loans impart an upward bias to high-yield downgrade per ......rose to 1.94:1 after excluding the...

WEEKLY MARKET OUTLOOK

OCTOBER 24, 2019

CAPITAL MARKETS RESEARCH

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Loans Impart an Upward Bias to High-Yield Downgrade per Upgrade Ratio

Credit Markets Review and Outlook by John Lonski Loans Impart an Upward Bias to High-Yield Downgrade per Upgrade Ratio

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The Week Ahead We preview economic reports and forecasts from the US, UK/Europe, and Asia/Pacific regions.


The Long View Full updated stories and key credit market metrics: Regardless of what’s in the next FOMC policy statement, the Fed will take its cue from the market following October 30’s likely rate cut.


Ratings Round-Up U.S. Upgrades Outnumber Downgrades


Market Data Credit spreads, CDS movers, issuance.


Moody’s Capital Markets Research recent publications Links to commentaries on: VIX, fundamentals, next recession, liquidity and defaults, cheap money, fallen angels, corporate credit, Fed moves, spreads, yields, inversions, unmasking danger, divining markets, upside risks, high leverage, revenues and profits, riskier outlook.


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.

Credit Spreads

Investment Grade: We see year-end 2019’s average investment grade bond spread above its recent 119 basis points. High Yield: Compared with a recent 426 bp, the high-yield spread may approximate 480 bp by year-end 2019.

Defaults US HY default rate: Moody's Investors Service’s Default Report has the U.S.' trailing 12-month high-yield default rate rising from September 2019’s actual 3.2% to a baseline estimate of 3.7% for September 2020.

Issuance For 2018’s US$-denominated corporate bonds, IG bond issuance sank by 15.4% to $1.276 trillion, while high-yield bond issuance plummeted by 38.8% to $277 billion for high-yield bond issuance’s worst calendar year since 2011’s $274 billion. In 2019, US$-denominated corporate bond issuance is expected to rise by 2.6% for IG to $1.309 trillion, while high-yield supply grows by 35.7% to $377 billion. The very low base of 2018 now lends an upward bias to the yearly increases of 2019’s high-yield bond offerings.

Moody’s Analytics Research

Weekly Market Outlook Contributors: Moody's Analytics/New York: John Lonski Chief Economist 1.212.553.7144 [email protected] Yukyung Choi Quantitative Research Moody's Analytics/Asia-Pacific: Katrina Ell Economist Moody's Analytics/Europe: Ross Cioffi Economist Barbara Teixeira Araujo Economist Moody’s Analytics/U.S.: Mark Zandi Chief Economist Ryan Sweet Economist Steven Shields Economist

Editor Reid Kanaley

Contact: [email protected]

http://www.moodys.com/wco

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2 OCTOBER 24, 2019 CAPITAL MARKETS RESEARCH / MARKET OUTLOOK / MOODYS.COM

Credit Markets Review and Outlook

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

Loans Impart an Upward Bias to High-Yield Downgrade per Upgrade Ratio The credit rating revisions of loan-only high-yield issuers reveal a higher frequency of rating downgrades compared to issuers with outstanding high-yield bonds. For high-yield credit rating changes, downgrades have been more numerous relative to upgrades after excluding rating revisions that applied to outstanding high-yield bonds. Third-quarter 2019’s U.S. high-yield downgrade per upgrade ratio of 1.73:1 rose to 1.94:1 after excluding the rating revisions of high-yield bonds.

For those high-yield rating changes that applied to outstanding high-yield bonds and often other credit market instruments including loans, third-quarter 2019’s downgrade per upgrade ratio was 1.48:1. These rating changes will be referred to here as bond revisions.

The high-yield downgrade per upgrade ratio was a much higher 2.14:1 for the third quarter’s rating revisions that (i) applied to corporate family ratings and/or loan ratings and (ii) did not affect high-yield bond ratings. The rating changes of high-yield CFRs and bank loans frequently overlap and may include revisions of speculative-grade liquidity ratings. Henceforth, these rating changes will be referred to as CFR/loan revisions.

For rating revisions that were limited to speculative-grade liquidity ratings, third-quarter 2019’s downgrade per upgrade ratio was a relatively low 1.25:1.

During 2019’s first nine months, the overall U.S. high-yield downgrade per upgrade ratio of 1.94:1 includes ratios of 2.37:1 for CFR/loans, 1.64:1 for bonds, and 1.29:1 for standalone SGLR changes. After excluding the CFR/loan rating revisions, January-September 2019’s high-yield downgrade per upgrade ratio fell to 1.69:1.

For some time, the CFR and loan rating changes have imparted an upward bias to the downgrade per upgrade ratio of U.S. high-yield rating revisions. Calendar-year 2018’s overall high-yield downgrade per upgrade ratio of 1.06:1 included ratios of 1.28:1 for CFR/loans, 0.80:1 for bonds, and 0.95:1 for SGLRs. Moreover, 2017’s high-yield downgrade per upgrade ratio of 1.09:1 stemmed from ratios of 1.98:1 for CFR/loans, 0.74:1 for bonds, and 0.33:1 for SGLRs.

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Figure 1: Moving Yearlong U.S. High-Yield Downgrade per Upgrade Ratios: Q3-2019 Shows the CFR/Bank Loan Downgrade per Upgrade Ratio of 2.2:1 Topping Overall High-Yield Ratio of 1.8:1 and Bond Ratio of 1.5:1 source: Moody's Analytics




The CFR/loan category’s higher downgrade per upgrade ratio helps to explain why October-to-date’s estimated 490 basis points rate spread for leveraged loans is wider than its 444 bp median for a sample commencing with October 1996, while October-to-date’s average high-yield bond spread of 448 bp is less than its comparably measured sample median of 492 bp. The latest high-yield loan spread implicitly projects an increase by the U.S. high-yield loan default rate from September 2019’s 2.6% to 3.1% by the summer of 2020.

Global High-Yield Loan Default Rate May Again Top Bond Default Rate However, analysts at Moody’s Investors Service now supply a global baseline forecast of 4.1% for September 2020’s default rate of loan-only issuers, which doubles September 2019’s actual loan-only default rate of 2.0%. For bond only issuers, the MIS baseline forecast has the global default rate increasing from September 2019’s 3.0% to 3.2% by September 2020.

