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Weekly Market Outlook: Fewer Defaults Will Stave Off Much Wider Spreads

The high-yield bond market recently incurred a jarring sell-off. On October 24, the composite speculative-grade bond yield and its spread over Treasuries bottomed at 5.46% and 340 bp, respectively. By November 15, the spec-grade yield had jumped up to 6.13%, while the spread swelled to 407 bp. Nevertheless, the latest widening of high-yield bond spreads more likely stems from a correction of under-compensation for default risk rather than from a deterioration of corporate credit quality.

November 2017 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Tomas Holinka , Barbara Teixeira Araujo, Katrina Ell

Weekly Market Outlook: Fewer Defaults Favor Even Pricier Equities

The benign outlook for high-yield defaults now supports the US equity market. Moody's Default Research Group recently projected a decline by the US high-yield default rate from October 2017's 3.2% to 2.1% by October 2018.

November 2017 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Tomas Holinka , Barbara Teixeira Araujo, Katrina Ell, Veasna Kong

Weekly Market Outlook: Slower Labor Costs and Pricier Metals Help Stocks Soar

To the benefit of credit quality, the world economy is humming. However, the pace of global expansion has yet to significantly boost inflation expectations or the real return demanded from credit market instruments. Thus, benchmark government bond yields remain low. For 10-year sovereign government bond yields, the US Treasury's recent 2.35% was well above Japan's 0.04%, Germany's 0.37%, the UK's 1.26%, and Canada's 1.95%.

November 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell, Veasna Kong

Project Finance: The Potential Returns

Effective risk assessment approaches to project finance must reflect a true understanding of complex issues. These assessments include the macroeconomic context, which provides an early indication of the potential risks and returns of infrastructure investments.

October 2017 Pdf Dr. Jing Zhang, Kevin Kelhoffer, Jorge A. Chan-Lau

Weekly Market Outlook: Higher Bond Yields Could Depress Share Prices

Any analysis regarding the appropriate valuation of a long-lived asset must account for the influence of interest rates. All else the same, a rise by the interest rates of lower-risk debt obligations, namely US Treasury debt, will reduce the prices of other financial and real assets. Whenever asset prices defy higher interest rates and rise, a worrisome overvaluation of asset prices may be unfolding. Today's high priceto- earnings multiples of equities and narrow yield spreads of corporate bonds have increased the vulnerability of financial asset prices to a widely anticipated climb by short- and long-term Treasury yields.

October 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell

Leveraging Technology to Transform Commercial Credit Origination — Build Versus Buy

In this webinar, David Ratnage, Senior Director, Credit Assessment & Origination at Moody's Analytics addresses some of the key areas of debate when banks consider the buy versus build approach when investing in commercial lending platforms.

October 2017 WebPage David Ratnage

Weekly Market Outlook: So Much Debt, So Little Growth

Today marks the 30th anniversary of the stock market crash of 1987. October 19, 1987's -17.9% daily plunge by the market value of US common stock included a -20.5% plummet by the S&P 500. To better grasp what transpired, consider that a -20% dive by today's Dow Jones Industrial Average would sink the blue-chip average by roughly 4,600 points to something under 20,000 points. Moreover, a -17.9% collapse would slash the market value of common equity by -$4.75 trillion, which approximates 25% of Q2-2017's nominal GDP.

October 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell, Faraz Syed

Modeling and Forecasting Interest Rate Swap Spreads

In this article, we model and forecast the term structure of swap spreads across a range of currencies using a principle component decomposition.

Stressed Realized LGDs: Forecasting Recovery Rates under Alternative Macroeconomic Scenarios

This article proposes a method of modeling realized losses given default (LGDs) as a function of macroeconomic drivers for stress testing purposes.

Weekly Market Outlook: Special Events Supply an Upside Surprise

Corporate credit is seeing one of the more unusual business cycle upturns since the Second World War. Not only have corporate bond yield spreads narrowed and default probabilities declined despite steeper leverage, but special events have gone from dragging ratings lower, on balance, to, once again, being of a net benefit to US corporate credit ratings.

