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Mixed metals performance flags that volatility remains a risk

Street Talk Episode 40 - Digital Banks Take a Page Out of 'Mad Men'

Broadband Only Homes Skyrocket In 2018 Validating Top MSOs Connectivity Pivot

Power Forecast Briefing: As retirements accelerate, can renewable energy fill the gap?

2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Fundamentals View


Mixed metals performance flags that volatility remains a risk

Concerns over the health of the global economy were growing again last week as a new report by American think tank Brookings Institute warned that "global growth is sliding back into the morass," just days before the International Monetary Fund and World Bank are set to come together and debate about the matter.

In the U.S., the presidential debate in the run-up to next month's elections dominated the news on the political front, while Europe saw a deepening of its banking sector crisis as troubled Deutsche Bank was hit by a US$14 billion fine by the U.S. Department of Justice.

On a global level, it emerged that dealmaking shrunk to its lowest level in three years as a result of a record level of withdrawn bids. At US$692 billion having been pulled so far this year, global dealmaking is now down 31% to some US$1.0 trillion. Merger and acquisition activity reached only US$2.37 trillion in the first nine months, a 22% fall compared with the record-breaking activity for the equivalent period last year.

Price ring

Commodities last week booked a mixed performance, with zinc and lead gaining further ground and copper widely flat at US$4,817 per tonne, while iron ore and nickel lost some pace.

Iron ore 62% China Imp CFR fell 1.6% to US$55.90 per tonne by the end of the week, and nickel saw a 2.1% drop to US$10,391 per tonne despite further mine suspension plans in the Philippines.

Zinc and lead both saw some strong gains, with zinc climbing 3.8% to US$2,354 per tonne and lead even jumping 6.5% to US$2,036 per tonne.

Major precious metals declined in value over the same time, booking declines between 1.2% and 1.7%, with gold settling at US$1,321 an ounce, silver at US$19.4 an ounce and platinum at US$1,036 an ounce.

Mining stocks had another week of strong performances, with the vast majority ending the week in the green. Interestingly, Vale SA and BHP Billiton Group both barely took a hit from Samarco Mineração SA's missed interest payment last week.

Talking points

Last week's mixed performance of mining stocks and metals prices underpinned that the industry continues to be shuffled by volatility.

This, in turn, means "cash is king" for most miners as cost-control and efficient management are key factors to offset the impact of volatile swings in the market.

According to new research by EY, capital considerations dominate the top three business risks in the mining and metals sector in the year 2016-2017, as companies who proactively mitigate risks with a well-managed and cost-effective end-to-end value chain are set to be best positioned for growth.

As compared to the previous year, cash optimization now replaces the aim of switching to growth, the report found. In light of tightening lending markets and stricter funding environments, higher cash levels and strong balance sheets are increasingly forming the base for longer-term profitability.

Equally, innovation has become central to stay afloat and resolve issues around productivity. Companies are increasingly engaging in digital tools and finding efficient ways to do everyday tasks, EY stated.

According to General Electronics, taking a different approach to operations and utilizing new technology could help mining companies to handle these challenges.

"[M]ethods of working need to advance and evolve to meet these [challenges]," the firm said in a Sept. 26 note.

"Across the world, regional energy shortages have also compelled some mines to sharply curtail their power consumption. This comes as no surprise as mining involves a diverse range of energy intensive processes such as excavation, material transfer, mineral preparation and separation."

"Mining companies must therefore look at cutting these costs by, among other things, using more efficient electrical equipment to ease this energy demand—and to meet the industry energy reduction targets made by many governments globally."

According to GE, global mining sites are as much as 28% less productive than a decade ago, largely due to the fact that easy-to-access commodities have already been mined and new deposits need to be tackled deeper underground, passing harder rocks of unpredictable size.Resulting in operational disruptions, this threatens productivity, and hence margins.

"While this unplanned downtime can cost mining operators serious money, there are ways that operators can avoid this. Using digital industrial technologies, which can monitor the state and performance of mining hardware in real time, means operators can diagnose and fix impending equipment failures before they happen, leading to significant cost savings and boosting productivity and efficiencies in the future," GE argued.

"While the outlook is currently looking a little murky, mining is a cyclical market. and attention must turn to the next wave of electrical and digital initiatives, which will not only improve operations today, but lead to longer-term benefits."

