DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Credit Suisse US Financial Intelligence Equity Research Americas/United States Credit Ratings Agency (CRA) Industry Primer July 18, 2016 RESEARCH ANALYSTS Ashley N. Serrao CFA Research Analyst +1 212-538-8424 [email protected]Marcus Carney Research Analyst +1 212-325-1442 [email protected]
Transcript
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS
OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors
should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
Credit Suisse US Financial Intelligence Equity Research
Americas/United States
Credit Ratings Agency (CRA) Industry Primer July 18, 2016
Collection of Valuable Benchmarks; SNL Amplifies Capital IQ & Platts
S&P Global boasts a collection of high margin and iconic brands with strong competitive
moats and/or secular tailwinds spanning ratings (S&P), indices (S&P Dow Jones) and
commodities information (Platts). Ultimately, this translates to pricing power, more durable
revs during a downturn and significant free cash flow generation. We expect the latter to be
deployed towards buybacks, organic investments (fixed income indices, commodities
benchmarks) and brand extensions via selective acquisitions (rolling up the fragmented
commodities information industry under Platts). In a similar vein, the recent SNL acquisition
amplifies the value of Capital IQ and Platts, with unique industry content that should drive
pricing power, provide new industries to grow into and build differentiated content sets (real
estate, media etc.) and boost margins in Market Intelligence towards 35%+.
Ratings Revenue Mix less Cyclical than MCO; L/T Opportunities Attractive
In our view, SPGI’s ratings business is better positioned to outperform Moody’s during a
down-turn, given more relationship-based recurring revenues (54% of issuance revs vs.
39% at MCO) and less exposure to more-cyclical structured products and high yield
issuance (21% vs. 28% at MCO). More broadly, the latter should drive a shallower down-
cycle with strong refinancing pipelines also providing an offset. We are also bullish on the
international opportunity from the secular disintermediation of banks in the lending market in
Europe (even more so after Brexit), and continued maturation of emerging capital markets. With respect to the latter, we view the near-term opportunity as India (SPGI owns the
leading ratings agency, CRISIL), with China being a much longer-term opportunity.
SNL and Platts Growth Under Appreciated & Revenue Stabilizers Hedge Volatility
SNL and Platts are two underappreciated assets that can together grow at a 10-12% clip
annually over the next few years, driven by a combination of pricing power and new content.
We are constructive on both brands rolling up their respective fragmented industries, further
entrenching their content sets. Furthermore, trading revenues within Platts and the index
business (~5% of firm-wide EBITDA) provide a hedge against volatility and stabilize revenues.
Risks to our Rating
1) Cyclical downturn in issuance that offsets the strong refinancing pipelines 2) failure to
integrate SNL and missing synergy targets 3) pricing regulation 4) market downturn in
indices that offsets organic growth and/or the counter-cyclical lift from trading volumes.
Attractively Valued Multiple Growth Levers & Scarcity Value of the Business
We initiate our 2016-2018 estimates proforma for the sale of JD Power at $5.03, $5.74
and $6.61. Our $123 target price implies that shares can trade at 21x our 2017 estimates.
SPGI–a Collection of High-Margin, Fast-Growing Businesses (2015 operating EBIT margins and forecasted 3-yr CAGR in percentage points)
Source: Company data, Credit Suisse estimates
Less Cyclical Product Mix and Non-Transaction Activity Stabilize Revenues (2015 revenue mix by product and transaction type in percentage points)
Platts and SNL Underappreciated Growth Assets (Yr/yr revenue growth in percentage points)
Ratings Business Operating Close to Peak Margins After Debt Boom
The Moody’s franchise today is heavily reliant on the ratings business (82% of EBITDA). While
we are constructive on long-term debt issuance, given low global rates and growing GDPs,
estimates already more than acknowledge the upside here in the near-term, and we believe the
business is operating close to peak margins after a surge in debt issuance in recent years. This
set-up amplifies the risk of a broader slowdown in debt issuance (beyond Brexit) driving
meaningful negative estimate revisions but we acknowledge this is not a Lehman like moment
and healthy refinancing pipelines should mitigate downside. Moreover, the pro-cyclical
transaction-oriented ratings revenue model further exacerbates margin pressure in the event of
a downturn. Specifically, relative to SPGI, the firm is more exposed to more cyclical and higher-
margin structured products (19% of revs vs. 12% at SPGI), and derives a greater portion of
revenues from transactions vs. recurring relationships (61% vs. 46% at SPGI).
Analytics–A Great Roll-up and Margin Expansion Story
The analytics business is a solid and growing (10%+ rev 3 yr-CAGR) business anchored by
secular trends (regulatory-driven focus on risk) and pricing power especially in the research
business (RD&A). Moody’s has built a powerful brand in the risk management space, which we
believe will only get stronger in the coming years as management rolls-up the fragmented software industry. All in, the business will be able to expand pretax margins by ~500 bps
towards 25% over the next three years; faster if the ratings business struggles. Key here will be
getting the enterprise risk solutions (ERS) business to scale/profitability and subsequent
exercising of pricing power to reflect the value of the offering.
Aggressive Capital Management & Tuck-In Acquisitions
Aggressive capital management should drive a 12% decline in share count over the next three
years. Given that the primary driver of management compensation is EBITDA growth, we
expect strategic tuck-in acquisitions to remain a feature of the Moody's story in the analytics
business. Furthermore, we expect any malaise in revenues to be countered by acquisitions, and
we would not be surprised to see Moody’s pull the trigger on larger acquisition in a downturn.
Risks to our Rating
1) Corporate issuance debt boom that complements strong refinancing pipelines and MCO’s
exposure to the ratings business 2) stronger than expected Analytics margin expansion 3)
stronger than expected pricing power
Fairly Valued in Our View As Debt Issuance Looks Like it Is Peaking
Our 2016-2018 estimates at $4.46, $4.97 and $5.48. Our target price of $99 implies that
shares can trade at 20x our 2017 estimates.