The sample medians are 3.5% for the global bond-only high-yield default rate and 2.5% for the global loan-only high-yield default rate. If the baseline forecast proves true and the loan default rate tops the bond default during June 2020 through September 2020, this will not be the first where the loan-only default rate exceeds the bond-only default rate. For the available 230-month sample that begins with August 2000, the global loan default rate was at least 0.1 of a percentage point greater than the bond-only default rate in a significant 52, or 22.6%, of the months.

Loan-Only Default Rate Becomes More Prominent since Great Recession Nevertheless, a loan default rate above the bond default rate has been far more common since the Great Recession. The loan default rate was greater than the bond default rate in only 6.7% of the sample’s months prior to 2008. By contrast, the loan default rate has exceeded the bond default rate in 34.1% of the months since June 2009, or the final month of the Great Recession.

The loan default rate last eclipsed the bond default rate in May 2014. Prior to that, the loan default rate exceeded the bond default rate in 43 of the 46 months beginning with March 2010 and ending in December 2013.

The rise by the loan-only default rate relative to the bond-only default rate and the growth of high-yield loan debt relative to high-yield bond debt explain why the U.S.’ average yield spread between high-yield bonds and high-yield loans has plunged from the 174 bp of August 2000 through December 2007 to the -16 bp of July 2009 through October 2019.

For U.S. high-yield issuers, September 2019’s overall default rate of 3.2% was joined by a high-yield bond default rate of 3.6% and a high-yield loan default rate of 2.6%. According to the baseline forecast of

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Recessions are shadedGlobal Bond-Only High-Yield Default Rate: %, actual & predictedGlobal Loan-Only High-Yield Default Rate: %, actual & predicted

Figure 2: Loan-Only High-Yield Default Rate Is Expected to Surpass Bond-Only Default Rate in June 2020 for First Time since May 2014Global default ratessources: Moody's Investors Service, NBER, Moody's Analytics




analysts from Moody’s Investors Service, the overall U.S. high-yield default rate may reach 3.65% by September 2020. The median gap between the U.S. high-yield bond and loan default rates has narrowed from 150 bp prior to 2008 to 99 bp since June 2009.

Caa Bond Spread Widens by 326 Basis Points from a Year Earlier Lately, much has been written about the high-risk, Caa segment of the speculative-grade bond market. According to ICE, Caa rated bonds supplied an average yield of 12.07% and an average yield spread of 1,045 bp on October 22. By contrast, the Caa yield and spread were 10.20% and 719 bp, respectively, on October 22, 2018. Nevertheless, the latest metrics on the Caa market compare favorably with the 13.59% yield and 1,105 bp spread of year-end 2018.

The latest available data showed that U.S. businesses had $1.207 trillion of outstanding high-yield bonds, which was a deep 10.2% under fourth-quarter 2016's record high of $1.344 trillion. Of the $1,207 billion of outstanding high-yield bonds, only $170 billion, or 14%, were graded Caa or lower—the smallest such share since the 13.6% of 1998’s final quarter.

During the final three years of 2002-2007’s business cycle upturn, the share of high-yield bonds rated Caa or lower averaged 18.6% in 2015, 16.4% in 2006, and 20.8% in 2007. The percent of high-yield bonds rated Caa or lower would then soar to annual averages of 29.5% for 2008 and 2009’s 37.6% for 2009. During 2008-2009’s Great Recession, bonds rated less than B3 peaked at a record high 41.6% of outstanding speculative-grade bonds in 2009’s first quarter.

Researchers at Moody’s Investors Service have estimated the average annual, or one-year, default rates at 3.6% for the B3 rating category, 4.4% for Caa1, 8.6% for Caa2, and 19.5% for Caa3. After five years, the cumulative default rates are 23.6% for B3, 26.2% for Caa1, 34.9% for Caa2, and 51.0% for Caa3. In other words, the historical record suggests that half of today’s Caa3-rated bonds are likely to default at some point in the next five years.

October-to-date’s Investment-Grade Bond Issuance Slows Considerably After an exuberant September, the issuance of US$-denominated corporate bonds has slowed considerably thus far in October. Compared to the year earlier span, the issuance of US$-denominated investment-grade corporate bonds plunged by 57% during October 1 through 21, 2019.

However, because of the atypically low issuance of a year earlier, October-to-date’s offerings of US$-denominated high-yield bonds advanced by 71% annually. For all of October, US$-denominated high-yield bond supply is likely to fall roughly 8% short of its $25 billion average for the Septembers of the five-years-ended 2018. Newly rated high-yield bank loan programs have also eased from September’s pace.

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Figure 3: September 2019's U.S. High-Yield Bond Default Rate of 3.6% ToppedU.S. High-Yield Loan Default Rate of 2.6%sources: Moody's Monthly Default Report, Moody's Capital Markets

The Week Ahead



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

THE U.S. By Mark Zandi of Moody’s Analytics

A Big ‘If’ U.S. economic growth has slowed over the past year, and the current pace of growth has slipped below the economy’s potential. Abstracting from the quarterly vagaries of the data, real GDP growth has slowed from close to 3% a year ago to below 2%. Accounting for upcoming revisions to the jobs data, job growth has been roughly halved over the same period, from approximately 225,000 per month to just over 100,000 per month.

The economic slowdown is global. While the only major countries in recession are Italy and Turkey, much of the rest of the world is struggling.

In Europe, the German and U.K. economies are barely keeping it together. In Asia, Hong Kong, Japan and Singapore are flirting with downturns, and the Chinese economy is growing at its slowest pace since the early 1990s. In the emerging world, Brazil, India, Mexico and South Africa have stumbled. Only a handful of smaller economies are enjoying consistent above-potential growth.

The U.S. trade war with China and other trading partners is the principal proximate cause for the slowdown. Higher tariffs have undermined global trade, which has come to a near standstill this year. This is the weakest performance since the financial crisis a decade ago. The uncertainty created by the trade war has also put global businesses in a dour mood, and they have put big investment plans on ice and pulled back on hiring. Layoffs remain low, but if they pick up, a global recession will have begun.

The tortuous political machinations in the U.K. over a possible Brexit are also contributing to the collective angst, particularly in Europe.

Further delay by the British over whether to leave the European Union will remain a pall over Europe, but so too would an actual Brexit, as the transition out of the EU is sure to be painful.

The Federal Reserve and other global central banks are working hard to forestall an economic downturn by aggressively cutting rates and signaling more rate cuts to come. The Fed has cut rates twice since the summer, by 0.25 percentage point each time, and at least one more 0.25-point rate cut appears imminent. Futures markets are pricing in a fourth cut in December.

