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Credit Analysis

Looking For Winners And Losers Of Tax Reform Amid Earnings Beat

5-Year Virtual Multichannel Revenue Forecast Underscores Segment's Opportunities

Wake Up Savers, Watch Out Banks - CDs Back In Vogue - Episode 25

Financial Consumer Watchdog's Powerful Investigative Tool Faces Overhaul - Episode 26

SNL Banker

Credit Analysis
Looking For Winners And Losers Of Tax Reform Amid Earnings Beat

Co-written by Melissa Doscher, Senior Manager, S&P Global Market Intelligence

Major year-end financial decisions and tax-planning activities were disrupted as politicians in Washington scrambled to reach a deal on tax reform at the end of 2017. But now, with the passage of the most sweeping tax rewrite in over 30 years, much of the apprehension has diminished. The S&P 500 Q4 earnings per share growth rate stood at 13.69% as of February 2, 2018, with many pointing to corporate tax cuts as playing a major role this earnings season. Companies have already started to examine the potential positive and negative impacts to their risk exposure and bottom lines and are changing the way they do business.

With implementation underway, we want to look beyond the political wrangling and controversy, and evaluate potential market implications of the tax reform plan. Following congressional approval of the Tax Cuts and Jobs Act (TCJA), we examined and highlighted notable sector, industry, and company-level probability of default (PD) changes as indicated by our PD Market Signal Model, a structural model that calculates the likelihood of a company defaulting on its debt or entering bankruptcy protection over a one- to five-year horizon.

Telecom companies among the biggest winners

Telecom companies pay some of the highest effective tax rates. The weighted average effective tax rate paid by the U.S. Telecommunication Services sector stood at 34.6% in 2016, while the weighted average rate for U.S. companies is generally about 27.2%.

Figure 1: 2016 weighted average tax rate by GICS sector (%)

2016 weighted average tax rate by GICS sector (%)

Following TCJA’s passage, telecommunication services saw its PD decrease 32.8%, from 1.27% on December 19, 2017 to 0.85% on December 21, 2017, the steepest decline among the GICS sectors.

Figure 2: One-day median market probability of default change by GICS sector (%)

1-day median market probability of default change by GICS sector (%)*

Lower taxes and enhanced deductions on capital expenditures will enable telecom companies to increase their capital investments, including efforts to upgrade and expand their networks. AT&T Inc. saw its PD subsequently decrease 33.0%. In the last quarter of 2017, the corporate tax overhaul helped the telecom book a $19 billion profit that will result in $3 billion in extra cash this year, a sum AT&T plans to spend on bolstering its network.[i]

TCJA and deregulation make telecom companies especially ripe for mergers and acquisitions in 2018. Convergence between telecom and cable and satellite is also expected, as telecom operators seek opportunities to add content offerings amid stagnating revenues.

Taking a deeper dive into subsectors, the household appliances industry, a subset of consumer discretionary, saw the largest drop in PD of 47.8%. Alternative carriers, a subset of telecommunication services, also saw a substantial decline in PD of 45.8%.

Figure 3: Largest decreases in one-day median market probability of default by industry (%)

Largest decreases in 1-day median market probability of default by industry (%)*

Will real estate and utilities lose out?

Immediately following TCJA’s passage, real estate and utilities observed the largest market-perceived escalations in credit risk. Real estate saw its PD increase 21.6% from 0.04% on December 19, 2017 to 0.05% on December 21, 2017, while utilities saw its PD increase 20.2%, from 0.15% to 0.18%. On a subsector level, specialized REITs and residential REITs observed the largest escalations in credit risk, with PD increases of 69.2% and 64.7%, respectively.

Figure 4: Largest increases in one-day median market probability of default by industry (%)

Largest increases in 1-day median market probability of default by industry (%)

Real estate’s and utilities’ PD upticks could be the result of dampened enthusiasm for these sectors during the last months of 2017. Before TCJA’s passage, much of the gridlock in Congress focused on a provision that eliminates the full deductibility of interest expense, which would raise the cost of financing for highly-leveraged, capital intensive industries such as utilities and REITs. However, the final law appears to exempt REITs and regulated utilities from this rule, allowing extra headroom for the former to pursue new property developments and the latter to invest in infrastructure and alternative energy.#learnMoreAboutLink("credit-analysis")

A tentative tailwind for U.S. companies

On a company-level, roughly 55% noted a decrease in their one-year PD the day following TCJA’s passage and 12% saw no change. Companies with both high and low last-twelve-months effective tax rates saw a reduction in credit risk.