47%
44% 44%
46%48%
53% 52%51%
47%46%
45%
41%43% 42%
44%
47%
35%
40%
45%
50%
55%
60%
2008 2009 2010 2011 2012 2013 2014 2015
Moody's S&P
MCO Retains an Edge on Ratings Margins, but S&P is Closing the Gap (Ratings segment operating pretax margins in percentage points)
77%
54%
0%
10%
20%
30%
40%
0%
20%
40%
60%
80%
100%
2007 2008 2009 2010 2011 2012 2013 2014 2015
Prof Svc ERS RD&A
Op pretax margin EBITDA margin
A Margin Expansion Story in Analytics as ERS Gains Critical Mass (Revenue mix and operating margin in percentage points, margin on right axis)
x x
2008 2009 2010 2011 2012 2013 2014 2015
Ranking by year as stated; NR = not ranked, "--" = no rating for that year
The Rise of a Bond Rating System The origins of the credit ratings industry can be traced back to the rise of U.S. mercantile credit reporting agencies during the 1840's. Unlike European capital markets, which were localized and
managed by incumbent financial institutions, the rapid expansion of the U.S. railroad industry fomented a fragmented, geographically-disparate network of lenders and borrowers as financial
wealth became concentrated in key cities while corporations ventured out west. Subsequently, the wave of defaults in 1837 made investors wary of lending to entities far removed from their watchful eye. Spying an opportunity to help investors manage credit risk, Louis Tappan established the first
mercantile credit reporting agency, that gauged credit worthiness of merchants in 1841. A few years later, Robert Dun and John Bradstreet followed suit (became Dun & Bradstreet in 1933).
In 1909, John Moody pioneered assigning letter-grade ratings of creditworthiness to railroad bonds.
Consequently, Moody's innovation became an overnight success for it’s simplicity and effectiveness
in gauging creditworthiness, and expanded to include industrial corporates a year later. Rival companies (Poor's Publishing, Standard Statistics, Fitch Publishing) began issuing ratings shortly
thereafter.
Post World War I, increasing U.S. prosperity and uneasiness abroad drove growth in the U.S. bond
markets. The economic expansion gave rise to a new investing class, who sought a tool to sort out the variety of issues they were presented—Credit Rating Agencies (CRAs) met that need, and grew
rapidly. With increased use, the agencies' reputational capital grew, and, by the 1930's U.S. regulators were incorporating ratings into financial regulation. The industry plateaued between 1940-1970, and consolidation ensued. Standard Statistics and Poor's merged (1941), Dun & Bradstreet
acquired Moody's (1962) and McGraw Hill purchased S&P (1966).
The 1970's were a pivotal decade, bringing about three key changes in the ratings landscape—1) the shift from an investor-pays revenue model to issuer-pays, 2) global proliferation of both debt
securities and ratings thereof, and 3) the designation of Nationally Recognized Statistical Ratings Organizations (NRSRO) by the SEC. Though S&P began charging municipalities for ratings in
1968, predominantly all ratings revenue up to 1970 was garnered from investors, who paid subscription fees or one-off amounts for ratings information. Two factors changed this model: the first was the $82 million default of Penn Central Transportation Company (the largest corporate
default at the time), after which investors demanded increased use of credit ratings, particularly among new issues. The second factor was the rise of information-sharing technology—printers,
copiers, and fax machines made it easier for groups of investors to share ratings publications,
thereby reducing the need for individual subscriptions. Faced with dramatically higher demand for ratings from both investors and issuers and rapidly diminishing revenue prospects from individual
subscribers, Moody's and Fitch began charging issuers for ratings in the 1970s, with S&P following suit more broadly four years later. The rating agencies leveraged a larger and growing revenue
stream to scale up dramatically to meet heightened demand.
The end of the Bretton-Woods system in 1971 led to rapid capital markets growth worldwide, and
investors looking abroad now faced a problem similar to investors looking at railroad bonds at the turn of the century—namely how to gauge credit quality from afar. Thus, the ratings agencies
expanded their scope beyond the U.S., and began rating sovereign and corporate debt internationally. The international opportunity also gave rise to regional ratings agencies—though
none would ever grow to rival the scope and reach of the "Big Three" (S&P, Moody's and Fitch), the development diversified the competitive landscape in many countries, and a few (DBRS and JCRA)
would gain enough clout to become NRSROs in the U.S.
Source: Credit Suisse
1841
Louis Tappan finds first credit reporting agency
1936
OCC, Fed restrict banks from purchasing “speculative grade” securities
1859
Robert Dun, John Bradstreet publish credit ratings guides
New business/merger Key event Regulation
1909
John Moody assigns letter grades to railroad firms
1868
HV Poor publishes financial statistics of railroad companies
1914
Fitch Publishing founded
1924
By 1924 Fitch, Poor Co. and Standard Statistics are issuing letter-grade credit ratings
1933
Dun and Bradstreet merge operations, forming Dun & Bradstreet
1941
Standard Statistics and Poor Co merge to form S&P
1962
Dun & Bradstreet acquire Moody’s
1966
McGraw Hill acquires S&P
1970
CRAs shift to issuer-pay model following Penn Central bankruptcy
Enron bankruptcy draws regulatory scrutiny to CRAs; SEC launches inquiry
2006
SEC passes CRA Reform Act of 2006
2008
CRAs come under renewed scrutiny for role in subprime MBS defaults
2009
SEC expands reporting requirements for NRSROs
2009
Wave of lawsuits post-crisis alleging liability for structured defaults; most are settled
2010
EU launches inquiry into CRAs following wave of sovereign downgrades
2014
EU adopts CRA reporting regulation
2015
S&P settles DoJ case for $1.4 Bn
2000
Moody’s spins off from Dun & Bradstreet
History of the Credit Ratings Agencies
4
x x
Year Regulator Country Description
Key CRA regulatory landmarks as stated
1936 OCC, Fed Res U.S. Prohibited banks from buying spec-grade securities
1948 OCC, Fed Res U.S. Prohibited insurance companies from buying spec-grade securities
1975 SEC U.S. NRSRO designation
1982 SEC U.S. Eased disclosure req. for IG-rated bonds
1989 U.S. Congress U.S. Prohibited S&L from investing in spec-rated bonds
1991 SEC U.S. Limited money-market holding of spec-grade paper
2004 IOSCO International Code of Conduct for CRAs ensuring quality and integrity of ratings process
2006 SEC U.S. Refined requirements for registration as an NRSRO
2008 SEC U.S. Heightened reporting requirements for NRSRO status
2009 CESR Europe Requires registration and enhanced oversight/reporting
2010 ASIC Australia Requires CRAs to hold a license and submit to greater oversight/reporting
2010 FSA Japan Requires CRA registration and compliance with IOSCO code of conduct
2011 ESMA Europe Grants ESMA CRA oversight and regulatory authority
2011 SFC Hong Kong Requires CRAs to hold a license and submit to greater oversight/reporting
2012 MAS Singapore Requires CRAs to hold a license and submit to greater oversight/reporting
2012 CSA Canada Requires CRA registration and enhanced reporting
2012 CNBV Mexico Requires CRA registration and enhanced reporting
2013 FSB South Africa Requires CRA registration and compliance with IOSCO code of conduct
2014 CMA Saudi Arabia Requires authorization of ratings activity subject to intl best practices and standardsx x
History of the Credit Ratings Agencies Regulation Endorses the Credit Rating System The third development was the official NRSRO designation itself. Though financial regulators in
the U.S. had been using ratings since the 1930's (to determine investable securities for banks and insurers), it was not until 1975 that the agencies' regulatory position was officially cemented.
