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U.S. Corporate Debt Market: The State Of Play In 2019

By dollar amount, outstanding U.S. corporate debt instruments rated by S&P Global Ratings grew by 3% in 2018—to $9.3 trillion as of Jan. 1, 2019. Nearly 72% of this debt is investment grade ('BBB-' or higher).

A greater share of this debt is from nonfinancial companies ($7.1 trillion) than from financial services issuers ($2.2 trillion). The 'BBB' category is the largest by debt amount, with nearly $3.8 trillion, 77% of which is from nonfinancial companies.

The importance of scale has been a driver of larger bank deals announced in 2019, but longtime analyst Nancy Bush is skeptical of the argument. In Episode 53 of Street Talk, the veteran bank analyst discussed recent large bank M&A, the future of equity research, and whether she believes bankers truly have learned lessons from past downturns and are better prepared for an eventual turn in the credit cycle with host Nathan Stovall.

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Navigating the ESG Risk Atlas

S&P Global Ratings has created the ESG Risk Atlas to provide a view of relative environmental, social, and governance (ESG) risks we see around the world. The Atlas, which takes the form of an online infographic, reflects our observations about various ESG risks that different sectors and geographies face.

The Atlas comprises a Sector Risk and a Country Risk component. Sector Risk highlights the relative environmental and social exposures of a comprehensive range of business sectors. Country Risk considers corporate governance standards, regulations, and exposure to natural disasters in various countries or regions.

Leveraging our global reach, we have combined insights from our credit analysts located worldwide and from public assessments (such as those from the UN-supported Principles for Responsible Investment, World Bank, World Health Organization, and Transparency International) to develop our ESG risk profiles for each sector and region.

Key Takeaways:

  • The observations and descriptions in this ESG Risk Atlas are designed to support the application of our ESG Evaluations Analytical Approach. 

  • For more information on our ESG Evaluation Analytical Approach please see here.

  • Please note that the ESG Risk Atlas is not a component of our credit rating methodologies.

Read the full article to engage with our interactive data visualizations, which take you deeper into S&P Global Ratings’ ESG Risk Atlas.


The U.S. – China Trade War: The Global Economic Fallout

S&P Global Ratings' Chief U.S. Economist Beth Ann Bovino, Chief Asia-Pacific Economist Shaun Roache, and Chief EMEA Economist Sylvain Broyer wrote a descriptive analysis of the U.S. – China trade war on May 22, 2019.

The article explains that while the trade war brewing between the U.S. and China will likely have minimal direct macroeconomic effects on either country in the near future, the longer-term consequences for global supply chains, U.S. business sentiment, and consumers' purchasing power are growing. For now, S&P Global Ratings' economists believe the increase in tariffs laid out by U.S. President Donald Trump will boost overall U.S. consumer price inflation modestly—even companies such as Walmart and Macy's are warning that shoppers will almost certainly soon pay higher prices.

Our Climate Week 2019 video analyzed how ESG is accelerating progress for a most sustainable future.


The Future of Banking: Cryptocurrencies Will Need Some Rules to Change the Game

Financial markets are abuzz with questions regarding the nature and viability of digital currencies. As far as rated financial institutions' risk exposure is concerned, however, S&P Global Ratings believes that it is much ado about nothing. In our opinion, in its current version, a cryptocurrency is a speculative instrument, and a collapse in its market value would be just a ripple across the financial services industry, still too small to disturb stability or affect the creditworthiness of banks we rate.

We believe that cryptocurrencies, in their current version, have many characteristics of a speculative instrument. We think that retail investors would be the first to bear the brunt in the event of a collapse in their market value. We expect banks rated by S&P Global Ratings to be largely insulated, given that their direct or indirect exposure to cryptocurrencies appears to remain limited.

Key Takeaways:

  • Cryptocurrencies are digital currencies that use encryption techniques to regulate the generation of units of currency and verify the transfer of funds. They have attracted a significant amount of attention from the market over the past 12 months. Cryptocurrencies are independent from central banks, and the risk of them infiltrating the traditional financial systems, exposing them to a possible bubble burst, is raising eyebrows at regulators.

