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TRANSCRIPT
FIXED INCOME IQ Corporate Credit Markets
Quarterly Fixed Income Trends
North America
June 2014 │ Issue 2
2
TABLE OF CONTENTS North America
Market Trends……..………………………………………………………..5 Market Indices Corporate Yield Curves CDS to Treasury Correlations
Credit Trends...……………………………………………………………..10 Ratings Trends CDS Market Sentiment CDS Market Outliers Fundamental and Market Implied Default Risk
PD Market Signals and PD Fundamentals Quantitatively Viewed Ratings Outliers
Financial Ratio Trends..…………………………………………………..17
Issuance Trends..…………………………………………………………..19
Please click on the links below to access research on other regions: Latin America Europe Asia-Pacific
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EDITORS’ NOTE
EDITORS’ NOTE: Welcome to the second installment of Fixed Income IQ, produced with fixed income investment managers in mind. Fixed Income IQ is a quarterly publication that provides a view into relevant market trends and indicators crucial to the investment decision making process by leveraging the extensive analytical intelligence and depth of data from S&P Capital IQ.
Overview:
- Overall credit markets improved in Q2 2014
- 10Y BBB curves showed tightening in all major sectors
- Year-over-year z-spreads tightened with the exception of AAA, B, and CCC curves
- Correlations between Treasuries and CDS indices are at yearly lows
- Overall Probabilities of Default have decreased across our Fundamental and Market Signal models
- Issuance on Single A bonds has increased significantly
Jay Bhankharia, CFA Senior Manager Investment Management S&P Capital IQ
AUTHORS:
James Elder Director Investment Management S&P Capital IQ
MARKET TRENDS
5
Relative Performance of Fixed Income Indices
NOTES: • As of June 30th, the
Barclays Investment Grade and High Yield Corporate Aggregates gained 2.66% and 2.41% in total return, respectively, underperforming the S&P 500 which rallied to finish Q2 up 5.5% in total return.
• As strong economic data continued to surface, credit markets continued their gains from the first quarter. Continued flows into fixed income are coming from pensions and overseas demand.
S&P 500®. Source: S&P Capital IQ as of June 30, 2014.
-4%
-2%
0%
2%
4%
6%
S&P U.S. Investment Grade Corporate Bond Index - Total Return % QTD
S&P U.S. High Yield Corporate Bond Index - Total Return % QTD
S&P 500 Index (TR) - Total Return % QTD
Barclays Capital US Aggregate: Corporate Investment Grade - Total Return % QTD
Barclays Capital US Aggregate: Corporate High Yield - Total Return % QTD
6
NOTES: • Industrials yield tightened
the most at the 10 year BBB level with a decrease in yield from 4.5% to 4.1%.
• The smallest drop in yields for Q2 was consumer staples only decreasing from 4.3% to 4.1%.
• Utilities and healthcare had the lowest yields of the cohort.
All spreads and yield curves are proprietary data developed from buy-side indicative quotes. All bonds are USD denominated. Source: S&P Capital IQ as of June 30, 2014.
Cons. Discr. Cons. Staples Energy Financials Healthcare Industrials IT Materials Telecom. Utilities Total % Change -7.06% -5.97% -9.01% -9.43% -6.71% -9.15% -6.34% -8.36% -7.44% -8.35%
10 Year BBB Sector Yields
3.9%
4.1%
4.3%
4.5%
4.7%
4.9%
5.1%
5.3%
Cons. Discr.
Cons. Staples
Energy
Financials
Healthcare
Industrials
IT
Materials
Telecom.
Utilities
7
bps Change YoY 1Y 5Y 10Y 15Y 20Y 30Y AAA -0.38 8.68 16.64 21.63 24.33 25.73 AA -5.55 -4.52 -3.70 -3.22 -2.97 -2.83 A -8.26 -12.50 -16.37 -18.84 -20.20 -20.89
BBB -28.87 -46.46 -62.22 -72.16 -77.60 -80.38 BB -69.59 -79.24 -88.03 -93.60 -96.68 -98.23 B -142.60 -81.45 -27.26 6.75 25.29 34.83
CCC -86.50 -37.37 6.36 33.87 48.89 56.60
All spreads and yield curves are proprietary data developed from buy-side indicative quotes. All bonds are USD denominated. Source: S&P Capital IQ as of June 30, 2014.
