An abatement of tariff-related fears reduced the uncertainty surrounding a positive outlook for US corporate earnings. In response, the market value of US common stock quickly approached its record high of August 29, 2018. Moreover, high-yield bonds rallied from already richly-priced levels. In turn, a recent composite high-yield bond spread was thinner than 340 basis points (bp) for the first time since the middle of April 2018.
First-quarter 2018's record ratio of U.S. nonfinancial-corporate debt to GDP has been cited as the harbinger of a steep upswing by corporate credit defaults once profits shrink materially again. However, first-quarter 2018's ratio of net nonfinancial-corporate debt to GDP supplies a far less ominous outlook, mostly because the liquid assets of nonfinancial corporations have been outpacing the accompanying growth of corporate debt. In terms of moving yearlong averages as of March 2018, the 11.4% annual increase by liquid assets outran the accompanying increases of 6.0% for corporate debt and 4.3% for nominal GDP.
This paper compares and contrasts, through the CECL lens, the two baseline scenarios Moody's Analytics produces monthly: the Moody's Analytics baseline and the consensus baseline.
In this article, we describe the methodology used by Moody's Analytics to assign probabilities to its regularly produced alternative macroeconomic scenarios and to calibrate these scenarios by taking into consideration recent post-crisis economic conditions.
The U.S. economy and financial markets have been pulling away from the rest of the world. Of special importance is the lagging performance of emerging market economies, which, not too long ago, had been the primary driver of world economic growth. The combination of higher U.S. interest rates and the relatively stronger performance of the U.S. economy has triggered a notable and potentially destabilizing appreciation of the dollar versus a host of emerging market currencies.
Private firm default rates have declined steadily during the past five years. At 1.4%, the rolling 12-month default rate is down 74% from its September 2009 peak of 5.2%. This trend has been driven primarily by a decline in the charge-off rate, now at its lowest level in ten years. In addition, the percentage of borrowers in non-accrual status has decreased 56% since September 2009. The number of borrowers rated “Substandard” has seen a steady increase since the first quarter of 2016, above pre-crisis levels, reflecting banks' cautious lending practices.
In this paper, we discuss some of the options that institutions have for incorporating economic forecasts into their expected loan loss reserve calculations. We discuss the benefits and costs of each approach and provide practical recommendations based on institution size and complexity.
The U.S. business cycle has entered its boom phase. This is a period that typically comes closer to the end of the cycle, just prior to a recession. It is characterized by robust economic growth, tightening labor and product markets, intensifying wage and price pressures, monetary tightening, and higher interest rates. Another feature of the boom phase of a business cycle is excessive risk-taking somewhere in the financial system. This fuels the boom and is eventually at the center of the subsequent bust. Subprime mortgage loans were the obvious culprit a decade ago, runaway internet stocks that pumped up a stock market bubble were the problem in the early-2000s recession, and the savings and loan crisis incited the early 1990s downturn.
New signs of industrial commodity price deflation have grabbed the attention of financial markets. Nevertheless, the latest slide by Moody's industrial metals price index has yet to even remotely approach its 26.1% average year-over-year plunge of the six-months-ended January 2016. The two major takeaways from the latest slide by base metals prices are global industrial activity has subsided and any stay by the 10-year U.S. Treasury yield above 3% will be short-lived.
This seminar will teach participants the framework and tools necessary for in-depth analysis of bank credit risk in both developed and emerging markets using Moody's bank rating (global rating method).
Moody's Analytics subject matter experts Scott Hoyt and Deniz Tudor discuss the current and anticipated trends in household credit conditions based on data from Equifax and forecasts from Moody's Analytics.
A high ratio of debt to GDP may be manageable, that is up until the income flow servicing such debt recedes. During the past several years, the ratio of U.S. nonfinancial-corporate debt to GDP seems to have lost its ability to explain both the magnitude and the direction of the high-yield default rate.
Last week's commentary began with a reference to the weak predictive power of an unadjusted median ratio of corporate debt to EBITDA for publicly held, nonfinancial-company issuers of high-yield debt. However, one reader was gracious enough to take the time to alert me to a major shortcoming of the median ratio of corporate debt to EBITDA, especially as it applies to high-yield issuers. EBITDA—or earnings before interest, taxes, depreciation and amortization—can be negative, especially among companies having speculative-grade ratings. As a result, an unadjusted median ratio of corporate debt to EBITDA often understates how burdensome outstanding debt is relative to the EBITDA of high-yield issuers.
