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The U.S. And Global Economy Need To Pick Up Steam In TheSecond Half Of 2013
Our second-quarter earnings-season-preview webinar (July 16) was titled, "The Outlook For
Second Quarter S&P 500 Earnings In A Challenging Top Line Revenue Growth Environment,"
which pretty much sums up our assessment of the recent second-quarter earnings season. The
second quarter's earnings growth of 4.8% was quite a bit better than the 2.9% originally
forecast by the S&P Capital IQ consensus at the start of earnings season, but is still
disappointing relative to our expectations for 5%-6% growth; signifying that the business
environment proved to be even more challenging than we had originally envisioned. S&P 500
revenue growth dipped into negative territory (-0.6%) during the latest quarter for the first time
since third quarter 2009, illustrating the challenging operating environment that many
corporations face.
Other contemporary episodes of negative S&P 500 revenue growth were all associated with
periods of economic recession in the U.S., so the latest quarter's result deserves attention. The
negative revenue growth that occurred between fourth quarter 2008 and third quarter 2009 is
associated with the 2008-2009 recession; prior to this instance, the negative revenue growth that
occurred between second quarter 2002 and first quarter 2003 is associated with the 2001 U.S.
recession, including the economic headwinds and corporate governance scandals that followed.
Global Markets Intelligence (GMI) Research believes that the negligible to non-existent top-line
growth in the recent quarter is due to the sub-par domestic recovery cycle, the recession in
Europe, and decelerating growth in Asia. Globally focused S&P 500 corporations derive nearly
half of their revenues from non-U.S. sources with nearly 10% coming from Europe, according
to our colleagues at S&P Dow Jones Indices, so suppressed economic conditions abroad are
clearly weighing on profitability. From this perspective, the S&P 500's recent downtick into
negative revenue growth is once again affiliated with a period of recession, only this
time-around it's in Europe.
Thankfully this discussion of recession and negative top-line revenue growth is largely backward
looking, with recent economic data, both at home and abroad, looking far more upbeat. The
eurozone's purchasing managers index (PMI) rose above 50 (neutral) in July for the first time in
two years, while the U.S. PMI simultaneously rose to 55.4 in July, also the best level recorded in
two years. U.S. initial jobless claims also dropped to 323,000 during the week of Aug. 10,
Lookout Reportfrom Global Markets Intelligence
August 23, 2013
Michael G Thompson
Managing Director
Global Markets Intelligence
(1) 212-438-3480
Robert A Keiser
Vice President
Global Markets Intelligence
(1) 212-438-3540
The Lookout Report is a compendium
of current data and perspectives from
across S&P Capital IQ and S&P Dow
Jones Indices covering corporate
earnings, market and credit risks,
capital markets activity, index
investing, and proprietary data and
analytics. Published bi-weekly by the
Global Markets Intelligence research
group, the Lookout Report offers a
detailed cross-market and cross-asset
view of investment conditions, risks,
and opportunities.
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establishing a new low-water mark for this expansion cycle. Looking forward, investors appear to expect sustained
improvement in the outlook for corporate profits and the economy. The S&P Capital IQ consensus sees quarterly revenue
growth of 4% in the second half of 2013, leading to just over 10% earnings growth by years-end. This potential inflection
point for top- and bottom-line growth will, nonetheless, require an environment of sustained healthy GDP growth, in our
opinion. From this perspective, the stronger than expected July PMI results (manufacturing PMI to 55.4, services PMI to
56.0) are an excellent and needed step in the right direction, supporting the outlook for positive S&P 500 revenue growth
in the second half of this year (see chart 1).
Chart 1
Inside This Issue:
Macroeconomic Overview
The second quarter's earnings growth of 4.8% was quite a bit better than the 2.9% originally forecast by the S&P Capital
IQ consensus at the start of earnings season, but is still disappointing relative to our expectations for 5%-6% growth;
signifying that the business environment proved to be even more challenging than we had originally envisioned. S&P 500
revenue growth dipped into negative territory (-0.6%) during the latest quarter for the first time since third quarter 2009,
illustrating the challenging operating environment that many corporations face.
The U.S. And Global Economy Need To Pick Up Steam In The Second Half Of 2013 Lookout Report from Global Markets Intelligence
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Economic And Market Outlook: North American And European Earnings
Earnings aside, the big story this season was, of course, revenues. While 65% of companies were able to beat expectations
on the bottom-line, only 53% were able to beat on the top-line. This is below the historical average of 60%, but better
than the trailing four-quarter average of 47%. Despite this lower than average beat rate, second quarter 2013 has actually
shown improvement in comparison with recent quarters. Last quarter (first quarter 2013) saw only 44% of companies
beat on the top-line, with revenue growth of 1.1%. Third quarter 2012 was even worse, with only 38% of companies
beating revenue expectations, the lowest amount in our 10 years of data.
International Update: Hostile Foreign Economic Broadsides To Keep Investors In Russian Stocks On The Defensive
Recent empirical evidence may show that emerging market economies possessing current account surpluses tend to exhibit
comparatively more resilience to downside volatility in their equity market returns than nations suffering
balance-of-payments shortfalls. Even though Russia might boast just such an overage in its external accounts, the generally
downward, though erratic, trend in the country's current account surplus is foreboding expressly because it relies so
asymmetrically on energy and natural resource demand from abroad to generate revenues in order to augment its foreign
currency reserves.
S&P Dow Jones Index Commentary: S&P 500 Foreign Sales And Income Tax Receipts
Manufacturing, a major driver of the U.S. economy, is slowly returning from abroad. However, given the current U.S.
economic situation, with many companies finding it increasingly difficult to improve their revenues and compete with
foreign labor costs, how much can U.S. manufacturing grow?
