Lookout Report

Home Sales Data Reveals Evidence Of Fed Success In ReflatingThe U.S. Economy And Markets

The timing was uncanny: Less than a week after the release of the minutes of the April Federal

Open Market Committee (FOMC) meeting, which suggested investors might be underestimating

the chances that the FOMC could raise the Fed funds target rate at its June meeting, April

readings on both existing and new home sales and prices were considerably stronger than what

was generally expected. U.S. existing home sales rose to 5.45 million units (seasonally adjusted

annual rate; SAAR) in April versus expectations for a rise to 5.38 million units. Meanwhile, new

single-family home sales exploded to 0.62 million units (SAAR) versus expectations for a much

more moderate improvement to 0.52 million units. In addition, the April sales rate for newly

constructed homes is the strongest it's been since January 2008.

Home sale prices were equally impressive. The average existing single-family home price rose to

$275,800 in April, up 4.2% from year-ago levels and just below the all-time record of $281,300

from June 2015. This puts existing home prices on par with the prior cyclical record of

$277,900 from June 2007. The new single-family median home sale price set a new record of

$321,100 in April, representing a 9.7% price increase from year-ago levels. Furthermore, the

monthly median new home sale price is now significantly higher (+22.3%) than the prior

cyclical high of $262,600 from March 2007. So while the underlying growth rate of GDP has

been sub-par since the inception of the ongoing economic recovery, the persistent appreciation

of home prices--with support from the Federal Reserve--has been relatively robust (see chart 1).

Lookout Report

May 27, 2016

Michael G Thompson

Managing Director

S&P Investment Advisory Services

(1) 212-438-3480

[email protected]

Robert A Keiser

Vice President

S&P Global Market Intelligence

(1) 212-438-3540

[email protected]

This report was prepared by S&P

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Chart 1

Home price appreciation at a rate that far exceeds that of underlying GDP growth could be one of the factors responsible

for the recent hawkish turn in Fed pronouncements and commentary. Some Fed officials have gone so far as to suggest

that up to three interest rate hikes could be forthcoming this year. Considering the strength evident in the April home sales

data, combined with the hawkish rhetoric coming from multiple Fed officials of late, it is very interesting to note that the

slope of the U.S. yield curve remains close to the post-recession cyclical lows set in the aftermath of the May 18 release of

the April FOMC meeting minutes. The yield spread between the U.S. 10-year and two-year Treasury notes closed at 93

basis points (bps) on May 23, which is the narrowest spread since November and December 2007 (see chart 2).

Home Sales Data Reveals Evidence Of Fed Success In Reflating The U.S. Economy And Markets Lookout Report

2

May 27, 2016

Chart 2

A flattening yield curve suggests that investors are not quite ready to conclude that inflation is about to become

problematic for Fed officials and financial markets. A sustained flattening of the yield curve from current levels would

suggest to us that multiple FOMC rate hikes are less likely over the balance of 2016. A more disturbing interpretation of a

sustained flattening of the curve would be that many fixed-income investors still believe that deflationary forces--as

opposed to inflationary ones--remain the predominant concern. Some might also believe that further rate hikes from the

Fed would only exacerbate the deflationary influences that briefly boiled to the surface in January and February but have

been dissipating ever since. Investors now need to digest upcoming high-profile economic data, predominantly the May

employment report, within the context of:

• Changes in the foreign exchange value of the U.S. dollar and any concurrent influence that the dollar has on industrial

sector activity and commodity prices, particularly crude oil (foreign exchange headwinds or tailwinds inflating or

deflating raw materials pricing);

• Changes in the slope of the yield curve as a barometer of whether global fixed-income investors are anticipating

inflation, deflation, or essentially price stability for the foreseeable future; and

• After seven years of recovery, is the U.S. economy suddenly displaying accelerating growth characteristics that would

normally be evident in the early stages of expansion?

