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CAPITAL MARKETS RESEARCH

JANUARY 23, 2020

How Corporate Might Burst an WEEKLY Bubble MARKET OUTLOOK

Moody’s Analytics Research Credit Markets Review and Outlook by John Lonski Weekly Market Outlook Contributors: How Corporate Credit Might Burst an Equity Bubble Moody's Analytics/New York: » FULL STORY PAGE 2

John Lonski The Week Ahead Chief Economist We preview economic reports and forecasts from the US, UK/Europe, and Asia/Pacific regions. 1.212.553.7144 » [email protected] FULL STORY PAGE 7

Yukyung Choi Quantitative Research The Long View Grade: We see the year-end 2020’s average Credit investment grade spread above its recent 106 basis Moody's Analytics/Asia-Pacific: Full updated stories and Spreads points. High : Compared with a recent 371 bp, the high- yield spread may approximate 415 bp by year-end 2020. Katrina Ell key credit market metrics: Defaults US HY rate: Moody's Service’s Default Economist The high-yield bond Report has the U.S.' trailing 12-month high-yield default rate issuance of January’s first dipping from December 2019’s actual 4.2% to a baseline Moody's Analytics/Europe: 17 days included $23.6 estimate of 3.5% for December 2020. Issuance For 2019’s offerings of US$-denominated corporate bonds, Barbara Teixeira Araujo billion from U.S. IG bond issuance rose by 2.6% to $1.309 trillion, while high- Economist businesses, $12.6 billion yield bond issuance surged by 55.8% to $432 billion. from Western Europe In 2020, US$-denominated issuance is Moody’s Analytics/U.S.: borrowers, and $9.1 billion expected to rise by 5.2% for IG to $1.377 trillion, while high- yield supply may grow by 5.3% to $456 billion. Ryan Sweet from Chinese issuers. Economist

Steven Shields Economist » FULL STORY PAGE 10

Ratings Round-Up Editor Upgrades Account for 10 of 11 U.S. Rating Changes Reid Kanaley » FULL STORY PAGE 14

Market Data

Contact: help@.com Credit spreads, CDS movers, issuance. » FULL STORY PAGE 17 Moody’s Capital Markets Research recent publications Links to commentaries on: Thin spreads, , rate sensitivity, sentiment, VIX, fundamentals, next , liquidity and defaults, cheap , fallen angels, corporate credit, Fed moves, yields, inversions, unmasking danger, divining markets, upside .

» FULL STORY PAGE 22 Click here for Moody’s Credit Outlook, our sister publication containing Moody’s rating agency analysis of recent news events, summaries of recent rating changes, and summaries of recent research.

Moody’s Analytics markets and distributes all Moody’s Capital Markets Research, Inc. materials. Moody’s Capital Markets Research, Inc. is a subsidiary of Moody’s Corporation. Moody’s Analytics does not provide investment advisory services or products. For further detail, please see the last page.

CAPITAL MARKETS RESEARCH

Credit Markets Review and Outlook Credit Markets Review and Outlook By John Lonski, Chief Economist, Moody’s Capital Markets Research, Inc.

How Corporate Credit Might Burst an Equity Bubble

Highly leveraged corporate balance sheets have often been cited as one of the greater threats to both the most richly valued U.S. equity market since 2000 and a record-long business cycle upturn. Exceptionally steep ratios of corporate to corporate earnings increase the susceptibility of corporate and spending to downturns in profitability and more limited access to financial capital. Heavily indebted have greater difficulty coping with adverse developments compared with businesses that use debt sparingly. The loss of financial flexibility to high leverage becomes most apparent when flows turn negative. However, by itself, high leverage does not assure impending doom for either equity valuations or the business cycle. Rather, the triggering agent for the destructive force of elevated corporate leverage is a contraction of profits and/or cash flows that amplifies corporate leverage and triggers an upswing by the default rate and an accompanying diminution of systemic liquidity. A sufficient worsening of the default outlook will prompt cutbacks in business outlays on staff and capital goods that are severe enough to turn the business cycle lower. Thus, high corporate leverage is unlikely to either burst the equity bubble or prompt a recession until corporate earnings shrink by enough to drive the default rate above 7%.

Figure 1: High-Yield Default Rates of 7.5% or Higher Were Joined by a Median -23% Plunge by Market Value of U.S. Common from Prior High sources: Dow Jones, Moody's Investors Service, Moody's Analytics % Change by Market Value of US Common Stock from Prior Record High (L) High-Yield Default Rate: %, actual & predicted (R) 9.0% 15% 4.5% 14% 0.0% 13% -4.5% 12% -9.0% 11% 10% -13.5% 9% -18 .0 % 8% -22.5% 7% -27.0% 6% -31.5% 5% -36.0% 4% -40.5% 3% -45.0% 2% -49.5% 1% -54.0% 0% Dec-83 Jun-86 Dec-88 Jun-91 Dec-93 Jun-96 Dec-98 Jun-01 Dec-03 Jun-06 Dec-08 Jun-11 Dec-13 Jun-16 Dec-18