Leveraged Commentary And Data: For The 2013 Loan Market, It Seems Records Were Made To Be Broken
Bolstered by strong market conditions through most of 2013, the loan market has broken through many mid-2000s-era
records, or is on pace to do so by years-end. For example, the universe of S&P/LSTA Index loans outstanding, a proxy for
the amount of investable term loans held outside of banks, expanded to an unprecedented $612 billion on Aug. 15. That's
up from $552 billion at years-end and atop the prior peak of $597 billion from October 2008.
R2P Corporate Bond Monitor
Strong U.S. economic data reignited fears that the Fed will begin to shrink its massive monetary stimulus program earlier
than had been expected. The number of U.S. workers seeking first-time unemployment benefits fell to its lowest level since
the start of the recession, underscoring steady gains in the labor market, while inflation rose 0.2% between June and July,
edging closer to the Federal Reserve's 2% target. Additional indications of a firming U.S. economy will increase the
likelihood that the Fed will begin to pare back its quantitative easing program (QE3).
Market Derived Signal Commentary: Credit Market Worries Moderate As The Eurozone Steps Out Of Recession
It may not be time to celebrate yet, but recently released data revealed that the eurozone's GDP grew 0.3% in the second
quarter, in both the euro area (EA17) and the European Union (EU27), potentially signaling the end of a recession that
began 18 months ago. However, seasonally-adjusted GDP fell by 0.7% in EA17 and by 0.2% in EU27 year-over-year,
according to Eurostat, the European Union's statistical office.
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Capital Market Commentary: IPOs, M&A, And Debt
With continuing political upheaval in the Middle East, have recent social and economic developments adversely impacted
deal making activity? From a quick glance at recent data, the answer would seem to be no. Presently, announced Middle
Eastern M&A activity stands at $22.73 billion, off 2.9% from the previous year's $23.4 billion. On the other hand, the
total number of deals over the same period has moved ahead by 4.1% to 379, from 364 last year, with the largest increase
coming from the financials sector.
S&P Fixed Income Index Commentary: Holding Bonds As Rates Rise
The bond market, which was already struggling to keep its head above water, took a dive after the FOMC minutes were
released, as many investors took them to mean the central bank would begin cutting back on its bond buying program as
soon as next month. The S&P/BGCantor U.S. Treasury Bond Index ended down 0.25% for the day, on top off its -0.84%
loss month-to-date. Between the slow drawn-out economic recovery and heightened expectations surrounding the timing
of the Fed's tapering of its asset purchases, bond market yields have risen significantly. As the Fed scales back, and
eventually ends, its stimulus, yields will continue to rise.
Economic And Market Outlook: North American And European Earnings
North America
Now that the second-quarter earnings season has all but ended, with only 12 companies left to report, we will take a look
back at some of the major trends from this season. Currently, year-over-year growth stands at 4.8%, which is lower than
the Global Markets Intelligence (GMI) group had initially expected at the beginning of the season. The surprise ratio of
3.0% (percentage by which companies were able to beat analysts' estimates) is much lower than the 15-year average of
6%, and the trailing four-quarter average of 3.8%. Much of the disappointing growth can be blamed on misses by three
large companies: Microsoft Corp., Google Inc., and Exxon Mobil Corp. If those three companies had reported results
in-line with analysts' expectations, growth would have come in at 6%, in-line with our initial prediction.
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Chart 2
Earnings aside, the big story this season was, of course, revenues. While 65% of companies were able to beat expectations
on the bottom-line, only 53% were able to beat on the top-line. This is below the historical average of 60%, but better
than the trailing four-quarter average of 47%. Despite this lower than average beat rate, second quarter 2013 has actually
shown improvement in comparison with recent quarters. Last quarter (first quarter 2013) saw only 44% of companies
beat on the top-line, with revenue growth of 1.1%. Third quarter 2012 was even worse, with only 38% of companies
beating revenue expectations, the lowest amount in our 10 years of data. Even so, that quarter saw revenue growth of
0.58%, compared with this quarter's growth of -0.6%, the first negative growth rate seen since third quarter 2009. This
season's disparity between top- and bottom-line growth only further highlights that while companies have been successful
at cutting costs, which is apparent from their bottom-line growth, their dismal sales results illustrate that they are simply
not growing.
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Chart 3
Of course, some sectors are faring better than others. The sectors with the highest revenue beat rates are utilities (67%),
energy (63%), and information technology (61%). Ironically, despite the beats in these sectors, overall revenue growth on
a year-over-year basis was very low, with utilities at -3.7%, energy at -18.4% (the lowest growth rate of all 10 sectors),
and IT nearly flat at 0.7%. On the flip side, the sectors that beat their revenue estimates by the smallest amount are
consumer staples (25%), materials (41%), and telecommunication services (43%). Of these three sectors, only the
materials sector is expecting decent year-over-year revenue growth (5.8%), the third best of all 10 sectors behind
consumer discretionary (14.2%) and financials (8.3%).
Despite the low revenue growth during the quarter, the sales picture for the balance of the year looks a bit brighter, with
analysts expecting revenue growth of 4.4% in the third quarter and 3.8% in the fourth quarter. Overall growth for 2013
is expected to come in at 2.2%, well below the 10-year average of 6.7%.
Europe
This week, three companies from the S&P Europe 350 Index have reported their second-quarter earnings, one has
reported for the half year, and five have reported interim earnings for 2013. Currently, 197 of the 350 (56%) companies
in the index are scheduled to release results for the quarter. Of those, 193 have also reported earnings for second quarter
2012, thus the aggregated growth rate of -10.9% is based on that small sample. It is important to keep in mind that, while
European companies are not required to report on a quarterly basis, they will be reporting half-year results, as well as
full-year results.
