Lookout Report - S&P Dow Jones Indices2016/08/22 · Lookout Report August 19, 2016 Michael G Thompson Managing Director S&P Investment Advisory Services (1) 212-438-3480 [email protected]

The U.S. And Global Economies Remain Supportive Of EarningsGrowth

Despite four consecutive quarters of negative S&P 500 earnings growth, and three consecutive

quarters of U.S. GDP growth below 1.5%, investor optimism remains largely unscathed. Fresh

record highs for the S&P 500 Index along with an elevated 17.6x forward price-to-earnings

ratio exemplify investors' confidence in the macroeconomic outlook and corporate earnings

expectations.

To confirm that this optimism is warranted, the financial market research team at S&P Global

Market Intelligence continues to monitor the purchasing managers' indices (PMIs) for the U.S.,

Europe, and China, as we have done since the start of 2016. As of July, the global PMI data

portrays an environment that remains supportive of future earnings growth.

At the start of 2016, the average manufacturing PMI for the U.S., Europe, and Asia was 49.9,

fueling fears of imminent recession in concert with weakness in other economic data such as the

January employment and retail sales reports. However, the relatively healthy average readings

on the non-manufacturing/services PMIs suggested that pessimism was a bit premature or

perhaps unwarranted (see "Lookout Report: U.S. Retail Sales Help Stock Market Investors

Breathe A Sigh Of Relief," published Feb. 19, 2016). The positive news now is that the average

reading of the tri-region services PMI has held within the narrow but still growth-oriented range

of 53.1 to 54.3 since the start of this year, even though every monthly reading to date in 2016

has predominantly been below the levels recorded throughout 2015 (see chart 1).

Lookout Report

August 19, 2016

Michael G Thompson

Managing Director

S&P Investment Advisory Services

(1) 212-438-3480

[email protected]

Robert A Keiser

Vice President

S&P Global Market Intelligence

(1) 212-438-3540

[email protected]

This report was prepared by S&P

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Chart 1

S&P 500 earnings expectations have been adjusted lower and in line with the reality of U.S. and global economies that

have avoided recession but nonetheless decelerated from 2015 growth rates. Calendar-year 2017 S&P 500 earnings per

share (EPS) expectations have now declined to $132.80 from $141.26 at year-end 2015, but the 2017 EPS growth rate has

actually improved to 13.8% from 12.5% as anticipated 2016 earnings have declined more than the following year. The

achievement of double-digit earnings growth in 2017 would validate investor optimism and existing stock market

valuations. To this end, we prefer to see steady improvement in the level of average U.S., Europe, and China services PMIs

in the coming months that restore this indicator to the 54-56 range recorded in 2015. Improving conditions in the

services-oriented portion of the global economy would also place sustained upward pressure on the average manufacturing

PMI that has not recorded a reading over 52.0 since November 2014. Over the balance of this year, should the average

manufacturing and services PMIs relapse to early 2016 levels, then investor optimism may turn out to be misplaced despite

the likelihood of extended extreme monetary accommodation by global central bankers.

Inside This Issue:

Macroeconomic Overview: The U.S. And Global Economies Remain Supportive Of Earnings Growth

Despite four consecutive quarters of negative S&P 500 earnings growth, and three consecutive quarters of U.S. GDP

growth below 1.5%, investor optimism remains largely unscathed. Fresh record highs for the S&P 500 Index along with

an elevated 17.6x forward price-to-earnings ratio exemplify investors' confidence in the macroeconomic outlook and

corporate earnings expectations. To confirm that this optimism is warranted, the S&P Global Market Intelligence

The U.S. And Global Economies Remain Supportive Of Earnings Growth Lookout Report

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August 19, 2016

continues to monitor the PMIs for the U.S., Europe, and China, as we have done since the start of 2016. As of July, the

global PMI data portrays an environment that remains supportive of future earnings growth.

Economic And Market Outlook: Retail Gives A Final Boost To Second-Quarter Earnings

Retailer earnings have been the focus the past two weeks as the industry group brings in the tail end of second-quarter

earnings season. As of Aug. 17, 73% of the retailers within the S&P 500 index have reported results. Nearly 60% of those

retailers beat the consensus earnings estimate. All told, we view the retailers' earnings reports as encouraging and another

sign of the strength of the consumer. The second half of the year is poised for solid fundamental performance as many

retailers will be up against easier sales and earnings comparisons, weather is projected to be more favorable, and there are

two extra selling days in the holiday selling period versus last year.