Executive exchange

Senior management changes last week included the appointment of Larry Yau as CEO of Spanish Mountain Gold Ltd. after Yau served as interim CEO since June last year. He will also serve as interim CFO and is expected to join the company's board in due course.

Asa Resource Group Plc named its executive chairman Yat Hoi Ning as group CEO, while making David Murangari the new nonexecutive chairman. Both changes are with immediate effect.

Meanwhile, Alchemy Resources Ltd. CEO Kevin Cassidy resigned from his post, effective Dec. 22. The company is searching for a replacement.

Financings

Among the major financing deals last week, Yunnan Tin Co. Ltd. approved a plan to apply for up to 3.1 billion Chinese yuan in credit lines from commercial banks.

Dundee Precious Metals Inc. secured a US$50 million prepaid forward gold transaction for the sale of about 18,000 ounces of gold in 2019 and 28,000 ounces of gold in 2020. The company will receive an average price of US$1,367 per ounce, with monthly deliveries starting in May 2019.

Compass Minerals International Inc. issued a new US$450 million senior secured term loan, with proceeds earmarked for the purchase of the remaining 65% stake in Produquímica Indústria e Comércio SA and to retire a portion of the debt Compass Minerals expects to assume from Produquímica at closing.

Resolute Mining Ltd. seeks raise at least 76.5 million new ordinary shares as it is seeking to raise up to A$150 million to advance the development of Ravenswood extension project in Queensland, Australia, and for exploration at the Bibiani gold mine in Ghana.

Lowell Copper Ltd., Gold Mountain Mining Corp. and Anthem United Inc. have increased a private placement related to their proposed business combination to create JDL Gold Corp on or about Oct. 6. The companies now aim to raise up to C$55 million, as compared to C$40 million previously targeted.


Listen: Street Talk Episode 40 - Digital Banks Take a Page Out of 'Mad Men'

Mar. 20 2019 — Some fintech companies are making hay with digital platforms that tout their differences with banks, even though they are often offering virtually the same products. In the episode, we discuss with colleagues Rachel Stone and Kiah Haslett the deposit strategies employed by the likes of Chime, Aspiration and other incumbent players such as Ally Financial, Discover and Capital One. Those efforts conjure up memories of a Don Draper pitch in Mad Men and likely will enjoy continued success.

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Technology, Media & Telecom
Broadband Only Homes Skyrocket In 2018 Validating Top MSOs Connectivity Pivot

Highlights

The segment stood at an estimated 23.6 million as of Dec. 31, 2018, accounting for 24% of all wireline high-speed data homes.

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.

Mar. 20 2019 — The U.S. broadband-only home segment logged its largest net adds on record in 2018, validating Comcast Corp.'s and Charter Communications Inc.'s moves to make broadband, or connectivity, the keystone of their cable communication businesses.

The size and momentum of the segment also put in perspective the recent high-profile online-video video announcements by the top two cable operators as well as AT&T Inc.'s WarnerMedia shake-up and plans to go toe-to-toe with Netflix in the subscription video-on-demand arena in the next 12 months.

We estimate that wireline broadband households not subscribing to traditional multichannel, or broadband-only homes, rose by nearly 4.3 million in 2018, topping the gains from the previous year by roughly 22%. Overall, the segment stood at an estimated 23.6 million as of Dec. 31, 2018, accounting for 24% of all wireline high-speed data homes.

For perspective, broadband-only homes stood at an estimated 11.3 million a mere four years ago, accounting for 13% of residential cable and telco broadband subscribers.

The once all-powerful, must-have live linear TV model, which individuals and families essentially treated as a utility upon moving into a new residence, increasingly is viewed as too expensive and unwieldy in the era of affordable, nimble internet-based video alternatives. This has resulted in a sizable drop in penetration of occupied households.

As a result, continued legacy cord cutting is baked in and broadband-only homes are expected to continue to rise at a fast clip, with the segment's momentum in the next few years compounded by Comcast's, Charter's and AT&T's ambitious moves into online-video territory.

Note: we revised historical broadband-only home estimates as part of our fourth-quarter 2018, following restatements of historical telco broadband subscriber figures and residential traditional multichannel subscriber adjustments.

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Q4'18 multichannel video losses propel full-year drop to edge of 4 million

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Q4'18 multiproduct analysis sheds more light on video's fall from grace

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Watch: Power Forecast Briefing: As retirements accelerate, can renewable energy fill the gap?