Fast-Rising Default Rate Helped Deflate the Great Equity Bubble of 1999-2000 The market value of U.S. common stock soared higher by a cumulative 53% from December 1997 to March 2000 notwithstanding a climb by the U.S. high-yield default rate from December 1997’s 2.1% to February 2000’s 5.8%. Nevertheless, by March 2000, a deterioration of prospects for corporate credit quality helped to establish a peak for a grossly overvalued U.S. equity market. Nearly seven years would pass until the U.S. equity market returned to its March 2000 apex in December 2006. During this span, the default rate crested at January 2002’s 11.1%. The next time the default rate

2 JANUARY 23, 2020 CAPITAL MARKETS RESEARCH / MARKET OUTLOOK / MOODYS.COM CAPITAL MARKETS RESEARCH

Credit Markets Review and Outlook approaches 10%, the drop by the U.S. equity market from its relevant peak will probably be deeper than 20%. Not only did the default rate reach 6.3% in March 2000, but trustworthy leading indicators of default signaled trouble ahead. For one thing, March 2000’s 8.3% average expected default frequency metric of U.S./Canadian high-yield issuers supplied a 7.3% baseline estimate for December 2000’s default rate. In addition, March 2000’s median high-yield EDF metric of 3.0% warned of a somewhat higher 7.6% default rate by year-end 2000. The latter would practically hit the bull’s eye according to December 2000’s actual default rate of 7.5%.

Figure 2: Latest High-Yield EDF Signals a Flat to Slightly Higher Speculative-Grade Default Rate sources: Moody's Investors Service, NBER, Moody’s Analytics are shaded US High-Yield Default Rate: % Average Expected Default Frequency (EDF) of US High-Yield Companies: % 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 100 Jan-9 6 Jan-9 8 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20 For now, market driven indicators of the high-yield default rate have yet to convincingly warn of a deterioration of corporate credit quality that might sink both the equity market and the . The recent 4.5% average high-yield EDF metric supplies a 4.0% midpoint estimate for October 2020’s default rate, while the latest median EDF of 0.30% foresees merely a 2.8% midpoint for October’s default rate. The recent composite high-yield bond spread of 371 basis points concurs with the median EDF and provides a baseline estimate of 2.8% for October 2020’s default rate. The latter is less than December 2019’s default rate of 4.2%, which was above the 2.8% of December 2019. The uncertain corporate earnings outlook for 2020 raises doubts as to whether yearlong 2019’s climb by the default rate will be fully reversed by October of this year. The implied optimism of the high-yield may be overdone.

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Credit Markets Review and Outlook

Figure 3: Recent High-Yield Bond Spread Supplies 2.8% Baseline Estimate for October 2020's High-Yield Default Rate -- Well Under December 2019's 4.2% sources: Moody's Investors Service, Moody's Analytics US High-Yield Bond Spread: basis points (bp) (L) US High-Yield Default Rate: %, actual & MIS baseline estimate (R) 2,000 14.5 1,800 13.5 12.5 1,600 11.5 1,400 10.5 9.5 1,200 8.5 7.5 1,000 6.5 800 5.5 4.5 600 3.5 2.5 400 1.5 200 0.5 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Dec-17 Dec-19

Improved Default Outlook Can Quickly End a Deep Equity Sell-Off Deep drops by the market value of U.S. common stock that are not accompanied by a substantial worsening of the default outlook tend to be short-lived. A recent example pertains to December 2018's latest bottom for the market value of U.S. common stock. Despite a drop by the U.S. default rate from June 2018's 3.6% to December 2018's 2.8% and a subsequent rise to June 2019's 3.2%, December 2018's month-long average for the market value of common stock was a deep 12.9% under its then record high of September 2018. December 2018’s market-driven leading indicators of the default rate correctly signaled a rise by the default rate from December 2018’s 2.8% that would not be severe enough to prevent a recovery by the U.S. equity market. Though a composite high-yield bond spread widened from a September 2018 low of 345 bp to December 2018’s 499 bp, the latter supplied a baseline estimate of a manageable 3.7% for September 2019’s default rate. Moreover, though the average high-yield EDF metric increased from September 2018’s 2.25% to December’s 3.67%, the latter projected a tolerable 3.2% midpoint for September 2019’s default rate. As it turned out, September 2019’s actual default rate was between the two estimates at a benign 3.3%. In addition to a critically important decline by benchmark rates, the sufficient containment of the default outlook explains why only seven months passed before the market value of U.S. common equity set a new record high in July 2019.

Medians Can Compensate for Misleading Averages The profits recession of 2015-2016 saw the moving yearlong average of core pretax profits drop by 7.7% from a first-quarter 2015 top to a third-quarter 2016 bottom. In response to the shrinkage of profits, the month-long average for core pretax profits sank by 12.9% from a May 2015 peak to a February 2016 bottom. Unlike the equity market’s latest bottom of December 2018, February 2016’s trough was joined by a troubling outlook for defaults. February 2016’s composite high-yield bond spread of 839 bp and average high-yield EDF of 8.1% supplied baseline estimates for November 2016’s default rate of 6.9% and 7.2%, respectively.