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In the most recent week, earnings estimates for calendar-year 2013 continued to fall sharply. At the beginning of the year
the index's earnings were projected to grow 10.4%, however, estimates now stand at -2.5%. This is the lowest growth
rate for 2013 we have seen since we began collecting estimates on April 1, 2012. Low estimates and poor results in the
second quarter, in particular, have negatively affected expectations for the year. Since we last covered European earnings
(see: "Lookout Report: These Are Complicated Times, Indeed, For The Federal Reserve--Part Two," published July 26,
2013), estimates for the year have dropped by 2.52 percentage points. The sectors that saw the greatest declines over this
period are utilities (falling 9.0 percentage points), materials (falling 7.1 percentage points), and energy (falling 6.5
percentage points).
Chart 4
For the first time this year, growth expectations for the Euro 350 and the S&P 500 seem to be lining up. The three sectors
that we previously mentioned as having fallen the most in the last month are also expected to have the lowest growth rates
of the year in both Europe and the U.S. For the Euro 350, utilities is expected to drop 22.6%, materials is expected to be
down 14.6%, and energy is expected to fall 6.7%. Within the S&P 500, utilities is pegged to come in at -0.5%, materials
at 0.9%, and energy at -1.4%. These results point to an ongoing trend we've seen regarding the cost of commodities. The
lower year-over-year prices of commodities makes for a difficult comparison with 2012, resulting in lower growth rates
for these sectors in 2013. For the materials sector, the metals and mining industry has been suffering due to lower
commodity costs, as well as lower seasonal demand in Europe and Asia-Pacific. Within the energy sector, the oil, gas, and
consumable fuels companies have been experiencing lower refining margins and similar demand issues in Europe and Asia,
China in particular.
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On the opposite end of the spectrum, both the information technology and financials sectors are expected to lead the Euro
350 in 2013, with growth estimates of 23.5% and 13.3%, respectively. For the IT sector, the strong expectations are
partially due to favorable year-ago comparisons as the sector fell 34% in 2012. The companies driving this growth are
SAP AG (24.5%), ASML Holding N.V. (18.9%), and Sage Group PLC (16.7%). The financials sector should remain
strong for the second year in a row, as its double-digit 2013 estimate comes on top of last year's 48.5% growth.
Chart 5
Next week, 21 S&P 350 companies are scheduled report their results for second quarter, half year, and interim 2013.
Contact Information: Christine Short, Associate Director—Global Market Intelligence, [email protected]
International Update: Hostile Foreign Economic Broadsides To Keep Investors In RussianStocks On The Defensive
The Russian stock market's performance (-7.4% and -8.6% in U.S. dollar (USD)- and euro (EUR)-denominated terms,
respectively) may be outshining MSCI's composite emerging equity market benchmark (-10.6% and -11.8% in USD and
EUR terms, correspondingly) year-to-date; however, weakening economic conditions and declining investor confidence in
the developing world poses prospectively more severe consequences for investments in commodity-driven nations,
especially Russia. As a major energy exporter, Russia may seem less susceptible to adverse demand trends in its Asian
neighbors, thanks to its exposure to Europe, yet investors in Russian stocks stand to lose a great deal from collapsing
stock markets in Asia.
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Recent empirical evidence may show that emerging market economies possessing current account surpluses tend to exhibit
comparatively more resilience to downside volatility in their equity market returns than nations suffering
balance-of-payments shortfalls. Even though Russia might boast just such an overage in its external accounts, the generally
downward, though erratic, trend in the country's current account surplus is foreboding expressly because it relies so
asymmetrically on energy and natural resource demand from abroad to generate revenues in order to augment its foreign
currency reserves. The end of the prolonged upturn in the commodity super-cycle could foreshadow a sustained decline in
the demand for, and prices of, energy and natural resources if signs of a recovery in Western Europe were to prove
unsustainable. Russia's vulnerability in this regard mirrors that of other paramount commodity producers--namely
Australia, Canada, and Brazil. So, while Russia's current account may still be in surplus, the fact that the country's export
growth remains on a downward trajectory should continue to discomfort both domestic and foreign investors in the
Moscow bourse.
Chart 6
The domestic political scene may appear stable, but uncertainty prevails in the markets surrounding the direction of
economic policymaking in Moscow. Now serving his third inconsecutive term at the helm of the Russian Federation,
Vladimir Putin remains as much a mystery now as when he first assumed the presidency more than 12 years ago. On the
one hand, his endorsement of privatization programs may give the impression that he favors liberal reforms, but on the
other, his cozy relationship with wealthy vested interests and his indirect exercise of authoritarian rule when he deems it
suitable would suggest indifference to, or perhaps a loss of interest in, promoting private sector initiatives and overhauling
outdated pension schemes. As for monetary policy, the Russian central bank is expected to retain a modest tightening
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posture in an effort to further restrain consumer inflation, in spite of the fact that the year-on-year rate of price increases
ebbed to 6.9% last June. Still, higher lending costs are discouraging businesses and households from borrowing, which
will lead to weakening domestic demand.
Abysmal since the end of January, the Moscow stock exchange's performance ranks it as the eleventh worst global equity
market so far this year. The market's prospects for the immediate future look about as grim as the losses it accumulated
over the last seven months. Russian stocks are currently trading at a deep discount to most markets in Western and
Eastern Europe, and their 2013 positive-adjusted forward price earnings multiple (p/e) of 5x is firmly below their record
high (13.4x) and historical average (6.96x). Yet, the fact that the Moscow exchange's p/e is merely five units above its
all-time low, and its trajectory is declining through 2015, points to further bearishness ahead--meaning now is not the time
to plunge headlong into Russian stocks.