An ideal outcome for investors and the Fed would be that the U.S. economy is now transitioning to a period of modestly

improved GDP growth, where expanding consumer demand largely offsets the potential deflationary influences associated


3

May 27, 2016

with a further normalization of U.S. monetary policy. Consumer price inflation under this scenario would remain largely

in check, limiting the need for a prolonged string of potentially disruptive future Fed rate hikes and allowing the existing

GDP and corporate profit cycle to run unabated for the foreseeable future.

The upcoming May employment report, to be released on June 3, should provide important clues on the health and vigor

of the U.S. recovery cycle. The previous jobs report revealed that nonfarm payrolls grew by just 160,000 in April, the

weakest gain since August and September 2015. The three-month average rate of nonfarm payroll employment growth has

now dipped to 200,000, the lowest level since October 2015 (see chart 3). Any further deceleration of jobs growth would

not support the contention of some Fed officials that multiple interest rate hikes are possible in 2016, whereas a sharp

rebound in job creation could end up making these prognostications a reality.

Chart 3

Inside This Issue:

Macroeconomic Overview: Home Sales Data Reveals Evidence Of Fed Success In Reflating The U.S. Economy And Markets

The timing was uncanny: Less than a week after the release of the minutes of the April Federal Open Market Committee

(FOMC) meeting, which suggested investors might be underestimating the chances that the FOMC could raise the Fed

funds target rate at its June meeting, April readings on both existing and new home sales and prices were considerably

stronger than what was generally expected. Home sale prices were equally impressive. Home price appreciation at a rate

that far exceeds that of underlying GDP growth could be one of the factors responsible for the recent hawkish turn in Fed


4

May 27, 2016

pronouncements and commentary. Some Fed officials have gone so far as to suggest that up to three interest rate hikes

could be forthcoming this year. The upcoming May employment report, to be released on June 3, should provide

important clues on the health and vigor of the U.S recovery cycle.

Economic And Market Outlook: As Q1 Earnings Close, The Outlook Improves

A few major retailers and technology companies have surprisingly helped boost first-quarter earnings in the past two

weeks as the earnings season comes to an end. The projected earnings growth rate for the S&P 500 is still the weakest

since the Great Recession at negative 5.6%, but it's better than the 6.0% decline expected two weeks ago and the 8.3%

decline anticipated on April 13. About 67% of the index has beat consensus expectations, which is in line with the

historical average beat rate of 66%. The size of the beats, however, has been smaller than the historical average.

Leveraged Commentary And Data: Privately Placed Second-Lien Loans, By The Numbers

The volume of second-lien loans launched to market is down by a staggering 75% in 2016 through May 17. More

specifically, arrangers have launched $937 million of second-lien loans, down from $3.78 billion for the same period last

year, as issuers and sponsors have largely been placing this debt privately.

S&P Dow Jones Index Commentary: For The S&P 500 Industrial (Old), Cash Remains King

With more than 90% of the data in, the S&P 500 Industrial (Old) could set a new cash and equivalent record for the first

quarter of 2016; the current record is $1.33 trillion in the fourth quarter of 2014. Even if the first quarter of 2016 falls

short of the record, there's no question companies have enough cash and access to debt and shares to do whatever they

want, with "want" being the key word. Mostly, it seems companies want to buy back stock. Dividends and capital

expenditures are also still in vogue, with some caveats.

R2P Corporate Bond Monitor

In the U.S., the latest murmurings from the FOMC of a possible rate hike as early as June or July were complemented by

more positive data in the last two weeks. The FOMC made clear that it would favor a June rate hike if conditions allowed

and if the economy continues to improve--a statement that seemingly halted the tightening of corporate spreads.

Capital Market Commentary: IPOs, M&A, And Debt

The lackluster initial public offering (IPO) market so far this year might soon see some bright spots. Coming ahead of the

Memorial Day holiday, six offerings were poised to be priced in the week ending May 27. Headlining the upcoming

docket of deals is a $1 billion offering by private-equity-controlled food distributor US Foods Holding, which is the largest

non-REIT IPO in 2016 to date.