4 JANUARY 23, 2020 CAPITAL MARKETS RESEARCH / MARKET OUTLOOK / MOODYS.COM CAPITAL MARKETS RESEARCH

Credit Markets Review and Outlook However, both the high-yield bond spread and average high-yield EDF metric of February 2016 were skewed higher by problems that were concentrated among companies having significant adverse exposure to a plunge by the month-long average price of crude oil from a June 2014 high of $105 per barrel to a February 2016 low of $31. For example, first-quarter 2016’s downgrades per upgrade ratio for U.S. high-yield revisions sank from 4.50:1 to 2.60:1 after excluding rating changes affecting issuers having significant exposure to the oil and gas prices. The degree to which the average high-yield spread and EDF metric were skewed higher by severe energy price can be inferred from February 2016’s much lower medians for the high-yield bond spread and high-yield EDF. February’s high-yield bond spread sank from an 839 bp average to a 555 bp median, while the accompanying EDF metric dropped from an 8.10% average to a 0.82% median. In turn, February 2016’s median spread and median EDF generated much lower baseline estimates for November 2016’s default rate of 4.9% and 3.7%, respectively. As it turned out, November 2016’s actual high-yield default rate was 5.7%, which, by chance, exactly matched the average of the baseline estimates supplied by the high-yield bond spread, the median high- yield bond spread, the average EDF, and the median EDF. Once again, soft energy prices weigh on high-yield credit rating revisions, but not to the extent found in 2016. Fourth-quarter 2019’s U.S. high-yield downgrade per upgrade ratio dipped from 1.95:1 to 1.69:1 after excluding the rating changes of issuers having significant adverse exposure to oil and gas prices. Natural gas prices have been faring much worse than crude oil prices. Second half 2019 revealed year- over-year declines of 29% for the price of natural gas (Henry Hub) and 12% for crude oil (WTI). The year- over-year percent changes for January-to-date show a 34% plunge for natural gas and an 18% increase for crude oil.

Gap Between Composite and Median High-Yield Spreads Helps to Divine the Future The size of the gap between the composite high-yield bond spread and the median spread offers useful insight regarding the direction to be taken by the composite high-yield spread over the next 12 months. For 65% of the months since January 1991 that showed the high-yield bond spread at least 50 bp wider than the accompanying median high-yield bond spread, the high-yield bond spread would be narrower 12 months later. The 65% tops the 53% of all months since January 1991 that were followed by a thinner high-yield bond spread 12 months later. However, for a much greater 89% of the months of the current business cycle upturn that had a composite high-yield bond spread at least 50 bp wider than the median high-yield spread, the composite high-yield spread was thinner 12 months later. The 89% well surpasses the 58% months of the current recovery for which the high-yield bond spread was narrower 12 months later. For 64% of the 72 months since January 1991 showing a composite high-yield bond spread that was less than the corresponding median high-yield bond spread, the composite high-yield bond spread would be wider 12 months later. This 64% share tops the 47% of all months since January 1991 that were followed by a wider high-yield bond spread 12 months later. Moreover, for larger 76% of the months coinciding with the current business cycle upturn where the composite high-yield bond spread was less than the accompanying median high-yield spread, the composite high-yield spread was wider 12 months later. The 76% well surpasses the 42% months of the current recovery for which the high-yield bond spread was wider 12 months later. The averages of 2019’s second half showed the 430 bp composite high-yield bond spread 67 bp above the accompanying 363 bp median high-yield spread.

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Credit Markets Review and Outlook

Figure 4: When the Composite High-Yield Spread Is At Least 50 bp Wider than the Median High-Yield Spread, the Composite Spread of 12-Months Later Has Declined 89% of the Time for Current Recovery in basis points; source: Moody's Analytics

US High-Yield Bond Yield Spread Median High-Yield Bond Spread

850

775

700

625

550

475

400

325

250 Sep-09 Jul-10 May-11 Mar-12 Jan-13 Nov-13 Sep-14 Jul-15 May-16 Mar-17 Jan-18 Nov-18 Sep-19

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The Week Ahead

The Week Ahead – U.S., Europe, Asia-Pacific

THE U.S. By Ryan Sweet of Moody’s Analytics

Is Trump Trying to Stack the Fed?

President Trump formally nominated Christopher Waller and Judy Shelton to fill the two open seats on the Board. Waller, executive vice president and research director at the Federal Reserve of St. Louis, faces an easier path to confirmation than does Shelton, U.S. executive director for the

European Bank of Reconstruction and Development.

Waller would be a dove and shares similar views on the path of interest rates as St. Louis Fed President James Bullard. It’s common for the regional Fed president and research directors to be cut from the same ideological cloth. Waller recently said that the St. Louis Fed doesn’t buy into the Phillips curve, which says there is an inverse relationship between and . Therefore, he would likely support the Fed cutting rates, as the risk of low unemployment generating significant inflation

pressures is fairly low. Our past work has shown that the slope of the Phillips curve is flat and that the unemployment rate could keep falling and the inflation implications would be modest.