The Week Ahead



The Fed’s success in forestalling a downturn will depend in significant part on whether President Trump continues to pursue his trade war. He has threatened more tariff increases on auto imports to the U.S. and on China before this year is over. If he follows through, a recession seems unavoidable, regardless of how the Fed responds. But under the working assumptions that Trump doesn’t escalate the war, Brexit takes a reasonably orderly path, and the Fed and other global central banks remain accommodative, the U.S. and global economy should avoid a recession, at least through the end of the decade.

Don’t worry be happy

Any optimism for the global economy also critically rests on the continued resilience of the American consumer. There is sturm and drang across the globe, but U.S. households have seemed oblivious. Consumer confidence measured by both the Conference Board and University of Michigan surveys remains stalwart and as upbeat as it ever has been, save at the height of the tech bubble in the stock market around Y2K.

Consumers have good reasons to feel good. Unemployment is at a 50-year low, and it is low across nearly all industries, occupations, and regions of the country. The surge in underemployment in the wake of the Great Recession has all but vanished—this category includes part-time workers who want more hours along with people not counted in the labor force but who say they want a job if they could find a suitable one. Even the employment-to-population ratio for prime-age workers, which had been slow to rise in this expansion, is back near its prerecession peak.

Americans’ finances are also in good shape, at least in aggregate. The personal saving rate is hovering near a 35-year high of 8%. In the midst of the housing bubble prior to the financial crisis, saving was less than half that. Households are also borrowing circumspectly, with overall household debt growing no more than the growth in incomes.

Debt service burdens—the percent of income that households must shell out to make timely interest and principal payments on their debt—are at record lows, and households are locked in at low interest rates after many rounds of mortgage refinancing. The delinquency rate on all household debt outstanding has never been lower.

Homeowners have also enjoyed consistently healthy house price appreciation. Last year’s tax cuts, which scaled back preferences in the tax code for homeowning, have dinged owners of high-end homes in the Northeast Corridor, in South Florida, around Chicago, and in coastal California. But a severe shortage of workforce housing is supporting price gains for lower- and mid-priced homes. An

The Week Ahead



increasingly small number of homeowners are still under water on their homes, owing more than it is worth.

However, consumers’ good mood could quickly change if jittery businesses pull back much further on hiring. That will surely be the case if businesses begin laying off workers. Job growth much below 100,000 per month for very long will cause unemployment to rise. Rising unemployment, even from a 50-year low, threatens to ignite a self-reinforcing vicious cycle: Consumers sense the weakening job market and turn more cautious in their spending, businesses respond by reining-in their payrolls even more, unemployment increases, and so on. Once this dynamic begins, recession is hard to avoid.

Consumer spending is also highly sensitive to the ups and downs in stock prices, and the stock market looks fragile. Although the S&P 500 is just below its all-time high, it has effectively gone nowhere for almost two years. And this despite today’s significantly lower long-term interest rates. Weighing on stock prices are corporate earnings, which have effectively flatlined in recent years as shrinking profit margins washed out the benefit from solid business sales.

Focus on stocks

Wealthy households are understandably most focused on whether stocks are in the green or red, and the wobbly stock market appears to have already impacted them. Over the past two years, spending by those in the top quintile of the income distribution has gone flat, and their share of personal outlays has declined nearly 2 percentage points. Households in the middle two quintiles have picked up the slack, while low-income households in the bottom two quintiles have simply held their own. But here is the rub: The top income quintile accounts for more than 60% of all spending. If the stock market slumps, this group will feel it and rein in their spending, and because they account for the bulk of all spending, so too will the broader economy. Since wealthy Americans also buy a lot of what is produced overseas, the entire global economy will feel it.

The stock market is thus now the best barometer of whether a recession is dead ahead. Stock prices always decline sharply prior to downturns and stay down, with anywhere from a couple of months to a year lead time. The importance of stock prices as a leading indicator is likely even greater now given the outsize contribution of wealthy consumers to overall spending, and Trump’s fixation on the stock market as something of a real-time gauge of how the economy is performing. If stock prices slump in earnest, wealthy consumers will likely pack it in, and recession is almost sure to ensue soon thereafter.

Odd recession

It would be odd to suffer a recession due to geopolitics such as a trade war or Brexit. Policymakers figure out their mistakes and right them before they become existential to the economy, as they

The Week Ahead



recognize the political ramifications of a downturn on their chances of remaining in power. This logic is expected to prevail in the current circumstances, and Trump will find a way to call a truce in his trade war and the British to avoid a no-deal Brexit. If so, with some help from central banks and the hedonism of American consumers, the global expansion should go on. But Trump and the British don’t have much time left to figure it out.

Next week Next week is very busy. We expect the Fed to cut interest rates while we get the October employment report, the Employment Cost Index, third quarter GDP, ISM manufacturing survey, vehicle sales, personal income and spending and the PCE deflators.

We will publish our forecasts for next week’s data on Monday on Economy.com.

EUROPE By Barbara Teixeira Araujo and Ross Cioffi of Moody’s Analytics

Brexit Day, Once Again

The week ahead is crucial for Europe, since next Thursday is Brexit day. The recent twists and turns in U.K. politics mean, nonetheless, that the chances of the Brexit deadline again being postponed—until next year—are high. Indeed, this is our baseline. U.K. Prime Minister Boris Johnson did manage to find an agreement with the European Union, but his deal still didn’t get parliamentary approval. Lawmakers have rejected his fast-track timetable to pass the Brexit bill before October 31. They claimed they needed more time to scrutinize it. Given the refusal, Johnson was forced by law to send a letter to the EU asking for an extension of Article 50 until January 31, 2020. The EU hasn’t responded yet—it will probably do so in the next few days—but all suggests the extension will be granted without much resistance. What happens next is still to be seen.

Provided the extension is granted, the government will have two options: agree with the opposition on a new timetable for the Brexit bill to be passed or try to call new elections. The second option is the most likely, as recent polls show the Conservative Party with a sizeable lead over rivals. The government currently lacks a majority in parliament, which means a snap vote would be the perfect opportunity for the Conservatives to increase their numbers and raise the chances of Johnson’s Brexit deal being passed. But we caution that polling results have been volatile and unreliable, and much would still depend on the platforms on which the different parties decide to campaign. A Tory victory isn’t at all guaranteed.

To trigger an election, Johnson would need support from the Labour Party, because the Fixed-term Parliaments Act requires two-third of lawmakers to approve such a motion. While the numbers do not look so good for the opposition, Labour has previously claimed it would support snap elections once the risk of an October no-deal Brexit had been eliminated. If the EU grants the extension, this will be the case, and Jeremy Corbyn, the Labor leader, could be under pressure to support such a vote.