Politics and economics are conspiring against investment in Russian shares, and will continue to do so for the foreseeable
future. In addition to domestic sources encouraging disinterest and disinvestment, foreign culprits are the main origin of
Russia's dismal market performance this year, owing to diminishing overseas demand for the country's energy and natural
resources. Worse still, in the event that the prevailing dispersion of global equity market declines were to convert to
full-fledged contagion, investors would be well advised to avoid Russia at all costs. For the time being though, those who
adjudge themselves eager to risk dabbling in the stocks of Russian companies should be highly selective--shunning the
financial, energy, and mining sectors in favor of cyclically defensive, low beta ones like consumer staples, health care, and
utilities.
Contact Information: John Krey, Director—Global Markets Intelligence, [email protected]
S&P Dow Jones Index Commentary: S&P 500 Foreign Sales And Income Tax Receipts
S&P 500 Sales:
European sales declined in 2012 to 9.7% of all S&P 500 sales, down from 11.1% in 2011 and 13.5% in 2010.
U.K. representation also declined, dropping to 1.7% from 2.4% in 2011. European sales excluding the U.K. declined to
8.0%, from 8.7% in 2011 and 12.0% in 2010. Asian sales have increased, now making up 7.5% of all S&P 500 sales,
from 7.2% in 2011 and 6.1% in 2010. Canadian sales declined to 4.1% of S&P 500 sales, down from 4.3% in 2011.
The information technology sector continued to be the most successful and exposed sector in terms of foreign sales, with
58.3% of its declared sales coming from abroad. The IT sector represents 16.2% of all U.S. foreign sales, down from
19.0% in 2011.
S&P 500 companies have reversed their tax payment levels from last year, and are now sending more money to
Washington than to foreign governments. Payments to Washington have increased 24.2% to $145.8 billion, as payments
abroad have declined 1.8% to $139.1 billion. Approximately 51.2% of declared income taxes were paid to the U.S., with
48.8% going to foreign governments.
There was a slick uptick in the number of companies reporting foreign sales; however, almost half of the S&P 500 issues
still do not report sufficient information to facilitate the production of a complete report on global sales.
For the S&P 500, 46.6% of all sales (goods and services) are estimated to have been produced and sold outside of the U.S.
in 2012, compared with 46.1% in 2011 and 46.3% in 2010.
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Observations:
At this point it is not just about tax rates and credits, but in what domain sales and profits are registered. Tax policy has
now become a major issue and we expect the public debate to grow substantially, emulating the levels of political turmoil
that surrounded the health care debate.
While European sales are down, and their growth expectations have been scaled back, they are still a major component of
U.S. sales.
Asian sales are increasing, and the importance of goods produced in Asia that are imported back to the U.S. cannot be
overlooked.
Manufacturing, a major driver of the U.S. economy, is slowly returning from abroad. However, given the current U.S.
economic situation, with many companies finding it increasingly difficult to improve their revenues and compete with
foreign labor costs, how much can U.S. manufacturing grow?
Retail issues tend to show the impact of foreign sales and currency fluctuations quite swiftly, as consumers can quickly
change their spending habits (Coach, Tiffany, McDonalds). On the other hand, decisions for major purchases, such as
equipment (Caterpillar), can take months to complete or change.
Foreign sales, as a percentage of total S&P 500 sales, have bounced back after last year's slight drop, with Asia continuing
to increase as Europe continues its steady decline.
Table 1
S&P 500 Regional Sales Makeup (%)
Region 2012 2011 2010 2009 2008
Africa 3.55 3.67 3.00 3.70 2.81
Asia 7.46 7.16 6.07 8.22 6.36
Austrailia 0.14 0.21 0.12 0.13 0.09
Europe 9.69 11.08 13.48 11.91 13.33
North America (excluding U.S.) 4.59 4.37 1.94 3.49 4.53
South America 2.65 2.62 2.14 2.65 2.58
Foreign 18.51 17.04 19.54 16.48 18.22
Total S&P 500 foreign 46.59 46.14 46.29 46.57 47.94
Source: S&P Dow Jones Indices.
The IT sector remains the leader in foreign sales, while the energy sector has seen a rebound and is now in second.
Table 2
S&P 500 Sectors--Foreign Sales (%)
2012 2011 2010 2009 2008
Consumer discretionary 42.45 42.28 42.98 42.43 44.05
Consumer staples 38.90 46.99 45.61 46.56 46.95
Energy 52.57 39.29 38.86 43.66 50.47
Financials 29.98 34.67 37.05 40.19 34.09
Health care 50.23 52.42 49.82 47.21 48.61
Industrials 47.41 47.96 45.06 44.21 46.14
Information technology 58.32 56.52 56.30 56.02 55.27
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Table 2
S&P 500 Sectors--Foreign Sales (%) (cont.)
Materials 50.70 53.71 52.46 52.06 49.66
Telecommunication services N/M N/M N/M N/M N/M
Utilities N/M N/M N/M N/M N/M
Total non-U.S. 46.59 46.14 46.29 46.57 47.94
N/M--Not meaningful. Source: S&P Dow Jones Indices.
The U.S. has become the majority holder of S&P 500 income tax receipts. We expect tax policy to become the key
political issue in the U.S. later this year, reviving the turmoil and rancor which surrounded the health care debate.
Table 3
S&P 500--2012 Income Taxes Paid
2012 2011 2010 2009 2008
Foreign (Mil. $) 139,132 141,639 117,341 91,876 135,129
U.S. (Mil. $) 145,765 117,337 101,662 92,667 107,205
--
Foreign change (%) (1.77) 20.71 27.72 (32.01) 9.32
U.S. change (%) 24.23 15.42 9.71 (13.56) (29.05)
--
Foreign change (Mil. $) (2,507) 24,299 25,464 (43,252) 11,518
U.S. change (Mil. $) 28,428 15,675 8,995 (14,538) (43,900)
--
Foreign (% of total) 48.84 54.69 53.58 49.79 55.76
U.S. (% of total) 51.16 45.31 46.42 50.21 44.24
Source: S&P Dow Jones Indices.