S&P Dow Jones Index Commentary: S&P 500 Corporate Pensions Missed The Mark By $369 Billion In 2015

Providing Americans with adequate retirement income and affordable medical care was one of the country's most hotly

debated social and political topics of the 20th century. However, the times have changed as the medical cost of prolonged

longevity has soared and corporations' ability to absorb the risks associated with multi-decade portfolios to finance those

commitments has weakened. Over the past decade, corporations in the private sector have successfully shifted the

responsibility of retirement to individuals, as programs have been frozen or closed to new employees, with 401(k)-type

saving programs acting as substitutes.

Leveraged Commentary And Data: Loan Market Technicals Shift Back To Favor Issuers In July

The loan market's technical pendulum swung decisively in favor of issuers in July after a relatively balanced June. All told,

demand vaulted atop visible supply by $6.5 billion versus a mere $1 billion surplus the prior month. The shift reflects the

slack new money supply in July. All told, index outstandings grew by a mere $475 million in the month, to roughly $886

billion, as the institutional loan market continued to suffer from a drought of merger and acquisition (M&A)-related deals

and other deals that represent fresh dollars to the asset class.

R2P Corporate Bond Monitor

The U.S. economy showed signs of cooling in a quiet week of economic data, extending the mixed signals we've become

accustomed to lately. Meanwhile, credit markets continued to tighten, albeit at a much slower pace. The Fed again

reiterated that it needs to see more strengthening, and not just in the labor market, before raising rates which, in our view,

could indicate that a rate rise is unlikely in the coming months. In Europe, the economic recovery progressed slowly with

some upbeat data. Manufacturing data picked up slightly, and credit markets continued to grind tighter in response to

European Central Bank policy, the recent Bank of England stimulus package, and quantitative easing plans.

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

The restaurant industry has had a particularly mixed bag for IPOs. First, no new IPOs in the restaurant industry have

come to market this year. According to S&P Global Market Intelligence data, the last restaurant industry IPO to price in

the U.S. was an $88.2 million issue by Dallas-based steakhouse chain Fogo de Chao Inc., which debuted in mid-June

2015. For all industries, announced M&A deal value in 2016 involving U.S.-based targets is approaching the $1 trillion

mark. According to S&P Global Market Intelligence data, over $933 billion in announced deals has occurred this year led

by the health care sector, which has had more than $177 billion in transactions.


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August 19, 2016

Economic And Market Outlook: Retail Gives A Final Boost To Second-Quarter Earnings

North America

Second-quarter earnings season is nearly complete for the S&P 500 Index with 95% of the constituents already reporting.

Growth is running 312 basis points ahead of initial expectations, though it's still projected to decline by 2.1% from the

second quarter of 2016. While this will be the fourth quarter in a row that the index posted a decline, the rate of decline

has improved substantially from the trough of -6.8% recorded in the first quarter. The current second quarter earnings

projection is for $29.16.

Chart 2

The consumer discretionary (14.3), industrials (13.0%), utilities (11.3%), and health care (6.3%) sectors were the profit

growth leaders in the second quarter. Retailers have been the focus in the final stages of earnings season as they are

typically the last to report results. Double-digit beat rates from the department stores have helped boost growth from retail

and consumer discretionary more generally. The largest drag on earnings continues to be the energy sector, which is slated

to post an 86.1% decline in growth. Other sectors weighing on growth are the financials (-7.8%), materials (-4.2%), and

telecommunication services (-2.6%). Excluding energy, earnings growth would be close to 3%.


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August 19, 2016

Chart 3

Retailer earnings have been the focus the past two weeks as the industry group brings in the tail end of second-quarter

earnings season. As of Aug. 17, 73% of the retailers within the S&P 500 index have reported results. Nearly 60% of those

retailers beat the consensus earnings estimate. A number of large beats from online retailers and department stores have

contributed to the significant improvement in growth expectations to 13.9% from 8.7% at the start of earnings season.

The department stores had a low hurdle, however, when it came to the second quarter as a weaker-than-expected first

quarter caused management teams to reduce full-year guidance. More seasonable weather and an improved job picture

helped Macy's Inc., Nordstrom Inc., and Kohl's Corp. beat estimates by 16% on average. As more specialty retailers

reported, the retail picture became a little more mixed with Lowe's Cos. Inc. missing estimates, The TJX Cos. Inc.

lowering its outlook, and Target Corp. disappointing on its sales guidance, to mention a few. That being said, the overall

retail picture showed same store sales for the industry improving in the second quarter from the first quarter, and sales in

the second quarter got better in each month as the quarter progressed. The top-line strength led to merchandise margin

and gross margin expansion. Further, inventory positions are aligned with sales, a positive for entering the third quarter.