Economic And Market Outlook: As Q1 Earnings Close, The Outlook Improves

North America

A few major retailers and technology companies have surprisingly helped boost first-quarter earnings in the past two

weeks as the earnings season comes to an end. The projected earnings growth rate for the S&P 500 is still the weakest

since the Great Recession at negative 5.6%, but it's better than the 6.0% decline expected two weeks ago and the 8.3%

decline anticipated on April 13. About 67% of the index has beat consensus expectations, which is in line with the

historical average beat rate of 66%. The size of the beats, however, has been smaller than the historical average. Coming


5

May 27, 2016

in about 230 bps ahead of projections at the start of the reporting season, growth hasn't been close to the typical beat of

400 bps to 450 bps. This is now the second quarter in a row for the index to post a below-average beat size.

Six of 10 sectors have negative growth rates in the quarter, a phenomenon that also hasn't happened since 2009. The

energy sector continues to weigh the most heavily on growth given its profit loss and the lowest earnings beat rate (only

14% of the companies that have reported announced better-than-expected results). Excluding the energy drag,

first-quarter growth is still in negative territory at negative 1.0%, though it's better than the negative 3.8% estimated at

the start of the season.

Chart 4

While oil and commodity price declines (West Texas Intermediate oil prices dropped 31% on average in the first quarter)

weighed on the energy (Q1 earnings growth of negative 106.6%) and materials sectors (Q1 earnings growth of negative

11.4%), they weren't the only sectors with weak growth rates. Financials, technology, industrials, and utilities also posted

earnings declines. Low interest rates, a still-strong dollar, and a global growth slowdown have weighed on several sectors.

Leading for the fourth quarter in a row are the consumer discretionary, telecommunications, and health care sectors.

Consumer staples crossed into positive growth on Thursday, May 19. Consumer discretionary is the only group with

double-digit growth at 21%, while telecommunications growth is at 9% and health care is at 8%. Consumer discretionary

growth was driven by automobiles and Internet retailers. Strong earnings reports from Home Depot Inc., Lowe's Cos.,

Walmart Stores Inc., and TJX Cos. Inc. also helped the sector's growth rate improve over the course of the past two

weeks, bucking the trend for disappointing retailer results. Consolidation (AT&T Inc. acquired DIRECTV last July) and a


6

May 27, 2016

reduction in competitive pressures benefited the telecommunications sector. Biotechnology once again was a key driver of

health care's robust growth rates, even as growth for the industry has slowed. Health care providers and services industry

companies--including HCA Holdings Inc. and United Health Services Inc.--also benefited the overall growth for the sector.

Chart 5

Even as companies have been able to beat the bottom-line estimates, revenue growth is once again settling in at a lower

rate than was anticipated at the start of the reporting period. The dollar only appreciated 2.5% on average year-over-year

in the first quarter, based on the U.S. Dollar Index (DXY), as we finally started cycling the sharp rise in the dollar. In the

fourth quarter of 2015, the average increase in the DXY was 12%, and the dollar rose 17% in the third quarter of 2015.

It seemingly takes some time for the reduced level of appreciation to benefit companies. The S&P 500 generates 47.8%

from overseas, according to S&P Dow Jones Indices, with the information technology, energy, materials, and health care

sectors having the largest exposures.

Sales growth of negative 2.0% makes the fifth quarter in a row for a decline, though that is an improvement from the

2.9% average decline in the preceding four quarters. Excluding the energy drag (negative 31.0% sales growth), total index

sales growth would be positive 1.7%. Six sectors are expected to finish with sales lower than last year. Historically, sales

growth has averaged 6%.

The sectors that have led sales growth continue to be the EPS growth leaders: telecommunication services, health care, and

consumer discretionary. On the other hand, energy, utilities, and materials are the largest laggards. Without top-line

growth, earnings growth has been tough to come by.


7

May 27, 2016

Chart 6

As we look to the remainder of 2016, earnings estimates are finally starting to move higher. While the trend is early, and

many management teams have reduced their outlook for the full year, we are encouraged by the move. Since the start of

the month, earnings growth rates for the third and fourth quarters as well as for the full year have improved by 20 bps to

30 bps. While that doesn't seem like a large move, it is the first time growth rates reversed the trend for deterioration since

the start of the year. The second half of the year is expected to be the driver of growth, with third- and fourth-quarter

earnings projected to grow 2.7% and 8.4%, respectively. When coupled with the weak first half of 2016, with both the

first and second quarters posting declines in growth, full-year 2016 growth will be just better than flat at 0.1%.

