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In This List

Global Trade at a Crossroads: What U.S.-China Trade Tensions Mean for Cross-Border M&A

S&P Global Ratings

COP24 Special Edition Shining A Light On Climate Finance

S&P Global Platts

Turning Tides: The Future of Fuel Oil After IMO 2020

S&P Global Ratings

S&P Global Ratings' Global Outlook 2019

S&P Global Platts

Energy: What to Watch in 2019


Global Trade at a Crossroads: What U.S.-China Trade Tensions Mean for Cross-Border M&A

While tit-for-tat tariffs risk an all-out trade war between the U.S. and China (see footnote 1), trade "skirmishes" have sprung up in foreign investment. Several cross-border mergers and acquisitions (M&As) involving Chinese companies acquiring U.S. entities have been blocked or terminated, purportedly for national security reasons (the same rationale behind some recent tariff actions). Meanwhile, the slow pace of approval of U.S. chipmaker Qualcomm's proposed takeover of NXP Semiconductors N.V. by Chinese regulators is likely a result of trade tensions between the two countries.

And the potential exists for these tensions to ratchet up--discussions are ongoing within the U.S. administration and Congress to increase regulatory scrutiny of cross-border M&A, especially if related to acquisitions of U.S. critical technologies by Chinese buyers. In addition, President Trump has decided to impose investment restrictions and enhanced export controls on Chinese companies relating to the acquisition of industrially significant technology. S&P Global Ratings expects these measures to be forthcoming by June 30, 2018, and to be implemented shortly thereafter.

Overview

  • Some recent M&As between the U.S. and China have been stopped at the border due to national security concerns.
  • Tariffs may grab the headlines, but restrictions on foreign investment and cross-border deals could have a more direct and immediate credit impact.
  • Although Chinese buyers are not behind the majority of U.S. cross-border M&A, they have had the highest number of transactions come under federal scrutiny in recent years.
  • While there are concerns that global trade tensions would slow cross-border M&A, the U.S. dealmaking landscape has improved.

What it Means for Credit Risk

From a business strategy perspective, the potential risks of tightened U.S. regulation on M&A are many; for example, it would temper companies' growth prospects and limit their preferred strategies. It could also lead to a tit-for-tat whereby other countries scrutinize ever more U.S. acquisitions abroad in retaliation. And the U.S. is particularly vulnerable in this area since it is both the largest destination and source of foreign direct investment (FDI) globally. (According to the Organisation for Economic Co-operation and Development [OECD], U.S. outward FDI--worth more than $362 billion in 2017--accounted for over 25% of the global total and far exceeded foreign investments from other countries.)

But from a credit perspective, muted cross-border M&A would lessen potential risk that comes from increased debt issuance, higher leverage, and other M&A-related challenges (e.g. execution risk).


Table 1 - Selected M&A Reviewed For National Security Risk

Deal Rating Impact
Broadcom's acquisition of Qualcomm was blocked in March 2018. No rating impact. Broadcom announced a $12 billion share-repurchase authorization recently following the blocked deal. We believe Broadcom favors M&A over share repurchases. However, the buyback program is a means to provide the company the flexibility to enhance shareholder returns.
Ant Financial, a subsidiary of Alibaba Group, planned to acquire MoneyGram. The plan was terminated in January 2018 because of failure to receive CFIUS approval. We affirmed our rating on Moneygram and removed it from CreditWatch positive, where we had placed it following the proposed acquisition announcement by 'A+' rated Alibaba Group.
Chinese investment company Canyon-Bridge's acquisition of Lattice Semiconductor was blocked in September 2017. We affirmed our rating on Lattice Semiconductor and removed it from CreditWatch with developing implications, where we had placed it after the proposed acquisition announcement.
ON Semiconductor offered to acquire Fairchild Semiconductor in November 2015. CFIUS did not block the deal. After the acquisition was completed, we lowered the rating on ON Semiconductor, and lowered the Fairchild Semiconductor rating to the same level as the rating on ON Semiconductor.
Broadcom's acquisition of Qualcomm was blocked in March 2018. No rating impact. Broadcom announced a $12 billion share-repurchase authorization recently following the blocked deal. We believe Broadcom favors M&A over share repurchases. However, the buyback program is a means to provide the company the flexibility to enhance shareholder returns.

Source: S&P Global Ratings


Acquisitions are a source of U.S.-China trade frictions

While news headlines mainly focus on the tariffs the U.S. and China have threatened to levy against one another, we believe this is just one aspect of the trade dispute. The primary sources of U.S.-China trade friction, in our view, are China's practices related to intellectual property transfer, in which China forces delivery of proprietary technology by the U.S. and other foreign business partners; and its limiting foreign owners to minority stakes in joint ventures to allow them to operate in China. There are also concerns in the U.S. administration that China's acquisitions of U.S. companies threatens U.S. national security.

Meanwhile, Chinese acquisitions of U.S. companies represent a small proportion of overall U.S. deals. In 2016, a watershed year for Chinese acquisitions, announced M&A with Chinese buyers were $50 billion (see chart 1), but even then represented less than 4% of the more than $1.3 trillion in U.S. M&A that year--and a number of these deals were eventually scuttled due in part to national security issues.