Waller has been with the St. Louis Fed since 2009 and his dovish views were well known before Trump was elected and the president began lobbying for the to cut interest rates, or even adopt negative rates. This should help Waller in the confirmation process despite concerns that Trump is trying to politicize the Fed. Any potential Fed governor's views on unconventional monetary policy should be assessed, since that person will likely be on the Federal Open Market Committee when the next recession hits and the Fed will need to think outside the box. Waller isn’t a fan of negative interest rates, a view shared among many current Fed officials. There is a history of regional Fed research directors becoming Fed presidents or Federal Reserve Board governors. John Williams was the research director at and then president of the San Francisco Fed before leaving to lead the New York Fed. Charles Evans, Loretta Mester and Mary Daly were all previously research directors and are now regional bank presidents. Odds are that Trump's other choice, Judy Shelton, will have a more difficult path to confirmation. She was previously an economic adviser to the Trump . This isn’t the first time Trump has nominated a former adviser; he nominated Stephen Moore last year, but Moore withdrew his name from consideration. Senators could be concerned that if Shelton were confirmed and Trump found a way to remove Fed Chairman Jerome Powell, she would be his replacement, fanning concerns about the Fed’s independence. Shelton supports the U.S. returning to the gold standard, or tying the value of the dollar to the price of gold. Proponents argue that the gold standard would keep inflation under control and create a standard base for the U.S. . Most economists don’t favor this. It would be a serious issue during a recession because it would constrain the Fed from stimulating the economy by increasing the . The U.S. is not returning to the gold standard, with or without Shelton on the Federal Reserve Board. However, we have seen less sink other Fed nominees.

Next week The economic calendar is busier with data on new-homes ales, durable goods, consumer confidence, pending-home sales, GDP, personal income and spending, along with the Employment Cost Index. The FOMC also meets.

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The Week Ahead

EUROPE

By Barbara Teixeira Araujo of Moody’s Analytics

Data Will Drive Any BoE Move

The last week of January will be extremely busy. We will get tons of data releases—including the first GDP estimates for France, Italy, Spain and the euro zone itself—but the show stealer will be the Bank of

England’s January monetary policy meeting. It will be a finely balanced one; right now, market-based expectations of an cut on January 30 are hovering just slightly above 50%. A rate cut wasn’t even being considered a few weeks ago; it was only following a series of dovish MPC member’s speeches—including one from the governor Mark Carney—and some downside data surprises that markets abruptly awakened to the possibility of a move. Our baseline remains that the bank will refrain

from cutting rates next week, but the truth is that the any economic data released by next Thursday will play a significant role in the bank’s decision.

That’s because we still have little leading data on the period covering the aftermath of December’s general elections, and all hopes lie on firms and households reacting well to the Conservatives’ victory—as it meant the passing of the withdrawal agreement and thus the fading of no-deal Brexit risks. But the survey and the hard data for January could disappoint, in which case we think that the bank wouldn’t hesitate to act, especially as it assesses the momentum of the economy as being extremely lackluster. But we continue to expect that there will be a strong rebound in confidence and

activity in the first quarter of this year, since business and consumers sat on their hands during most of the second half of 2019, waiting to have more clarity on the future of the economy. A lot of pent-up demand could be unleashed. True, uncertainty remains the word of the day. The EU and the U.K. still need to negotiate a free-trade agreement before the end of the year, no easy feat. If they fail, the alternative could be a no-deal Brexit on December 31. But we think that December 31 is too far in the future for those households and firms which already have long postponed major decisions. Indeed, our baseline is that spending and investment will rebound during the first half of 2020, before GDP slows sharply again in the second half of the year—when everyone will realize that the reaching of a trade deal is not guaranteed, and that negotiations aren’t easy. In any case, we think that the bank should wait until the spring before making its decision. This is because the monthly data can be volatile. Waiting until March or May would provide policymakers a much better understanding of how consumers and business reacted to the fading of political uncertainty. As of now, there is no signs that the economy is deteriorating further. On the contrary, the economic data have stabilized or even improved over the past month. And better-than-expected news is coming out of the euro zone, suggesting that the area’s manufacturing downturn may have bottomed. Granted, inflation pressures in the U.K. are extremely subdued—inflation fell to only 1.3% y/y in December—but most of the downside comes from one-off factors, while underlying inflation remains much stronger. While we expect that growth will rebound in the first quarter, the data for the fourth quarter of 2019 are likely to be ugly. We expect that the economy all but stalled in the three months to December as political uncertainty peaked before the elections and dragged on consumption, investment and inventories.

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The Week Ahead

Key indicators Units Moody's Analytics Last Mon @ 11:00 a.m. France: Job Seekers for December mil, SA 3.30 3.30 Tues @ 8:00 a.m. Spain: Unemployment for Q4 % 13.8 13.9 Tues @ 2:00 p.m. Russia: Sales for December % change yr ago 2.7 2.3 Tues @ 2:00 p.m. Russia: Unemployment for December % 4.6 4.6 Wed @ 9:00 a.m. Spain: Retail Sales for December % change 0.1 0.5 Fri @ 9:55 a.m. Germany: Unemployment for January % 5.0 5.0 Thur @ 10:00 a.m. Italy: Unemployment for December % change 9.7 9.7 Thu @ 11:00 a.m. Euro Zone: Unemployment for December % 7.5 7.5 Thur @ 11:00 a.m. Euro Zone: Business and Consumer Sentiment for January index 102.0 101.5 Thur @ 12:00 p.m. U.K.: Monetary Policy and Minutes for January % 0.8 0.8 Fri @ 7:30 a.m. France: GDP for Q4 % change 0.2 0.3 Fri @ 8:00 a.m. Germany: Retail Sales for December % change 0.6 2.1 Fri @ 8:45 a.m. France: Household Consumption Survey for December % change 0.5 0.1 Fri @ 11:00 a.m. Euro Zone: Preliminary Consumer Price Index for January % change 1.3 1.3 Fri @ 11:00 a.m. Euro Zone: Preliminary GDP for Q4 % change 0.2 0.2

