WEEKLY MARKET OUTLOOK：High Shareholder Compensation Menaces Credit

WEEKLY MARKET OUTLOOK JUNE 23, 2016 CAPITAL MARKETS RESEARCH High Shareholder Compensation Menaces Credit Credit Markets Review and Outlook by John Lonski High Shareholder Compensation Menaces Credit. » FULL STORY PAGE 2 Topic of the Week by Ben Garber US Corporate Downgrade Warnings Take a Breather. » FULL STORY PAGE 5 The Week Ahead We preview economic reports and forecasts from the US, UK/Europe, and Asia/Pacific regions. » FULL STORY PAGE 9 The Long View Check our chart here for forecast summaries of key credit market metrics. Full updated stories, “The annual growth of US$-denominated investment-grade bond issuance is expected to rise from H1-2016’s 1% to 14% for H2-2016,” begin on page 16. » FULL STORY PAGE 16 Ratings Round-Up by Njundu Sanneh Downgrades Up in US; Upgrades Up in Europe. » FULL STORY PAGE 19 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 21 Moody’s Capital Markets Research recent publications Links to commentaries on: Angang, Hungary, foreboding, ECB, FedEx, Portugal, XOM, equities, SOCGEN, CASA, YUM, IBM, oil, banks, REP, profits, spreads. » FULL STORY PAGE 25 Credit Spreads Investment Grade: Year-end 2016 spread to be close to its recent 145 bp. High Yield: After recent spread of 609 bp, it may approximate 63 bp by year-end 2016. Defaults US HY default rate: after May 2016’s 5.0%, Moody’s Credit Policy Group forecasts 6.4% by Q4 2016. Issuance In 2015, US$-denominated investment-grade (IG) bond offerings advanced by 17.5% to $1.326 trillion, while US$-denominated high-yield bond issuance sank by -15.0% to $358 billion. For 2016, US$-denominated IG bond issuance may increase by 6.5% to a record $1.412 trillion, while US$-priced high-yield bond issuance may sink by -11.4% to $313 billion. Click here for Moody’s Credit Outlook, our sister publication containing Moody’s rating agency analysis of recent news events, summaries of recent rating changes, and summaries of recent research. Moody’s Capital Markets Research, Inc. Weekly Market Outlook Contributors: David W. Munves, CFA 1.212.553.2844 david.munves@moodys.com John Lonski 1.212.553.7144 john.lonski@moodys.com Ben Garber 1.212.553.4732 benjamin.garber@moodys.com Njundu Sanneh 1.212.553.4036 njundu.sanneh@moodys.com Yukyung Choi 1.212.553.0906 yukyung.choi@moodys.com Irina Baron 1.212.553.4307 irina.baron@moodys.com Franklin Kim 1.212.553.4419 franklin.kim@moodys.com Xian (Peter) Li 1.212.553.1404 Xian.li@moodys.com Moody's Analytics/Europe: Tomas Holinka +420 ( 221) 666-384 Tomas.holinka@moodys.com Moody's Analytics/Asia-Pacific: Jack Chambers +61 (2) 9270-8118 Jack.chambers@moodys.com Faraz Syed +61 (2) 9270-8146 Faraz.sayed@moodys.com Editor Dana Gordon 1.212.553.0398 dana.gordon@moodys.com Moody’s Analytics markets and distributes all Moody’s Capital Markets Research, Inc. materials. Moody’s Capital Markets Research, Inc is a subsidiary of Moody’s Corporation. Moody’s Analytics does not provide investment advisory services or products. For further detail, please see the last page. CAPITAL MARKETS RESEARCH Credit Markets Review and Outlook Credit Markets Review and Outlook By John Lonski, Chief Economist, Moody’s Capital Markets Research, Inc. High Shareholder Compensation Menaces Credit Companies cannot afford indefinitely to fund increases in shareholder compensation from corporate earnings, especially if earnings are flat to lower. The demands placed on earnings by shareholder compensation can be assessed by the ratio of the sum of net equity buybacks plus net dividends to pretax profits from current production (as derived from US government data). We call this the shareholder compensation ratio. During the year-ended Q1-2016, the sum of net equity buybacks plus net dividends approximated 96% of pretax profits from current production for US nonfinancial corporations. The latter exceeded each comparably measured yearlong ratio prior to 2007. Moreover, net stock buybacks plus net dividends averaged a smaller 67% of profits from current production during the three previous recoveries, wherein the ratios ranged from 61% for 1983-1990’s upturn, 55% for 1991-2000’s recovery, and 80% for 2002-2007’s upswing. Ratios of 85% or higher more than three years after the end of a recession tend to indicate either the late stage of a business cycle upturn or the presence of a recession. (Figure 1.) 0125%40%55%70%85%100%115%130%85Q187Q289Q391Q494Q196Q298Q300Q403Q105Q207Q309Q412Q114Q216Q3Recessions are shaded[Net Equity Buybacks + Net Dividends] as % of Profits from Current Production: yearlong ratio, nonfin. corp.Figure 1: Q1-2006's Ratio of the Sum of Net Stock Buybacks plus Net Dividends to Pretax Operating Profits Tops Tops All Ratios Prior to Q1-2007 During the mature phase of 2002-2007’s recovery, the ratio first broke above 85% in Q4-2006. A recession materialized after the shareholder compensation ratio climbed u