On the data front, the focus next week will be on the GDP estimates for major euro zone countries. The preliminary estimate for euro zone third quarter GDP will be released alongside GDP figures in France, Spain and Italy; Germany’s will come in November. We foresee output in a holding pattern. French GDP will likely grow at a slightly slower rate in the third quarter at 0.2% q/q, GDP growth should remain flat in Italy, and the rate in Spain will likely increase slightly to 0.6%.

France and Spain have outperformed other euro zone heavyweights this year. However, signs of fatigue are showing—ultimately, no economy can remain insulated from the effects of the cool down in manufacturing and trade. As a result, domestic demand in both economies should remain positive though weaker than earlier in the year. The story in Italy is worse. We expect that GDP flatlined for the

https://www.economy.com/dismal/

The Week Ahead



second consecutive stanza in the three months to September, and that the unemployment rate rose to 9.7% in October from 9.5% in September. Like Germany, Italy is extremely exposed to manufacturing and export pains, and an added difficulty is that Italy totally lacks the fiscal space to implement substantial stimulus. Therefore, we’ll be keeping an eye on budget negotiations between the EU and Italy, as once again Italy has proposed a budget that allows the structural deficit to deteriorate.

For the currency area as a whole, we expect that euro zone growth slowed to 0.1% q/q in the three months to September from 0.2% previously. Growth is weighed down by the preponderance of downside risks, which stem from Brexit and the trade wars. And in this climate, we don’t see inflation picking up any time soon. So, our expectation is that CPI inflation in October has remained weak, at 0.9%. However, it’s important to note that CPI has been weighed down across the euro zone in large part due to energy dynamics. Low oil prices are likely to suppress headline inflation until 2020, although, if geopolitical risks materialize in the Middle East, the price of oil will be set to increase at a much faster pace.

ASIA-PACIFIC By Katrina Ell of Moody’s Analytics

Bank of Japan Could Cement a More Dovish Tone at October Meeting The Bank of Japan will likely signal at its October monetary policy meeting an even greater willingness to act if conditions deteriorate. Chances are high that the central bank could cement a more dovish tone by signaling that the existing and extremely accommodative settings will remain in place for a prolonged period. The central bank is waiting to see the impact of the 1 October consumption tax hike on the economy, alongside existing weakness from manufacturing and exports from subdued global demand, before taking a more aggressive accommodative stance. In addition, inflation has been relatively subdued, albeit well off the 2% target. Odds that the BoJ will be compelled to act early in 2020 are high. The yen could be a catalyst; existing upward pressure on the yen could increase with major central banks offshore turning more dovish and heightened geopolitical risk.

Japan’s September activity data will likely be broadly positive, largely lifted by front-loading ahead of the sales tax hike from 8% to 10% on 1 October. Retail sales likely remained upbeat in September, following the 4.8% m/m surge in August. Widespread advertising ahead of the value-added-tax increase have encouraged the flurry of spending. But while consumers are spending, their confidence has stumbled. Concern about the impact of higher prices with subdued wages, a dispute with South Korea, and concern about the health of the global economy are persistent drags.

China’s official manufacturing PMI likely improved a notch in October to 49.9, from September’s 49.8. The index is forecast to remain below the neutral 50. Easing of trade tensions with the U.S. and the ongoing release of timid stimulus from Beijing have helped sentiment in recent months. But downside risks plague the outlook and the existing tariffs on Chinese goods into the U.S. are expected to remain in place into 2020.

Key indicators Units Moody's Analytics Last

Tues @ 9:00 a.m. Spain: Retail Sales for September % change 0.4 0.2

Wed @ 7:30 a.m. France: GDP for Q3 % change 0.2 0.3

Wed @ 8:45 a.m. France: Household Consumption Survey for September % change 0.3 0.0

Wed @ 9:55 a.m. Germany: Unemployment for October % 5.0 5.0

Wed @ 11:00 a.m. Euro Zone: Business and Consumer Sentiment for September index 101.2 101.7

Thur @ 8:00 a.m. Germany: Retail Sales for August % change 0.5 0.5

Thur @ 9:00 a.m. Spain: GDP for Q3 % change 0.6 0.5

Thur @ 10:00 a.m. Italy: Unemployment for September % change 9.7 9.5

Thur @ 11:00 a.m. Euro Zone: Preliminary GDP for Q3 % change 0.1 0.2

Thur @ 11:00 a.m. Euro Zone: Preliminary Consumer Price Index for October % change 0.9 1.0

Thur @ 11:00 a.m. Euro Zone: Unemployment for September % 7.4 7.4

Thur @ 12:00 p.m. Italy: GDP for Q3 % change 0.0 0.0

The Week Ahead



Key indicators Units Confidence Risk Moody's Analytics Last

Wed @ 10:50 a.m. Japan Retail trade for September % change yr ago 3 2.4 2.0

Wed @ 11:30 a.m. Australia CPI for Q3 % change 3 0.4 0.6

Thurs @ 10:00 a.m. South Korea Retail trade for September % change 3 -1.8 3.9

Thurs @ 10:50 a.m. Japan Industrial production for September % change 3 1.9 -1.2

Thurs @ 12:00 p.m. China Manufacturing PMI for October Index 3 49.9 49.8

Thurs @ 4:00 p.m. Japan Consumer confidence survey for October Index 2 35.4 35.6

Thurs @ 6:30 p.m. Thailand Foreign trade for September US$ bil 2 3.3 3.6

Thurs @ 7:30 p.m. Taiwan GDP for Q3 % change yr ago 3 1.9 2.4

Thurs @ 7:30 p.m. Hong Kong GDP for Q3 % change 3 -0.6 -0.3

Thurs @ Unknown Japan Monetary policy for October ¥ tril 3 80 80

Fri @ 10:00 a.m. South Korea Consumer price index for October % change yr ago 2 -0.1 -0.4

Fri @ 10:30 a.m. Japan Unemployment rate for September % 3 2.3 2.2

Fri @ Unknown South Korea Foreign trade for October US$ bil 2 2.3 6.0


CAPITAL MARKETS RESEARCH The Long View

d The Long View Regardless of what’s in the next FOMC policy statement, the Fed will take its cue from the market following October 30’s likely rate cut. . By John Lonski, Chief Economist, Moody’s Capital Markets Research Group October 24, 2019

CREDIT SPREADS As measured by Moody's long-term average corporate bond yield, the recent investment grade corporate bond yield spread of 119 basis points was less than its 122-point mean of the two previous economic recoveries. This spread may be no wider than 130 bp by year-end 2019.