NOTES: • Spreads on the long end of
the curve widened for AAA names as markets prepare for higher interest rates as the end of QE approaches.
• Both B and CCC curves also widened on the long end of the curve as opposed to the prior year period.
• Tightening of curve was
greatest in the BB rating category.
Z-Spread Ratings Term Structure (Year-Over-Year)
-2%
0%
2%
4%
6%
8%
10%
12%
1M 3M 6M 9M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y
11Y
12Y
13Y
14Y
15Y
16Y
17Y
18Y
19Y
20Y
21Y
22Y
23Y
24Y
25Y
26Y
27Y
28Y
29Y
30Y
AAA14 Q2AAA13 Q2AA14 Q2AA13 Q2A 14 Q2A 13 Q2BBB14 Q2BBB13 Q2BB14 Q2BB13 Q2B14 Q2B13 Q2CCC14 Q2CCC13 Q2
8
NOTES: • This chart shows the rolling
60D correlation between CDX NA IG and CDX NA HY 5 Year spreads to 5 Year Treasuries. Overall correlations between credit and interest rates have been very small during the second quarter.
• Investment Grade is typically more sensitive to interest rates than High Yield. Surprisingly, we see that the IG to Treasuries 60D correlations have been negative over most of the year as rates have been range bound, while IG credit continues to tighten.
• High Yield has exhibited a high correlation early in the year to interest rates which has slowly declined as HY spreads remain stable. Both IG and HY have shown minimal correlations to Treasuries over the last two months.
CDS to 5Y Treasury Correlations
Source: S&P Capital IQ as of June 30, 2014.
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
Correlation of CDX NA IG to 5Y TreasuriesCorrelation of CDX NA HY to 5Y Treasuries
CREDIT TRENDS
10
NOTES: • Q2 2014 saw more
upgrades than downgrades, continuing the trend from Q1 and at a faster pace (149 upgrades in Q2 vs. 90 upgrades in Q1). We see that more Ratings were on Negative Outlook than Positive Outlook (10% and 8%, respectively), while the majority of issuers remained Stable. This remains consistent with last quarter.
S&P Ratings Services View: • Credit conditions in North
America remain generally favorable.
• Global risks linger,
particularly from normalization of Fed policy, China’s financial sector vulnerabilities, and geopolitical issues.
Constituents include all rated companies with a Local Currency Long Term Rating and S&P Capital IQ sector classification in the United States and Canada. Source: S&P Capital IQ as of June 30, 2014 and Global Credit Portal ‘Credit Conditions: North America’s Credit Conditions Remain Favorable But Not Without Risks’ published on June 9, 2014.
S&P Ratings Trends
0
20
40
60
80
100
120
140
160
2014 Q1 2014 Q2
Rating Actions Upgrades Downgrades Developing
0% Negative 10%
Positive 8%
Stable 79%
Watch Dev 0%
Watch Neg 2%
Watch Pos 1%
Outlook/Credit Watch
0
200
400
600
800Rating Distribution
11
The Market Derived Signal (MDS) is a quantitative analytic that uses Credit Default Swaps (CDS) to facilitate the interpretation of how the CDS markets generally view the credit quality of well-known firms and sovereigns. It aims to capture the market’s sentiment regarding an entity’s perceived credit risk. One of the objectives of the MDS is to identify where market sentiment may differ from the issuer credit rating. CDS spreads are used to compute the difference between an entity’s actual spread and expected spread for a given rating. Universe is all companies that have S&P Long-Term Local Rating, primary headquarters in US or Canada, and an S&P Capital IQ sector classification. Source: S&P Capital IQ as of June 30, 2014.
