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Rising Rates, U.S. Tax Law Seen Dampening Corporate Debt Demand

Energy

Power Forecast Briefing: Fleet Transformation, Under-Powered Markets, and Green Energy in 2018

Trading Of US Linear TV Advertising Shifting To Programmatic Trading

Every Industry Is Now A Technology Industry

Online Video Bolstering Consumer Home Video Spend, Spearheaded By Subscription Streaming

Banking & Financial Services
Rising Rates, U.S. Tax Law Seen Dampening Corporate Debt Demand

Highlights

U.S. corporate debt loads remain elevated — especially in the consumer discretionary sector — but higher interest rates and tax law changes could lead to an end of the decade-long rise in borrowing.

Jul. 13 2018 — A decade-long rise in borrowing has left debt loads elevated, especially in the consumer discretionary sector, but rising interest rates and tax law changes could curb the corporate credit binge.

Debt levels among S&P 500 companies rose 41% from year-end 2008 through March 31, 2018, according to an S&P Global Market Intelligence analysis.

S&P 500 companies in the consumer discretionary sector — a broad grouping that includes advertisers, automakers, broadcasters, cable companies, publishers, restaurants, and specialty stores — finished the first quarter with $731 billion in net debt, which is total debt minus cash and equivalents. By that measure, the consumer discretionary sector was the most levered among the sectors comprising the S&P 500.

Consumer discretionary in this analysis also posted a total debt-to-equity ratio of 1.43x, trailing only slightly the ratios posted by the telecommunication services and financials sectors. However, both of these two sectors have much lower net debt levels compared to consumer discretionary.

Companies in all sectors have been issuing debt to take advantage of low rates. S&P 500 companies inched up their debt totals to $8.594 trillion at the end of the first quarter from $8.544 trillion at year-end 2017. Paul Giroux, head portfolio manager at First Empire Asset Management, said some companies were issuing debt early in the year to get ahead of expected higher rates.

"They probably front loaded a bit," he said in an interview.

While borrowing costs remain at historically cheap levels, they have begun moving up and are expected to keep increasing in the wake of the U.S. Federal Reserve's June 13 decision to raise its benchmark interest rate. With higher rates, issuance activity should wane, said Jack Gilligan, director of research at ClearRock Capital LLC. 

"The days of super cheap capital are coming to an end," Gilligan said in an interview.

Debt underwriting activity has been slowing in 2018, dropping 17% year-over-year, according to a June 15 report from Credit Suisse Securities (USA) LLC analyst Susan Roth Katzke. Higher rates are not the only factor that is expected to increase corporate debt expense. The recent tax reform law makes debt less attractive because it limits the amount of interest companies can deduct to 30% of annual adjusted taxable income; companies previously could deduct up to 100% of interest. It also gives companies less need to issue bonds since they can now retain more capital through earnings thanks to lower federal tax rates.

Giroux expects issuance activity to slow eventually, but for the moment he said appetite for debt remains, with demand for 10-year and 30-year paper coming from insurance companies, pension funds, and investors in Asia. Giroux noted that on June 14, the day after the Fed announced the interest rate hike, about eight deals worth at least $10 billion were in the market and coming in oversubscribed. "There's a massive amount of cashflow coming into the market," he said.

Investor demand coupled with slower issuance can help keep rates down for issuers. And in a rising rate environment, large investment grade companies could see increased demand from fixed-income investors, who fear high-yield companies could have trouble servicing debt as the expense increases.

Cumberland Advisors Inc. Chairman and Chief Investment Officer David Kotok said he is advising clients to favor the highest-rated credits. "Big-cap companies in conditions like this definitely benefit from a flight to safety," he said in an interview.

But Kotok noted that companies with the greatest levels of variable debt are most susceptible to higher costs in a rising rate environment. Wynn Resorts Ltd. and Alliance Data Systems Corp. were the only S&P 500 companies with debt-to-equity multiples topping 10x and variable debt-to-total debt ratios of at least 40% at the end of the first quarter. Ford Motor Co., which had the highest net debt and 20th-highest debt-to-equity multiple among S&P 500 companies, reduced its variable debt to about $8 billion at the end of the first quarter from $10 billion at year-end 2014.

Kotok has also noticed more companies moving to lock up fixed rates over longer periods, after years of relying on floating or shorter-term borrowings. "I'm seeing that as a recurring theme," he said.

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Watch: Power Forecast Briefing: Fleet Transformation, Under-Powered Markets, and Green Energy in 2018

Steve Piper shares Power Forecast insights and a recap of recent events in the US power markets in Q4 of 2017. Watch our video for power generation trends and forecasts for utilities in 2018.


Technology, Media & Telecom
Trading Of US Linear TV Advertising Shifting To Programmatic Trading

Oct. 08 2018 — Both buyers and sellers of traditional linear TV advertising, not including connected TV or over-the-top video, are moving toward the adoption of programmatic trading. In 2017, Kagan estimates that $690 million or 0.9% of total linear TV spend was traded programmatically. Within the next five years, that figure is expected to climb to $9.76 billion or nearly 12% of total linear TV advertising revenue. MVPDs are forecast to trade the greatest percentage of their ad inventory programmatically in 2022 with 30% of ad revenue from programmatic trading.

Kagan defines programmatic trading as being automated and data-enhanced, not just one or the other. Trading may be through a private or open marketplace and does not have to be through an auction, which is more common in digital video advertising.

