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Financial consumer agency's powerful investigative tool faces overhaul

SNL Banker

Credit Analytics Case Study: Carillion Plc

Live Linear OTT Streaming Bumps Up The Multiscreen Transcoder Market

FOX Could Reap Substantial Rewards For 2026 World Cup


Financial consumer agency's powerful investigative tool faces overhaul

Blake Johnson was stunned when the Consumer Financial Protection Bureau demanded hundreds of detailed financial and operational records from his credit repair company, Prime Credit, at the start of 2015.

The CFPB offered little insight into why it wanted the information, but the California-based company that Johnson co-founded was confident it had not breached any rules and turned over 200 pages of documentation.

"I don't think they really understood what they were asking for," Johnson said in an interview. "So they asked for everything, and then some."

Prime Credit was facing a civil investigative demand, or CID — a powerful CFPB tool that lets the bureau's enforcement team dig into a company's documents to determine whether it is upholding federal consumer financial laws.

A CFPB spokesperson declined to say how many CIDs have been issued since the agency was formed in 2011, but the process could be poised for change. Acting bureau director and Trump-appointee Mick Mulvaney asked for recommendations on changing the CID process as part of a broad effort to shrink an agency that, during the Obama administration, held a reputation for strongly policing the financial services industry. On Jan. 24, the CFPB launched a request for information on CIDs, the first of 12 public comment requests asking industry stakeholders to provide evidence that the agency is following its mandate to protect consumers.

As public comments wrap up for all the requests for information, Mulvaney or his named successor, Kathy Kraninger, will have the opportunity to overhaul the way that CIDs are issued.

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Separating examination and supervision

Consumer advocates see CIDs as a necessity in ensuring that companies are adhering to post-financial crisis rules.

"If the CFPB didn't have the CID authority, it would not be able to effectively conduct investigations," said Christopher Peterson, a former senior counsel for the CFPB's enforcement office who is now a law professor at the University of Utah.

Peterson criticized regulators such as the Federal Reserve for treating the financial services industry with "kid gloves" prior to the CFPB's creation.

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But CID critics contend that the process is too difficult, costly and complex.

In public comments on CIDs, some industry groups pointed to general inefficiencies at the CFPB. For example, the American Bankers Association's member institutions commented that the bureau's enforcement teams often ask for materials that have already been provided in regular examinations.

Communication within the CFPB is another concern for some. Steve Henslee, who served in the CFPB's early years as an examiner before becoming chief of staff for supervision, said the examination and supervisory teams operate separately, potentially hampering the flow of information and leading to misunderstandings or even mistrust.

Henslee suggested requiring the enforcement team to communicate findings to the supervision team, which would then investigate those issues. The CID would be a last resort if the supervisory process did not adequately address enforcement's concerns.

But the separation of supervision and enforcement is by design, counters Joanna Pearl, who spent six years as chief of staff for the CFPB's enforcement office. Supervision relies on its own set of tools to assess the broad operations of a company while enforcement uses CIDs to "drill down" to specific activities, Pearl said.

Pearl, who now works for the policy startup Public Rights Project, said the enforcement office sometimes shares information with other offices on a "case-by-case basis," adding that there are rules barring the office from sharing confidential investigative information.

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Street Talk is a podcast hosted by S&P Global
Market Intelligence.

In this episode, Brian Cheung discusses the CFPB's
use of the civil investigative demand, or CID, and
how changes to the process could impact banks
and consumers.

Listen on SoundCloud and iTunes.

Purpose and petitions

Industry groups frequently criticize the breadth of CID requests. By law, the CFPB cannot ask for too many documents or "tangible things" without explaining the conduct under investigation and the laws applicable to any possible violation.

The Federal Reserve's Office of Inspector General released a report in September 2017 noting that CIDs are issued fairly as required under Dodd-Frank, but that the agency's guidance is vague, leading the scope of some CIDs to be too broad. The CFPB says it has since tightened its statements of purpose to clarify the relevant case law.