  • If cryptocurrencies become an asset class, the impact on financial services firms will be more gradual. That is because we believe that their future success will largely depend on the coordinated approach of global regulators and policymakers to regulate and enhance market participants' confidence in these instruments. More importantly, we believe that blockchain technology could be a positive disrupter for various financial value-chains. If widely adopted, blockchain could have a meaningful and lasting impact on the celerity, traceability and cost of financial transactions.

  • In our view, cryptocurrencies do not meet the basic two requisites of a currency: An effective mean of exchange and an effective store of value.


Saudi Aramco IPO is Mission Impossible

Saudi Aramco’s IPO looks doomed to failure as it targets a $2 trillion flotation. Tepid oil prices, the fraught politics of the Middle East and the demonization of fossil fuel producers in response to climate change fears have all made the initial public offering (IPO) a mission impossible.

The kingdom had looked poised to list up to 2% of its shares on its domestic market within weeks. But the long-delayed partial privatization of the world’s largest state-owned oil company now faces another indefinite postponement after the devastating attacks on some of its most important facilities at Abqaiq and Khurais in the Eastern Province of Saudi Arabia.

In this episode of ESG Insider, a podcast from S&P Global, we explore the social audit process and talk to experts about flaws in the system. Social audits are used by consumer goods companies to identify potential human rights abuses, labor violations, and other ESG risks in their supply chains. But critics argue that social audits fall short of their stated objectives.

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U.S. Corporate Cash Reaches $1.9 Trillion But Rising Debt and Tax Reform Pose Risk

Wealth inequality in the U.S. isn't just for individuals; the divide between the haves and the have-nots continues to widen for American companies too. In fact, of the roughly 2,000 U.S. nonfinancial corporate borrowers S&P Global Ratings rates, just 25—or the top 1%—hold more than half of the record $1.9 trillion in cash and short- and long-term liquid investments as of year-end 2016.

This now $1 trillion hoard is nearly twice the $510 billion they held just five years ago. While all corporate cash grew a significant 10% last year, from $1.7 trillion at the end of 2015, the imbalance between cash and debt outstanding that we highlighted last year persists, with total debt rising approximately $350 billion, to $5.8 trillion.

Key Takeaways:

  • Cash and investments held by S&P Global Ratings' universe of rated U.S. nonfinancial corporate issuers rose by 10% to $1.9 trillion in 2016 as the rich get richer: The top 1% control more than half of this cash pile.

  • But rising debt, now at a collective $5.1 trillion for the 99%, is a concern: Adjusted leverage for both investment-grade and speculative-grade issuers is near decade highs and, conversely, the cash-to-debt ratio near decade lows.

  • At the same time, tax reform that facilitates the repatriation of roughly $1.1 trillion in cash held offshore would likely spur a wave of share repurchases, leading to lower cash balances and potentially weaker credit metrics.

  • To be sure, the top 1% have more than enough cash to repay their total debt of about $750 billion. But for the other 99%, credit risk remains. These issuers hold just $875 billion in cash against a whopping $5.1 trillion in debt, putting their cash-to-debt ratio at just 17%—the lowest since the 16% seen in 2008.


The 'BBB' U.S. Bond Market Exceeds $3 Trillion

'BBB' category bonds represent the majority of U.S. investment-grade corporate bond debt, and this category surpasses the entirety of the speculative-grade bond market in size.

Globally, 'BBB' category corporate debt (which includes bonds, notes, term loans, and revolving credit facilities) exceeds $7 trillion, and companies from the U.S. account for more than half of this debt.

Less than a third of 'BBB' category debt in the U.S. is rated 'BBB-', and the utility and high technology sectors account for the largest share of this 'BBB-' debt.

Our video on COP25 detailed the kickoff of the climate talks in Madrid this December and showcased our recent research on climate risk.