Looking to set minimum capital requirements for broker-dealers, the SEC selected the ratings of securities as a measure of sensitivity and risk. Moreover, to ensure no upstart ratings agency
would issue AAA ratings to broker-dealer portfolios, the SEC created the NRSRO designation—by virtue of their position in the credit markets, S&P, Moody's and Fitch were the first three agencies to be designated NRSROs. Soon, other regulatory bodies followed suit, which further
entrenched the CRAs in the global credit markets, incentivizing issuers to obtain a rating.
The 1980's and 1990's saw ratings proliferate. The rise of the high-yield bond market in the
1980's led to the issuer base multiplying, the continued growth of global capital markets compounded the international growth seen in the 1970's and the advent of structured finance
created a new (and lucrative) set of securities to rate. As such, CRAs grew, opening offices in key growth areas (Europe, Asia, Latin America) and expanding the ranks of credit analysts to
tackle new geographies and products. New entrants like IBCA, Duff & Phelps, MCM and Thomson BankWatch all gained NRSRO status—though by 2000, various mergers reduced the NRSRO list back to the original three. In 2000, Dun & Bradstreet decided to spin off Moody's.
The Enron and WorldCom bankruptcies in 2001-2002 fueled a tumultuous decade for the
CRAs. The failure to predict financial issues with the companies drew the attention of regulators and investing public, who clamored for reform. Thus, a 2003 SEC inquiry eventually culminated in
the Credit Rating Agency Reform Act of 2006, which specifically outlined the criteria to become an NRSRO—over the next two, years five more ratings agencies were named NRSROs, swelling the ranks to 10 by 2008. Though there were more regulator-approved ratings agencies, the top CRAs still enjoyed an enviable position, accounting for ~90-95% of the ratings over the decade
and capitalized on the growth in structured products during the early-to-mid 2000's.
Shortly after the CRA Reform Act of 2006, a bevy of sub-prime mortgage defaults and the subsequent Greek debt crisis drew renewed attention to the CRAs, their role in the markets and
the issuer-pays business model. As billions of dollars of structured mortgage products defaulted during the financial crisis, the agencies were scrutinized by the regulators for possibly
misrepresenting ratings, and investors as well—S&P and Moody's saw several lawsuits leveled against them for their alleged role in the crisis by states, investment funds and the U.S.
Department of Justice. While many of these cases were dismissed or judged in favor of the CRAs (as a rating is considered an opinion, and the agencies hold no explicit liability for offering an opinion), S&P and Moody's settled a few key cases out of court—S&P alone paid nearly $1.4
billion to the Department of Justice and several states for activity related to the financial crisis. The SEC responded by enacting new rules for NRSROs, including enhanced transparency
requirements, greater barriers between ratings analysts and fee negotiations and annual reports to Congress. While American regulators were focused on the ratings agencies for potentially
inflating ratings, European regulators focused on the opposite—they felt that the wave of sovereign downgrades in 2010 were too aggressive, caused yields to spike and rendered a Greek bailout inevitable. Though the criticism was different, the regulatory response was
comparable to that in the U.S.—enhanced transparency reporting and increased measures to reduce conflicts of interest.
Despite increased focus and greater regulation in the aftermath of the financial crisis, the CRA
industry remains largely unchanged in structure from its pre-crisis form—while corporate debt issuance has replaced structured products as the key revenue driver for the CRAs, the Big Three still rate a majority of global credit (96% per the 2014 SEC report), the issuer-pays model is intact, barriers to entry remain high and demand from both issuers and investors remains strong.
x x
First Ratings NRSRO Designation # Ratings 2014 Share
CRAs derive ratings revenues from a number of sources and means. Fees
are generally charged according to the service performed, based on the
volume and complexity of the issue at hand. The types of fees charged for
ratings activities can be grouped into the following buckets:
– Credit Assessment. For first-time issuers there are fees paid for the
initial credit assessment, well before any obligations are issued. These can
range anywhere from $15,000 to $50,000 depending on the size,
complexity and type of issuer seeking assessment.
– Initial Rating Fee. Fee paid for the initial rating of the issuer, which tends
to be above $50,000 for corporate issuers.
– Issuance Fee. The most evident fees for ratings agencies, these are paid
by the issuer as a basis-point share of the size of the specific issue. The
price can range from 5 bps for plain vanilla IG corporate bonds, to
upwards of 12 bps for more complex structured transactions. We note
that certain frequent issuers enter into contracts in which they pay a fixed
amount annually and receive upwards of a 40% discount per issue
throughout the year. These annual contracts range from $100,000 to
$250,000. – Surveillance Fee. After issuance, the CRA will charge an annual fee to
monitor and maintain the rating on both the issue and the issuer. These
fees are $60,000-$100,000 a year for corporate issuers, but tend to be
much less for governmental issuers (~$20,000).
