Credit Cycle Enjoys a Respite

WEEKLY MARKET OUTLOOK APRIL 13, 2017 CAPITAL MARKETS RESEARCH 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. Credit Cycle Enjoys a Respite Credit Markets Review and Outlook by John Lonski Credit Cycle Enjoys a Respite. » FULL STORY PAGE 2 The Week Ahead We preview economic reports and forecasts from the US, UK/Europe, and Asia/Pacific regions. » FULL STORY PAGE 5 The Long View Check our chart here for forecast summaries of key credit market metrics. Full updated stories, “A recent climb by the VIX index to its most risk averse reading since Election Day will help to slow bond issuance from Q1-2017’s torrid pace,” begin on page 13. » FULL STORY PAGE 13 Ratings Round-Up by Njundu Sanneh Upgrade Ratio Still Positive. » FULL STORY PAGE 17 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 19 Moody’s Capital Markets Research recent publications Links to commentaries on: South Africa, yields, Venezuela, equity, eurozone, hike, global, profits, Korea, Caa, yes, hike, VIX, rates, France, demography, boom, Japan, reform, India. » FULL STORY PAGE 23 Credit Spreads Investment Grade: Year-end 2017 spread to exceed its recent 12 6 bp. High Yield: After recent spread of 412 bp, it may approximate 480 bp by year-end 2017. Defaults US HY default rate: after March 2017’s 4.7%, Moody’s Credit Policy Group forecasts it near 2.9% during 2018’s first quarter. Issuance In 2016, US$-IG bond issuance grew by 5.6% to a record $1.412 trillion, while US$-priced high-yield bond issuance fell by -3.5% to $341 billion. For 2017, US$-IG bond issuance may rise by 4.8% to a new zenith of $1.468 trillion, while US$-priced high-yield bond issuance may increase by 16.9% to $398 billion but still lag 2014’s $435 billion zenith. 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: Katrina Ell +61 (2) 9270-8144 katrina.ell@moodys.com Jack Chambers +61 (2) 9270-8118 jack.chambers@moodys.com Editor Dana Gordon 1.212.553.0398 dana.gordon@moodys.com CAPITAL MARKETS RESEARCH 2 APRIL 13, 2017 CAPITAL MARKETS RESEARCH, INC. / MARKET OUTLOOK / MOODYS.COM Credit Markets Review and Outlook Credit Markets Review and Outlook By John Lonski, Chief Economist, Moody’s Capital Markets Research, Inc. Credit Cycle Enjoys a Respite For the first time since 1987-1988, the US credit cycle has stabilized following a surge by credit rating downgrades relative to upgrades, a jump by the high-yield default rate, and a pronounced widening by corporate bond yield spreads. After six years at 49% of US high-yield credit rating revisions from July 2009 through June 2015, downgrades soared to 71% in the year-ended June 2016. Then downgrades eased to 58% for the year-ended March 2017 and sank to 48% during Q1-2017. The much reduced relative incidence of downgrades was joined by a drop for the forward-looking high-yield EDF (expected default frequency metric from February 2016’s current recovery high of 8.1% to a recent 3.7% and a narrowing by the high-yield bond spread from February 2016’s nearly eight-year high of 839 bp to a recent 412 bp. In addition, after peaking at January 2017’s 5.9%, the US high-yield default rate has eased to March’s 4.7% and is projected to average 3.1% during 2017’s final quarter. Market expects profits to again outpace corporate debt The deterioration of high-yield credit rating revisions comparing the six years ended June 2015 with the year ended June 2016 was linked to a dramatically different performance by nonfinancial-corporate profits from current production. After having advanced by 9.8% annually, on average, during the six years ended June 2015, profits from current production contracted by -9.2% annually during the year ended June 2016. The loss of financial flexibility to the shrinkage of profits was made worse by an acceleration of nonfinancial-corporate debt from the 2.5% average annualized rise of the six-years-ended June 2015 to th