Using the index's current membership (proforma), we see that a stronger gain was posted in foreign sales.
Table 4
Total Foreign Sales (%)
2012 2011 2010 2009 2008
46.59 46.14 46.29 46.57 47.94
--Proforma based on current membership--
46.59 45.35 42.05
Source: S&P Dow Jones Indices.
Contact Information: Howard Silverblatt, Senior Index Analyst—S&P Dow Jones Indices, [email protected]
Leveraged Commentary And Data: For The 2013 Loan Market, It Seems Records Were Made ToBe Broken
Bolstered by strong market conditions through most of 2013, the loan market has broken through many mid-2000s-era
records, or is on pace to do so by years-end. For example, the universe of S&P/LSTA Index loans outstanding, a proxy for
the amount of investable term loans held outside of banks, expanded to an unprecedented $612 billion on Aug. 15. That's
up from $552 billion at years-end and atop the prior peak of $597 billion from October 2008.
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Chart 7
Not coincidentally, new-issue volume is running at a record pace this year. Through Aug.15, arrangers have syndicated
$412 billion of leveraged loans, including $314 billion of institutional tranches. That is up from $249 billion/$150 billion
during the same period last year, and within sight of the all-time annual high of $535 billion/$365 billion from 2007. In
fact, if the current pace continues through years-end, the 2013 final figure will tip the scales at $663 billion/$505 billion.
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Chart 8
Driving this spike in volume is turbocharged opportunistic deal flow. Issuers have certainly taken advantage of strong
conditions to issue a record amount of recap loans. Through Aug. 15, dividend-related loan volume stood at $51.2 billion,
up from $32.7 billion in the same period last year and on pace to exceed 2012's record of $56.4 billion.
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Chart 9
As usual, private equity (PE) firms were overrepresented here, accounting for 77% of 2013 dividend-related loans, or
$39.5 billion. By comparison, PE-backed entities represent 53% of 2013's leveraged loan issuance.
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Chart 10
Of course, recap loans often have multiple purposes. Drilling down to just the amount used to pay dividends, year-to-date
volume stands at $24.8 billion overall and $20.4 billion for PE firms, versus $20.3 billion/$14.5 billion during the same
period last year.
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Chart 11
Repricing has also been a major theme in 2013. In the year to date, issuers have shaved spreads on $206 billion of
institutional loans, or 37% of S&P/LSTA Index loans outstanding, a figure that includes $66 billion of resyndicated loans
that LCD counts toward new-issue volume statistics and $139 billion of executions done via amendment that we don't.
Either way, 2013 is already a record year for repricings, besting the prior high of $140 billion in 2007.
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Chart 12
M&A loan volume is also up in 2013, though activity in this critical segment of leveraged finance continues to lag far
behind its peak years of 2006-2007, when jumbo leveraged buyouts (LBOs) abounded. So far this year, issuers have
tapped the leveraged loan market for $102 billion of acquisition-related loans, up from $77 billion during the first eight
months of 2012. At this pace, M&A-related lending will reach a six-year high in 2013.
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Chart 13
As this chart suggests, LBO deal-making continues to lag the previous cycle's highs. That said, a few multibillion-dollar
buyouts loans--led by Heinz's $9.5 billion institutional execution--did help bolster M&A loan flow this year. In fact, LBO
loan volume so far in 2013 totals $47 billion through Aug. 15 (excluding the still-unresolved Dell transaction). That's up
from $24 billion during the first eight months of 2012, and is on pace to be the highest annual figure since 2007.
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Chart 14
Drilling down, second-lien volume shot the moon, jumping to $19.2 billion between Jan. 1 and Aug. 15, from $7.9 billion
during the first eight months of last year. Second-lien volume is also on track to top the prior full-year's high of $30.1
billion in 2007. This is a companion trend to this year's recap wave. Indeed, 37% of 2013-model second-lien loans
financed a dividend.
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Chart 15
Tack-on activity has also been on a roll in 2013, jumping to $30 billion through Aug. 15, including $28 billion of
institutional tranches, from $24 billion/$21 billion during the first eight months of last year.
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Chart 16
Among add-on deals, refinancing was the most common purpose, followed by M&A.
Table 5
Add-On Volume By Purpose (%)
Refinancing 45
Acquisition 34
Dividend 13
Corp. purpose 4
DIP 3
General recap 1
DIP--Debtor-in-posession. Source: S&P Capital IQ LCD.
Looking ahead, participants expect arrangers to continue to roll out opportunistic transactions in September--that is,
barring any other announcements from the Fed or important macroeconomic developments--along with the slate of
already announced M&A-related executions that are poised to hit the market, including Hudson Bay and Activision.
Beyond these announced deals--which total some $29 billion--the outlook is hazier. Arrangers say that despite the recent
increase in volume, the pipeline is spotty. For one thing, the price gap between sellers and buyers remains wide, what with
the stock market pushing to record highs. For another, strategic buyers are flush with cash and, as is usually the case, are
often able to justify higher prices on the back of prospective operating efficiencies.
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Still, it's hard to deny that M&A has been on a mini-tear lately. Institutional volume in this category, for instance, reached
a post-credit-crunch high of $14.5 billion in July and remained relatively robust in August, at $4.4 billion in the month to
date. What's more, the calendar of M&A-related loans swelled to a post-credit-crunch high of $30.4 billion on July 31
before retreating to $28.9 billion on Aug. 14, versus $25.8 billion a month earlier.