There are several issues holding participants back from programmatic trading. Unlike digital programmatic marketplaces, where there is a seemingly unending supply of ad inventory, linear TV has a finite supply. Demand for TV inventory exceeds the supply, so there is still an attitude of "If it isn't broken, don't fix it." TV ads are also bought well in advance, not immediately.

While many agencies have experimented with the programmatic trading of linear TV, not all are on board. Many of the advertisers and agencies are interacting directly with the supplier platform rather than going through a demand-side platform, or DSP, today. In their experiments, the agency needs to use separate platforms to aggregate inventory and tie it together, which is a lot of work.

The lack of inventory is one factor holding back programmatic trading. The only way it takes off is to make linear TV inventory available in some type of buyer platform that can combine the various supply platforms. It is even more complicated when the buyer wants to bring in connected TV (OTT).

Agencies do like the automation capabilities of programmatic, particularly where the process takes a lot of time. An algorithm may do better in areas such as weighting estimation, the first pass at scheduling and the negotiation process as well as postings and billings. The process of buying inventory is not difficult, but computing where a buyer will be able to find its preferred audience is. Therefore, interest in automating the planning and analysis to find an optimal audience is high.

We forecast a gradual uptake for programmatic trading with continued testing in 2018. Broadcast stations and networks, cable programmers, and MVPDs need to add more inventory to programmatic platforms before agencies begin using it in earnest. It will take time for all parties to feel comfortable transacting in a new way.

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Technology
Every Industry Is Now A Technology Industry

Highlights

And every company is now a technology company.

Sep. 28 2018 — As machine learning (ML), artificial intelligence (AI), and robotics become commonplace and enter the operations of mainstream organizations, leadership teams are finding that failure to harness and leverage AI puts them behind the competition. Repeatable tasks are carried out by bots in a fraction of the time and employees are more focused on adding value, which means companies on the forefront of technology can be more reliable, more user-friendly, and faster to market.

In this highly disruptive environment, one traditional truth of business has withstood, or has perhaps even guided, these technological advances: above all, the customer experience is king. More than ever before, businesses have effective technologies at their fingertips to quickly and effectively address customer pain points, while at the same time dramatically improving their internal operations.

At S&P Global Market Intelligence, we strive to get beyond the buzzwords and truly deliver essential insight. And second to this, we strive to adopt real operational efficiencies into our delivery that are paralleled by the workflow efficiencies we promise to our customers. To that end, we are committed to remaining on the cutting edge of emerging technologies, first through optimization, then automation.

Download a recent analysis of how we’re applying new technology like natural language processing to structure data, robotic process automation to deliver insights faster, and predictive analytics to stay ahead of the market.

You can also view this analysis in Spanish, Portuguese, Mandarin, and Japanese.

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Natural Language Processing – Part II: Stock Selection

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Natural Language Processing, Part I: Primer

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Technology, Media & Telecom
Online Video Bolstering Consumer Home Video Spend, Spearheaded By Subscription Streaming

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.

Sep. 20 2018 — Spending on home entertainment is rising toward levels not seen since 2004, when consumers spent $24.37 billion building massive home-video libraries of DVDs and VHS cassettes. Since then, the optical-disc market saw more than a decade of significant declines as consumers shifted to digital entertainment. By 2012, total spending on home entertainment was down to $20.13 billion, with $4.13 billion coming from online video while DVDs and Blu-ray discs accounted for $12.88 billion and multichannel PPV/VOD contributed the remaining $3.13 billion.

Fast forward to 2017 and the mix of consumer spending has changed significantly. Consumers spent a total of $22.62 billion on home entertainment from multichannel, online and disc retail/rental sources. Online spending accounted for $13.00 billion of that total while spending on discs dropped to $6.84 billion and multichannel PPV/VOD shrank to $2.79 billion.

While the data might seem like good news for traditional providers of home entertainment, a key component of the growth in digital spending is the rise of subscription video on demand. The majority of online spending is going to over-the-top services like Netflix, Hulu and Amazon Prime, which increasingly have focused on creating original programming (mainly episodic TV) rather than licensing content from Hollywood studios.

Removing subscription streaming from the consumer spending pool paints a less favorable picture for traditional content providers. In 2012, consumers spent just $1.43 billion on non-subscription online video purchase/rental, and a total of $17.44 billion excluding the SVOD component. By 2017, while consumer spending on online video overall had risen to $13.00 billion, some $10.47 of that came from streaming subscriptions versus $2.53 billion from online video purchase/rental, and total home-entertainment spending was just $12.16 billion excluding SVOD.

Spending on sell-through home video peaked in 2006 when consumers shelled out $16.53 billion for DVDs and VHS cassettes. Since then spending has declined by hundreds of millions (sometimes billions) each year. In 2017, consumers spent $6.50 billion on DVD and Blu-ray sell-through and electronic sell-through. This seems to suggest that people are becoming less and less interested in adding to their home-video libraries and are turning to the more affordable streaming options. The story is similar for the home-video rental segment, which saw consumer spending peak in 2001 at nearly $8.45 billion before dropping to $2.87 billion by the end of 2017.

This has to be a somewhat unsettling trend for the major film studios, and is likely a key factor in shifting their strategy to focus on major franchise films and low-cost genre fare. The former tend to have broad worldwide appeal and can still move enough video units to help offset their high production and distribution costs. The low-cost genre fare, on the other hand, may be more risky and not sell as well internationally, but has a fair chance to break even. If the latter films lose money, the successful franchise films typically cover the losses.

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US Online Video Outlook To Eclipse $15B In 2018

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DVD, Blu-ray Spending Down $1B-plus For 11th Year In A Row

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