Mar. 19 2019 — Steve Piper shares the outlook for U.S. power markets, discussing capacity retirements and whether continued development of wind and solar power plants may mitigate the generation shortfall.

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Credit Analysis
2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Fundamentals View

Mar. 15 2019 — On November 20, 2018, a joint event hosted by S&P Global Market Intelligence and S&P Global Ratings took place in London, focusing on credit risk and 2019 perspectives.

Pascal Hartwig, Credit Product Specialist, and I provided a review of the latest trends observed across non-financial corporate firms through the lens of S&P Global Market Intelligence’s statistical models.1 In particular, Pascal focused on the outputs produced by a statistical model that uses market information to estimate credit risk of public companies; if you want to know more, you can visit here.

I focused on an analysis of how different Brexit scenarios may impact the credit risk of European Union (EU) private companies that are included on S&P Capital IQ platform.

Before, this, I looked at the evolution of their credit risk profile from 2013 to 2017, as shown in Figure 1. Scores were generated via Credit Analytics’ PD Model Fundamentals Private, a statistical model that uses company financials and other socio-economic factors to estimate the PD of private companies globally. Credit scores are mapped to PD values, which are based on/derived from S&P Global Ratings Observed Default Rates.

Figure 1: EU private company scores generated by PD Model Fundamentals Private, between 2013 and 2017.

Source: S&P Global Market Intelligence.2 As of October 2018.

For any given year, the distribution of credit scores of EU private companies is concentrated below the ‘a’ level, due to the large number of small revenue and unrated firms on the S&P Capital IQ platform. An overall improvement of the risk profile is visible, with the score distribution moving leftwards between 2013 and 2017. A similar picture is visible when comparing companies by country or industry sector,3 confirming that there were no clear signs of a turning point in the credit cycle of private companies in any EU country or industry sector. However, this view is backward looking and does not take into account the potential effects of an imminent and major political and economic event in the (short) history of the EU: Brexit.

To this purpose, S&P Global Market Intelligence has developed a statistical model: the Credit Analytics Macro-scenario model enables users to study how potential future macroeconomic scenarios may affect the evolution of the credit risk profile of EU private companies. This model was developed by looking at the historical evolution of S&P Global Ratings’ rated companies under different macroeconomic conditions, and can be applied to smaller companies after the PD is mapped to a S&P Global Market Intelligence credit score.

“Soft Brexit” (Figure 2): This scenario is based on the baseline forecast made by economists at S&P Global Ratings and is characterized by a gentle slow-down of economic growth, a progressive monetary policy tightening, and low yet volatile stock-market growth.4

Figure 2: “Soft Brexit” macro scenario.5

Source: S&P Global Ratings Economists. As of October 2018.

Applying the Macro-scenario model, we analyze the evolution of the credit risk profile of EU companies over a three-year period from 2018 to 2020, by industry sector and by country:

  • Sector Analysis (Figure 3):
    • The median credit risk score within specific industry sectors (Aerospace & Defense, Pharmaceuticals, Telecoms, Utilities, and Real Estate) shows a good degree of resilience, rising by less than half a notch by 2020 and remaining comfortably below the ‘b+’ threshold.
    • The median credit score of the Retail and Consumer Products sectors, however, is severely impacted, breaching the high risk threshold (here defined at the ‘b-’ level).
    • The remaining industry sectors show various dynamics, but essentially remain within the intermediate risk band (here defined between the ‘b+’ and the ‘b-’ level).

Figure 3: “Soft Brexit” impact on the median credit risk level of EU private companies, by industry.

Source: S&P Global Market Intelligence. As of October 2018.

  • Country Analysis (Figure 4):
    • Although the median credit risk score may not change significantly in certain countries, the associated default rates need to be adjusted for the impact of the credit cycle.6 The “spider-web plot” shows the median PD values for private companies within EU countries, adjusted for the credit cycle. Here we include only countries with a minimum number of private companies within the Credit Analytics pre-scored database, to ensure a robust statistical analysis.
    • Countries are ordered by increasing level of median PD, moving clock-wise from Netherlands to Greece.
    • Under a soft Brexit scenario, the PD of UK private companies increases between 2018 and 2020, but still remains below the yellow threshold (corresponding to a ‘b+’ level).
    • Interestingly, Italian private companies suffer more than their Spanish peers, albeit starting from a slightly lower PD level in 2017.