Companies do have the opportunity to negotiate the terms and timing of a CID and can even petition the agency to modify or set aside the CID.

Christopher Willis, a Ballard Spahr partner who has represented financial services companies facing CIDs, said that in his experience, CFPB attorneys have been "generally courteous" and willing to compromise on the scope and timing of compliance.

"If you're working with the staff to negotiate a compromise, you don't file the petition because you'd rather resolve the issue amicably with the staff than litigate the issue," Willis said.

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But since its creation, the bureau has never fully granted a petition. The CFPB partially granted one from Synchrony Financial, but only because the agency had previously withdrawn some portions of the CID.

The outcomes of the CFPB petition process are similar to those at another agency that issues CIDs, the Federal Trade Commission, which allows companies to file a "petition to quash." The FTC has not granted a single petition since 2012.

Former CFPB Director Richard Cordray has said companies can pursue due process through the legal system. "Like every other part of the federal government, no different for us, what we do can be challenged in the courts," Cordray told Congress in April 2017.

It remains unclear what stance the bureau's current leader takes on CIDs, though comments earlier this year suggest he is sympathetic to companies going through this process. A day before issuing the request for public comment in January, Mulvaney told CFPB staff in a memo that "[i]f a company closes its doors under the weight of a multiyear civil investigative demand, you and I will still have jobs at the CFPB." Mulvaney vowed to pull back on Cordray's legacy of actively pursuing wrongdoing in the financial services industry, which Mulvaney characterized as "regulation by enforcement."

At Prime Credit, Johnson and other executives settled for $1.5 million in June 2017, without admitting or denying the CFPB allegations of misleading advertising and illegal advance fees.

Johnson said the company tried to work with CFPB attorneys to argue the allegations, but was ultimately forced to settle. He said documents handed over to the CFPB show no wrongdoing, but he alleged that the bureau's attorneys were intent on fining the company.

"For me, it was incredibly expensive," Johnson said. "I spent well over $1 million on attorneys. For what purpose?"


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Credit Analysis
Credit Analytics Case Study: Carillion Plc

Highlights

Co-written by Elijah Harden, Risk Services.

Jul. 05 2018 —

Bankruptcy Summary
Carillion Plc (Carillion), a construction services firm, had “declining profit margins” and “high adjusted debt [due to] reverse factoring and its unfunded pension deficit” according to S&P Global Ratings1 . When Carillion filed for liquidation on January 15, 2018, the company had debt and liabilities in excess of £1.5 billion. Trading in the shares was suspended that same day. S&P Global Market Intelligence’s Fundamental Probability of Default (Fundamental PD) rose to 18.27% in the first quarter of 2017 from 1.32% the previous quarter – the equivalent of the implied credit score falling to ‘ccc’ from ‘bb’2 . An additional 30% increase from Q1 to Q2 2017 brought the Fundamental PD to 24%, six months ahead of Carillion’s liquidation. In the quarter leading up to its compulsory liquidation filing, the median Market Signal Probability of Default (Market Signal PD) was 18%, and reached as high as 29%. The Market Signal PD increased nearly sixfold, from 2.17% to 12.69% (equivalent to a credit score decrease from ‘bb-‘ to ‘ccc+’) during July 2017 in response to a share price decline of nearly 70% during the month. Carillion’s share price fell by 39% on July 10 alone, triggered by a profit warning (the first of three) and the announcement of a strategic review.

Exhibit 1: Market Signal and Fundamental PD Escalation

Source: S&P Global Market Intelligence as of June 11, 2018. For illustrative purposes only.

Business Description
Carillion provides maintenance, facilities management, and energy services to buildings and large property estates, in public and private sectors; infrastructure services for roads, railways, and utility networks. It serves aviation, corporate, financial services, oil and gas, central and local government, defense, healthcare, transport, education, commercial and retail, and residential and leisure sectors. Carillion was incorporated in 1999 and is headquartered in Wolverhampton, in the United Kingdom.