Table 1

Quarterly S&P 500 EPS Growth Estimates

(%) 1-Jan 1-Apr 1-May 26-May

Q2 2016 4.11 (2.51) (4.69) (4.98)

Q3 2016 9.12 4.80 2.40 2.66

Q4 2016 15.17 9.44 7.96 8.35

FY 2016 7.47 1.50 (0.08) 0.12

Source: S&P Global Market Intelligence.


8

May 27, 2016

Europe

This week, eurozone finance ministers agreed to provide Greece with $11.5 billion in bailout funds to be used to make

debt payments that are due starting in June. As things currently stand, Greek public debt is 180% of the country's gross

domestic product.

Earnings growth rates for the Euro 350 continue to fluctuate, with 2016 expected to decline 4.5% (versus a 4.3% decline

a month ago) and to increase 14.4% in 2017 (versus a 13.9% gain a month ago).

Five of the 10 Euro 350 sectors are expected to report growth in 2016. Health care (2.9%) leads, followed by

telecommunication services (2.4%) and consumer discretionary (1.8%). Energy (negative 28.6%), financials (negative

9.9%), utilities (negative 8.2%), information technology (negative 7.5%), and materials (negative 6.7%) are all expected

to report declines in growth.

Table 2

Calendar-Years 2016 And 2017 Euro 350 EPS And Growth Rate

--Calendar-year 2016-- --Calendar-year 2017--

EPS (€) Growth (%) EPS (€) Growth (%)

Consumer Discretionary Sector Index 130.27 1.80 145.03 11.30

Consumer Staples Sector Index 156.58 1.50 171.22 9.40

Energy Sector Index 51.58 (28.60) 84.76 64.30

Financials Sector Index 62.68 (9.90) 71.40 13.90

Health Care Sector Index 127.78 2.90 136.93 7.20

Industrials Sector Index 106.91 1.60 120.57 12.80

Information Technology Sector Index 62.14 (7.50) 74.51 19.90

Materials Sector Index 105.35 (6.70) 124.63 18.30

Telecommunication Services Sector Index 72.06 2.40 80.29 11.40

Utilities Sector Index 88.45 (8.20) 90.73 2.60

S&P 350 89.02 (4.50) 101.82 14.40

Contact Information: Lindsey Bell, Senior Analyst--S&P Global Market Intelligence, [email protected].

Follow S&P Global aggregated consensus earnings news on Twitter (@SPGearnings) for earnings insights & results.

Leveraged Commentary And Data: Privately Placed Second-Lien Loans, By The Numbers

The volume of second-lien loans launched to market is down by a staggering 75% in 2016 through May 17. More

specifically, arrangers have launched $937 million of second-lien loans, down from $3.78 billion for the same period last

year, as issuers and sponsors have largely been placing this debt privately.


9

May 27, 2016

Chart 7

In 2016 through May 17, LCD has reported on more than $2.6 billion of second-lien debt that has been placed privately,

up from just shy of $1 billion in the same period last year. Although the high-yield market has opened up this year after a

sluggish start, the amount of unsecured debt that is placed privately is also up considerably--to approximately $3 billion

versus $534 million for the same period last year.


10

May 27, 2016

Chart 8

Following the market volatility late last year that sent secondary prices sharply lower and upended the primary market,

banks backed away from underwriting the second-lien and junior debt components of transactions. At the same time,

business development companies and hedge funds, which had been big buyers of second-lien paper, shied away from new

deals after realizing large mark-to-market losses. In turn, sponsors seeking junior debt reached out directly to buy-side

firms, often existing relationships, to place this debt.