Figure 4: “Soft Brexit” impact on the median credit risk level of EU private companies, by country.

Source: S&P Global Market Intelligence. As of October 2018.

“Hard Brexit” (Figure 5): This scenario is extracted from the 2018 Stress-Testing exercise of the European Banking Authority (EBA) and the Bank of England.7 Under this scenario, both the EU and UK may go into a recession similar to the 2008 global crisis. Arguably, this may seem a harsh scenario for the whole of the EU, but a recent report by the Bank of England warned that a disorderly Brexit may trigger a UK crisis worse than 2008.8

Figure 5: “Hard Brexit” macro scenario.9

Sources:”2018 EU-wide stress test – methodological note” (European Banking Authority, November 2017) and “Stress Testing the UK Banking system: 2018 guidance for participating banks and building societies“ (Bank of England, March 2018).

Also in this case, we apply the Macro-scenario model to analyze the evolution of the credit risk profile of EU companies over the same three-year period, by industry sector and by country:

  • Sector Analysis (Figure 6):
    • Despite all industry sectors being severely impacted, the Pharmaceuticals and Utilities sectors remain below the ‘b+’ level (yellow threshold).
    • Conversely, the Airlines and Energy sectors join Retail and Consumer Products in the “danger zone” above the ‘b-’ level (red threshold).
    • The remaining industry sectors will either move into or remain within the intermediate risk band (here defined between the ‘b+’ and the ‘b-’ level).

Figure 6: “Hard Brexit” impact on the median credit risk level of EU private companies, by industry.

Source: S&P Global Market Intelligence. As of October 2018.

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  • Country Analysis (Figure 7):
    • Under a hard Brexit scenario, the PD of UK private companies increases between 2017 and 2020, entering the intermediate risk band and suffering even more than its Irish peers.
    • Notably, by 2020 the French private sector may suffer more than the Italian private sector, reaching the attention threshold (here shown as a red circle, and corresponding to a ‘b-’ level).
    • While it is hard to do an exact like-for-like comparison, it is worth noting that our conclusions are broadly aligned with the findings from the 48 banks participating in the 2018 stress-testing exercise, as recently published by the EBA:10 the major share of 2018-2020 new credit risk losses in the stressed scenario will concentrate among counterparties in the UK, Italy, France, Spain, and Germany (leaving aside the usual suspects, such as Greece, Portugal, etc.).

Figure 7: “Hard Brexit” impact on the median credit risk level of EU private companies, by country.

Source: S&P Global Market Intelligence. As of October 2018.

In conclusion: In Europe, the private companies’ credit risk landscape does not yet signal a distinct turning point, however Brexit may act as a pivot point and a catalyst for a credit cycle inversion, with an intensity that will be dependent on the Brexit type of landing (i.e., soft versus hard).

1 S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence.
2 Lowercase nomenclature is used to differentiate S&P Global Market Intelligence credit scores from the credit ratings issued by S&P Global Ratings.
3 Not shown here.
4 Measured via Gross Domestic Product (GDP) Growth, Long-term / Short-term (L/S) European Central Bank Interest Rate Spread, and FTSE100 or STOXX50 stock market growth, respectively.
5 Macroeconomic forecast for 2018-2020 (end of year) by economists at S&P Global Ratings; the baseline case assumes the UK and the EU will reach a Brexit deal (e.g. a “soft Brexit”).
6 When the credit cycle deteriorates (improves), default rates are expected to increase (decrease).
7 Source: “2018 EU-wide stress test – methodological note” (EBA, November 2017) and “Stress Testing the UK Banking system: 2018 guidance for participating banks and building societies”. (Bank of England, March 2018).
8 Source: “EU withdrawal scenarios and monetary and financial stability – A response to the House of Commons Treasury Committee”. (Bank of England, November 2018).
9 As a hard Brexit scenario, we adopt the stressed scenario included in the 2018 stress testing exercise and defined by the EBA and the Bank of England.
10 See, for example, Figure 18 in “2018 EU-Wide Stress Test Result” (EBA November 2018), found at:https://eba.europa.eu/documents/10180/2419200/2018-EU-wide-stress-test-Results.pdf

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2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Market-Driven View

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