October 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell, Faraz Syed

Weekly Market Outlook: Rate Spike Would Tame the Bulls

The US equity market may continue to set new record highs as the VIX index lengthens its stay under an extraordinarily low 10 points. Ample liquidity implies that a recent high-yield bond spread of 359 bp might soon dip under 350 bp.

October 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell, Faraz Syed

Five Focus Points for Commercial Lease Due Diligence

Proper assessment of your prospective borrower's future cash flow from rental income involves both a qualitative and quantitative analysis of the underlying leases. A sample “Lease Abstract Form” is provided to facilitate the compilation of relevant information. This article discusses five key aspects of a commercial lease which drive this analysis.

September 2017 Pdf Robin Russell

Weekly Market Outlook: Less Fear, More Debt

Times have changed. In a world where core inflation ebbs amid a sharply lower jobless rate and corporate bond yield spreads narrow despite steeper leverage, pigs just might fly.

September 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell

Weekly Market Outlook: Low Inflation May Suppress Bond Returns

A less accommodative US monetary policy may heighten market volatility near term. However, over time, the fundamentals that give direction to business activity and financial markets will prevail. For now, current trends involving demography, technology, regulation, and globalization favor the containment of core price inflation and still relatively low US Treasury bond yields.

September 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell, Faraz Syed

Weekly Market Outlook: What Might Trigger the Next Market Plunge?

An overvalued equity market and an extraordinarily low VIX index offer no assurance of impending doom for US equities. Provided that interest rates do not rocket higher, expectations of corporate earnings growth should be sufficient for the purpose of avoiding a severe equity market correction that would doubtless include the return of corporate bond yield spreads in excess of 700 bp for high-yield and above 200 bp for Baa-rated issues.

September 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell, Faraz Syed

Weekly Market Outlook: Jobs, VIX and Defaults Move Together

Consensus forecasts of corporate bond yields are hard to come by. However, the Blue Chip Financial Forecasts publication supplies a consensus outlook for the long-term Aaa and Baa corporate bond yields.

September 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell

Rent Rolls at Risk - Assessing Commercial Leases

Proper assessment of your prospective borrower's future cash flow from rental income involves both a qualitative and quantitative analysis of the underlying leases. Understanding these key drivers will allow a lender to properly prepare a rental rate sensitivity analysis to stress test projected income.

September 2017 WebPage Robin Russell

Weekly Market Outlook: Low Inflation Trims Interest-Rate Risk

The recent slowdown by the underlying rate of consumer price inflation significantly lowered the risk of a disruptive climb by interest rates. In response, the VIX index sank from the 16.0 points of August 10, 2017 to a recent 10.7 points, while a composite high-yield bond spread narrowed from August 11's 410 bp to August 30's 399 bp.

August 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell

Weekly Market Outlook: Medium-Grade Bond Yields May Lag Consensus Views

Though the number of new jobs has been plentiful, the quality of new jobs has not been great enough to improve the outlook for employment income. In order to compensate for lackluster employment income prospects, interest rates must not increase significantly. The 10-year Treasury yield is unlikely to spend much time close to or above 2.5% anytime soon.

August 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell, Jack Chambers

Weekly Market Outlook: Jobless Rate's Waning Influence on Inflation and the Fed

The minutes of the July 25-26 meeting of the FOMC indicated that Fed policymakers have become increasingly concerned about persistently soft consumer prices despite higher rates of resource utilization, including the lowest unemployment rate in 16 years. In response, fed funds futures recently assigned only a 44.4% likelihood to a year-end 2017 midpoint for the fed funds rate that is higher than its current 1.125%. Policymakers and some market participants worry that if underlying inflation slows when rates of resource utilization climb, then a destructive bout of price deflation might arrive once resource utilization rates inevitably ease.