The sector remains divided by winners and losers. Even with a solid showing in the second quarter, the department stores

have been a clear market share donator, with the off-price retailers benefiting from the consumer's desire for more

value-oriented products. Sales at the off-priced chains, TJ Maxx, Marshalls, Ross Stores and Nordstrom's Rack have

among the strongest same-store sales growth given this trend, which has been in place for several years now. Home

improvement is benefiting from a still-strong housing market and a desire to renovate and remodel as home prices rise.


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August 19, 2016

Online retail is the clear winner with Amazon.com Inc. in the lead. Several retailers are focused on expanding their online

presence to compete with the behemoth, with Macy's announcing plans to close another 100 stores and invest further in

its online business and Wal-Mart Stores Inc.'s acquisition of Jet.com. Expectations remain high for retailers that have been

on the winning side of the equation, making the stock upside from earnings results harder to come by for those winners

(especially when the winning stock has outperformed the market year to date).

All told, we view the retailers' earnings reports as encouraging and another sign of the strength of the consumer. The

second half of the year is poised for solid fundamental performance as many retailers will be up against easier sales and

earnings comparisons, weather is projected to be more favorable, and there are two extra selling days in the holiday selling

period versus last year.

Table 1

Detailed Retail EPS Growth Estimates And Performance Metrics

EPS growth estimates (%)

Q2 Fiscal-year 1016 Year-to-date price change (%) Next 12 months P/E (x)

Retailing 14.2 14.4 6.6 24.9

Distributors 11.7 6.9 20.4 19.5

Internet and catalog retail 73.4 53.3 7.3 55.6

Multiline retail 3.6 8.7 12.0 15.5

Specialty retail 7.5 9.3 4.5 18.9

EPS--Earnings per share. P/E--Price-to-earnings ratio. Source: S&P Global Market Intelligence.

Europe

News out of Europe over the last week has been relatively light. Earnings growth rates for the Euro 350 continue to

fluctuate with 2016 expected to decline 5.8% (versus -4.5% a month ago) and to increase 14.1% in 2017 (versus 13.9% a

month ago).

Only three of the 10 Euro 350 sectors are expected to report growth in 2016. Consumer discretionary (4.3%) leads,

followed by telecommunication services (2.4%), and health care (2.2%). Energy (-28.6%), financials (-19.3%), utilities

(-11.5%), information technology (-9.8%), industrials (-4.2%), consumer staples (-1.8%), and materials (-1.5%) are all

expected to report growth declines.

Table 2

Calendar-Year 2016 And 2017 EPS And Growth Rate

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

EPS (€) Growth (%) EPS (€) Growth (%)

Consumer discretionary 128.81 4.3 141.14 9.6

Consumer staples 151.1 (1.8) 167.1 10.6

Energy 51.49 (28.6) 82.78 60.8

Financials 56.13 (19.3) 64.95 15.7

Health care 126.89 2.2 135.83 7.0

Industrials 102.21 (4.2) 113.82 11.4

Information technology 60.62 (9.8) 72.67 19.9

Materials 111.26 (1.5) 126.72 13.9

Telecommunication services 72.07 2.4 78.84 9.4

Utilities 85.83 (11.5) 87.27 1.7


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August 19, 2016

Table 2

Calendar-Year 2016 And 2017 EPS And Growth Rate (cont.)

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

EPS (€) Growth (%) EPS (€) Growth (%)

S&P 350 85.41 (5.8) 97.43 14.1

EPS--Earnings per share. Source: S&P Global Market Intelligence.

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.

S&P Dow Jones Index Commentary: S&P 500 Corporate Pensions Missed The Mark By $369Billion In 2015

Providing Americans with adequate retirement income and affordable medical care was one of the country's most hotly

debated social and political topics of the 20th century. However, the times have changed as the medical cost of prolonged

longevity has soared and corporations' ability to absorb the risks associated with multi-decade portfolios to finance those

commitments has weakened. Over the past decade, corporations in the private sector have successfully shifted the

responsibility of retirement to individuals, as programs have been frozen or closed to new employees, with 401(k)-type

saving programs acting as substitutes. What remains is a lingering program of the past that will slowly decline in size and

number of covered retirees over the coming decades. For now, both pensions and other post-employment benefits (OPEBs)

remain a manageable cost with sufficient resources (and cash flow) to support them--even as current low interest rates are

expected to make funding levels worse for 2016. For 2015, corporate pension underfunding stood at $369 billion--5.3%

lower than in 2014 as markets posted slight gains and interest rates ticked higher. The funding level also ticked up to

81.42% from the 81.21% posted in 2014. The last full-funding level (104.40%) was in 2007.