Brand Power Gives CRAs Immense Pricing Power
The brand power and benchmark status of the primary players gives them
pricing power—in fact, both MCO and SPGI have guided to being able to
sustainably raise pricing 3-4% annually. Additionally, the myriad types of fees involved give the CRAs a great degree of flexibility in determining how and
where to raise fees to reach that 3-4%—MCO cites ~150 different pricing
levers they can pull in a given year to optimize their pricing profile. For
example, since, 2005 S&P raised the minimum fee for corporate and public
finance issues by 6% and 14%, annually on average, handily outpacing
inflation, but kept structured and sovereign product pricing more steady, in
part due to the financial difficulties some municipalities and decreased
demand for structured products post-crisis.
Initial credit assessment
($15-$150k)
Initial rating fee
(>$50k)
Total Fees Paid to CRA
Issuance fee
~5 bps of size
Surveillance fee (annual)
($60-$100k)
S&P’s Pricing Power Evident in Corporate and Public Issuance Fees (2005-2016 CAGR of minimum fee by product and GDP in percentage points)
Source: Company data, IMF, Bloomberg, Credit Suisse estimates
Components of Ratings Fees (As stated)
Pricing 101—Product Matters
They type of product also determines fees garnered by a CRA. More
complex products, such as ABS, MBS and other structured products, tend to
command higher fees, due to not only the inherent complexity of the product
being analyzed, but also due to the transactional nature of such issues. The
bespoke work involved in a one-off issuance and lack of a frequent issuer
discount also drive fees higher. The next-highest type of fee is generally
corporate credit, as these products can, at times, rival structured products in
term of complexity, and there are the dimensions of both the credit quality of
the issuer and the specific issue to consider. Finally, public and sovereign
debt fees fall towards the lower end of the spectrum.
8
The Value of a Rating—Why Pay for a Rating? A Regulatory Stamp of Approval & Driver of Funding Costs
A Reliable Signal of Creditworthiness
Though there is some debate about conflicts of interest between raters and
issuers (particularly in the wake of the financial crisis), historical analysis of
ratings and default rates show ratings to be reasonable indicators of
creditworthiness, particularly over long periods of time. This track record
particularly appeals to bond investors, who may hold an issue for decades
and need to monitor their portfolios.
Why Pay for a Rating? Marketing, Regulation, and Cost
Given how much a bond rating can cost from one agency, let alone the two
or more an issuer would likely hire, it is reasonable to ask why an issuer
would pay for one or more ratings. Beyond affirming creditworthiness, there
are several more pragmatic reasons to acquire a rating. For one, many
investment funds have restrictions on the types of investments they can
make, limiting credit investments to investment-grade alone, so many issuers
will seek to obtain ratings as a stamp of approval to increase their potential
investor base. Another key reason is regulation—CRA ratings are widely
used as a measure of creditworthiness in national legislation, deposit and
capital requirements at financial institutions and minimum investment quality
standards in pension and money market funds. In addition to the qualitative
and regulatory reasons to seek a rating, there is a material benefit as well.
Looking at the CDS spreads of consumer giants Kraft and Dillard's, we find
that there is a demonstrable reduction in spreads (a proxy for risk and
interest costs) on debt following an initiation or upgrade. Thus, the long-term
expense savings from a lower interest rate are likely to more than offset the
Corporate Issuance: the Engine for CRA Revenues Post-Crisis Corporate Issuance Surges
Post-Crisis Corporate Debt Room
Since 2008, annual issuance volume has grown more than 75% and non-
financial corporate debt (NFCD) outstanding has nearly doubled. The boom has
been driven by a number of factors, including historically low interest rates, a
weak dollar and the maturation of global capital markets—APAC grew from 8%
of non-financial corporate debt outstanding in 2008 to 24% in 2015. Despite
December’s U.S. hike, rates are likely to remain low for some time given recent
rounds of QE in Europe (prompting recent growth in “reverse Yankee” issuance), the Brexit, and anemic global growth prospects. Even if the U.S. raises rates
(increasingly unlikely post-Brexit), they would still remain low by historical
standards, and the last rate cycle showed rising rates did to deter issuance.
Total Corporate Debt Issuance at Peak Levels (Total corporate debt issuance by type by year in $ trillions, 2015 annualized; IG = investment grade; HY = high yield) Sources: Dealogic, IMF, BIS
GDP Growth is a Key Driver of Issuance (Yr/yr change in percentage points, GDP % on right axis)
48% 51% % of 2015
revenue
13
$0
$1
$2
$3
$4
$5
$6
Jan-88 Jan-93 Jan-98 Jan-03 Jan-08 Jan-13
ROW Europe U.S.
Refinancing Boom Implies Steady Refi Activity
With the tremendous amount of issuance and fairly stable EBITDA,
companies have continuously gone back to the market to both issue and
refinance debt—the latter a hallmark of the ongoing corporate debt boom.
Of the stated uses of proceeds for corporate debt since 2002, refinancing
has come to represent a much higher proportion relative to capex or M&A.
We expect this trend to continue, as pipelines are robust–the current maturity wall implies at least ~$2 trillion a year that would need to roll forward.
Digging a little deeper, most of the activity over the next two to three years is
likely to be concentrated in the investment grade arena (more insulated from
economic cycles), with more volatile high yield activity peaking in 2021.
Issuance Drivers—Corporates Non-Fin Issuance Near Cyclical Peaks; Refi Pipelines Strong
Corporate Leverage Near Cyclical Peaks But EBITDA much Higher
Non-financial corporate leverage is hovering near prior cyclical peaks, but
EBITDA, the base for debt issuance, is also much higher. More importantly,
EBITDA has been quite stable in recent years, unlike the parabolic increase
that preceded the 2008 crisis. Equally important features of the current debt
cycle are the drastically lower rate environment, which has made debt
attractive as a source of financing, and the dearth of risky, less sustainable leveraged buyout activity. The former doesn’t appear to be changing anytime
soon with quantitative easing measures being discussed and implemented
globally in response to Brexit. While we are not baking in further leveraging
into our estimates, we would not be surprised to see this cycle’s peak
exceed 2008.