The recent high-yield bond spread of 426 bp is thinner than what is suggested by the accompanying long-term Baa industrial company bond yield spread of 189 bp, but wider than what might be inferred from the recent ultra-low VIX of 13.5 points.

DEFAULTS September 2019’s U.S. high-yield default rate was 3.2%. The high-yield default rate may average 3.4% during 2020’s first quarter, according to Moody’s Investors Service.

US CORPORATE BOND ISSUANCE Yearlong 2017’s US$-denominated bond issuance rose by 6.8% annually for IG, to $1.508 trillion and soared by 33.0% to $453 billion for high yield. Across broad rating categories, 2017’s newly rated bank loan programs from high-yield issuers sank by 26.2% to $72 billion for Baa, advanced by 50.6% to $319 billion for Ba, soared by 56.0% to $293 billion for programs graded single B, and increased by 28.1% to $25.5 billion for new loans rated Caa.

Second-quarter 2018’s worldwide offerings of corporate bonds eked out an annual increase of 2.8% for IG but incurred an annual plunge of 20.4% for high-yield, wherein US$-denominated offerings rose by 1.6% for IG and plummeted by 28.1% for high yield.

Third-quarter 2018’s worldwide offerings of corporate bonds showed year-over-year setbacks of 6.0% for IG and 38.7 % for high-yield, wherein US$-denominated offerings plunged by 24.4% for IG and by 37.5% for high yield.

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.

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).

For 2018, worldwide corporate bond offerings sank by 7.2% annually (to $2.322 trillion) for IG and plummeted by 37.6% for high yield (to $376 billion). The projected annual percent increases for 2019’s worldwide corporate bond offerings are 4.3% for IG and 29.2% for high yield. When stated in U.S. dollars, issuers based outside the U.S. supplied 60% of the investment-grade and 57% of the high-yield bond offerings of 2019’s first half.



d

US ECONOMIC OUTLOOK As inferred from the CME Group’s Fed Watch Tool, the futures market recently assigned an implied probability of 93.5% to a cutting of the federal funds rate at the October 30, 2019 meeting of the Federal Open Market Committee. 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.

EUROPE By Ross Cioffi of Moody’s Analytics October 24, 2019

EURO ZONE The European Central Bank decided to keep rates steady Thursday, confirming our expectations that in light of last month’s big policy move only a dire change in the economy would warrant further easing. Flash composite PMI results were published for the euro zone and its two largest economies, Germany and France. We were happy to see that the index held ground from September to October, given that it has been on a steep downward trend since 2018. The results meant that the euro zone economy may be stalling, however, and we cannot rule out further declines. That said, there is still a way to go before the gauge reaches the lows it did during the sovereign debt crisis in 2013, let alone those during the financial crisis in 2009. The French results saved the day. Alongside a softer drop in Germany’s PMI, the French figures helped keep the euro zone composite from breaching the break-even balance of 50. Euro zone businesses reported that new orders for goods and services fell for the second month in a row. The outlook was coloured mostly by the continued slump in manufacturing, though growth in services softened to its weakest since 2014. Volumes of new business rose in France, where services drove the gain, and there was even a slight rebound in new export business for both manufacturers and service providers. But although French manufacturing and services firms continued to hire in October at a slightly higher pace than in September, this isn’t a sign that manufacturing is recovering, as external conditions remain poor. The German composite rose slightly, but the bad news from the country’s PMI is that the recession in manufacturing appears to be affecting services as well. German services are still growing, but the rate has slowed to the weakest in over three years. The standout news is that the index registered a net contraction in employment for the first time in six years. This was driven by manufacturing, though the rate of services hiring slowed further in October. For the currency area as a whole, the flash PMI predicts a growth rate of 0.1% for the fourth quarter, in line with our forecast. The European Commission on Wednesday issued warnings to a number of member states over their budget drafts for 2020. Top among them were Italy and France, though Finland received notice for excessive spending while Spain, Portugal and Belgium received them for incomplete drafts. Italy will be in the spotlight given the showdown this past summer in which the country narrowly avoided the opening of a budget infringement case. We hope that the less confrontational stance of the new government means the two sides might find a peaceable solution, but the commission has good reason to push forward with at least a warning. The structural budget is set to worsen under the new budget and net primary expenditures will increase. We expect the EC to formally allow some flexibility, given the Italian government is showing goodwill.



d

ASIA PACIFIC By Katrina Ell of Moody’s Analytics October 24, 2019

CHINA Slower conditions characterized China’s September quarter. GDP growth cooled to 6% y/y, its weakest pace in 27 years. This follows 6.2% in the June quarter and the 6.6% full-year growth of 2018. GDP growth hit 6.2% y/y YTD in the third quarter, at the bottom end of the government’s 6%-to-6.5% target range.

Comments from the National Bureau of Statistics are notoriously optimistic, but following the third quarter national accounts data release, NBS spokesman Mao Shengyong noted that the economy faced “mounting risks and challenges at both home and abroad.” Clearly, the likelihood of a rebound is remote, and the government is managing expectations accordingly.

The enduring trade war with the U.S. has been a blight on China's economy. The impact of the trade war is clear in foreign trade data. Exports have been mediocre through 2019 as the tensions and tariffs have escalated. In September, exports surprised on the downside with a 3.2% y/y decline. Shipments to the U.S. fell by 21.9% y/y, building on the 16% contraction in August, while exports to Japan and South Korea fell 5% and 5.1%, respectively.

Total imports dropped for a fifth straight month in September and were down by 8.5% y/y after August's 4.6% fall. Imports have struggled with the marked decline in imports from the U.S., which is the source of around 10% of China's total imports.

Trade talks The U.S. and China have agreed on phase one of a trade deal. The U.S. tariff increase scheduled for 15 October didn’t go ahead. China will increase its purchases of U.S. agricultural products by $40 billion to $50 billion, though it is unclear when. The agreement is expected to be signed in November, but it doesn’t resolve the main issues behind the trade tensions, including China’s intellectual property theft, forced technology transfers, and China's industrial subsidies. All told, this agreement decreases the odds of escalation in the trade tensions, but there’s still much progress to be made. In particular, the 15% tariff on US$160 billion Chinese products scheduled to take effect from 15 December is still going ahead, while Washington added several high-tech Chinese companies to the “entity list” because of human rights concerns, potentially blacklisting them from dealing with U.S. companies.