Clearly, the traditional, defined-benefit corporate pension has become a relic of an earlier age, one that dates back to

World War II when the average American's life expectancy was 65 years. By 1974, when Congress passed the Employee

Retirement Income Security Act (the federal law that sets minimum standards for most voluntarily-established pension and

health plans in the private sector), Americans' average life expectancy had risen to 72 years. Today, the average life

expectancy in the U.S. is 79 years (77 years for men and 82 years for women). In 1983, when the life expectancy was 74,

the official Social Security age of "full retirement" was scaled forward from 65 years to 67 years, depending on the year of

birth, and longevity continues to move up. Medicare eligibility, however, has remained at 65. As a result,

post-employment medical costs associated with longevity have skyrocketed and so have the costs of prescription drugs and

elder care.

Even if the S&P 500 manages to post a double-digit gain for 2016, low interest rates (which increase discounted liabilities)

could result in a record pension and OPEB underfunding level for the year.

The regulated pension system in the U.S. continues to suffer from antiquated accounting regulations that can sometimes

distort the financial position of pension funds and their sponsors. The problem is that the pay-as-you-go system has been

hampered by low funding rates, few incentives, and few legal guarantees.

In 2015, pension and OPEB assets set aside for issues in the S&P 500 amounted to $1.68 trillion, a 4.1% decrease from

the $1.75 trillion held at year-end 2014. Obligations posted a 5.04% decrease to $2.22 trillion, after increasing 11.3% in

2014 to a record $2.34 trillion. These decreases combined to form an underfunding of $539.6 billion, a slight

improvement from the 2014 deficit of $585.0 billion or the record $686.6 billion deficit of 2012. The combined coverage


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August 19, 2016

ratio increased to 75.7% from last year's 75.0% (it was 70.0% in 2012).

For individuals, personal wealth depletion--via diminished home equity, low-yield savings and fixed income investments,

prolonged high unemployment, lower-paying jobs, and reduced pension and OPEB--has left potential retirees with little

ability to retire even as homes and equity prices have improved. While household wealth has climbed well above its

prerecession level (to $86.8 trillion at the end of 2015 from $68.9 trillion in the second quarter of 2007), the distribution

of that wealth has been uneven. Despite the lowest unemployment rate since 2008 and U.S. equity markets posting new

highs in 2015 and 2016, the current economic reality for retirement for many Americans is painful. Strained government

programs, the need for additional tax revenue, reduced spending on entitlement programs, and higher social costs have

heralded a return to the retirement of prior generations. That is, you work for most of your (now-longer) life and spend

your remaining years in retirement with a reduced lifestyle.

Chart 4

Table 3

S&P 500 2015 Pension And OPEB Funding Statistics

Assets and obligations

Pensions OPEB Combined

2015 2014 2015 2014 2015 2014

Assets (bil. $) 1,614.62 1,682.00 65.92 71.00 1,680.54 1,753.00

Obligations (bi. ) 1,983.15 2,070.96 237.03 267.03 2,220.19 2,337.99


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August 19, 2016

Table 3

S&P 500 2015 Pension And OPEB Funding Statistics (cont.)

Funding status (bil. $) (368.53) (388.96) (171.12) (196.03) (539.65) (584.99)

Funding ratio (%) 81.42 81.22 27.81 26.59 75.69 74.98

% funded

Pensions (%) OPEB (%) Combined (%)

Fully funded 9.82 5.22 5.37

Funded 90% to 100% 12.58 3.36 8.95

Funded 80% to 90% 28.53 3.36 18.93

Funded 70% to 80% 29.45 4.10 24.55

Funded 60% to 70% 10.43 3.36 14.83

Funded less than 60% 9.20 80.60 27.37

No assets (OPEB incl in less than 60%) 1.53 56.72 3.07

OPEB--Other post-employment benefits. Source: S&P Dow Jones Indices.

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

[email protected].

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

Leveraged Commentary And Data: Loan Market Technicals Shift Back To Favor Issuers In July

The loan market's technical pendulum swung decisively in favor of issuers in July after a relatively balanced June. All told,

demand vaulted atop visible supply by $6.5 billion versus a mere $1 billion surplus the prior month.


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August 19, 2016

Chart 5

The shift reflects the slack new money supply in July. All told, index outstandings grew by a mere $475 million in the

month, to roughly $886 billion, as the institutional loan market continued to suffer from a drought of merger and

acquisition (M&A)-related deals and other deals that represent fresh dollars to the asset class.