Refinancing Activity Most Frequent Reason for Issuance (Share of stated uses of debt proceeds for deals >$10 m by year in % points ) Note: “General Corporate Purposes” excluded from data set
Non-Financial Corporate Leverage Levels Ticking Up (Net debt-to-EBITDA ratios and L/T world average in multiple points)
Maturity Wall Implies a Robust Refinancing Pipeline Through 2020 (Corporate debt by rating coming due in $ trillions)
But EBITDA Much Higher And Steadier Than the Lead up to 2008 (In trillions)
Long-Term Issuance Drivers—Corporates European Disintermediation Could Provide an Added Lift
European Bank Disintermediation Picking Up Steam…
Looking globally, we expect corporate issuance to receive an added boost
from the long-term trend of bank disintermediation in Europe. In contrast to
the U.S., European corporate debt markets have historically favored loans
over bonds–a function of the deep regional relationships between local banks
and corporates. Since the financial crisis, European corporates have
increasingly gone to the public credit markets for capital, as traditional bank
loans became more expensive due to increasing capital requirements and balance sheet concerns at major banks. In fact, loan issuance has declined
every quarter since 2012, driving bonds’ share of total European NFCD to
16% of outstanding, up from the pre-crisis average of 10%. Going forward,
we expect a combination of historically low interest rates and increasing
regulation in Europe to accelerate this shift, given the combination of
attractive financing costs and European banks looking to reduce balance
sheet exposure. At present debt levels, a 5% shift in share from loans to
bonds equates to over €200 billion in additional corporate bond issuance. All
in, should the European capital markets mirror that of the U.S., we estimate
a €4.2 trillion issuance opportunity, or $1.6 billion revenue opportunity over time.
…And Reverse Yankees Could Add to the Boom as the ECB Steps In
Since 2008, relatively lower interest rates drove a surge of corporate debt
issued in the U.S., denominated in USD but from non-U.S. companies—otherwise known as “Yankee” issuance. With U.S. rates at the beginning of
an up-cycle and Europe looking to stay lower for longer, we expect an uptick
in “reverse Yankee” issuance denominated in Euros from non-European
corporates. We expect this trend to be further exacerbated by the ECB’s
recently announced $92 billion/month bond-buying programme, as a large
and unwavering buyer across the pond creates an even greater incentive to
issue debt in the region. One criterion of the new program is that the ECB
can only purchase rated debt—increasing the benefit to CRAs. To the extent
Europe sees even 50% of the kind of boom seen in the U.S., it could mean
an incremental $25 billion a year in issuance from non-European businesses,
adding fuel to the fire of local bank disintermediation.
U.S. and E.U. Debt Markets a Mirror Image of Composition (Corporate debt composition as of 4Q15 in percentage points)
European Union Non-Financial Corporates Increasingly Using Bonds Over Loans (Net quarterly flows by type in € billions, share of total corp debt in % points on right axis)
Source: ECB, Federal Reserve, Dealogic, Credit Suisse estimates
Yankee Issuance Soars on Low Rates, Reverse Yankees Picking Up in Europe (In $ billions)
48% 51% % of 2015
revenue
5%
7%
9%
11%
13%
15%
17%
€ 2
€ 3
€ 4
€ 5
€ 6
3Q98 3Q00 3Q02 3Q04 3Q06 3Q08 3Q10 3Q12 3Q14
Bonds Loans % Bonds
15
0%
20%
40%
60%
80%
100%
1995 1999 2003 2007 2011 2015
Other
Turkey
Mexico
Brazil
Russia
India
China
16%
10%
5% 5%2%
29%
18%
0%
10%
20%
30%
40%
Developing APAC Developing
countries
Developing
LATAM
Developing
Europe
Developing Africa
and ME
NFCD-to-GDP U.S. Developed countries
Long-Term Issuance Drivers—Corporates The Emerging Markets Opportunity is Compelling
Emerging Markets a $2-$6 Trillion Opportunity
A frequent topic of discussion is the incremental opportunity for corporate
issuance as credit markets in the developing world mature. Looking at ratios
of outstanding NFCD-to-GDP across countries, we find that, while
increasing since the early 2000’s, many developing regions still have room to
grow relative to the developed world. We estimate that, if developing regions
mirrored the NFCD-to-GDP ratio of the developed world, that would
theoretically drive $0.90-$1.29 in EPS for the major CRAs. Closing the gap to the U.S. would imply a $2.22-$3.00 opportunity. However, it is
paramount to understand that the realization of this opportunity has a number
of hurdles:
1. Some regulators prohibit direct ownership by foreign entities, thereby
limiting direct participation in rating local debt. e.g. China, which alone
comprises 70% of global EM volume
2. Established local credit rating agencies who often dominate the local
market e.g. Dagong in China
3. Immature local debt markets, which foster reliance on bank lending
4. Underdeveloped bankruptcy regulation that encourages ratings shopping and does not adequately protect creditors
Developing World Credit Markets Have Room to Grow (Outstanding NFCD-to-GDP as of 2014 in percentage points)
Source: Company data, BIS, World Bank, Dealogic, Credit Suisse
Debt-to-GDP Ratios Have Been Rising Since the Early 2000’s (Outstanding NFCD-to-GDP in percentage points)
Dev eloped countries
Dev eloping APAC
Dev eloping Europe
Dev eloping LATAM
Dev eloping Af rica and ME0%
5%
10%
15%
20%
1989 1993 1997 2001 2005 2009 2013
48% 51% % of 2015
revenue
25% 50% 75% 100%
Implied NFCD-to-GDP ratio in percentage points
Developing Africa and ME 6% 10% 14% 18%
Developing APAC 16% 17% 17% 18%
Developing Europe 8% 11% 15% 18%
Developing LATAM 8% 11% 15% 18%
Developing countries 12% 14% 16% 18%
Average annual EPS impact in $
MCO
Developing Africa and ME $0.10 $0.20 $0.29 $0.39
Developing APAC $0.05 $0.11 $0.16 $0.21
Developing Europe $0.07 $0.14 $0.21 $0.28