The next high-level trade negotiations between Beijing and Washington are scheduled for mid-November at the APEC leaders summit. Beijing is also attempting to shore up demand domestically, with cuts to the reserve requirement ratio and tax cuts, though it is yet to be determined whether demand will sufficiently react to the increases in credit supply.

Higher inflation won't deter further stimulus Chinese inflation continued to climb and hit 3% y/y in September, its highest in almost three years, following 2.8% in August. CPI troughed in February at 1.5% y/y and has been climbing since. Food has been the consistent upward contributor and hit 11.2% y/y in September, up from 10% in August. High pork prices remained a primary upward contributor, climbing by 69.3% y/y in September, from 46.7% in August.

Higher pork prices have become a rising priority for the government. Pork reserves have been released to try to contain prices, and the consolidation of pig farms and aggressive slaughtering are being implemented to contain African swine flu, which is the catalyst for the high prices. The disease has yet to be contained, and there is no vaccine or cure. Some estimates suggest it will wipe out 20% of global protein supplies by the end of the year. The fever has been reported in 50 countries. Core CPI growth has been steady and remained at 1.5% y/y in September, a testament to the underlying softness in demand.

Beijing has stepped up its efforts to stimulate growth. Recently, the People's Bank of China cut the reserve requirement ratio by 50 basis points for all banks, with an additional 100-basis point cut for qualified city commercial banks, releasing around US$130 billion into the economy. However, there are limits to such measures in addition to limits to demand for funds, especially from the private sector, amid the cyclical downturn and poor investor sentiment. In addition, further loosening will be tempered by the need to keep debt risks in check following previous excesses.



d Still, the PBoC will probably loosen monetary policy further and deepen debt burdens at the risk of financial stability because ensuring demand does not dip too far in the short run is a more imminent priority, whereas the danger of elevated debt is a more distant problem.

Industrial production a bright spot… China’s industrial production picked up 5.8% y/y in September, after touching a 17-year low of 4.4% in August. The gain was fairly broad-based, led by mining, which increased 8.1% y/y in September, from 3.7% in August, and an uptick in manufacturing production, which rose 5.6% y/y in September, after 4.3% in August.

The aggregate gain was supported by a pickup in several key industries as manufacturing output gained pace, rising at 5.6%, and was well supported by mining. Within industries, while general equipment and metal products increased 2% to 3.5%, textiles production continued to be modest, increasing at less than 1%. However, auto manufacturing output was a significant outlier, as production rose by a minimal 0.5% on an annual basis, down from a 4.3% increase in August.

…Fixed investment less so Fixed asset investment growth cooled for the third month in a row, ticking down to 5.4%, from August's 5.5%. Similar to the previous month, the government picked up part of the slack left by the private sector, which continues to deteriorate during the downturn.

By industry, investment in mining remained strong, while manufacturing continued to be weak. Manufacturing is more export-facing than mining. Manufacturing investment rose 2.5% y/y YTD, slowing from the 2.6% rise in August. Growth was led by the 7.6% increase in chemical manufacturing and the 8.7% rise in special equipment manufacturing. Automotive manufacturing investment growth remained anaemic at 1.8%, though slightly up from 1.5% in the previous month. Mining investment held at 26.2% y/y YTD in September.


CAPITAL MARKETS RESEARCH Ratings Round-Up

Ratings Round-Up

U.S. Upgrades Outnumber Downgrades By Steven Shields U.S. rating activity was elevated in the period ended October 22. Twenty-two firms received ratings changes with upgrades comprising nearly two-thirds of the changes. On October 18, Rite Aid Corp.’s guaranteed senior unsecured notes were downgraded to Caa2 from Caa1 and senior unsecured notes were downgraded to Caa3 from Caa2. The retailer’s credit profile reflects its weakened market position as it lacks both the scale and balance sheet to compete with well capitalized competitors. The downgrade affected $4.3 billion in debt and accounted for nearly half of debt affected in the period. Hudson Pacific Properties Inc. was responsible for the significant upgrade in the period with a new LTD rating of Baa2 from Baa3 previously. The report noted the real estate investment trust’s good liquidity profile and solid operating performance aided by its well-position office portfolio in premier markets. Through September 2019, credit downgrades outnumbered upgrades by nearly 30% on the year, but weakness is sector specific and not symptomatic of broader macroeconomic weakness. Energy-related industries and, to a lesser extent, business services and auto suppliers, account for most high yield downgrades. Investment grade securities have held up well with upgrades outnumbering downgrades 21-to-17 this year. European rating activity was mild in the period with only three firms receiving a rating change. Pernod Ricard S.A. was the most notable change in terms of debt affected, with its senior unsecured bonds upgraded to Baa1 from Baa2 previously. The change impacted $7.6 billion in debt. The upgrade mirrors Pernod's track record of strong profit growth, resulting from steady sales growth, positive product mix and efficiency gains, which have translated into improved credit metrics and reduced leverage. The beverage company’s outlook remains stable.

FIGURE 1

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

0.0

0.2

0.4

0.6

0.8

1.0

0.0

0.2

0.4

0.6

0.8

1.0

Aug00 Oct03 Dec06 Feb10 Apr13 Jun16 Aug19

By Count of Actions By Amount of Debt Affected

* Trailing 3-month average

Source: Moody's



FIGURE 2

Rating Key

BCF Bank Credit Facility Rating MM Money-MarketCFR Corporate Family Rating MTN MTN Program RatingCP Commercial Paper Rating Notes NotesFSR Bank Financial Strength Rating PDR Probability of Default RatingIFS Insurance Financial Strength Rating PS Preferred Stock RatingIR Issuer Rating SGLR Speculative-Grade Liquidity Rating

JrSub Junior Subordinated Rating SLTD Short- and Long-Term Deposit RatingLGD 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 SubordinatedLTIR Long-Term Issuer Rating STD Short-Term Deposit Rating



FIGURE 3

Rating Changes: Corporate & Financial Institutions – US

Date Company Sector RatingAmount

($ Million)Up/

Down

Old LTD

Rating

New LTD

Rating

IG/SG

10/16/19 BLACKBOARD, INC. Industrial LTCFR/PDR U Caa1 B3 SG

10/16/19HUDSON PACIFIC PROPERTIES, INC.

