US Domestic Strength Guards Against Default Surge

WEEKLY MARKET OUTLOOK AUGUST 20, 2015 CAPITAL MARKETS RESEARCH US Domestic Strength Guards Against Default Surge Credit Markets Review and Outlook by Benjamin Garber US Domestic Strength Guards Against Default Surge. » 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 Check our chart here for forecast summaries of key credit market metrics. Full updated stories, “Shareholder friendly actions and limp sales keep high grade spreads elevated compared to past recoveries” begin on page 14. » FULL STORY PAGE 14 Ratings Round-Up by Njundu Sanneh Energy Sector Woes Fuel Rating Downgrades. » 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: Bond outflow, China, Australia, STI, CMA, Linn, Brazil, PRU, dollar, bank risk, Unilever, ExxonMobil, CAT, Chevron. » FULL STORY PAGE 23 Credit Spreads Investment Grade: Year-end 2015 spread to resemble its recent 164 bp. High Yield: Recent spread of 573 bp should approximate 520 bp by year-end 2015. Defaults US HY default rate: July 2015, 2.2%; Moody’s Credit Policy Group forecasts 3.0% in first seven months 2016 Issuance For 2015, US$ IG bond offerings may grow by 23% to $1.394 trillion, while US$ HY bond issuance sinks by -4% to $403 billion. In 2014, US$ IG bond issuance rose by 0.9% to $1.129 trillion, while US$ HY bond issuance dropped by -2.3% to $421 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 1.420 ( 221) 666-384 Tomas.holinka@moodys.com Moody's Analytics/Asia-Pacific: Alaistair Chan 1.612.9270.8148 Alaistair.Chan@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 Benjamin Garber, Asst-Dir Economist, Moody’s Capital Markets Research, Inc. US Domestic Strength Guards Against Default Surge The global corporate default rate is likely to continue to rise into next year, with distressed firms in the energy and mining sector absorbing much of the pain. Yet the strengths of the US economy stand as a bulwark against a broader based break-out in the number of business failures, as the default rate can avoid topping 4% for the sixth straight year in 2016. Solid domestic demand and persistent profit growth among most industries can keep both the US economy and credit cycle in expansion mode The default rate is creeping upward Moody’s Investors Service placed the global high yield default rate at 2.4% in July, the highest in 15 months. Though this rate is projected to rise mildly through the first half of next year, Moody’s projects it will remain comfortably under the 25-year average of 4.6%. Yet the most recent count and cash volume of defaults are on a disconcerting uptrend, which has kept investors on edge. This year is on an annualized pace for 77 defaults on $86 billion in debt, well ahead of last year’s count of 53 defaults on $69 billion in debt (Figure 1). But though such totals are climbing, the pace of increase does not yet mirror previous credit busts. The last two years when the default rate surpassed 5% en route to double-digit percentage peaks, 1999 and 2009, the annual count of defaults rose by 106% and 158%, respectively. $0$50$100$150$200$250$300$350050100150200250300Figure 1: Global Corporate Default Count & VolumeAnnual Default Count* ( L )Annual Default Volume* in $billions ( R )*2015 values are projected, source: Moody's Investors Service Looking at the prior two corporate credit contractions, the steady climb of the default rate from 1997 to 2002 contrasts with the rapid climb seen in 2008 and 2009. The trough to peak rise for the default rate in the more distant period took 62 months, growing from 1.3% in April 1997 to the peak of 11.1% in May 2002. The