows the break out of initial ratings for those issuers that are currently rated in the 'BBB' category. Source: S&P Global Fixed Income Research; S&P Global Market Intelligence's CreditPro®
45. 16 Ratings Performance Has Improved Over Time Shaded areas indicate recessions. Data as of Dec. 31, 2018. Source: S&P Global Fixed Income Research; S&P Global Market Intelligence's CreditPro®. INTERNAL USE ONLY
46. Ratings Show A Clear Correspondence With The Cost Of Debt... 17 The Cost Of Dropping A Notch To ‘BBB+’ from ‘A-’ Is Just 26 bps …the cost differential between investment-grade rating categories is low
47. The Spec-Grade Market Has Seen Large Infusions Of Downgraded Debt In The Past, And Always Rebounded 18 Data as of Dec. 31, 2018. Source: S&P Global Fixed Income Research; S&P Global Market Intelligence's CreditPro®. INTERNAL USE ONLY Ranging from one-off cases, to extended bouts of market volatility, to recessions
48. 19 Even During The Financial Crisis, The Market Rebounded INTERNAL USE ONLY In fact, much faster than equities S&P 500 Index fell around the same time, but didn’t recover until Feb. 2011. Source: S&P Global Fixed Income Research
49. Default Risks – Why Worry? 20 INTERNAL USE ONLY
50. 21 Growing Populations Of Lower Rated Issuers Precedes Default Rate Spikes Data as of Dec. 31, 2018. Source: S&P Global Fixed Income Research; S&P Global Market Intelligence's CreditPro®. 20 25 30 35 40 45 50 55 0 2 4 6 8 10 12 14 Dec-81 May-83 Oct-84 Mar-86 Aug-87 Jan-89 Jun-90 Nov-91 Apr-93 Sep-94 Feb-96 Jul-97 Dec-98 May-00 Oct-01 Mar-03 Aug-04 Jan-06 Jun-07 Nov-08 Apr-10 Sep-11 Feb-13 Jul-14 Dec-15 May-17 Oct-18 Global Corporate Speculative Grade Default Rate Versus Prevalence Of Speculative-Grade Issuers Speculative Grade Default Rate (left axis) % All Issuers with Speculative Grade Ratings (right axis) Source: S&Ps Global Fixed Income Research; S&P Global Market Intelligence's (%) (%) 0 2 4 6 8 10 12 14 0 10 20 30 40 50 60 1/1/1981 1/1/1983 1/1/1985 1/1/1987 1/1/1989 1/1/1991 1/1/1993 1/1/1995 1/1/1997 1/1/1999 1/1/2001 1/1/2003 1/1/2005 1/1/2007 1/1/2009 1/1/2011 1/1/2013 1/1/2015 1/1/2017 Speculative-Grade Origination Trends And Default Rate: U.S. & Tax Havens 'B-' & below (left scale) 12-mo spec-grade default rate (right scale) (%) (%) U.S. & Tax Hav ens: United States, Bermuda, and Cay man Islands. B- and below ratings calculated as a share of total speculativ e grade. Data through Dec. 31, 2018. Source: S&P Global Fixed Income Research; S&P Global Market Intelligence's CreditPro®. A Growing Prevalence Of Speculative-Grade Issuers Often Precedes Rising Default Rates
51. 60.0 80.0 100.0 120.0 140.0 160.0 180.0 2019 2020 2021 2022 2023 Annual Maturities For Nonfinancial Sectors With The Greatest Refinancing Demand Oil & Gas Consumer Products Telecommunications High Technology Note: Data as of Jan. 1, 2019. Includes bonds, loans, and revolving credit facilities that are rated by S&P Global Ratings . Source: S&P Global Fixed Income Research. 22 Corporate Refinancing Demand Rises Through 2023 Source: S&P Global Fixed Income Research INTERNAL USE ONLY Rated Debt Maturing By Year (Financial & Nonfinancial Issuers) 0.0 100.0 200.0 300.0 400.0 500.0 600.0 700.0 800.0 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 BBB- BBB BBB+ Investment grade Speculative grade (Bil. $) Note: Data as of Jan. 1, 2019. Includes bonds, loans, and revolving credit facilities that are rated by S&P Global Ratings. Source: S&P Global Fixed Income Research. Annual Maturities For Nonfinancial Sectors With The Greatest Refinancing Demand (Bil. $)
52. 23 APAC Refinancing: $1.1 Trillion Corporate Debt Is Set To Mature Through 2023 INTERNAL USE ONLY Asia-Pacific Debt Maturities Peak In 2020 At $264.8 Billion Data as of Jan. 1, 2019. Source: Global Fixed Income Research. Includes financial and nonfinancial issuers' bonds, loans, and revolving credit facilities that are rated by S&P Global Ratings. Excludes debt instruments that do not have a global scale rating. Foreign currencies are converted to U.S. dollars.
53. 24 INTERNAL USE ONLY S&P Expects The U.S. Default Rate To Increase To 2.7% U.S. Default Surveillance Tool Kit
54. Higher Weakest Links tend to signal increases in default rates 12 months ahead of time 25 INTERNAL USE ONLY TTM – Trailing 12-Month. APAC includes Asia (including Japan), Australia, and New Zealand. Data as May 20, 2019. Source: S&P Global Fixed Income Research; S&P Global Market Intelligence's CreditPro®. Global Weakest Links vs. Global TTM Default Rates vs. APAC TTM Default Rates U.S. Recession Current reading shows elevated default risk, albeit from a low starting point