ASIA-PACIFIC By Katrina Ell of Moody’s Analytics

Japan’s Domestic Demand Likely Improved After Initial -Hike Fallout

Japan’s December data dump will likely show improvement in domestic demand after the 1 October consumption tax hike and disruption after natural disasters. We expect seasonally adjusted industrial production recorded modest growth in December after contracting by 0.9% m/m in November and 4.5% in October. Production was particularly hit hard by Typhoon Hagibis, which struck northern Japan in October. It was the strongest to hit the country in decades, causing widespread disruption and damage to homes, businesses and links. The annual decline in Japan’s retail trade is forecast to have moderated further in December after falling by 2.1% y/y in November, following a 7% slide in October. There was a dramatic pullback in spending after the tax hike, but with consumer sentiment improving, households are expected to keep loosening their purse strings, albeit very gradually. Indeed, consumer sentiment reached a six-month high in December, with the uptick being driven by broad-based improvement in the major categories; the subcomponent for the willingness to buy durable goods rose by a notable 1.3 points on a monthly basis. China’s manufacturing sentiment likely improved in January, after remaining unchanged at 50.2 in the prior two months. In November, the index returned to expansion territory after six consecutive months in contraction territory. Helping bolster sentiment is the signing of the Phase One trade deal on 15 January, reducing the odds of the U.S.-China trade war moving back to escalation phase. The relationship between Beijing and Washington has improved in recent weeks, and while existing tariffs are unlikely to be removed in the near term, further tariffs that would cause additional pain on Chinese manufacturers are unlikely to be imposed.

Key indicators Units Confidence Risk Moody's Analytics Last Wed @ 8:00 a.m. South Korea Consumer sentiment index for January Index 3  100.5 100.4 Wed @ 11:30 a.m. Australia Consumer price index for Q4 % change 3  0.4 0.5 Wed @ 4:00 p.m. Japan Consumer confidence survey for January Index 3  39.3 39.1 Fri @ 10:00 a.m. South Korea Retail sales for December % change 2  -0.7 3.0 Fri @ 10:30 a.m. Japan Unemployment rate for December % 3  2.3 2.2 Fri @ 10:50 a.m. Japan Industrial production for December % change 2  0.1 -0.9 Fri @ 10:50 a.m. Japan Retail sales for December % change yr ago 3  -1.1 -2.1 Fri @ 12:00 p.m. China Manufacturing PMI for January Index 3  50.7 50.2 Fri @ 6:30 p.m. Thailand Foreign trade for December US$ bil 2  2.4 2.0 Fri @ 7:00 p.m. Taiwan GDP for Q4 % change yr ago 3  2.5 2.9

9 JANUARY 23, 2020 CAPITAL MARKETS RESEARCH / MARKET OUTLOOK / MOODYS.COM CAPITAL MARKETS RESEARCH

The Long View d The Long View

The high-yield bond issuance of January’s first 17 days included $23.6 billion from U.S. businesses, $12.6 billion from Western Europe borrowers, and $9.1 billion from Chinese issuers.

By John Lonski, Chief Economist, Moody’s Capital Markets Research Group January 23, 2020

CREDIT SPREADS As measured by Moody's long-term average corporate bond yield, the recent investment grade corporate bond yield spread of 106 basis points was less than its 122-point mean of the two previous economic recoveries. This spread may be no wider than 115 bp by year-end 2020.

The recent high-yield bond spread of 371 bp is thinner than what is suggested by the accompanying long- term Baa industrial bond yield spread of 169 bp, but wider than what might be inferred from the recent below-trend VIX of 13.0 points.

DEFAULTS December 2019’s U.S. high-yield default rate of 4.2% was up from December 2018’s 2.8% and may average 3.6% during 2020’s final quarter according to Moody's Investors Service.