August 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Alaistair Chan, Katrina Ell

Weekly Market Outlook: Swelling of Low-Grade Spreads Looms

Markets became slightly unhinged at the prospect of a US military confrontation with North Korea over the latter's nuclear weapons program. As of August 10's early afternoon trading, the market value of US common stock had declined by -1.2% from its August 8 close, or just prior to the intensification over the North Korean conflict. In a more immediate response to jitters surrounding the possibility of a very destructive conflict, a composite high-yield bond spread widened from August 8's 371 bp to August 9's 387 bp as the accompanying speculative-grade bond yield jumped up from 5.57% to 5.72%.

August 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo

Data Analytics and the Future of Credit Risk Management

The future is closer than you think – start shaping your risk management future today. Banking is becoming more future oriented and data analytics can help financial institutions be on the forefront of innovation.

August 2017 WebPage Eric Snyder

Weekly Market Outlook: Liquidity Buoys Corporate Credit

Long-term fundamentals suggest that interest rates will remain well under their averages of 2002-2007's recovery. If only because of an unprecedented and irreversible aging of the US population and workforce, fears of a disruptive lift-off and extended high-altitude orbit by Treasury bond yields are probably exaggerated.

July 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Katrina Ell, Barbara Teixeira Araujo, Alaistair Chan

Weekly Market Outlook: Low Interest Rates Offset Fiscal Gridlock

A fundamentally excessive climb by Treasury bond yields is one of the bigger risk factors facing corporate credit. Now that gridlock may persist indefinitely in Washington, the absence of fiscal stimulus requires a continuation of low interest rates.

July 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Katrina Ell, Faraz Syed

Weekly Market Outlook: The Least Inaccurate Forecaster

The forthcoming passive reduction of the Fed's bond holdings may not be followed by higher Treasury bond yields. So suggests what came after October 2014's end to the third installment of quantitative easing (QE3). In fact, since the October 2014 expiry of QE3, the average 10-year Treasury of 2.07% has been less than its 2.30% average of October 2014, never mind its “taper tantrum” average of 2.71%.

July 2017 Pdf John Lonski, Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , Katrina Ell

Best Practices for Corporate Treasurers: OECD BEPS 2018 Transfer Pricing Compliance

As countries continue implementing the guidelines from the OECD's BEPS action plan, corporations are facing increasing challenges in conducting transparent intercompany loan transfer pricing transactions.

July 2017 WebPage Christophe Marinier

Weekly Market Outlook: Overvalued Equities Boost Credit Ratings

Relatively narrow corporate bond yield spreads reflect confidence in the business outlook for 2017's second half. Apparently, corporate credit expects profits growth will be sufficient to avoid a worsening outlook for defaults.

July 2017 Pdf John Lonski, Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , Katrina Ell

CECL: What's on Tap for the Future of Credit Loss Accounting?

A new model for expected credit losses is supposed to fix flaws in the accounting system and protect against future financial crises. But the so-called CECL model comes with its own set of challenges that will dramatically change firms' accounting practices for impaired loans. The Financial Accounting Standard Board's (FASB) recently issued current expected credit loss (CECL) model attempts to align measurement of credit losses for all financial assets held at amortized cost, and specifically calls out potential improvements to the accounting for purchased credit impaired (PCI) assets.

July 2017 Pdf Masha Muzyka

Combining Information to Better Assess the Credit Risk of Small Firms and Medium-Sized Enterprises

In this article, we discuss the issues associated with acquiring behavioral and financial data and transforming it into a business decision. We also present a unified modeling approach for combining the information into a credit risk assessment for both small firms and medium-sized enterprises.

July 2017 Pdf Dr. Douglas Dwyer

A Balanced Approach to Credit Analysis

A recent webinar with Moody's Analytics set an attendance record at over 1300 lender participants. The follow up response was tremendous, including a large array of topics. In fact, if I addressed each one, I would be busy well into next year! However, the follow up questions provided valuable insight into the evolving approach to credit. Agriculture is a cyclical industry; and one that is currently in an elongated downturn. Thus, the best approach to credit and customers is one of balance. Actually, a balanced approach is necessary to maintain the stability of credit in agriculture.

July 2017 Pdf David Kohl
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