In 2018, even though overall M&A activity is running above last year's pace, transactions with Chinese buyers have slowed to a trickle, and their U.S. targets have become less diverse--more focused on technology, health care, consumer discretionary, and capital goods than in previous years (see chart 2). Similarly, U.S. acquisitions of Chinese companies, which had been far more active a decade ago, has fallen off sharply.

Chart 1

Chart+-+China+and+U.S.+M%26A+Deals

Chart 2

Chart+-+Chinese+Acquisitions+by+Sector

The Impact Of Increased Scrutiny

Although Chinese M&As in the U.S. are not relatively large, they have seen increased scrutiny from the Committee on Foreign Investment in the United States (CFIUS)--the interagency group that reviews foreign acquisitions of U.S. companies for national security risk (see footnote 2). From 2013-2015, the highest number of transactions under CFIUS' review have had buyers from China, followed by Canada, the U.K., and Japan (see chart 3). While some have raised national security concerns about Chinese interests in acquiring critical U.S. technologies (see footnote 3), other countries such as the U.K. and Canada are the largest foreign acquirers of U.S. critical technology companies (see chart 4).

Chart 3

 

Chart+-+CFIUS+Reviews+by+Foreign+Buyer+%282013-2015%29

Chart 4

 

Chart+-+Home+Country+of+Foreign+Acquirer+of+U.S.+Critical+Technology+%282015%29

M&A pickup will drive credit risk higher

There are a myriad of proposals for greater CFIUS scrutiny (see footnote 4), such as shifting to mandatory notification for certain transactions, introducing a "country of special concern" (a country that poses a significant national security threat), and expanding its purview to encompass U.S. technological and industry leadership. These measures, if adopted, could deter dealmaking, and not just from Chinese buyers. CFIUS reviews are often associated with a drop in stock prices and negative publicity, among other outcomes.

The dealmaking landscape in the U.S. has benefited from continued accommodative financing conditions and the elimination of uncertainties related to U.S. tax reform (which lowered effective tax rates, and increased cash flow generation and access to previously "trapped" cash in foreign subsidiaries).

U.S. M&A has picked up, sparked by the return of megadeals and increased leveraged buyouts. Announced transactions in the first half should top $600 billion, representing above 400 deals--up about 40% by deal value over last year but lower by deal count (see chart 5). Health care, technology, and energy were the most active sectors (see chart 6). The factors driving transactions continue to be low organic growth, disruptive technologies, and scale efficiencies. We expect the busy M&A landscape to continue in the second half of 2018, and we see the approval of the AT&T Inc. and Time Warner Inc. merger spurring more megadeals in the cable and telecom sectors, and possibly elsewhere.

M&A has been a key rating mover for the past few years, and we expect it to remain an important rating risk going forward.

Chart 5

Chart+-+U.S.+Corporate+M%26A--Deal+Value+and+Count+%282018+1H%29

Chart 6

Chart+-+U.S.+Corporate+M%26A%3A+Deal+Value+by+Sector+%282018+1H%29



COP24 Special Edition Shining A Light On Climate Finance

Highlights

− Green loans are evolving, with the Climate Bond Initiative forecasting nearly $1 trillion in green bond issuance by 2020.

− Despite the uptick in green bond and loan issuance, the market still remains relatively small, especially compared to the universe of assets comprising CLO 2.0 transactions.

− In our view, a green CLO market has large growth potential, boosted by regulatory initiatives and emerging interest from both issuers and investors in 2018.

− We built a hypothetical rating scenario for a green CLO to compare and contrast the underlying portfolio and structure with a typical European CLO 2.0 transaction.

− Our hypothetical green CLO analysis showed that green loans may have different fundamental characteristics to corporate loans, such as lower asset yields, higher credit quality, and higher recovery rates assumptions.

The global collateralized loan obligation (CLO) market has experienced a rebirth (2010 in the U.S. and 2013 in Europe). New issuance continues to increase due to investor familiarity with the product, as well as low historical default rates. While a market for green assets, such as green loans and bonds has been established for a while, although still of a relative size, a sustainable securitization market is still in its infancy. Considering the challenge in financing the amounts, S&P Global Ratings expects green CLOs to play a role in increasing the private sector presence in the sustainable finance market.

Following the Paris Agreement that came into force in November 2016, 184 parties have ratified the action plan to limit global warming. For this purpose, developed nations have pledged to provide $100 billion (about €87 billion) annually until 2025. As part of this deal the EU has committed to decrease carbon emissions by 40% by 2030. In March 2018 the European Commission (EC) proposed the creation of environmental, social, and corporate governance 'taxonomy', regulating sustainable finance product disclosures, as well as introducing the 'green supporting factor' in the EU prudential rules for banks and insurance companies.