Developing LATAM $0.10 $0.20 $0.30 $0.40
Developing countries $0.32 $0.64 $0.96 $1.29
SPGI
Developing Africa and ME $0.07 $0.14 $0.21 $0.28
Developing APAC $0.04 $0.07 $0.11 $0.15
Developing Europe $0.05 $0.10 $0.15 $0.20
Developing LATAM $0.07 $0.14 $0.21 $0.28
Developing countries $0.23 $0.45 $0.68 $0.91
% of the Difference Between Current and Developed Mkts
Closing the Gap with the Developed World a $0.90-$1.29 EPS Opportunity (Non-financial corporate debt outstanding in percentage points, EPS opportunity in $ as stated)
China Alone Constitutes ~70% of Developing Market Issuance (Mix of developing market DCM issuance in percentage points)
16
x x
Date Issuer Value Nationality
Top IG bond deals in $ billions
Sep-13 Verizon Communications $49.0 United States
Jan-16 Anheuser-Busch InBev $46.0 Belgium
Mar-15 Allergan $20.5 United States
May-16 Dell (Denali Holding Inc) $20.0 United States
Apr-15 AT&T $17.5 United States
Apr-13 Apple $17.0 United States
Dec-14 Medtronic $17.0 United States
May-15 AbbVie $16.7 United States
Mar-01 Orange $16.4 France
Dec-15 Visa $16.0 United States
Jul-15 Charter Communications $15.5 United States
Jul-15 CVS $15.0 United States
Mar-16 Anheuser-Busch InBev $14.7 Belgium
Nov-12 AbbVie $14.7 United States
Sep-15 Hewlett Packard $14.6 United States
Feb-09 Roche Holding $14.3 Switzerland
Feb-09 Roche Holding $13.5 Switzerland
Mar-09 Pfizer $13.5 United States
Oct-15 Microsoft $13.0 United States
Jun-16 Aetna $13.0 United States
Apr-14 Apple $12.0 United States
Feb-16 Apple $12.0 United States
Feb-16 Exxon Mobil $12.0 United States
May-01 Verizon Communications $11.9 United States
Mar-02 General Electric $11.0 United States x x
-$10
-$5
$0
$5
$10
$15
3Q04 1Q06 3Q07 1Q09 3Q10 1Q12 3Q13 1Q15
Issuance Drivers—Investment Grade % of 2015
revenue
Appetite for IG Credit Healthy
High Demand for IG Corporates To Help Issuance
Appetite for IG credit remains robust. While the market has seen spreads
tick up relative to long-term averages, 2016 has seen continued strong
demand for IG corporate paper, as evidenced by five of the largest deals
since 1995 (AB InBev, Dell/Denali, Aetna and Apple). Thus, putting aside
the large and visible IG maturity wall mentioned previously, the issuance
outlook here is positive due to demand—the likelihood of sustained
low/negative interest rates puts pressure on institutional investors globally to continue to seek yield, and one of the few safe places it can be found is in
IG corporate debt.
IG Spreads Poking Above LT Averages (IG issuance volume in $ trillions, benchmark spread in percentage points on right axis)
Source: Dealogic, Bloomberg, SIMFUND
0%
1%
2%
3%
$0.0
$0.2
$0.4
$0.6
$0.8
$1.0
1Q03 1Q05 1Q07 1Q09 1Q11 1Q13 1Q15
IG Vol AAA AAA avg
IG Appetite Strong as Five of the Largest IG Deals Have Occurred in 2016 (Top 25 IG bond deals by value in $ billions)
IG Mix by Industry, 1995-Present (IG issuance volume in $ trillions)
Source: Dealogic, Bloomberg, SIMFUND, Credit Suisse LOCUS
% of 2015
revenue 9% 9%
HY Fund Flows (HY fund flows by quarter in $ billions)
18
Top 11 GSIB Long-Term Debt Well Above Pre-Crisis Levels (Total LT debt of top 11 GSIBs in $ trillions, debt-to-equity ratio in multiple points on right axis)
Issuance Drivers—FIG Structurally Higher; TLAC Should Help
FIG Issuance Structurally Higher; TLAC Might Provide a Slight Lift
FIG issuance has been steady since the financial crisis, growing at a 4%
CAGR since 2010 as banks comply with regulation (Basel) and shore up
loss-absorbing capital levels. Higher capital levels and the necessity of debt
in the capital stack is a structural change that should keep FIG issuance
healthy in the coming years. Moreover, ongoing discussions around the
FSB’s total loss-absorbing capital (TLAC) proposal are likely to spur more
issuance. TLAC requires global systematically important banks (GSIBs) to hold 16-18% of risk-weighted assets’ (RWA) in debt and equity capital by
2019. The TLAC shortfall at GSIBs has been estimated at ~$0.5 trillion by
the BIS, but banks have two routes to make this up—issuance of capital or
reduction of RWA. Many banks are using a combination of both, meaning
the incremental issuance upside here is likely less than $0.5 trillion.
Major Banks Have $500 Billion TLAC Shortfall to Make Up by 2019 (Estimated TLAC shortfall by compliance year and scenario as of Nov 2015 in $ trillions)
FIG Issuance Has Exploded in Recent Years, 1995-Present (Issuance volume in $ trillions)
Source: Dealogic, BIS, S&P Capital IQ
Note: TLAC “Main” scenario assumes no current senior unsecured debt counts towards proposal, “Alt”
scenario assumes current senior unsecured debt does count towards proposal
GSE RMBS a Majority of U.S. RMBS Activity (In $ billions, GSE share of total in percentage points on right axis)
% of 2015
revenue 19% 11%
21
0%
10%
20%
30%
40%
50%
$0
$20
$40
$60
$80
1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16
CMBS CMBS %
0
100
200
300
400
1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16
Structured Products Drivers—MBS Jumbo RMBS and CMBS to Drive Activity Here
Some Rays of Light in the RMBS Market
Despite the increasing participation of the GSEs we see two opportunities in
the U.S. RMBS market for the CRAs. The first are GSE credit risk transfer
(CRT) deals, which are non-agency originated RMBS collateralized by agency
mortgages, designed to draw private capital back to the mortgage market.
Because these aren’t explicitly issued by the GSEs (only using their mortgages
in the reference portfolio), each of these transactions is rated by a CRA. The
market is still nascent–more than $13 billion in CRT volume has been issued since 2009, with three $1 billion+ deals being priced so far in 2016.
The second opportunity lies in the steady increase in the number of private
jumbo mortgage originations. Recall, the GSEs have an upper limit to the
amount they will pay for a single mortgage ($417,000 in most counties).