When Women Lead, Firms Win

In one of the most comprehensive studies of its kind, a report from the S&P Global Market Intelligence Quantamental Research Team examined the performance of firms that have made female appointments to their CEO and CFO positions. The study found that firms with female CFOs are more profitable and generated excess profits of $1.8T over the study horizon. Firms with female CEOs and CFOs have produced superior stock price performance, compared to the market average. In the 24 months post-appointment, female CEOs saw a 20% increase in stock price momentum and female CFOs saw a 6% increase in profitability and 8% larger stock returns. These results are economically and statistically significant.

Firms with a high gender diversity on their board of directors were more profitable and larger than firms with low gender diversity. Firms with female CEOs and CFOs have a demonstrated culture of Diversity and Inclusion (D&I), evinced by a larger representation of females on the company’s board of directors. Firms with female CEOs have twice the number of female board members, compared to the market average (23% vs 11%).

Analysis of executive biographies suggests that one driver of superior results by females may be that females are held to a higher standard. Overall, the attributes that correlate with success among male executives were found more often in female executives.

This finding refutes the commonly held belief in ‘token’ female executives.


The Future Of Banking: Virtual Banks Chase the Dream in Asia-Pacific

Virtual banking is intensifying the competitive dynamics affecting Asia-Pacific banking.

Newly licensed indigenous virtual banks, global virtual-only banks, and digitized traditional banks are driving competition.

In the long term, virtual banking will likely contribute to the potential for increasing ratings differentiation between banking systems and banks across Asia-Pacific.

Key Takeaways:

  • Virtual banking is fanning the competitive flames in Asia-Pacific banking. New indigenous entrants in many Asia-Pacific countries—including in China, Hong Kong, Taiwan, Australia, Singapore, Japan, Korea, and India—have either already begun operations or are expected to become functional in the next year or so. As more bank regulators across the region develop the infrastructure to manage and supervise virtual banks we expect this trend will continue.

  • To date, this development has not caused any noteworthy changes to our outlooks for banking sector country risks across the region. 

  • Our current base case is that virtual banking may not lead to rating or outlook changes for Asia-Pacific banks over the next two years. Over a longer time horizon, however, as virtual banking strategies take hold and further disrupt the traditional bank sector, the potential for ratings differentiation is greater. 


Global Structured Finance 2019 Securitization Energized With $1 T In Volume

2018 turned out to be quite active in the structured finance markets, with over $1 trillion equivalent issued across the globe, representing double-digit growth on a year-over-year basis.

The U.S., China, Japan, Europe, and Canada all showed volume increases, while issuance in Australia and Latin America (LatAm) declined. With continued GDP growth and unemployment low, U.S. structured finance markets are forecast to perform well over the foreseeable future.

Some potential factors that could affect the continued global recovery of structured finance include the renegotiation of existing trade agreements, Brexit uncertainty, rising interest rates, and any market volatility that affects liquidity. Despite the risk of such exogenous shocks, we believe that the structured finance markets are unlikely to be affected broadly over the near term. As such, we expect 2019 issuance volume to be in the same $1 trillion neighborhood, and possibly slightly higher than last year.

Key Takeaways:

  • U.S. - Buoyed by expected low unemployment and continued GDP growth, 2019 U.S. structured finance issuance is likely to remain in the same neighborhood as last year, with the anticipated growth in RMBS largely canceled out by the likely contraction in CLO volume from record levels. This is not factoring in the expected decline in CLO reset/refi volume, due to the dynamics of prevailing liability spreads.

  • EUROPE - On most measures, we expect aggregate European structured finance credit performance to be positive in 2019. That said, the default rate will likely remain somewhat elevated compared with the pre-2008 time frame, but likely lower than its 1% long-term average.

  • CHINA - Continued normalization of growth, reduced liquidity due to policy-driven credit adjustments, uncertainty from the trade tensions with the U.S., and the rate hike environment outside China may pose threat to the performance of some industries. That said, we believe securitization remains largely shielded by conservative asset selection and transactions' repayment structures.

  • LATIN AMERICA - Credit conditions remain challenging in Argentina and investor confidence in Mexico has weakened since the inauguration of Andres Manuel Lopez Obrador. Meanwhile, in Brazil, market participants have reacted positively to the election of Jair Bolsonaro, but they remain cautious given the macro scenario.