With market conditions strengthening considerably in recent weeks, there are signs that the broadly syndicated second-lien

market has also begun to thaw. The first- and second-lien financing backing Bain Capital and Vista Equity Partners'

acquisition of Vertafore, which was announced earlier this month, is said to be fully underwritten. Generation Brands and

Verisk are also syndicating the second-lien components of their LBO deals, while Vencore and National Veterinary are

syndicating second-lien add-on deals.

The improvement is more tangible in the secondary market, where the average price of performing second-lien S&P/LSTA

Index loans (excluding oil and gas credits) had run up to 91.27 after slumping to 86.39 at the end of February, though it is

still well below where the paper was trading at the same time last year.


11

May 27, 2016

Chart 9

Even though the market is opening back up after a frigid start to 2016, players expect to see some sponsors continue to

place second-liens privately even if a broadly syndicated deal is an option. Amid a dearth of supply in the new-issue

syndicated loan market, there is plenty of demand from certain buy-side investors to take a large position in a second-lien,

and private equity firms are also in the game, sources say. Private equity limited partners have also stepped in as

large-scale buyers of junior debt, effectively doubling down on their equity commitments to individual private equity

transactions. With expectations lowered on equity returns, the debt begins to look more interesting as an alternative

investment, especially in an environment of decreased buyout activity.

With sponsors and buy-side firms now working directly on more transactions, the framework exists to place this debt

privately, and the pool of investors interested in these transactions has grown. Also, pre-placing the debt provides issuers

with more certainty about the cost of funding because the pre-placed debt is not subject to flex language.

Although conditions in the second-lien market have improved, they are hardly robust. Given regulatory requirements, a

changing buyer base, and a lower appetite for risk among the underwriting banks, participants are by no means expecting

a return to 2014, when nearly $36 billion of broadly syndicated second-liens priced.

Contact Information: Kerry Kantin, Vice President--Leveraged Commentary and Data, [email protected].


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May 27, 2016

S&P Dow Jones Index Commentary: For The S&P 500 Industrial (Old), Cash Remains King

With more than 90% of the data in, the S&P 500 Industrial (Old) could set a new cash and equivalent record for the first

quarter of 2016; the current record is $1.33 trillion in the fourth quarter of 2014.

Even if the first quarter of 2016 falls short of the record, there's no question companies have enough cash and access to

debt and shares to do whatever they want, with "want" being the key word. Mostly, it seems companies want to buy back

stock. Dividends and capital expenditures are also still in vogue, with some caveats.

First up are buybacks. With 85% of the data in, the first quarter of 2016 is running 21% ahead of the fourth quarter of

2015 and 31% ahead of first-quarter 2015. This means companies' talk about supporting stocks when share prices were

down early in the quarter was backed up by buying. What's more, the average price in the first quarter of 2016 was 4.9%

lower than in fourth-quarter 2015 and 1.1% lower than in first-quarter 2015, meaning companies got more shares for

what they spent. All in all, buybacks are alive and well, and first-quarter 2016 could be among the top three quarters for

them. (The highest was the third quarter of 2007 with $172.0 billion; the second highest was the first quarter of 2014

with $159.3 billion.) As a result of all the stock repurchase activity, share counts continue to decline. So far, 26.9% of

issues have reduced their year-over-year share count by at least 4%, thereby increasing their earnings per share by at least

4%. That's up from the 25.8% participation rate in the fourth quarter of 2015 and the participation rates of 20%-23% in

the prior seven quarters. Looking to second-quarter 2016, based on S&P Dow Jones Indices estimates, 20% of issues

already have a share count reduction of at least 4%. In other words, the share count reduction trend is continuing.

Next up are dividends. S&P 500 dividends for the second quarter of 2016 (the first quarter is already history; see

"Lookout Report: Seeking Confirmation That The Economic And Market Outlook Has Finally Turned The Corner,"

April 29, 2016) could set a new record by a couple of pennies ($400 million). Therefore, they would potentially set a

record in the full U.S. common market as well. However, given that energy sector dividend cuts have continued and

account for 65% of the dollar cuts (and 54% of the issues that have cut dividends) in the quarter to date, the record is in

doubt. One way to ensure a new dividend record for the quarter would be for Alphabet to start paying a 1% yield. The

technology sector currently yields 1.7%, with dividend-paying issues in the sector yielding 2.5%. A 1%-yielding dividend

from Alphabet would add $4.9 billion into investors' hands and $4.2 billion into the index (adjusted for membership and

float), where the current annual rate is $394.4 billion (of which another tech bellwether, Apple, pays $12.6 billion).