Industrial SrUnsec/LTIR 1,300 U Baa3 Baa2 IG

10/16/19 CCF HOLDINGS LLC FinancialSrSec

/SrUnsec/LTCFR319 D Caa1 Caa2 SG

10/17/19MGIC INVESTMENT CORPORATION

FinancialSrUnsec

/JrSub/IFSRU Ba2 Ba1 SG

10/17/19 RADIAN GROUP INC. FinancialSrUnsec/SrSub /Sub/IFSR/PS

U Ba2 Ba1 SG

10/17/19 NMI HOLDINGS, INC. Financial SrSec/BCF/IFSR U Ba3 Ba2 SG

10/17/19ESSENT GROUP LTD -ESSENT GUARANTY, INC.

Financial IFSR U Baa1 A3 IG

10/17/19PING IDENTITY HOLDING CORP. -PING IDENTITY CORPORATION

IndustrialSrSec/BCF

/LTCFR/PDRU B2 B1 SG

10/18/19 RITE AID CORPORATION IndustrialSrUnsec/SrSec

/BCF/LTCFR/PDR4,355 D Caa1 Caa2 SG

10/18/19 TMX FINANCE LLC Financial SrSec/LTCFR 450 U Caa1 B3 SG

10/18/19 NN, INC. Industrial PDR U Caa1 B3 SG

10/18/19COOPER'S HAWK INTERMEDIATE HOLDING, LLC

Industrial PDR D B3 Caa1 SG

10/21/19 UNIT CORPORATION IndustrialLTCFR

/SrSub/PDR1,300 D B3 Caa1 SG

10/21/19CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

Industrial SrUnsec 1,000 U B1 Ba3 SG

10/21/19 ALTERRA MOUNTAIN COMPANY IndustrialSrSec/BCF

/LTCFR/PDRU B2 B1 SG

10/21/19PLASKOLITE PPC INTERMEDIATE II LLC

IndustrialSrSec/BCF

/LTCFR/PDRD B2 B3 SG

10/21/19 BVI MEDICAL, INC. Industrial SrSec/BCF D B2 B3 SG

Source: Moody's



FIGURE 4

Rating Changes: Corporate & Financial Institutions – Europe

Date Company Sector RatingAmount

($ Million)Up/

Down

Old LTD

Rating

New LTD

Rating

IG/SG

Country

10/17/19 FABEGE AB Industrial LTIR U Baa3 Baa2 IG SWEDEN

10/18/19 PERNOD RICARD S.A. Industrial SrUnsec/LTIR 7,646 U Baa2 Baa1 IG FRANCE

10/18/19 TECHNICOLOR S.A. IndustrialSrSec/BCF

/LTCFR/PDRD B2 B3 SG FRANCE

Source: Moody's



Market Data

Market Data Spreads

0

200

400

600

800

0

200

400

600

800

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Spread (bp) Spread (bp) Aa2 A2 Baa2

Source: Moody's

Figure 1: 5-Year Median Spreads-Global Data (High Grade)

0

400

800

1,200

1,600

2,000

0

400

800

1,200

1,600

2,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Spread (bp) Spread (bp) Ba2 B2 Caa-C

Source: Moody's

Figure 2: 5-Year Median Spreads-Global Data (High Yield)



Market Data

CDS Movers

CDS Implied Rating Rises

Issuer Oct. 23 Oct. 16 Senior RatingsBall Corporation Aa2 A1 Ba1Realogy Group LLC Caa2 Ca B3CMS Energy Corporation Aa1 Aa3 Baa1Packaging Corporation of America Aa2 A1 Baa2Bank of America Corporation A2 A3 A2Ally Financial Inc. Baa3 Ba1 Ba2Toyota Motor Credit Corporation Aa3 A1 Aa3Comcast Corporation A1 A2 A3Citibank, N.A. Baa2 Baa3 Aa3American Express Credit Corporation Aa2 Aa3 A2

CDS Implied Rating DeclinesIssuer Oct. 23 Oct. 16 Senior RatingsFord Motor Credit Company LLC B2 B1 Ba1CVS Health Baa3 Baa2 Baa2International Business Machines Corporation A3 A2 A2Philip Morris International Inc. Baa2 Baa1 A2Ford Motor Company B2 B1 Ba1Enterprise Products Operating, LLC Baa2 Baa1 Baa1Boeing Company (The) A3 A2 A2Southern California Edison Company Baa2 Baa1 Baa2Abbott Laboratories A3 A2 A3Waste Management, Inc. Baa1 A3 Baa1

CDS Spread IncreasesIssuer Senior Ratings Oct. 23 Oct. 16 Spread DiffNeiman Marcus Group LTD LLC Ca 5,690 5,318 373Penney (J.C.) Corporation, Inc. Caa3 2,991 2,677 314Frontier Communications Corporation Caa3 6,773 6,669 104Cablevision Systems Corporation B3 389 358 31Liberty Interactive LLC B2 135 111 23Ford Motor Company Ba1 231 215 17Mattel, Inc. B3 385 370 16L Brands, Inc. Ba1 326 312 13First Industrial, L.P. Baa2 239 226 13Chesapeake Energy Corporation B2 1,506 1,495 12

CDS Spread DecreasesIssuer Senior Ratings Oct. 23 Oct. 16 Spread DiffRealogy Group LLC B3 644 812 -168Rite Aid Corporation Caa3 1,398 1,520 -122K. Hovnanian Enterprises, Inc. Caa3 1,662 1,724 -63Dean Foods Company Caa3 2,743 2,792 -49SLM Corporation Ba2 296 342 -47United States Steel Corporation B3 728 765 -36Pitney Bowes Inc. Ba2 447 478 -31American Airlines Group Inc. B1 208 231 -24International Game Technology Ba2 155 179 -24Tenet Healthcare Corporation Caa1 397 420 -23

Source: Moody's, CMA

CDS Spreads

CDS Implied Ratings

CDS Implied Ratings

CDS Spreads

Figure 3. CDS Movers - US (October 16, 2019 – October 23, 2019)



Market Data

CDS Implied Rating Rises

Issuer Oct. 23 Oct. 16 Senior RatingsBarclays Bank PLC A2 Baa1 A2Bank of Scotland plc Aa2 A1 Aa3France, Government of Aaa Aa1 Aa2United Kingdom, Government of Aa1 Aa2 Aa2Spain, Government of Aa3 A1 Baa1Societe Generale Aa2 Aa3 A1Lloyds Bank plc Aa3 A1 Aa3Barclays PLC Baa2 Baa3 Baa3Portugal, Government of Aa3 A1 Baa3Banco Bilbao Vizcaya Argentaria, S.A. A2 A3 A3