Chart 17
During the first seven months of 2013, loan mutual funds' assets under management (AUM) grew by $47 billion to a
record $137.6 billion on July 31, according to Lipper FMI, Yahoo! Finance, and fund information. To put this figure in
context, the next largest seven-month AUM increase was $29 billion between November 2010 and May 2011.
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Chart 18
As this suggests, loan mutual funds' share of the overall pool of institutional loans, as measured by S&P/LSTA Index loans
outstanding, has now reached 23%--the biggest share since at least 2002, when LCD started tracking these data.
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Chart 19
Collateralized loan obligation (CLO) volume, meanwhile, is also up big so far this year, climbing to $50.1 billion through
mid-August. This compares with $21.6 billion during the first eight months of last year, and is within range of 2012's
five-year high of $54.3 billion.
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Chart 20
However, with collateral dearer today than it has been since 2007, and 'AAA' spreads wider than they were earlier in the
year, CLO activity has slowed significantly, dropping from the first quarter's all-time high of $26.3 billion to $23.8 billion
in the four and a half months since.
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Chart 21
This slowdown is likely to persist until the equity arbitrage improves. Until then, managers expect volume to remain at
low ebb, running at $4 billion give or take. That suggests $62 billion of CLO issuance for the full year, well short of
2006's high-water mark of $97 billion.
Of course, if collateral gets cheaper for some reason, and in the process helps bolster model-driven returns, managers say
CLO volume would likely rise, as it did in June, when issuance touched a three-month high of $7.2 billion.
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Chart 22
Contact Information: Steve Miller, Managing Director—Leveraged Commentary And
Data, [email protected]
R2P Corporate Bond Monitor
Strong U.S. economic data reignited fears that the Fed will begin to shrink its massive monetary stimulus program earlier
than had been expected. The number of U.S. workers seeking first-time unemployment benefits fell to its lowest level since
the start of the recession, underscoring steady gains in the labor market, while inflation rose 0.2% between June and July,
edging closer to the Federal Reserve's 2% target.
Additional indications of a firming U.S. economy will increase the likelihood that the Fed will begin to pare back its
quantitative easing program (QE3), with this sentiment already pushing 10-year U.S. Treasury yields to 2.90%, the highest
level seen in two years.
Likewise in the U.K., official data from the Office for National Statistics showed a 3% jump in retail sales between July
2012 and last month, the fastest rise in two and a half years. With markets already skeptical that the Bank of England can
keep interest rates down for three years, a healthy boost to U.K. retail sales is unlikely to convince investors that the
Bank's forward guidance plan will hold until 2016.
Concurrently, statistics released by Eurostat on Aug. 14 revealed that the eurozone finally emerged from recession after six
consecutive quarters of economic decline. Initial estimates show that the eurozone's GDP expanded by 0.3% in second
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quarter 2013, marking its first turnaround since the sharp double-dip in the last quarter of 2011. Germany and France,
the eurozone's two largest economies, drove the improvement, growing by 0.7% and 0.5%, respectively, due to stronger
domestic demand.
Upbeat data from the U.S. and Europe could have offset worries of U.S. economic stimulus tapering, since risk-reward
profiles--as measured by average Risk-to-Price (R2P) scores--increased in North America and Europe in the month to Aug.
16 (see tables 6 and 7). As a matter of fact, yield increased while market risk decreased in both regions.
In North America, scores increased by 22% as a result of a decrease in the average probability of default (PD) of 0.02%
and the average historical 20-day bond price volatility (BP Vol.) of 0.25%, while the average option-adjusted spread
(OAS) widened by 24 basis points (bps).
In Europe, scores increased by 30% as a result of a decrease in the average BP Vol. of 0.14% and a widening in the
average OAS of 15 bps, more than offsetting the increase in the average PD of 0.002%.
Table 6
North American Risk-Reward Profiles By Sector--One Month Avg. R2P Score And Components Change
Scores (%) OAS (bps) PD (%) BP Vol. (%)
Consumer discretionary 14 32 0.110 (0.287)
Consumer staples 14 25 0.028 (0.229)
Energy 25 30 (0.012) (0.268)
Financials 34 9 (0.011) (0.190)
Health care 29 23 0.016 (0.258)
Industrials 22 22 0.008 (0.264)
Information technology 30 14 (0.267) (0.220)
Materials 31 22 (0.064) (0.281)
Telecommunication services 13 36 0.025 (0.311)
One month change to Aug. 16, 2013. Source: S&P Capital IQ.
Table 7
European Risk-Reward Profiles By Sector--One Month Avg. R2P Score And Components Change
Scores (%) OAS (bps) PD (%) BP Vol. (%)
Consumer discretionary 28 2 (0.030) (0.114)
Consumer staples 20 15 (0.001) (0.132)
Energy 22 31 0.051 (0.222)
Financials 30 7 (0.120) (0.105)
Health care 66 16 (0.005) (0.166)
Industrials 29 9 (0.019) (0.107)
Information technology 1 28 (0.014) (0.010)
Materials 29 6 0.006 (0.266)
Telecommunication services 55 21 0.050 (0.128)
One month change to Aug. 16, 2013. Source: S&P Capital IQ.
Contact Information: Fabrice Jaudi, Vice President—Global Markets Intelligence, [email protected]
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Market Derived Signal Commentary: Credit Market Worries Moderate As The Eurozone StepsOut Of Recession
It may not be time to celebrate yet, but recently released data revealed that the eurozone's GDP grew 0.3% in the second
quarter, in both the euro area (EA17) and the European Union (EU27), potentially signaling the end of a recession that
began 18 months ago. However, seasonally-adjusted GDP fell by 0.7% in EA17 and by 0.2% in EU27 year-over-year,
according to Eurostat, the European Union's statistical office.
The question now is whether this perceived nascent recovery will last, given continued economic weakness in some
eurozone member countries.
