WEEKLY MARKET OUTLOOK DECEMBER 14, 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. Dangers Lurk Amid 2018’s Positive Outlook Credit Markets Review and Outlook by John Lonski Dangers Lurk Amid 2018’s Positive Outlook. » 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, “High-yield spreads remain thin despite how the less favorable tax treatment of interest expense may adversely affect at least 25% of high-yield issuers,” begin on page 11. » FULL STORY PAGE 11 Ratings Round-Up by Njundu Sanneh Defaults Surprise in November » 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: Saudi Arabia, defaults, credit/stocks, China, yields/prices, debt/growth, Spain, upside surprise, bulls, less fear, Fed & BoJ, inflation, market triggers, hurricanes, data in sync, Harvey, inflation, yields, Korea, jobless rate, spreads, Saudi Arabia. » FULL STORY PAGE 24 Credit Spreads Investment Grade: Year-end 2017 spread to eclipse its recent 107 bp. High Yield: Compared to a recent spread of 365 bp, it may approximate 375 bp by year-end 2017. Defaults US HY default rate: Compared to November 2017’s 3.4%, Moody's Default and Ratings Analytics team forecasts that the US' trailing 12-month high-yield default rate will average 2.4% during 2018’s third 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 $341 billion. For 2017, US$-denominated IG bond issuance may rise by 7.4% to a new zenith of $1.517 trillion, while US$-priced high-yield bond issuance may increase by 32.7% to $452 billion, surpassing 2014’s record $435 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 Analytics Research Weekly Market Outlook Contributors: John Lonski 1.212.553.7144 john.lonski@moodys.com Njundu Sanneh 1.212.553.4036 njundu.sanneh@moodys.com Franklin Kim 1.212.553.4419 franklin.kim@moodys.com Yuki Choi 1.212.553.0906 yukyung.choi@moodys.com Moody's Analytics/Europe: Tomas Holinka +420 ( 221) 666-384 Tomas.holinka@moodys.com Barbara Teixeira Araujo +420 (224) 106-438 Barbara.TeixeiraAraujo@moodys.com Moody's Analytics/Asia-Pacific: Katrina Ell +61 (2) 9270-8144 Katrina.ell@moodys.com Faraz Syed +61 (2) 9270-8146 Faraz.syed@moodys.com Editor Reid Kanaley 1. 610.235.5273 reid.kanaley@moodys.com CAPITAL MARKETS RESEARCH 2 DECEMBER 14, 2017 CAPITAL MARKETS RESEARCH / 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. Dangers Lurk Amid 2018’s Positive Outlook Earnings-sensitive markets thrived in 2017. Though late 2016’s outlook for 2017’s pretax operating profits proved to be fairly accurate, the market value of U.S. common stock still soared higher by 18% to a new record high. Several developments explained why the market value of common equity outran the growth of core profits in 2017. First, the market strongly believes in the efficacy of forthcoming tax law changes and has effectively shrugged off whatever harmful effects may arise from a wider federal budget deficit. Moreover, a recent study from Moody’s Investors Service concludes that while most US companies will be better off following the enactment of corporate tax reform, at least a quarter of highly-leveraged companies will be worse off. Not All Companies Will Benefit from Proposed Tax Reform The cut in the top corporate income tax rate from 35% to 21% and the ability to immediately fully expense capital spending will outweigh the loss of full interest deductibility for almost all investment-grade issuers. However, the loss of full tax deductibility of interest expense will adversely affect the after-tax earnings of a number of high-yield companies. About 26% of high-yield issuers will be worse off under the House plan and 36% will be worse off under the Senate proposal because of how the House plan allows interest expense to be deductible up to 30% of EBITDA, while the Senate’s version limits the deductibility of interest expense up to 30% of EBIT. (EBITDA equals earnings before interest costs, taxes and depreciation, whil