Our experts, Masha Muzyka and Jin Oh, cover transition disclosures focus areas, potential implication of the methodology chosen to the expected disclosures and ECL disclosure best practices emerging to date.
CECL Disclosures – Required and Beyond
Dr. Steven G. Cochrane is the Chief APAC Economist of Moody's Analytics
The median ratio of interest expense to EBITDA offers another way of explaining the high-yield default rate. This approach fares far better when compared to explaining the default rate with the median ratio of debt to EBITDA. Since year-end 2005, the quarterly default rate generates a relatively meaningful correlation of 0.75 with the median ratio of interest expense to EBITDA from one to two quarters earlier.
An evaluation of features, functions, and security
Performance optimization through business insight, dealing with IFRS 17 in a post-Solvency II world, and the challenges associated with stress testing for insurance firms in the US. These were the focus areas for Moody's Analytics at this year's Moody's Insurance Summits in London and New York.
Choosing the Right Cloud-Based Credit Origination Solution
Though it goes practically unmentioned, one of the more unexpected developments of late has been the stunning collapse of Moody's industrial metals price index. In part, the industrial metals price index's average of July-to-date is a deep 8.2% under its June 2018 average because of uncertainties stemming from trade-related issues. Since worries surrounding a trade war came to the fore following June 14's close, the base metals price index has sunk by 13.0%. Nevertheless, the base metals price index's month-long average had peaked some time ago in February 2018, where the subsequent slide by the index through mid-June reflected a loss of momentum for global industrial activity.
CECL will require institutions to incorporate macroeconomic forecasts formally into their loss allowance estimates for the first time. There are a number of ways in which this can be achieved as the CECL guidelines don't specify any one particular approach. In this presentation, we discuss some of the options that institutions have for incorporating economic forecasts into their expected loan loss reserve calculations. We discuss the benefits and costs of each approach and provide practical recommendations based on institution size and complexity. We also show a simple solution for calculating the lifetime expected losses for consumer loans for different products.
Fill out this form to request more information on our Trade War Scenarios. Moody's Analytics scenarios are the foundation of risk management, compliance and strategic planning needs
Challenges in CECL Implementation
Financial markets believe that the U.S. is likely to fare better than most other major economies in an all-out trade war. This is because (i) international trade accounts for a smaller share of U.S. business activity, (ii) the U.S. imports far more than it exports, and (iii) the U.S. now well outperforms other major economies. Nevertheless, though the U.S. is better able the withstand the direct and collateral damage of a trade conflict, it is still expected suffer casualties in a trade war. And such casualties might well influence the outcome of November's Congressional elections.
Simple But Not Simpler: Day 1 Modeling Approaches. This presentation is a review of simple approaches available to community banks on the road to their CECL journey.
According to Moody's Capital Markets Research Group, second-quarter 2018's outstandings of Moody's-rated U.S. corporate bonds excluding ABS and MBS rose by 3.3% year-over-year to $7.212 trillion, which was a slight 0.6% under first-quarter 2018's record high of $7.259 trillion. The second quarter's yearly increase of 3.3% was much slower than the 6.3% yearly increase of 2018's first quarter and was the smallest since the 2.1% of 2015's final quarter. The -0.6% dip by U.S. corporate bonds outstanding from the first to the second quarter of 2018 was only the third such sequential decline by the rated outstandings of U.S. corporate bonds during the past five years. The other two quarterly retreats were those of 0.2% of 2016's final quarter and 5.7% in 2015's final quarter.
Chartis Research is the leading provider of research and analysis on the global market for risk technology. This report focuses on Moody's Analytics Balance Sheet Management solution.
Let's start with the good news of operating profits' much faster rise relative to the growth of corporate debt. During 2018's first quarter, the 9.7% year-to-year advance by the pretax operating profits of U.S. nonfinancial corporations far outran the accompanying 5.2% increase by nonfinancial corporate debt. Moreover, for the year-ended March 2018, operating profits' 7.2% increase also outpaced the 5.9% growth of corporate debt. In turn, the moving yearlong ratio of debt to operating profits for nonfinancial corporations eased from third-quarter 2017's cycle high of 699% to the 691% of 2018's first quarter.