CDS Implied Rating DeclinesIssuer Oct. 23 Oct. 16 Senior RatingsDZ BANK AG Baa2 Baa1 Aa1Allied Irish Banks, p.l.c. Baa3 Baa2 A3RCI Banque Ba1 Baa3 Baa1Eurobank Ergasias S.A. Caa3 Caa2 Caa1Credit Suisse AG A3 A2 A1Bank of Ireland Baa1 A3 A2Casino Guichard-Perrachon SA Caa2 Caa1 B1Renault S.A. Ba1 Baa3 Baa3Brisa Concessao Rodoviaria S.A. Baa2 Baa1 Ba2UPC Holding B.V. Ba1 Baa3 B2

CDS Spread IncreasesIssuer Senior Ratings Oct. 23 Oct. 16 Spread DiffCMA CGM S.A. Caa1 1,746 1,664 82Iceland Bondco plc Caa2 640 570 70Casino Guichard-Perrachon SA B1 644 601 43UPC Holding B.V. B2 111 89 22RCI Banque Baa1 99 90 9Renault S.A. Baa3 96 87 9METRO Finance B.V. Ba1 135 126 9Suedzucker AG Baa3 115 111 5Hammerson Plc Baa1 167 164 4Pearson plc Baa2 66 62 4

CDS Spread DecreasesIssuer Senior Ratings Oct. 23 Oct. 16 Spread DiffPizzaExpress Financing 1 plc Caa2 10,741 11,473 -733Boparan Finance plc Caa1 2,723 2,845 -122Matalan Finance plc Caa1 806 867 -60Vedanta Resources Limited B2 494 523 -28Novafives S.A.S. Caa2 705 731 -26Wienerberger AG Ba1 133 158 -25Greece, Government of B1 161 181 -20TDC A/S B1 120 138 -18thyssenkrupp AG Ba3 204 220 -16Jaguar Land Rover Automotive Plc B1 617 631 -14

Source: Moody's, CMA

CDS Spreads

CDS Implied Ratings

CDS Implied Ratings

CDS Spreads

Figure 4. CDS Movers - Europe (October 16, 2019 – October 23, 2019)



Market Data

Issuance

0

600

1,200

1,800

2,400

0

600

1,200

1,800

2,400

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Issuance ($B) Issuance ($B)2016 2017 2018 2019

Source: Moody's / Dealogic

Figure 5. Market Cumulative Issuance - Corporate & Financial Institutions: USD Denominated

0

200

400

600

800

1,000

0

200

400

600

800

1,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Issuance ($B) Issuance ($B)2016 2017 2018 2019

Source: Moody's / Dealogic

Figure 6. Market Cumulative Issuance - Corporate & Financial Institutions: Euro Denominated



Market Data

Investment-Grade High-Yield Total*Amount Amount Amount

$B $B $BWeekly 15.486 4.450 21.138

Year-to-Date 1,130.715 338.598 1,555.572

Investment-Grade High-Yield Total*Amount Amount Amount

$B $B $BWeekly 16.612 3.677 21.048

Year-to-Date 708.610 82.032 814.313* Difference represents issuance with pending ratings.Source: Moody's/ Dealogic

USD Denominated

Euro Denominated

Figure 7. Issuance: Corporate & Financial Institutions



Moody’s Capital Markets Research recent publications

VIX, EDF and National Activity Index Go Far at Explaining the High-Yield Spread (Capital Markets Research)

Worsened Fundamentals Lift Downgrades Well Above Upgrades (Capital Markets Research)

Next Recession May Lower 10-year Treasury Yield to Range of 0.5% to 1% (Capital Markets Research)

Abundant Liquidity Suppresses Defaults (Capital Markets Research)

Cheap Money in Action (Capital Markets Research)

Bond Implied Ratings Hint of More Fallen-Angel Downgrades (Capital Markets Research)

Leading Credit-Risk Indicator Signals A Rising Default Rate (Capital Markets Research)

Upon Further review, Aggregate Financial Metrics Worsen (Capital Markets Research)

Faster Loan Growth Would Bode Poorly for Corporate Credit Quality (Capital Markets Research)

Likelihood of a 1.88% Fed Funds Rate by End of July Soars (Capital Markets Research)

Market Implied Ratings Differ on the Likely Direction of Baa3 Ratings (Capital Markets Research)

Below-Trend Spreads Bank on Profits Growth, Lower Rates and Healthy Equities (Capital Markets Research)

Global Collapse by Bond Yields Stems from Worldwide Slowdown (Capital Markets Research)

Borrowing Restraint Likely Despite Lower Interest Rates (Capital Markets Research)

The Fed Cured 1998's Yield Curve Inversion (Capital Markets Research)

Extended Yield Curve Inversion Would Presage Wide Spreads and Many Defaults (Capital Markets Research)

Business Debt's Mild Rise Differs Drastically from 2002-2007's Mortgage Surge (Capital Markets Research)

Earnings Slump Would Unmask Dangers of High Leverage (Capital Markets Research)

Credit May Again Outshine Equities at Divining Markets' Near-Term Path (Capital Markets Research)

Not Even the Great Depression Could Push the Baa Default Rate Above 2% (Capital Markets Research)

Benign Default Outlook Implies Profits Will Outrun Corporate Debt (Capital Markets Research)

Upside Risks to the U.S. Economy (Capital Markets Research)

Outstandings and Rating Changes Supply Radically Different Default Outlooks (Capital Markets Research)

High Leverage Offset by Ample Coverage of Net Interest Expense (Capital Markets Research)

Subdued Outlook for Revenues and Profits Portend Lower Interest Rates (Capital Markets Research)

Fed Will Cut Rates If 10-Year Yield Breaks Under 2.4% (Capital Markets Research)

Riskier Outlook May Slow Corporate Debt Growth in 2019 (Capital Markets Research)

Replay of Late 1998's Drop by Interest Rates May Materialize (Capital Markets Research)

High-Yield Might Yet Be Challenged by a Worsened Business Outlook (Capital Markets Research)

Default Outlook Again Defies Unmatched Ratio of Corporate Debt to GDP (Capital Markets Research)

Equity Analysts' Confidence Contrasts with Economists' Skepticism

Fed's Pause May Refresh a Tiring Economic Recovery (Capital Markets Research)

Rising Default Rate May be Difficult to Cap (Capital Markets Research)

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To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.

NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.

Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody’s Investors Service, Inc. for ratings opinions and services rendered by it fees ranging from $1,000 to approximately $2,700,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.

Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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