Speaking of the two tech giants, Apple made $10.5 billion last quarter ($50.7 billion over the last year) and has $233

billion in cash and equivalents; Alphabet made $4.2 billion ($16.5 billion over the last year) and has $73.1 billion in cash

and equivalents.

On to capital expenditures: With 93% of the numbers reported, the first quarter of 2016 is coming in 4% lower than the

same quarter last year. The first quarter stat is 17% lower than that of fourth-quarter 2015, but a large drop from the

fourth quarter to the first is normal. Excluding the 40% energy reduction over the 12 months, the remaining issues spent

11% more in the first quarter of 2016 than they did a year ago.

A quick note on definitions: Cash and equivalents (cash) are classified under current assets on the balance sheet and

represent a company's readily available discretionary liquid assets. Cash is measured for the S&P Industrial (Old)--which

consists of the S&P 500 minus financials, utilities, and transportation issues--because these issues maintain high cash

reserves as part of their normal operation process. The S&P Industrial (Old) dates back for decades. When the Global

Industry Classification Standard (GICS) was developed, one of its sector designations became industrials. As a result, the

former group is referred to as the "S&P Industrial (Old)."

Contact Information: Howard Silverblatt, Senior Index Analyst--S&P Dow Jones Indices,


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May 27, 2016

[email protected].

Follow Howard on Twitter (@hsilverb) for analysis from S&P Dow Jones Indices.

R2P Corporate Bond Monitor

In the U.S., the latest murmurings from the FOMC of a possible rate hike as early as June or July were complemented by

more positive data in the last two weeks. The FOMC made clear that it would favor a June rate hike if conditions allowed

and if the economy continues to improve--a statement that seemingly halted the tightening of corporate spreads.

Accompanying this, industrial data for April showed positive movement for the second quarter, with industrial production

rising 0.7% in the month due to increased utility output, following a contraction of 0.9% in March. Retail sales for April

jumped 1.3% following a 0.3% fall in March, with a rise in auto sales spurring consumer spending. This is a significant

sign of consumer strength that will likely affect the FOMC's decision.

Eurozone GDP expanded by 0.5% quarter-on-quarter for the first three months of 2016 following 0.3% growth in the

previous two quarters. The growth represents some progress, however modest, and is due to expansion in Germany,

France, and Italy. Unfortunately, the positive news stopped there, as the headline CPI rate stagnated in April after a 1.2%

jump in March, with core inflation stagnating in the year through April. PMI data moderated slightly in May, with the

Composite PMI coming in at 52.9 compared with 53.0 in March. The reading was dragged down slightly by the

manufacturing sector, with the Manufacturing PMI falling to 51.5 from 51.7. The Services PMI remained at 53.1, where it

has been for three months.

Risk/reward profiles (measured by average risk-to-price scores) improved across both Europe and North America in the

month ended May 20, 2016.

In North America, the risk/reward profile improved slightly overall as spread tightening appeared to be abated. Credit risk

(as measured by the probability of default) and market risk (as measured by bond-price volatility) remained fairly stable.

In Europe, the risk/reward profile improved more markedly as spreads widened across nearly every sector and market risk

fell slightly. Credit risk levels remained fairly stable.

Table 3

North American Risk/Reward Profiles By Sector*

Scores (%) Option-adjusted spreads (bps) Probability of default (%) Bond-price volatility (%)

Consumer Discretionary 0 3 0.252 (0.005)

Consumer Staples 0 9 0.004 0.011

Energy 25 (9) (0.050) (0.238)

Financials 5 (2) (0.016) (0.017)

Healthcare (1) 18 0.408 0.026

Industrials 2 (3) (0.058) (0.002)

Information Technology (3) 23 (0.264) 0.019

Materials 11 (13) (0.056) (0.152)

Telecommunication Services (7) 10 0.081 (0.041)

Utilities (13) (7) (0.232) (0.018)

Average 2 3 0.007 (0.042)

*One-month average Risk-to-Price score and components changes through May 20, 2016. bps--Basis points. Source: S&P Global Market

Intelligence.


