WEEKLY MARKET OUTLOOK JANUARY 15, 2015 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. Spreads Anticipate More Downgrades, Fewer Upgrades Credit Markets Review and Outlook by John Lonski Spreads Anticipate More Downgrades, Fewer Upgrades. » FULL STORY PAGE 2 Topic of the Week by Ben Garber Potential Rating Changes Are Largely Driven by Mergers. » FULL STORY PAGE 7 The Week Ahead We preview economic reports and forecasts from the US, UK/Europe, and Asia/Pacific regions. » FULL STORY PAGE 11 The Long View Check our chart here for forecast summaries of key credit market metrics. Full updated stories: “January's issuance of investment grade (IG) corporate bonds has fared much better than high yield offerings because of the radical difference between the yearly drop of -60 bp for the IG yield compared to the +120 bp jump of the speculative grade yield,” begin on page 19. » FULL STORY PAGE 19 Ratings Round-Up by Njundu Sanneh Very Few Changes. » FULL STORY PAGE 22 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 23 Moody’s Capital Markets Research recent publications Links to commentaries on: Anadarko, Honda, Apache, bank risk, sovereign, Noble, Starwood, oil RIG, issuance, iStar, WM. » FULL STORY PAGE 27 Credit Spreads Investment Grade: Year-end 2015 spread to be under its recent 135 bp. High Yield: Recent spread of 537 bp could dip to 475 bp by year-end 2015. Defaults US HY default rate: November 2014, 1.9%; 2.1% average in 1H/2015 Issuance IG: In 2013, US$ investment grade bond issuance dipped by -1.5% to $1.119 trillion. In 2014, it rose by 0.7% to $1.127 trillion. HY: 2013 US$ high yield bond issuance advanced by 11% to a record $431 billion; in 2014 it dropped by -2 .7% to $419 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: Zach Witton 44 (20) 7772-1678 Zach.witton@moodys.com Moody's Analytics/Asia-Pacific: Glenn Levine 1.612.9270.8159 Glenn.levine@moodys.com Katrina Ell 1.612.9270.8144 Katrina.ell@moodys.com Editor Dana Gordon 1.212.553.0398 dana.gordon@moodys.com CAPITAL MARKETS RESEARCH 2 JANUARY 15, 2015 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. Spreads Anticipate More Downgrades, Fewer Upgrades Though not as severe as the plunge by oil prices, the recent drop by industrial metals prices rattled the markets. Global business activity shows a much stronger positive correlation with changes in base metals prices compared to changes in oil prices. The latest price slump by base metals stems from subpar expenditures growth for the world economy. The severity of the recent slowdown by global demand can be inferred from the pronounced deceleration of China’s imports from 2013’s 7.4% increase to 2014’s 0.4% rise. Not since 1998’s 0.5% annual uptick has the growth of China’s imports fared so poorly in the context of a global upturn. On January 14, 2015, Moody’s industrial metals price index closed at its lowest reading since July 19, 2010. The base metals price index was recently -11.4% under its lagging 52-week average. The base metals price index last moved at least -11% under its lagging 52-week average in May 2012. When the industrial metals price index averaged -10.5% less than its trailing 52-week average during May-July 2012, the averages of 1.63% and 2.74% for the 10- and 30-year Treasury yields were joined by averages of 232 bp for Moody’s long-term Baa industrial company bond yield spread and 647 bp for the US composite high yield bond spread. In addition, the VIX index averaged 19.9 and the mean EDF (expected default frequency) metric for US high yield issuers averaged 4.21%. By comparison, recent spreads of 204 bp for the Baa industrials and 540 bp for high yield were accompanied by 10- and 30-year Treasury yields of 1.86% and 2.47%, respectively, as well as by a VIX index of 21.5