Fundamental Probability of Default Analysis
Upon closer inspection of the Fundamental PD in the third quarter of 2017, business and financial risks were significant problems for the company, with vulnerable and highly leveraged scores, respectively. In the first quarter of 2017, Carillion’s Fundamental PD of 1.32% was better than the UK Construction & Engineering industry median of 4.43%. The Fundamental PD later increased to place Carillion in the worst 25% of the industry by the second quarter of 2017. The most significant factor contributing to the increase in Fundamental PD is Carillion’s EBIT interest coverage, a measurement of the company’s ability to pay interest on debt, which fell to -0.32 in the first quarter of 2017 from 2.75 in the fourth quarter of 2016 (semiannual data was multiplied by 0.5). The elevated Fundamental PD was also due to total equity and cash interest coverage which stood at -£405MM and 0.09, respectively, in the first quarter of 2017 down from £730MM and 2.7 in Q4 2016. Between Q4 2016 and Q1 2017 EBIT decreased by £132MM to a net loss of £100MM and equity decreased by an astonishing £1,135MM. The Fundamental PD illustrates Carillion’s sizable net losses left the company debt ridden and unable to operate.

Exhibit 2: Fundamental Probability of Default Contribution Analysis

Source: S&P Global Market Intelligence as of June 11, 2018. For illustrative purposes only.

Exhibit 3: Key Developments

Source: S&P Global Market Intelligence as of June 11, 2018. For illustrative purposes only.

Copyright © 2018 by S&P Global Market Intelligence, a division of S&P Global Inc.
These materials have been prepared solely for information purposes based upon information generally available to the public and from sources believed to be reliable. S&P Global Market Intelligence, its affiliates, and third party providers (together, “S&P Global”) do not guarantee the accuracy, completeness or timeliness of any content provided, including model, software or application, and are not responsible for errors or omissions, or for results obtained in connection with use of content. S&P Global disclaims all express or implied warranties, including (but not limited to) any warranties of merchantability or fitness for a particular purpose or use.

S&P Global Market Intelligence’s opinions, quotes and credit-related and other analyses are statements of opinion as of the date they are expressed and not statements of fact or recommendation to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security.

S&P Global keeps certain activities of its divisions separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain divisions of S&P Global may have information that is not available to other S&P Global divisions.

S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD credit model scores from the credit ratings issued by S&P Global Ratings.

S&P Global provides a wide range of services to, or relating to, many organizations. It may receive fees or other economic benefits from organizations whose securities or services it may recommend, analyze, rate, include in model portfolios, evaluate, price or otherwise address.

[1] Source: S&P Global Ratings, Carillion’s Demise: What’s At Stake? https://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=38529831&From=SNP_CRS as published on March 23, 2018.
[2] Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD scores from the credit ratings used by S&P Global Ratings. S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence.

Credit Analytics Case Study: Carillion Plc

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50 Years Of Altman Z-score, And PD Model Fundamentals – Case Study General Motors

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Credit Market Pulse March 2018 Issue

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Technology, Media & Telecommunications
Live Linear OTT Streaming Bumps Up The Multiscreen Transcoder Market

Highlights

Multiscreen transcoding is widely used today to prepare and distribute video content in over-the-top and TV Everywhere services.

Jul. 05 2018 — Multiscreen transcoding is widely used today to prepare and distribute video content in over-the-top and TV Everywhere services. Multiscreen transcoding revenue is forecast to grow to $628.2 million in 2022, up from $415.1 million in 2017. However, revenue is not rising as quickly as the amount of video being delivered. There are a large number of competitors, so price pressure and the move from hardware appliances to software licenses and cloud services is affecting worldwide multiscreen transcoder revenue.