The credit market appears to believe it will, at least for the time being. The average spread of the S&P/ISDA Eurozone
Developed Nation Sovereign CDS Index (eurozone index), which tracks five-year credit default swap (CDS) spreads for a
basket of European nations, was at 110 basis points (bps) on Aug. 19, 2013, just 7 bps above the year's low of 103 bps
reached on May 22, 2013. The average spread over the past year was 134 bps, hitting its high of 225 bps on Aug. 30,
2012. At its present level, the 110-bps spread is near, but modestly superior to, a Standard & Poor's Ratings Services
sovereign credit rating of 'BBB+' (119 bps).
Chart 23
Stronger-than-expected GDP growth in Germany (0.7%), the largest economy in the eurozone, and France (0.5%) helped
propel the eurozone out of recession, according to a report from the BBC. Portugal's GDP also grew in the second quarter,
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up 1.1%. At one point during the 18-month downturn, the eurozone shrank by a record 2.5% (in first quarter 2009
compared with fourth quarter 2008), partially driven by a 3.5% contraction in Germany's GDP, according to Eurostat.
On the downside, Spain contracted by 0.1% and Italy contracted by 0.2% in the second quarter.
The trading pattern in the spreads for the five countries have mirrored the trend in the eurozone index--Germany has
tightened 51% to 27 bps; France by 42% to 70 bps; Spain by 49% to 229 bps; Italy by 40% to 237 bps; and Portugal by
31% to 437 bps. But the wide gamut of spreads clearly depicts the differing range of financial strength among the
sovereigns.
Ahead of the Eurostat report, on June 27, 2013, Standard & Poor's Ratings Services opined that a meaningful economic
recovery in the eurozone had yet to occur, even though analysts had said that the recession appeared to hit bottom in
second quarter 2013.
"Despite signs that the downturn is easing in the region as a whole, some countries are faring worse than others. In Spain
and Italy, for example, there seems to be no letup in the decline of private-sector business investment, whereas in Germany
and France investment appears to be steadying," S&P said. "Some countries such as Germany and Ireland have made
some progress in reducing their high levels of private-sector debt, while others have seen marked increases in private debt
since 2007. The implication here is that the deleveraging process may still be in its infancy for some countries."
We believe the third-quarter report on eurozone GDP will be critical in maintaining the currently low eurozone spreads.
One quarter of economic growth does not a trend make, so we will be watching eurozone sovereign spreads closely for
any changes in sentiment.
Lisa Sanders, Director—Global Markets Intelligence, [email protected]
Capital Market Commentary: IPOs, M&A, And Debt
IPOs
With more than four months remaining in the year, some aspects of 2013's IPO market have already surpassed their levels
from full-year 2012. For example, more IPOs have come to market from the health care, financials, and utilities sectors so
far in 2013 than in the entirety of 2012. For several other sectors, IPO activity is just an issue or two away from matching
last year's results. Only the energy sector, which would have to double its number of IPOs over the remainder of 2013 just
to match last year's deal count, shows decreased demand. As for total proceeds, 2013's to date volume stands less than
$10 billion away from last year's total. Given that underwriting has been averaging over $5 billion per month this year,
that target seems within reach.
Table 8
U.S. IPO Activity
Sector Jan. 1, 2012-Dec. 31, 2012 2013 YTD
Energy 22 11
Materials 5 4
Industrials 9 6
Consumer discretionary 14 12
Consumer staples 4 4
Health care 14 26
Financials 44 47
Information technology 27 21
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Table 8
U.S. IPO Activity (cont.)
Telecommunication services 0 0
Utilities 0 1
No primary industry assigned 3 1
Total isssues 142 133
Total proceeds (Mil. $) 48,365.9 38.441.9
Source: S&P Capital IQ.
M&A
With continuing political upheaval in the Middle East, have recent social and economic developments adversely impacted
deal making activity? From a quick glance at recent data, the answer would seem to be no. Presently, announced Middle
Eastern M&A activity stands at $22.73 billion, off 2.9% from the previous year's $23.4 billion. On the other hand, the
total number of deals over the same period has moved ahead by 4.1% to 379, from 364 last year, with the largest increase
coming from the financials sector. As for valuations, our examination shows that buyers of Middle Eastern businesses are
becoming more conservative, with a typical deal in 2013 priced at 13.6x EBITDA, compared with a 15.0x EBITDA for
transactions in 2012. In light of recent developments, another noteworthy sign is the fact that the market capitalization of
publicly-traded Egyptian stock has climbed from about $42 billion to nearly $45 billion since early July. At least from the
data, it seems that the marketplace is viewing the region's upheaval as a good buying opportunity.
Table 9
Announced Middle Eastern M&A
Number of transactions by sector Jan. 1, 2012-Aug. 20, 2012 Jan. 1, 2013-Aug. 20, 2013 Change (%)
Energy 24 11 (54.2)
Materials 21 15 (28.6)
Industrials 67 60 (10.4)
Consumer discretionary 53 44 (17.0)
Consumer staples 17 19 11.8
Health care 21 24 14.3
Financials 78 103 32.1
Information technology 49 49 0.0
Telecommunication services 7 5 (28.6)
Utilities 9 18 100.0
No primary industry assigned 18 31 72.2
Total 364 379 4.1
Valuation summary
Total deal value(Mil. $) 23,397.5 22,728.1 (2.9)
Average deal value 120.0 113.1 (5.8)
Average TEV/revenue 2.7 7.2
Average TEV/EBITDA 15.0 13.6
Average day prior premium (%) 78.7 20.3
Number of deals by transaction range
Greater than $1 billion 5 5 0.0
$500 million-$999.9 million 4 5 25.0
$100 million-$499.9 million 42 27 (35.7)
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Table 9
Announced Middle Eastern M&A (cont.)
