Lookout Report
Transcript of 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
Robert A Keiser
Vice President
S&P Global Market Intelligence
(1) 212-438-3540
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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).
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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
Home Sales Data Reveals Evidence Of Fed Success In Reflating The U.S. Economy And Markets Lookout Report
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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
Home Sales Data Reveals Evidence Of Fed Success In Reflating The U.S. Economy And Markets Lookout Report
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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
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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
Home Sales Data Reveals Evidence Of Fed Success In Reflating The U.S. Economy And Markets Lookout Report
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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.
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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.
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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.
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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.
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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.
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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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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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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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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;
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
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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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