Figure 5: 25 highest tax rates covered by S&P Global Market Intelligence (under 45%)

25 highest SPGMI-covered tax rates (under 45%)

Figure 6: 25 lowest tax rates covered by S&P Global Market Intelligence (over 10%)

25 lowest SPGMI-covered tax rates (over 10%)

In summary, our PD Market Signal model shows that TCJA did impact the short-term market perceived credit quality of firms. While the legislation’s longer term implications remain uncertain, we saw in 1986 how the widely praised ‘Reagan tax cuts’ led to an implosion in the real estate market and the onset of the savings and loan crisis. More recently, we saw how TCJA fueled an epic stock rally and stellar earnings forecasts. Likewise, the TCJA will most likely have its own winners and losers. Companies, as well as individuals, should be especially alert as the longer term impacts play out.

For more information on how you can leverage our PD Market Signal Model and associated workflow tools, please request a demo.

[i] AT&T Is the Latest Company to Report a Tax Reform Windfall. (n.d.). Retrieved February 02, 2018, from http://fortune.com/2018/02/01/att-earnings-tax-reform/



5-Year Virtual Multichannel Revenue Forecast Underscores Segment's Opportunities

Highlights

The following post comes from Kagan, a research group within S&P Global Market Intelligence.

To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

Jul. 18 2018 — Driven by subscriber gains from AT&T Inc.'s DIRECTV NOW and DISH Network Corp.'s Sling TV and assisted by a batch of new arrivals in 2017 that includes Hulu LLC's Hulu with Live TV and Alphabet Inc.'s YouTube TV, Kagan estimates virtual multichannel services will reach nearly $2.82 billion in overall revenue in 2018, rising to more than $7.77 billion by 2022.

The large gains we project reflect the relative fledgling status of a market that is positioned to take advantage of widespread internet access by presenting new, alternative choices to traditional multichannel operators.

While the growth of virtual services is expected to dampen the projected decline in customers with some form of live linear channel package, we project the shift to have significant revenue implications for the market due to markedly lower average revenue per user rates associated with the new services.

Future developments could impair the segment over the five-year outlook. For instance, legacy distributors could revisit skinny bundles at competitive price points and leverage their existing customer relationships to undercut virtual providers.

Of note, traditional multichannel operators also providing wireline broadband have additional leverage with broadband bundles. For this category of ISPs, broadband could also be leveraged through the creation of prioritization lanes given the FCC's net neutrality reversal.

Recent M&A activity also clouds the future, led by the pursuit of key 21st Century Fox Inc. assets by Walt Disney Co. and Comcast Corp.

Disney has been quite transparent about the rationale behind the move. The media juggernaut plans to launch direct-to-consumer services leveraging its vast content libraries, including some of the world's most valuable franchises such as Marvel and Star Wars.

Although Comcast is playing its strategy cards closer to the vest, its pursuit of Sky PLC and 21st Century Fox, combined with the company's foray into wireless telecommunications, intimate wide-scale video-streaming plans.

FOX Could Reap Substantial Rewards For 2026 World Cup

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WatchTV's $15 Price Tag Outpaces Programming Costs Per Subscriber

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Listen: Wake Up Savers, Watch Out Banks - CDs Back In Vogue - Episode 25

Jul. 17 2018 — CD specials are back. More banks are offering the promotional rates on CDs, or certificates of deposits, to attract new customers. While that is good news for savers, it means funding costs likely will rise even more for banks. The episode shines a light on recent CD rates offered by banks and features commentary on smart deposit strategies from Bruce Hinkle of StoneCastle Cash Management and KeyCorp CFO Donald Kimble.

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P).


Listen: Financial Consumer Watchdog's Powerful Investigative Tool Faces Overhaul - Episode 26

Jul. 17 2018 — Mick Mulvaney, the acting director of the Consumer Financial Protection Bureau, has changed the way the agency operates and reduced enforcement actions against banks. Now, Mulvaney is turning his attention to a powerful tool used by the agency called the civil investigative demand. S&P Global Market Intelligence colleague Brian Cheung discusses how the CFPB uses the tool and what changes could mean for banks and consumers.

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P).


Watch: SNL Banker

Jul. 10 2018 — Transform internal data into vital insight with SNL Banker from S&P Global Market Intelligence. Our solution integrates seamlessly with internal systems to give U.S. community banks and credit unions greater visibility into finances and operations