Read the Full Report
Download


Turning Tides: The Future of Fuel Oil After IMO 2020

This report provides a thorough introduction to the IMO's sulfur cap on marine fuel, its impact on markets and what to expect from the new regulatory framework. Aiming to provide market-leading insight and analysis, S&P Global Platts outlines the regulation's impact on refiners and shipowners, analyzes how markets will adapt, and offers birds-eye view on how it could affect the environment.

The IMO’s lower sulfur cap is set to take away the bulk of marine fuel oil demand from the start of next year. Most shipowners and operators will switch to burning new low-sulfur bunker blends, meaning an almost overnight shift of 3 million b/d of demand.

The change poses a tough challenge to fuel oil producers, and prices are  expected to drop dramatically towards the end of 2019. Ships fitted with scrubbers to clean their emissions on board are set to benefit from this drop in their fuel bills, but only a small fraction of the global fleet are expected to invest in the systems by 2020.

LNG producers can expect to see some new demand for their product as an alternative marine fuel. But the IMO’s greenhouse gas strategy may hold back interest in LNG bunkering beyond the 2020s.

The global refining industry is investing in new units aimed at reducing fuel oil output and maximizing middle distillate production. Russian fuel oil exports in particular have fallen dramatically over the past two years.

But new sources of fuel oil demand can be expected to emerge in the coming years, partly offsetting the decline in marine demand. Saudi Arabia has already increased fuel oil consumption for power generation and its water desalinization plants, and Bangladesh is expected to become another key consumer.

2020 will not be the end of the road for fuel oil. A century after its first move to widespread adoption in shipping, fuel oil still has a significant role to play in the oil industry.

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Download


S&P Global Ratings' Global Outlook 2019

 A deep dive into S&P Global Ratings’ insights on the credit outlook for 2019 and what are the risks and vulnerabilities to look out for.

Access all the Global Outlook
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Energy: What to Watch in 2019

Highlights

S&P Global Platts Analytics Issues Two Special Reports

Pricing across the global energy markets will face headwinds in 2019, with a weaker and more uncertain macroeconomic framework deflating price formation in general, according to two special reports just issued by S&P Global Platts Analytics. Such headwinds will require the industry and portfolio managers to take a big-picture approach.

See the Executive Summary of the S&P Global Platts Analytics special report 2018 Review and 2019 here. Access the full S&P Global Platts Analytics Top Factors to Look Out For in 2019 for Energy here.

"One of the key lessons learned in 2018, painfully by some, is that market sentiment can shift violently without much change in fundamentals, requiring a steady, holistic perspective," said Chris Midgley, global head of analytics, S&P Global Platts. "It is clear that this volatility will remain a feature across the energy markets in 2019, particularly as IMO 2020 nears."

Particularly blustery headwinds are in store for markets where prices finished 2018 at elevated levels, and well above costs, such as North American natural gas and global coal. However, if the supply side can adjust to the reality of slowing demand growth, energy prices can find support. For natural gas liquids (NGLs), the ongoing logistical constraints at the US Gulf Coast are likely to manifest on continued price volatility, particularly for ethane and liquid petroleum gas (LPG), over the next year despite strong global demand.

LPG, such as propane and butane and used in transportation fuel, refrigeration, heating and cooking, is rapidly facing US export capacity constraints, especially along the US Gulf Coast. For LPG feedstock propylene, there is clear potential for high volatility globally over the next 12-18 months.

Analysts at S&P Global Platts see weakening prices of Henry Hub natural gas. The slowdown in US demand growth will exceed that of supply. But if winter temperatures prove to be colder than normal, near-term prices will need to move higher to bring on enough supply to replenish depleted storage levels.

For global liquefied natural gas (LNG), it will be end-user-backed LNG demand that faces particular struggle to cope with the speed and force of new supply entering the market in 2019. Non price-responsive demand in Asia will be easily met and JKM spot physical prices (reflecting LNG as delivered into Japan, Korea and China) will sag next year.

Access the full S&P Global Platts Analytics Top Factors to Look Out For in 2019 for Energy here. Among the 22 key take-away themes:

  • NGL supply growth will strain the North American energy system
  • Saudi Arabia will need to be nimble to balance 2019 oil supply
  • US oil supply limited by pipelines
  • Oil demand slowing: trade war, industrial slump
  • 2019 LNG supply additions largest since the Qatari mega-trains
  • US gas supply growth to exceed demand growth even with LNG exports
  • Global solar growth slowing
  • Shipping disruption looming - IMO 2020
  • New Russian gas pipeline advantage over Ukraine
  • US coal demand to decline again in 2019
  • Growth in new refineries and complex capacity likely to weigh on refinery margins especially in Asia

Year 2019 will certainly be one of transition for crude and refined oil products as it will lead into 2020 when roughly three million barrels per day of high-sulfur fuel oil must be “destroyed” (including enhanced usage of HSFO in power generation) due to the International Marine Organization (IMO) mandate of eco-friendly shipping fuels in use at sea. A similar amount of middle distillate/low sulfur fuel must be created (by refinery changes and by running more crude oil. The increase in refinery capacity between now and 2020 is large, but mostly needed to cover normal demand growth. Expect prices of light sweet crudes to be bid up in 4Q19.