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May 27, 2016

Table 4

Europe Risk/Reward Profiles By Sector*

Scores (%) Option-adjusted spreads (bps) Probability of default (%) Bond-price volatility (%)

Consumer Discretionary 20 4 (0.033) (0.088)

Consumer Staples 14 1 (0.011) (0.019)

Energy 29 32 (0.021) (0.145)

Financials 5 (1) (0.036) (0.008)

Healthcare (5) 9 0.022 (0.024)

Industrials 16 3 (0.023) (0.014)

Information Technology 29 3 0.017 (0.202)

Materials 9 17 0.052 (0.005)

Telecommunication Services 8 10 (0.003) (0.040)

Utilites 13 8 (0.031) (0.019)

Average 14 9 (0.007) (0.056)

*One-month average Risk-to-Price score and components changes through May 20, 2016. bps--Basis points. Source: S&P Global Market

Intelligence.

Contact Information: Fabrice Jaudi, Vice President--S&P Investment Advisory Services, [email protected].

Kunaal Vora, Credit Research Analyst--S&P Investment Advisory Services, London +44(0)207 176 8317;

[email protected].

Capital Market Commentary: IPOs, M&A, And Debt

IPOs

The lackluster initial public offering (IPO) market so far this year might soon see some bright spots. Coming ahead of the

Memorial Day holiday, six offerings were poised to be priced in the week ending May 27. Headlining the upcoming

docket of deals is a $1 billion offering by private-equity-controlled food distributor US Foods Holding, which is the largest

non-REIT IPO in 2016 to date. Meanwhile, aftermarket performance of the 25 IPOs priced in the U.S. market so far this

year has generally been a pleasant surprise to investors. Excluding closed-end funds, only eight are trading below their

initial offer price. (The average gain for an IPO this year is 20.3%.) Also, the IPO gains this year have not been restricted

to smaller issues, as the 10 largest offerings have posted an average gain of 19.4% from their offer price. Seven of the top

10 gainers were from the health care sector (see Table 5).

Table 5

2016 YTD Leading IPO Performers

Effective

date Issuer

Total transaction value

(Mil. US$)

Offer price per

share ($USD)

Recent share

price (US$) % change

02/02/2016 Editas Medicine Inc. (NasdaqGS:EDIT) 94.4 16.00 35.75 123.44

02/10/2016 AveXis, Inc. (NasdaqGS:AVXS) 95.0 20.00 42.81 114.05

05/05/2016 Intellia Therapeutics Inc.(NasdaqGM:NTLA)

108.0 18.00 28.82 60.11

02/10/2016 Proteostasis Therapeutics, Inc.(NasdaqGM:PTI)

50.0 8.00 12.50 56.25

05/12/2016 Acacia Communications, Inc.(NasdaqGS:ACIA)

103.5 23.00 35.35 53.70

05/11/2016 SiteOne Landscape Supply, Inc.(NYSE:SITE)

210.0 21.00 28.94 37.81


15

May 27, 2016

Table 5

2016 YTD Leading IPO Performers (cont.)

Effective

date Issuer

Total transaction value

(Mil. US$)

Offer price per

share ($USD)

Recent share

price (US$) % change

04/20/2016 American Renal Associates Holdings,Inc. (NYSE:ARA)

165.0 22.00 27.33 24.23

04/27/2016 Global Water Resources, Inc.(NasdaqGM:GWRS)

7.3 6.25 7.46 19.36

03/02/2016 Syndax Pharmaceuticals, Inc.(NasdaqGS:SNDX)