US CORPORATE BOND ISSUANCE Fourth-quarter 2018’s worldwide offerings of corporate bonds incurred annual setbacks of 23.4% for IG and 75.5% for high-yield, wherein US$-denominated offerings plunged by 26.1% for IG and by 74.1% for high yield. First-quarter 2019’s worldwide offerings of corporate bonds revealed annual setbacks of 0.5% for IG and 3.6% for high-yield, wherein US$-denominated offerings fell by 3.0% for IG and grew by 7.1% for high yield. Second-quarter 2019’s worldwide offerings of corporate bonds revealed an annual setback of 2.5% for IG and an annual advance of 17.6% for high-yield, wherein US$-denominated offerings sank by 12.4% for IG and surged by 30.3% for high yield. Third-quarter 2019’s worldwide offerings of corporate bonds revealed annual advances of 15.2% for IG and 56.8% for high-yield, wherein US$-denominated offerings soared higher by 36.8% for IG and 81.3% for high yield. During yearlong 2017, worldwide corporate bond offerings increased by 4.1% annually (to $2.501 trillion) for IG and advanced by 41.5% for high yield (to $603 billion). Fourth-quarter 2019’s worldwide offerings of corporate bonds revealed annual advances of 15.3% for IG and 329% for high-yield, wherein US$-denominated offerings dipped by 0.8% for IG and surged higher by 330% for high yield. For 2019, worldwide corporate bond offerings grew by 5.4% annually (to $2.447 trillion) for IG and advanced by 49.2% for high yield (to $561 billion). The projected annual percent increases for 2020’s worldwide corporate bond offerings are 2.6% for IG and 4.3% for high yield. US ECONOMIC OUTLOOK In view of the underutilization of the world’s productive resources, low inflation should help to rein in Treasury bond yields. As long as the global economy operates below trend, the 10-year Treasury yield may not remain above 2.00% for long. A fundamentally excessive climb by Treasury bond yields and a pronounced slowing by expenditures in dynamic emerging market countries are among the biggest threats to the adequacy of economic growth and credit spreads.

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The Long View d

EUROPE By Barbara Teixeira Araujo of Moody’s Analytics January 23, 2020

ECB That the European Central Bank made no changes to its monetary policy settings at its January meeting was no surprise. The euro zone’s economic outlook improved slightly since the bank’s last meeting, which corroborates our story that the ECB can afford to stand pat through this year provided that the currency area’s economy doesn’t start falling off a cliff. If that happened, we don’t think bank President Christine Lagarde would hesitate to follow former ECB President Mario Draghi’s dovish footsteps and loosen policy further. Lagarde’s second press conference at the helm of the bank was a success. A key detail of her speech is that she sounded a bit more optimistic regarding the inflation outlook; the bank now sees signs of a moderate increase in underlying inflation pressures, which wasn’t the case before. Also, Lagarde stated that while risks are still tilted to the downside, they have become less pronounced lately given the fading of geopolitical uncertainties. This represents a marginally hawkish shift in the ECB's overall story compared with December, though this by no means suggests that the current ample degree of monetary accommodation is no longer warranted, or that the next move in interest rates will be up rather than down. Our view is that, while growth has managed to hold up in the currency area, it remains extremely fragile with risks abounding. The star of Thursday’s show was the launch of the ECB’s strategic review, the first big move by Lagarde at the helm of the institution. Details were rather thin, as expected, but we welcomed that the ECB is planning to turn every rock before the end of the year. It plans to tackle all the tough questions; it will put into question its definition of price stability—that is, inflation close to but below 2%—and the way it is measured and how it can be delivered, and how the ECB communicates. Other considerations will be employment and climate change. Lagarde expects that the ECB’s strategic review will be completed by December—a date not set in stone—and that the bank will continue to follow the same reaction function in the meantime. All in all, we are sticking to our outlook of no further rate cuts over the coming year. The ECB still needs to see how the additional stimulus translates into the real economy, as now have little margin to further reduce lending rates.

United Kingdom Wednesday brought further good news for the U.K. economy. In the CBI Industrial Trends Survey’s results, British manufacturers’ business sentiment surged from -44 to 23 in the January quarter, its highest level since the April stanza of 2014. Adding to the cheer, investment intentions improved markedly with a record proportion of firms now expecting to authorize capital expenditure for expanded capacity. This comes in line with our expectation that overall confidence and activity rose at the start of the year following the Tory victory in December’s general elections and the passing of the Brexit deal. Following the release of the survey, markets cut the chances of the Bank of England lowering interest rates next week to 52% from 65%. Given that only a handful of leading data are available for January, we expect that Friday’s flash PMI will be a major market mover and will be paramount for the bank’s decision. If it rises in line with our expectations—we expect the composite index to increase to 50.8 from 49.3—we expect that the market-implied probability of a rate cut on January 30 will fall significantly below 50%. Our view remains that the BoE can afford to wait at least until the spring before slashing rates, as it will then have much more information about how households and firms reacted to the fading of Brexit uncertainty. But while the uncertainty related to an immediate no-deal Brexit has been removed, we caution that a no-deal exit remains a possibility at the end of the transition period on December 31. That’s because there is a chance that the U.K. and the EU won’t manage to agree by then on a trade deal. So, while we expect activity to rebound in the first half of the year, it should then slow in the second half as it becomes clearer that the trade negotiations will not be easy. We have not made a no-deal exit our baseline, though. As of now, we put its probability at 20%. Given the extremely tight schedule for talks, one possibility is that the U.K. and the EU will reach only a very thin, barebones agreement (20% probability), leaving the bulk of the trade-related decisions for later. However, our base case (50% probability) is that the transition period will be extended for a year or so, to allow for trade negotiations to continue