Consequently, private originators have stepped in to meet increasing jumbo
mortgage demand, thereby, driving a majority of non-GSE RMBS issuance.
Despite the slight recovery since the financial crisis, we note that jumbo
mortgage origination remains a small part of the overall market—only 15-
18% of residential mortgage origination in recent years has qualified as jumbo. Though small, it should provide steady work for the CRAs in the
RMBS space.
U.S. a Good Indicator for CMBS as Well
As the U.S. CMBS market comprises over 90% of the global CMBS market,
like RMBS we view it as a good indicator of global CMBS trends. While the
U.S. commercial mortgage market overall has recovered moderately since
the financial crisis (returning to levels last seen 2004-2006), CMBS volumes
have not tracked origination volume higher. The outlook here is steady, as
securitization remains a key funding source for most commercial mortgages.
U.S. Commercial Mortgage Originations At Levels Last Seen 2004-2006 (Annualized commercial/multifamily origination volume indexed to 100, the 2001 average)
U.S. Jumbo Residential Mortgage Origination Steady Post-Crisis (In $ billions)
But U.S. CMBS Volume Have Yet to Catch Up (in $ billions, CMBS % of total MBS in percentage points on right axis)
% of 2015
revenue 19% 11%
22
$10
$20
$30
$40
$50
$50
$70
$90
$110
$130
$150
$170
1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16
Auto ABS issuance follow sloan origination higher
Structured Products Drivers—ABS Lukewarm Outlook for Auto & Credit Card ABS
Auto Loan ABS Outlook Tepid Going Forward
In the wake of the financial crisis and the dropoff in home equity ABS, auto-
related receivable assets have come to comprise the largest share of ABS
collateral and issuance—nearly 40% in 2015, up from ~10% in 2007. Though
ABS issuance activity tends to be seasonal and volatile (thus obscuring tangible
correlations), looking at the chart below, one can see that auto loan origination
and ABS issuance are closely related. The outlook here is mixed; while increased
consumer confidence and lower oil prices bode well for auto sales (thus, loan
originations and ABS issuance), light vehicle sales (retail consumer cars and
trucks) are expected to be flat to slightly down over the next few years, due to
myriad factors, including vehicle durability, a shrinking customer base and the fact that car price inflation has outpaced wage inflation every year since 2013. As
such, we are lukewarm about a meaningful boost from auto ABS in the future.
Credit Card ABS Outlook Also Weak
Credit card receivable ABS comprise a small portion (~10%) of overall ABS
activity, and are unlikely to be a meaningful contributor going forward.
Outstanding credit card balances (the underlying asset for this type of ABS)
have been creeping up in recent quarters, but issuance has not kept pace.
We attribute this to banks, who have become the primary issuers of credit
cards post-crisis, having the liquidity and capital resources to manage
receivables absent securitization.
Auto ABS Follows Auto Loan Origination Higher Post-Crisis (Auto loan origination and auto ABS issuance in $ billions, ABS on right axis)
0
5
10
15
20
2005 2007 2009 2011 2013 2015 2017 2019
Vehicle sales to plateau 2016-2019
Vehicle Sales Outlook Tepid Near-Term (Light vehicle sales historical and projected in units millions)
Source: Dealogic, NADA, Federal Reserve
Credit Card Receivable ABS Issuance Not Following Balances Higher (Outstanding credit card balances and credit card ABS issuance in $ billions, ABS on right axis)
Student loan ABS declines as legacy products roll off
0%
5%
10%
15%
20%
25%
30%
35%
0 €
2 €
4 €
6 €
8 €
10 €
12 €
Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16
ABS issuance Net change in holdingsPrimary % of total ECB
24
0
2
4
6
8
10
12
2010 2015 2020 2025 2030 2035 2040 2045 2050
Developed countries Developing countries
2010-2050 CAGR: 1%
30%
40%
50%
60%
70%
80%
90%
$0
$20
$40
$60
$80
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
General govt debt
% of GDP, actual
% of GDP, estimate
Public Finance & Infrastructure Drivers Growing GDP and Populations Necessitate Issuance
Public Debt Has Risen in Sync with GDP and Growing Populations
There is no shortage of public debt—gross levels of public debt have grown
at a 9% CAGR since 1993, and is currently equal to ~80% of global GDP.
Furthermore, levels of overall public debt are expected to rise ~2.7% per
year over the next 5 years according to the IMF. This increase is driven
primarily by emerging markets, which will see debt growth of ~7% annually
as they spend to match their growing economies and populations.
Drivers of Public Debt Issuance
Public entities issue debt for several reasons. For sovereigns, debt tends to
be an integral part of government financing, helping to manage any
budgetary shortfall from longer-term revenue collection (taxes) and nearer-
term liabilities. Governments may also need to increase issuance to pay for
public needs like healthcare, infrastructure or defense. For sub-sovereigns
(states, cities, municipalities), issuance is more transactional, driven by
specific needs: infrastructure, construction, schooling, hospitals, etc.
