WEEKLY MARKET OUTLOOK MAY 3, 2018 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. M&A Both Enhances and Diminishes Corporate Credit Quality Credit Markets Review and Outlook by John Lonski M&A Both Enhances and Diminishes Corporate Credit Quality » 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 6 The Long View Full updated stories and key credit market metrics: For January-April 2018, US$-denominated corporate issuance incurred yearly setbacks of -8% for investment-grade and -11% for high-yield. » FULL STORY PAGE 12 Ratings Round-Up by Njundu Sanneh Positive Rating Revisions Point to Improving Credit Quality » FULL STORY PAGE 17 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 20 Moody’s Capital Markets Research recent publications Links to commentaries on: Default rates, profit growth, foreign investors, internal funds, tariffs, borrowing restraint, corporate bonds, tax law changes, stocks and spreads, Greek drama, South Korea, Brazil sovereign credit, Greece and Spain, dangers in the outlook. » FULL STORY PAGE 25 Credit Spreads Investment Grade: We see year-end 2018’s average investment grade bond spreads exceeding its recent 11 8 bp. High Yield: Compared to a recent 353 bp, the high-yield spread may approximate 425 bp by year-end 2018. Defaults US HY default rate: Compared to March 2018’s 3.9%, Moody's Default and Ratings Analytics team forecasts that the U.S.' trailing 12-month high-yield default rate will sink to 1.7% by March 2019. Issuance In 2017, US$-denominated IG bond issuance grew by 6.8% to a record $1.508 trillion, while US$-priced high-yield bond issuance advanced by 33.0% to a new record calendar-year high of $453 billion. For 2018’s US$-denominated corporate bonds, IG bond issuance may drop by 5.4% to $1.428 trillion, while high-yield bond issuance is likely to fall by 4.0% to $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 Franklin Kim 1.212.553.4419 franklin.kim@moodys.com Yuki Choi 1.212.553.0906 yukyung.choi@moodys.com Njundu Sanneh 1.212.553.4036 njundu.sanneh@moodys.com Moody’s Analytics/U.S.: Ryan Sweet 1.610.235.5213 ryan.sweet@moodys.com Moody's Analytics/Europe: Barbara Teixeira Arajuo +420.224.222.926 barbara.teixeiraarajuo@moodys.com Moody's Analytics/Asia-Pacific: Katrina Ell +61.2. 9270.8144 katrina.ell@moodys.com Alaistair Chan +61.2. 9270.8148 alaistair.chan@moodys.com Editor Reid Kanaley 1. 610.235.5273 reid.kanaley@moodys.com CAPITAL MARKETS RESEARCH 2 MAY 3, 2018 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. M&A Both Enhances and Diminishes Corporate Credit Quality Mergers, acquisitions and divestitures wield considerable influence over corporate credit quality, where M&A’s impact on a single company’s credit standing can vary over time. For example, a credit rating may be downgraded early on because of the substantial increase in leverage brought on by a debt-financed acquisition. However, over time, the acquisition may help to boost profitability, liquidity and the company’s market value by enough to eventually prompt a credit rating upgrade. If the subsequent upgrade is partly ascribed to the success of an earlier merger, then the upgrade will be linked to M&A. To the contrary, if a once promising merger or acquisition instead flops and thereby triggers a credit rating downgrade, the downgrade will be viewed as being the offshoot of M&A. M&A Tends to Produce More Downgrades than Upgrades for Investment-Grade Data on the influence of M&A on U.S. corporate credit rating revisions has been compiled since early 1986. For a span covering January 1986 through March 2018, M&A figured in 806 upgrades and 1,141 downgrades of U.S. investment-grade issuers and 1,500 upgrades and 1,194 downgrades of speculative-grade issuers. Thus, over the past 32 years, M&A has been cited in more downgrades than upgrades for investment-grade companies and in more upgrades than downgrades for high yield. Often, when a financially stronger company acquires a financially weaker entity, the stronger company’s credit rating is more likely to be downgraded while the weaker company’s