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The Long View d

ASIA PACIFIC By Katrina Ell of Moody’s Analytics January 23, 2020

CHINA China’s GDP growth came in a little stronger than expected in the final quarter of 2019, hitting 6% y/y, unchanged from the September quarter. This brings full-year GDP growth to 6.1%, at the lower end of the government’s 6%- to-6.5% target range and follows 6.6% in 2018. This also brings GDP growth in 2019 to its slowest in 29 years, unsurprising given the monthly indicators were overwhelmingly slower than in 2018. For instance, retail trade grew 8% y/y in 2019, compared with 9% in 2018. Industrial production was up 5.7% in 2019 following 6.2% in 2018. Fixed investment rose 5.4% y/y YTD in December, slightly better than the 5.2% y/y YTD in November, which was the joint lowest on record. Clearly, last year was tough for China, managing the evolving and unpredictable trade war alongside challenges at home, including high corporate leverage, growing household debt, managing pollution targets, and continuing the gradual transition toward a more sustainable growth path that meant only piecemeal and targeted stimulus was released. African swine flu became a rising concern and kept headline inflation around its highest in 17 years late in the December quarter. That said, our economic health check shows there were pockets of improvement in the final quarter of 2019. Manufacturing sentiment improved, as did the forward-looking subcategories of overseas and total manufacturing orders. Exports and credit growth also picked up, as did retail trade, industrial production and fixed asset investment. This, combined with the relationship between Washington and Beijing being in a more conciliatory state, suggests that the clouds hanging over China’s economy have eased a little.

Exports finished 2019 on a high China’s headline trade surplus widened to US$46.8 billion in December from US$37.9 billion in November. Exports surprised heavily on the upside with a 7.6% y/y expansion after the 1.3% contraction in November. Taking a broader view, exports rose by 0.5% y/y in 2019, markedly weaker than the 9.9% expansion in 2018. An important drag throughout 2019 came as expected from the U.S., with shipments to the U.S. falling by 12.5% in 2019, a direct impact of the trade dispute. Imports surged by 16.3% y/y in December following a 0.5% rise in November. The surge in imports is attributed to increasing purchases of U.S. pork and soybeans after Beijing issued tariff waivers in early December. These were the result of negotiations with Washington as well as Beijing trying to calm food price growth. Food prices spiked over 2019 due to African swine flu dramatically reducing pork supplies, leading headline CPI to reach 4.5% y/y late in 2019, its highest in 17 years. Hence, it is misleading to assume that December’s import surge is the result of an improvement in Chinese domestic demand. Imports were down by 2.8% in 2019.

Green shoots in manufacturing China’s industrial production gained 6.9% y/y in December, up from 6.2% y/y in November and 4.7% in October. Manufacturing was the main driver of the acceleration, up 7% following 6.3% in November, while mining and power supply recorded healthy growth of 5.6% and 6.8%, respectively. Fixed asset investment in China grew by 5.4% y/y YTD in December, improving from November’s record-low 5.2% y/y YTD. The manufacturing subcomponent improved to 3.1% y/y YTD from November’s 2.5%, its strongest reading since July. On the investment and production side, manufacturing in China was hit hard in 2019 by weakened global demand, alongside the disruption from the U.S.-China trade war. Expectations of further, albeit modest, improvements in global demand and easing tensions between Washington and Beijing have lifted manufacturing activity. Despite existing tariffs between the U.S. and China remaining in place at least through most of 2020, a rebound will remain elusive.

Late improvement in consumption China's retail trade held up better than expected in December, rising by 8% y/y and maintaining the pace set in November. Retail trade in November picked up by 0.8 percentage point from October, likely on the back of the growing popularity of the Singles' Day celebration on 11 November. The underlying drivers of retail trade changed from November to December. In November, there were accelerations in annual terms in products such as clothing,

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The Long View d cosmetics and household electronics. This is to be expected, as these are the items that are targeted with the Singles' Day promotion. In December, there was cooling in these categories, and instead the auto and petroleum categories helped pick up the slack to maintain the headline. It was surprising to see a gain in auto spending given that separately released vehicle sales fell by 0.1% y/y in December, marking the 18th straight month of decline, according to the Association of Automobile Manufacturers. The slump is partially regulatory- driven, as local governments introduced changes to emission standards amid a broader push to lower pollution and improve air quality. In the near term, we expect that household spending will remain around its current pace, helped by the government's stimulus efforts to support domestic demand. But a sharp rebound in consumer spending will remain elusive, since the government is concerned about the sharp rise in household debt and wants to contain further gains. As a result, it is deliberately not using the property market to bolster domestic demand given the largest chunk of household debt is tied to the local property market.