The amount of video streamed via the internet continues to grow. However, not all of the video is transcoded using a broadcast-quality multiscreen transcoding solution from the vendors discussed in detail in Kagan's latest transcoder report. Some of the largest video streamers in the world, including Netflix Inc. and Alphabet Inc.'s YouTube, use an internal solution. Additionally, those who do not need the same level of density or quality may use solutions such as the free FFmpeg or x264 software, particularly for file transcoding. In some cases, a content producer will use the transcoder that is part of its media asset management system rather than a separate transcoding solution.

Growth in live transcoding revenue is being helped by the expansion of TV Everywhere, or TVE, services. Many multichannel video programming distributors continue to expand the number of linear channels and the amount of VOD content available on their TVE systems in order to offer the same ability to view content on other devices as is available via the set-top box, or STB, in the home. For example, Sky Deutschland GmbH is expanding to offer more than 100 linear channels on Sky Go rather than just the Sky Sport channels. OTT provider ivi.ru of Russia added streamed channels to its service in 2018. Nc+ GO of Poland added 22 channels in April 2018.

FFmpeg and open source solutions have more of an impact on the file transcoding market since multiple passes can be done to produce the quality desired. Therefore, file transcoding vendor revenue is not growing as quickly as the live transcoding vendor revenue. However, some content producers and OTT VOD providers do choose to buy products and services for file-based multiscreen transcoding rather than using an internal or open source solution. The amount of content and the number of versions required to monetize that content continues to grow, causing our expectations of revenue in the file transcoding segment to increase by single-digit percentages each year.

Many transcoder vendors offer cloud transcoding services, oftentimes with multiple cloud providers. The cloud providers tend to be agnostic to the transcoder vendors. A primary example of this is Amazon Web Services, or AWS. Even though AWS owns AWS Elemental, many others also run on AWS, including Beamr Ltd., Bitmovin Inc, Encoding.com Inc., Harmonic Inc., Telestream Inc. and Zencoder Inc.

Revenue from cloud transcoding is expected to increase each year as both the overall multiscreen transcoder revenue grows, as well as the percentage of transcoder revenue that comes from transcoder services that run in the public cloud. The advantages of using cloud transcoding simply outweigh any disadvantages for most use cases.

This article provides some of the highlights contained in Kagan's latest in-depth report titled "Worldwide Transcoding: Live linear OTT streaming bumps up the multiscreen transcoder market," which updates vendor activity and provides global forecasts for live and file transcoding revenue by region, as well as cloud transcoding revenues as a percent of total revenues through 2022.

Video CDN Revenue To Reach $2.2 Billion In 2022

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Technology, Media & Telecommunications
FOX Could Reap Substantial Rewards For 2026 World Cup

Jul. 05 2018 — The 2018 FIFA Men's World Cup has struggled with U.S. viewership due in part to the timing of matches aired from Russia. But the June 14 announcement that the quadrennial cup competition will head back to North America in 2026 was likely music to the ears of TV rights owners Telemundo and 21st Century Fox Inc.'s FOX Sports. The choice of a three-country combination — the U.S., Canada, and Mexico — does not come cheap for the U.S. networks, however. The two will pay a combined $887 million for the 2026 games, including an additional approximately $300 million bonus paid to FIFA because North America was chosen as the location.

The upside is that the World Cup will take place in more ideal airing times, offering stronger ad pricing and bigger audiences. In addition, the number of teams in 2026 will increase to 48, compared to 32 today.

The current tournament is the first in which Telemundo and FOX Sports took away rights from Univision Communications Inc. and Walt Disney Co.'s ESPN/ABC. The announcement may make up for some of the troubles surrounding this year's competition after the U.S. Men's National Team failed to make the cut. In addition, the tournament is in Russia, meaning many of the games have aired during lower viewing times in the U.S.

Despite the challenges, Telemundo and FOX Sports could deliver higher ad revenues compared to 2014, according to some estimates. Telemundo recently announced that it had reached its goal of $225 million in ad sales for this year's tournament. The networks may be benefiting from unused funds tied to the NBA Finals, which ended after just four games

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