NOTES: • The CDS market sentiment
for telecom moved closer to parity with Ratings this past quarter from a one notch difference over the last two quarters.
• As credit conditions continue to improve, the CDS market has continued to view both the industrials and utilities sectors more positively relative to their current Ratings.
S&P Rating
CDS MDS Value
AAA aaa 23 AA+ aa+ 22 AA aa 21 AA- aa- 20 A+ a+ 19 A a 18 A- a- 17 BBB+ bbb+ 16 BBB bbb 15 BBB- bbb- 14 BB+ bb+ 13 BB bb 12 BB- bb- 11 B+ b+ 10 B b 9 B- b- 8 CCC+ ccc+ 7 CCC ccc 6 CCC- ccc- 5 CC cc 4 C c 3 D d 2 SD sd 1 NR nr 0
CDS Market Sentiment By Sector
Cons. Discr. Cons. Staples Energy Financials Healthcare Industrials IT Materials Telecom. Utilities
CDS MDS
S&P Rating
CDS MDS
S&P Rating
CDS MDS
S&P Rating
CDS MDS
S&P Rating
CDS MDS
S&P Rating
CDS MDS
S&P Rating
CDS MDS
S&P Rating
CDS MDS
S&P Rating
CDS MDS
S&P Rating
CDS MDS
S&P Rating
13 Q3 13.0 13.0 15.3 15.6 15.4 15.4 15.1 15.5 16.2 15.9 15.5 14.7 14.0 14.6 14.1 14.4 14.0 14.1 15.2 14.5 13 Q4 13.1 13.0 15.1 15.5 15.2 15.3 15.2 15.5 16.0 15.8 15.6 14.8 14.2 14.7 14.2 14.5 13.3 14.0 15.1 14.6 14 Q1 13.0 13.0 15.1 15.6 15.3 15.3 15.5 15.8 16.4 16.3 15.6 14.8 14.5 14.8 14.6 14.5 13.2 14.0 15.2 14.6 14 Q2 12.9 12.9 15.0 15.4 15.2 15.1 15.5 15.8 16.0 16.3 15.9 14.9 14.5 15.0 14.6 14.5 13.7 14.0 16.2 15.2
VALUE CONVERSION:
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
Not
ch D
iffer
ence
CDS Market Sentiment
13 Q3
13 Q4
14 Q1
14 Q2
12
NOTES: • We have highlighted
companies with some of the biggest divergences between their S&P Rating and their CDS Market Derived Signal in red. This provides us with a list of firms whose market sentiment is significantly different than its Rating. As shown by the blue circles, the vast majority of firms were scored +/- 4 notches from their Credit Rating.
• We notice the CDS market has more bullish outliers than bearish especially in the lower S&P investment grade area.
Company CDS MDS S&P Rating
CDS MDS Positive Divergence
Textron Financial Corporation aa+ BBB-
Burlington Northern Santa Fe, LLC aaa BBB+
American Electric Power Co., Inc. aa BBB Cinergy Corp. aa+ BBB+
Duke Energy Carolinas, LLC aa+ BBB+
Freeport-McMoRan Corporation aa BBB Norfolk Southern Corporation aa+ BBB+
Northrop Grumman Corporation aa+ BBB+ Progress Energy Inc. aa+ BBB+ CDS MDS Negative Divergence
Allergan Inc. bbb- A+ Avon Products Inc. b BBB-
General Electric Capital Corporation a- AA+ AutoNation Inc. b- BBB- New York Life Insurance Co. bbb+ AA+ Safeway Inc. B BBB
MBIA Inc. b- A-
Assured Guaranty Municipal Holdings Inc. b- A
Assured Guaranty Corp. b AA Assured Guaranty Municipal Corp b AA
CDS Market Outliers
The Market Derived Signal (MDS) is a quantitative analytic that uses Credit Default Swaps (CDS) to facilitate the interpretation of how the CDS markets generally view the credit quality of well-known firms and sovereigns. It aims to capture the market’s sentiment regarding an entity’s perceived credit risk. One of the objectives of the MDS is to identify where market sentiment may differ from the issuer credit rating. CDS spreads are used to compute the difference between an entity’s actual spread and expected spread for a given rating. Universe is all companies that have S&P Long-Term Local Rating, primary headquarters in US or Canada, and an S&P Capital IQ sector classification. Source: S&P Capital IQ as of June 30, 2014.