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Ratings Round-Up Ratings Round-Up

Upgrades Account for 10 of 11 U.S. Rating Changes Steven Shields

U.S. rating activity was undeniably positive in the latest period. For the week ended January 21, upgrades accounted for 10 of the 11 ratings changes. Rating activity was once again dominated by speculative-grade companies, with only Adobe Systems Inc. and Leidos Inc. staking claim to an investment-grade credit rating. Adobe’s senior unsecured bonds were upgraded from A3 to A2 which impacted $1.9 billion in outstanding debt. The change reflects Adobe’s exceptional market positions across multiple product lines, conservative financial policies and significant cash generating capabilities. Leidos Holdings Inc. was upgraded to investment-grade Baa3 from Ba1 previously, reflecting its position as the largest pure play defense services contractor with scale to prime large contracts and possessing noteworthy customer breadth spanning foreign governments, U.S. federal agencies, and commercial health markets. The upgrade affected approximately $670 million in debt. The largest upgrade in terms of debt affected was Albertson Companies Inc. with $10.5 billion affected in the change from B3 to B2 for its senior unsecured notes. Moody’s Investors Service noted the company’s good liquidity, scalability, good store base and established brands, and expectations for leverage to improve over the next twelve months.

The opposite was true for European rating activity with activity slowing and downgrades for all three ratings changes. The most notable rating change was made to Berner Kantonalbank AG, which saw its counterparty risk rating decline to A2. The downgrade affected approximately $207 million in debt. A second Swiss bank, Clientis AG, was also downgraded from A1 to A2. The change reflects both banks’ strong exposure to the mortgage and financing business in Switzerland.

FIGURE 1 Rating Changes - US Corporate & Financial Institutions: Favorable as % of Total Actions

By Count of Actions By Amount of Debt Affected 1.0 1.0

0.8 0.8

0.6 0.6

0.4 0.4

0.2 0.2

0.0 0.0 Nov00 Jan04 Mar07 May10 Ju l13 Sep16 Nov19

* Trailing 3-month average Source: Moody's

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Ratings Round-Up

FIGURE 2 Rating Key BCF Bank Credit Facility Rating MM Money-Market CFR Corporate Family Rating MTN MTN Program Rating CP Rating Notes Notes FSR Bank Financial Strength Rating PDR Rating IFS Financial Strength Rating PS Preferred Stock Rating IR Issuer Rating SGLR Speculative-Grade Liquidity Rating JrSub Junior Subordinated Rating SLTD Short- and Long-Term Deposit Rating LGD Loss Given Default Rating SrSec Senior Secured Rating LTCF Long-Term Corporate Family Rating SrUnsec Senior Unsecured Rating LTD Long-Term Deposit Rating SrSub Senior Subordinated LTIR Long-Term Issuer Rating STD Short-Term Deposit Rating

FIGURE 3 Rating Changes: Corporate & Financial Institutions – US Old New Amount Up/ Date Company Sector Rating LTD LTD IG/SG ($ Million) Down Rating Rating

COMPASS GROUP DIVERSIFIED SrUnsec/SrSec 1/15/20 Industrial 400 U B3 B2 SG HOLDINGS LLC /BCF/LTCFR/PDR

1/15/20 LADDER CAPITAL CORP Financial SrUnsec/LTCFR 1,166 U Ba3 Ba2 SG

1/16/20 ADOBE SYSTEMS INCORPORATED Industrial SrUnsec 1,900 U A3 A2 IG

SrSec/BCF 1/16/20 BJS WHOLESALE CLUB INC Industrial U B2 B1 SG /LTCFR/PDR AMERICAN WOODMARK SrUnsec 1/16/20 Industrial 350 U Ba3 Ba2 SG CORPORATION /LTCFR/PDR

1/16/20 DEALER TIRE, LLC Industrial SrSec/BCF U B2 B1 SG

LEIDOS HOLDINGS, INC. 1/17/20 Industrial SrUnsec 422 U Ba1 Baa3 SG -LEIDOS, INC

1/21/20 ALBERTSONS COMPANIES, INC. Industrial SrUnsec 10,498 U B3 B2 SG

SrSec/BCF 1/21/20 SWITCH, LTD. Industrial U B1 Ba3 SG /LTCFR/PDR VICI PROPERTIES INC. SrSec 1/21/20 Financial 3,017 U B1 Ba3 SG -VICI PROPERTIES 1 LLC /SrUnsec/BCF SrSec/BCF 1/21/20 BW NHHC HOLDCO, INC. Industrial D Caa3 Ca SG /LTCFR/PDR Source: Moody's

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Ratings Round-Up

FIGURE 4 Rating Changes: Corporate & Financial Institutions – Europe Old New Amount Up/ Old New IG/ Date Company Sector Rating LTD LTD Country ($ Million) Down LGD LGD SG Rating Rating FRONERI LIMITED- FRONERI LTCFR UNITED 1/15/20 Industrial D Ba3 B1 SG INTERNATIONAL /PDR KINGDOM LIMITED BERNER SrUnsec 1/21/20 Financial 207 D A1 A2 IG SWITZERLAND KANTONALBANK AG /LTD

1/21/20 CLIENTIS AG Financial LTD D A1 A2 IG SWITZERLAND

EUROPCAR MOBILITY 1/21/20 Industrial LGD 1,720 U LGD-6 LGD-5 SG FRANCE GROUP S.A. Source: Moody's

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Market Data Market Data

Spreads

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Market Data CDS Movers

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Market Data

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Market Data Issuance

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Market Data

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22 JANUARY 23, 2020 CAPITAL MARKETS RESEARCH / MARKET OUTLOOK / MOODYS.COM CAPITAL MARKETS RESEARCH

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