Less than $100 million 144 164 13.9
Undisclosed 169 178 5.3
Source: S&P Capital IQ.
Debt
With yields on a variety of securities, such as the 10-year U.S. Treasury, reaching their two-year highs recently, it shouldn't
be surprising that demand for security identifiers related to various debt issues was affected. Based on the latest
information from CUSIP Global Services, the total weekly volume of CUSIP orders for the six asset classes featured below
dropped from 484 to 439, a drop of 9.3%. To date this year, total CUSIP demand among these profiled security classes
has slipped 5.7%, with a more than one-sixth haircut in municipal security CUSIP requests from year ago levels driving
the overall totals lower. And, while weekly corporate debt CUSIP demand fell by half last week from the preceding period,
the number of orders so far this year remains ahead of the previous year's pace.
As the final month of the third quarter approaches, we'll be keeping an eye on CUSIP activity for any signs of a
turnaround.
Table 10
Selected Debt CUSIP Requests
Week ending Aug. 16 Week ending Aug. 9 2013YTD 2012YTD Change (%)
Domestic corp. debt 73 156 7117 6737 5.60
Municipals 241 218 9092 11020 (17.50)
Short-term Muni note 29 29 884 960 (7.90)
Long-term Muni note 18 14 439 369 19.00
Int'l debt 31 36 1397 1019 37.10
PPN domestic debt 47 31 1383 1442 (4.10)
Total 439 484 20312 21547 (5.70)
Source: S&P Capital IQ.
Contact Information: Rich Peterson, Director—Global Markets Intelligence, [email protected]
S&P Fixed Income Index Commentary: Holding Bonds As Rates Rise
This week's FOMC minutes revealed that almost all the members of the committee agreed that it was not yet time to begin
tapering the Fed's asset purchases. Many committee members urged additional caution, and advocated waiting until more
concrete evidence about the economy's recovery was available. The report continued to explain that the members
generally supported Fed Chairman Bernanke's "contingent outlook". The Fed's inaction shows that its members are
comfortable with waiting patiently as the economic recovery unfolds. Come the September FOMC meeting, however, and
the Fed may begin to change its tune.
The bond market, which was already struggling to keep its head above water, took a dive after the FOMC minutes were
released, as many investors took them to mean the central bank would begin cutting back on its bond buying program as
soon as next month. The S&P/BGCantor U.S. Treasury Bond Index ended down 0.25% for the day, on top off its -0.84%
loss month-to-date. Between the slow drawn-out economic recovery and heightened expectations surrounding the timing
of the Fed's tapering of its asset purchases, bond market yields have risen significantly. As the Fed scales back, and
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eventually ends, its stimulus, yields will continue to rise. Also, the Fed will likely keep the short-term Federal Funds Rate
near zero at the start, if not all the way through the tapering process. The combination of these two events means that the
yield curve should steepen with anchored short-term rates and increasing intermediate to long term rates. The yield of the
S&P/BGCantor 7-10 Year US Treasury Bond Index is 36 basis points wider month-to-date, and long duration indices have
been performing poorly as well, as seen by the maturity sub-indices of the broad S&P/BGCantor U.S. Treasury Bond
Index in the table below. Unfortunately for investors the curve steepening is likely to continue, even as yields on long
duration investments have become attractive and the continuing increase in rates pushes prices downward. Sticking with
short durations, or implementing a laddering strategy out to the middle of the curve, will help. As short bonds in the
laddering strategy mature, the money can be reinvested at the long end of the ladder and capture higher yields in a rising
rate environment, while the short end of the ladder stay consistent as long as the Fed keeps the front end near zero.
Chart 24
Table 11
Index Performance
Index Level One day (%) MTD (%) QTD (%) YTD (%)
S&P/BGCantor US Treasury Bond Index 390.29 (0.25) (0.84) (0.85) (2.38)
S&P/BGCantor 1-3 Year US Treasury Bond Index 306.89 (0.06) (0.11) 0.05 0.06
S&P/BGCantor 3-5 Year US Treasury Bond Index 412.08 (0.29) (0.73) (0.40) (1.64)
S&P/BGCantor 5-7 Year US Treasury Bond Index 472.44 (0.51) (1.49) (1.52) (4.22)
S&P/BGCantor 7-10 Year US Treasury Bond Index 509.38 (0.60) (2.21) (2.63) (6.53)
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Table 11
Index Performance (cont.)
S&P/BGCantor 10-20 Year US Treasury Bond Index 592.59 (0.71) (2.65) (3.62) (8.84)
S&P/BGCantor 20+ Year US Treasury Bond Index 626.43 (1.04) (4.91) (6.44) (14.85)
S&P US Treasury TIPS Index 201.53 0.05 (0.98) (0.58) (7.84)
S&P U.S. Agency Index 100.06 (0.04) (0.35) (0.32) (1.52)
S&P National AMT-Free Municipal Bond Index 128.04 (0.15) (1.43) (2.50) (5.31)
S&P U.S. Issued Investment Grade Corporate Bond Index 96.01 (0.27) (1.56) (0.89) (3.99)
S&P U.S. Issued High Yield Corporate Bond Index 101.88 (0.08) (0.97) 0.71 1.88
S&P/LSTA U.S. Leveraged Loan 100 Index 1,800.67 (0.05) (0.27) 0.95 2.92
S&P U.S. Preferred Stock Index 1,568.82 (0.01) (3.57) (4.14) (2.72)
Data as of Aug. 21, 2013. Source: S&P Dow Jones Indices.
Contact Information: Kevin Horan, Director—S&P Dow Jones Indices, [email protected]
About S&P Capital IQ and S&P Dow Jones Indices Research & Analytics
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