52.8 12.00 14.30 19.17

02/02/2016 BeiGene, Ltd. (NasdaqGS:BGNE) 158.4 24.00 27.62 15.08

Source: S&P Global Market Intelligence

M&A

On May 18, 2016, German pharmaceutical company Bayer AG (DB:BAYN) made an unsolicited, non-binding proposal to

acquire Missouri-based fertilizer and agricultural company Monsanto Co. (NYSE:MON) in a transaction valued at over

$62 billion. According to S&P Global Market Intelligence data, the transaction ranks as the second-largest foreign

acquisition of a U.S.-based target ever proposed and the largest-ever foreign acquisition in the U.S. materials sector. More

significant is foreign buyers' accelerating share of announced U.S. merger and acquisition transactions. An examination of

U.S. M&A annual volume since 1998 reveals that the strongest year for foreign acquisitions in the U.S. (by proportion of

total deal value) was in 2008, when more than 24% of that year's $828 billion in U.S. M&A involved foreign buyers.

Including the Bayer-Monsanto transaction, proposed foreign acquisitions amount to more than $224 billion, which is

40% of the $560.9 billion total. That's nearly double the proportion in 2015, when the $444 billion from foreign

investors was 21% of the $2.12 trillion total deal value. Among the foreign acquisitions announced so far this year, the

materials sector is most active with nearly $70.5 billion in deals, followed by health care with $50.4 billion and financials

with $23.3 billion. In addition, extrapolating the amounts announced so far through the balance of the year, it would be

reasonable to see foreign acquisitions in the U.S. this year top the previous annual record of $444 billion set last year.

Table 6

Foreign Acquisitions In U.S.

Foreign M&A in U.S. (Bil.

US$) U.S. M&A (Bil. $)

% of U.S. M&A from foreign buyers by dollar

amount Number of deals

1998 244.5 1450.1 16.90 593

1999 265.1 1256.8 21.10 756

2000 318.4 1725.5 18.50 1,069

2001 117.8 729.3 16.20 832

2002 62 449.3 13.80 562

2003 52.6 509 10.30 591

2004 72.3 802.8 9.00 689

2005 119.4 1074.7 11.10 981

2006 263.4 1393.7 18.90 1,268

2007 325.7 1400.3 23.30 1,493

2008 200.8 828.2 24.20 1,270

2009 60.3 729.4 8.30 951

2010 194 838.8 23.10 1,247

2011 160.4 1004.8 16.00 1,418


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Table 6

Foreign Acquisitions In U.S. (cont.)

Foreign M&A in U.S. (Bil.

US$) U.S. M&A (Bil. $)

% of U.S. M&A from foreign buyers by dollar

amount Number of deals

2012 198.8 917.9 21.70 1,361

2013 164 1109.7 14.80 1,228

2014 275.9 1515.9 18.20 1,530

2015 444.3 2119.4 21.00 1,592

2016 YTD 224.5 560.9 40.00 623

Debt

Based on recent order trends for security identifiers, signs of an upswing in upcoming debt offerings--both in corporates

and municipals--appear to be muddled. According to recent data for new CUSIP requests for a variety of debt issues (see

Table 7), 636 new orders were processed in the week ending May 20 compared to 741 in the prior week. Contributing in

large part to the downturn was a 28% drop in the number of CUISIPs requested for forthcoming municipal issues. On the

other hand, while modest weekly gains were posted for CUSIP orders for upcoming domestic corporate debt, international

debt, and PPN domestic debt offerings, two of those three asset classes are still experiencing double-digit percentage

declines in CUSIP demand from a year ago.

Table 7

Selected Debt CUSIP Requests

Week of 5/20 Week of 5/13 2016 YTD 2015 YTD % change

Domestic Corp Debt 135 105 3,244 4,083 (20.55)

Municipals 352 492 6,269 6,176 1.51

ST Muni Note 12 20 365 361 1.11

LT Muni Note 7 7 107 117 (8.55)

Int'l Debt 70 66 809 1,184 (31.67)

PPN Domestic Debt 60 51 789 755 4.50

Total 636 741 11,583 12,676 (8.62)

Source: CUSIP Global Services.

Contact Information: Rich Peterson, Senior Director--S&P Global Market Intelligence, [email protected].


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