CD
S M
DS
Scor
e
Rating
aaa
a
bbb
bb
b
ccc
c
d
aa
D/NR C CCC B BB BBB A AA AAA
13
S&P Capital IQ’s proprietary probability of default (PD) model, ‘Market Signals’, is a unique analytical model which provides daily changing, 1-year forward looking PDs of publicly listed companies based on a cutting-edge econometric framework. Universe is all companies that have S&P Long-Term Local Rating, primary headquarters in US or Canada, and an S&P Capital IQ sector classification. Source: S&P Capital IQ as of June 30, 2014.
NOTES: • Overall median PDs
decreased by 47% during the second quarter, driven again by a strong economic rebound. Telecom had higher overall PD levels due to smaller cap names in the sector with significantly higher risk exposure.
• Over the last quarter, PD
Market Signals viewed consumer staples and energy as having the biggest credit improvement, decreasing its probability of default by 67% and 64%, respectively. Consumer discretionary had the smallest improvement, decreasing its PD by 14%.
Equity Market Sentiment Implied Default Risk By Sector
Cons. Discr. Cons.
Staples Energy Financials Healthcare Industrials IT Materials Telecom. Utilities Grand Total 3/31/2014 0.16% 0.03% 0.07% 0.05% 0.06% 0.06% 0.03% 0.11% 0.42% 0.01% 0.06% 6/30/2014 0.14% 0.01% 0.03% 0.04% 0.04% 0.03% 0.02% 0.07% 0.22% 0.01% 0.03%
% Change -14.29% -66.67% -64.29% -28.57% -27.59% -41.59% -34.62% -36.94% -48.82% -15.79% -46.77%
0.0%
0.1%
1.0%
10.0%
100.0%
PD Market Signals (Median)
Cons. Discr.
Cons. Staples
Energy
Healthcare
Industrials
IT
Materials
Telecom.
Utilities
Grand Total
Financials
14
S&P Capital IQ’s proprietary probability of default (PD) model, ‘PD Model Fundamentals’, provides an innovative approach to assessing potential default that separates credit risk into two components—financial risk and business risk. The PDs are applicable for any public or private company and provide a short- to mid-term view of credit risk. They are based purely on fundamental data—financial ratios and macro factors – and are updated when new financials are released or there is some change in the macro factors. Universe is all companies that have S&P Long-Term Local Rating, primary headquarters in US or Canada, and an S&P Capital IQ sector classification. Source: S&P Capital IQ as of June 30, 2014.
NOTES: • PD levels trended
downward over the past year, fueled by a decreased risk in all sectors except materials.
• PD Fundamentals showed the largest year-over-year credit improvement in the healthcare sector.
• The companies with the highest risk levels in the materials sector are Momentive Specialty Chemicals Inc. and WireCo WorldGroup Inc. respectively.
Fundamental Implied Default Risk By Sector
Cons. Discr. Cons. Staples Energy Financials Healthcare Industrials IT Materials Telecom. Utilities Grand Total 13 Q2 1.50% 0.56% 0.96% 0.18% 0.50% 1.21% 0.61% 0.87% 1.20% 0.75% 0.79% 14 Q2 1.25% 0.52% 0.74% 0.12% 0.32% 0.92% 0.48% 0.88% 0.77% 0.71% 0.68% % Change -16.98% -6.79% -23.01% -32.43% -36.16% -24.40% -21.73% 1.27% -35.64% -4.50% -14.28%
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
PD Fundamentals (Median)
15
NOTES: • We have highlighted
companies with some of the biggest divergences between their S&P Rating and their CreditModel (CM) Score, which is purely quantitative, in red. This provides us with a list of firms with fundamental attributes that may be a positive or negative outlier. As shown by the blue circles, the vast majority of firms were scored +/- 3 notches from their Credit Rating.