Global Public Debt to Grow 2-3% a Year to 2020 (In $ trillions)
Source: IMF, UN
Global Government Debt and Share of GDP (In percentage points)
% of 2015
revenue 16% 9%
GDP Projected to Grow ~3% a Year Through 2020 (Yr/yr GDP growth in percentage points, IMF estimates as of Apr 2016)
Global Population to be 9.7 Billion by 2050 (Global population forecast as of Jul 2015, 2010 actual baseline)
-1%
0%
1%
2%
3%
4%
5%
6%
1980 1985 1990 1995 2000 2005 2010 2015 2020
GDP % Δ Forecast $0
$20
$40
$60
$80
2016 2017 2018 2019 2020
Developed Developing
2016-2020 CAGR: 2%
25
-5%
0%
5%
10%
15%
1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
N. Amer Europe
APAC LATAM
ME Africa
High GDP growth
Low GDP growth
Poor infrastructure
Good infrastructure
High-grow th, low-infrastructure countries w ill need to spend to keep grow th pace
Issuance Drivers—Public Finance & Infrastructure Need for Infrastructure to Necessitate Government Spending
Global Infrastructure Needs Could Drive Public Issuance Higher
The global need for investment in infrastructure is evident—McKinsey
projects $57 trillion in necessary global infrastructure spending through 2030
in order to keep pace with GDP growth. This is especially true in the
developing world—the disparity between GDP growth and infrastructure
ratings in key developing markets illustrates the stark gap. To the extent that
infrastructure investment increases and drives further GDP growth, emerging
economies could sustain their breakneck pace through targeted infrastructure investments. While the U.S. is expected to grow infrastructure
spending from $800 billion per year to $1 trillion over the next ten years, the
real growth will come from Asia—China is expected to double its annual
infrastructure spend over the same period (to more than 3x the U.S.), and
APAC overall is anticipated to comprise 60% of global infrastructure
spending by 2025. $0
$2
$4
$6
$8
$10
2018 2025
Africa
ME
LATAM
APAC
FSU/CEE
Eur
N. Amer
Source: IMF, World Bank, Oxford Economics
Annual Infrastructure Spending to Reach $10 Trillion by 2025 (Expected infrastructure spending by region in $ trillions)
Global Need for Infrastructure Most Dire in High-Growth Countries (5-yr GDP growth in percentage points on y-axis, infrastructure rating as stated on x-axis, bubble size = annual GDP in $ billions)
% of 2015
revenue 16% 9%
26
Issuance Drivers—Public Finance & Infrastructure Ageing Populations, Cost Inflation Drive Further Public Spending
Healthcare Spending
In addition to the tangible need for infrastructure investment, the world’s
governments face another looming expense issue—rising healthcare costs.
Since 1995, public healthcare spending as a share of GDP has increased
from 6% to 8% globally, and remained at historically elevated levels post-
crisis. This spending is expected to grow further as governments contend
with ageing populations and cost inflation—spending here is set to increase
2-5% in developed markets and as much as 15% in emerging markets. Given the strong global bias towards public spending over private, we believe
rising healthcare costs will necessitate additional government debt issuance
to meet expected demand.
Source: IMF, UN, World Bank, Economist Intelligence Unit
Public Health Spending as a % of GDP Remains Elevated Post-Crisis (In percentage points)
60% 66%76%
61%47%
40% 34%24%
39%53%
0%
20%
40%
60%
80%
100%
World APAC Europe OECD U.S.
Private Public
Healthcare Spending Weighted Heavily Towards Governments (Mix of healthcare spending in 2013 in percentage points)
2.4%
4.6% 4.9%
8.1% 8.7%
12.5%
15.2%
0%
5%
10%
15%
20%
Europe LATAM U.S. All APAC ME/Afr. China India
Healthcare Spending Set to Rise Across Regions and Countries into 2018 (Expected annual healthcare spending growth 2014-2018 in percentage points)
10%
12%
14%
16%
18%
20%
22%
24%
0.0
0.5
1.0
1.5
2.0
2.5
2015 2020 2025 2030 2035 2040 2045 2050
Pop >60 % of total
Global Population Over 60 to Double by 2050 (Est. population over 60 years old in billions, % of total in percentage points on right axis)
% of 2015
revenue 16% 9%
4%
6%
8%
10%
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
World US APAC OECD Europe
Smaller denominator due to GDP drop during the f inancial crisis, remains elev ated during recov ery
Disclosures
Companies Mentioned (Price as of 15-Jul-2016) Moody's Corporation (MCO.N, $103.34, NEUTRAL, TP $99.0) S&P Global (SPGI.K, $115.64, OUTPERFORM, TP $123.0)
Disclosure Appendix
Important Global Disclosures I, Ashley N. Serrao, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Moody's Corporation (MCO.N)
MCO.N Closing Price Target Price
Date (US$) (US$) Rating
10-Dec-13 73.09 87.00 O *
07-Feb-14 80.02 95.00
07-May-14 81.98 97.00
30-Jun-14 87.66 102.00
08-Sep-14 95.50 NR
11-Jul-16 97.85 99.00 N *
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
N O T RA T ED
N EU T RA L
3-Year Price and Rating History for S&P Global (SPGI.K)
SPGI.K Closing Price Target Price
Date (US$) (US$) Rating
10-Dec-13 73.81 86.00 O *
07-May-14 76.07 95.00
08-Sep-14 85.20 NR
11-Jul-16 110.26 123.00 O *
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
N O T RA T ED
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s t otal return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12 -month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.
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Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 51% (41% banking clients) Neutral/Hold* 36% (17% banking clients) Underperform/Sell* 13% (38% banking clients) Restricted 0% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
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Target Price and Rating Valuation Methodology and Risks: (12 months) for Moody's Corporation (MCO.N)
Method: Our $99 target price is based on 20x our 2017 EPS estimate, reflective of historical analysis of trading multiples and present growth expectations. Our Neutral rating reflects expected performance relative to peers, as we believe that the firm is presently operating at peak margins, and the pro-cyclical transaction-oriented ratings business model could pressure margins in the event of a downturn.
Risk: Risks to our Neutral rating include: 1) Corporate issuance debt boom that complements strong refinancing pipelines and MCO’s exposure to the ratings business 2) stronger than expected Analytics margin expansion 3) stronger than expected pricing power
Target Price and Rating Valuation Methodology and Risks: (12 months) for S&P Global (SPGI.K)
Method: Our $123 target price is based on 21x our 2017 EPS estimate, reflective of historical analysis of trading multiples and present growth expectations. Our Outperform rating reflects expected performance relative to peers, as we believe that the firm boasts a collection of high margin and iconic brands with strong competitive moats and/or secular tailwinds, which translates to pricing power, more durable revenue during a downturn and significant free cash flow generation
Risk: Risks to our Outperform rating include: 1) Cyclical downturn in issuance that offsets the strong refinancing pipelines; 2) failure to integrate SNL and missing synergy targets; 3) pricing regulation; 4) market downturn in indices that offsets organic growth and/or the counter-cyclical lift from trading volumes.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (MCO.N) within the next 3 months. As of the date of this report, Credit Suisse makes a market in the following subject companies (MCO.N).
For a history of recommendations for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to https://rave.credit-suisse.com/disclosures/view/report?i=238185&v=-rj1z89up65vur5j88yr2pt30 .
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