• Companies that are new on the list this quarter include Time Inc., The Babcock & Wilcox Company, Delta Air Lines Inc., Aimia Inc., AutoZone, Inc., and VeriSign, Inc.
Company CMScore S&P Rating
CreditModel Positive Divergence
The ADT Corporation a+ BB- Delta Air Lines Inc. A BB- GenOn Americas Generation LLC bbb+ B
Star Gas Partners, L.P. a- B+ Keurig Green Mountain, Inc. A BB The Babcock & Wilcox Company a+ BB+ Time Inc. A BB CreditModel Negative Divergence
Aimia Inc. b BBB- AutoZone, Inc. b+ BBB
VeriSign, Inc. b- BB+ WGL Holdings Inc. bbb- A+
Amazon.com Inc. bbb- AA-
EnerCare Inc. b+ BBB+
EnerCare Solutions Inc. b+ BBB+
Imperial Oil Ltd. a- AAA
Mississippi Power Co. bb A
Questar Pipeline Company bb A
The model output is a stable credit score, which is expressed in the well-known nomenclature of S&P Ratings but in lower case letters, such as bbb, in order to indicate that this score is the outcome of a purely quantitative model. CreditModel is trained on ratings, rather than on default data, which helps CreditModel generate a long-term stable view of credit risk that is aligned with a ratings process. Source: S&P Capital IQ as of June 30, 2014.
Quantitatively Viewed Ratings Outliers
CM
Sco
re
Rating
aaa
a
bbb
bb
b
ccc
c
d
aa
D/NR C CCC B BB BBB A AA AAA
FINANCIAL RATIO TRENDS
17
NOTES: • Debt/Capital levels
remained steady within North America.
• EBITDA/Interest Coverage levels have ticked up for both high yield and investment grade issuers.
• CFO/Debt levels continued to decline for investment grade companies as they continue to issue debt at low interest rates, while high yield had a slight increase in this ratio.
Universe is all non-financial companies that have S&P Long-Term Local Rating, primary headquarters in US or Canada, and an S&P Capital IQ sector classification. Source: S&P Capital IQ as of June 30, 2014.
Financial Ratio Trends
0
10
20
30
40
50
60
HY IG
Debt/Total Capital (%)
2010 Q1
2011 Q1
2012 Q1
2013 Q1
2014 Q1
0
5
10
15
20
2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1
EBITDA/Interest Coverage HY IG
00.020.040.060.08
0.10.120.14
2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1
Cash Flow From Ops/Debt HY IG
ISSUANCE TRENDS
19
Issuance Trends By Rating Category
NOTES: • There was a large
increase in single A issuance this quarter relative to Q2 2013.
• Some of the big issuers this quarter were Apple and Oracle as these companies look to take advantage of low interest rates.
Universe incudes all corporate debt issuance that is denominated in USD or CAD currencies. Source: S&P Capital IQ as of June 30, 2014.
$0
$50,000
$100,000
$150,000
$200,000
$250,000
AAA AA A BBB BB B CCC CC
($($
MM
))
13 Q2
14 Q2
20
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21
Disclosures
S&P Capital IQ is analytically and editorially independent from S&P Ratings Services. CreditModel and PD Market Signals (and various Market Derived Signals) are analytical tools but are not credit ratings. Neither CreditModel, PD Market Signals nor credit ratings should be considered to be investment advice. A credit rating from Standard & Poor's Ratings Services is an opinion of the rated organization's creditworthiness and involves both qualitative and quantitative characteristics. CreditModel and PD Scores are based on but differ significantly from Standard & Poor's Ratings Services criteria and do not include a qualitative assessment or opinion. CreditModel and PD Market Signal scores are represented by lowercase nomenclature to differentiate them from S&P Ratings Services credit ratings.
Charts, graphs and screenshots are provided for illustrative purposes only.
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