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August 19, 2016

Chart 6

July's volume was light even by recent standards, with the primary market taking a brief pause after the U.K. surprised the

Street by voting to exit the European Union. The $15.9 billion of first-lien loans that broke secondary pales in comparison

to the $47.5 billion of first-lien allocations in June and falls shy of the $22 billion and $29 billion totals in July 2015 and

2014, respectively.


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August 19, 2016

Chart 7

In addition, corporate M&A and other takeout activity continued to detract from index outstandings, with issuers such as

Celanese U.S. Holdings LLC and Electronic Funds Source exiting the index in July.

The demand side of the ledger, meanwhile, was relatively steady. Visible inflows from mutual funds and collateralized

loan obligations (CLOs) totaled approximately $6 billion, versus $5.7 billion in June, despite initial concerns that the

outcome of the Brexit vote would dampen CLO issuance and spur outflows from loan mutual funds.

Neither of those fears was realized: CLO issuance was $5.76 billion, down from $6.64 billion in June but still marking the

third-highest total of 2016, and loan mutual funds eked out a $172 million net inflow for the month, according to funds

that report weekly to Lipper FMI.


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August 19, 2016

Chart 8


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August 19, 2016

Chart 9

There continued to be chatter of cash coming into the asset class from pension funds and other institutional buyers,

though the amount of money here isn't quantifiable.

To par and beyond

With demand outpacing supply, the secondary trended higher in July, recouping losses posted in June and then some. The

S&P/LSTA Index returned 1.43% last month, its best monthly performance since April, with the average bid price of the

index hitting a year-to-date high late in the month.


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August 19, 2016

Chart 10


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August 19, 2016

Chart 11

With many loans running out of upside potential--at the month end, 37.3% of performing index loans were bid at par or

higher, and 66.2% were bid at 99 or higher--and with the risk of repricings/refinancings, declining oil prices, and an

increasingly active new issue market, the secondary began to level off in late July and has remained largely rangebound in

August.

Getting back to July's action, clearing yields among loans breaking secondary in July widened a touch from June, to

5.28%, from 5.17%, as July's relatively small pool of breaks included some higher-yielding credits.


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August 19, 2016

Chart 12

The data was bifurcated: The yield to month on higher-rated deals tightened in the month, while lower-rated deals, on

average, widened.


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August 19, 2016

Chart 13

Flex activity, overall, was biased toward investors, increasingly so in the latter half of the month. In the first half of July,

arrangers cut pricing on five deals, while flexing higher on six others, but in the second half of the month, nine deals

flexed down and none flexed up.

Table 4

Number Of Flexes Per Month

Down Up Ratio

August 2015 3 4 0.8

September 2015 3 2 1.5

October 2015 2 22 0.1

November 2015 5 9 0.6

December 2015 1 11 0.1

January 2016 4 6 0.7

February 2016 1 9 0.1

March 2016 8 2 4.0

April 2016 26 4 6.5

May 2016 22 3 7.3

June 2016 37 8 4.6

July 2016 14 6 2.3

Source: LCD, an offering of S&P Global Market Intelligence.


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August 19, 2016

More of the same?

Against this issuer-friendly technical backdrop, August has gotten off to a particularly robust start in the primary market.

Through Aug. 8, arrangers launched 24 transactions totaling $13.7 billion, and note the latter figure doesn't incorporate

repricings and amend-to-extend activity that Leveraged Commentary and Data (LCD) doesn't count toward volume. And

there are some big deals in this camp: CDW LLC, Hilton Worldwide Holdings Inc., and Western Digital Corp.

The lion's share of the recent burst of activity, however, has been opportunistic, and thus the market remains vexed with

the same issue it has been grappling with for months: generating enough new issue supply to sate demand and offset

repayments.

Several refinancing or recap deals have recently hit the market that are accretive to institutional outstandings--Extended

Stay Americas Inc., Aclara Technologies Inc., Dayton Power & Light Co., Harbor Freight Tools U.S. Inc., Inteva Products

Inc., Safway Services LLC, and Truck Hero Inc. are among them--but at the same time, the speculative-grade and pro rata

markets are wide open for takeout deals.

Topping the pro rata list is Broadcom Ltd. (Avago), which decreased its institutional exposure by $2.52 billion as part of

its repricing exercise. Dollar Tree Inc. is also in market with a $1.275 billion term loan A to refinance a portion of its

institutional outstandings, while Quanex Building Products Corp., MedImpact Holdings Inc., and TriNet HR Corp. have

also recently executed pro rata deals to refinance institutional outstandings.

On the speculative-grade side, HCA Inc.'s $1.2 billion deal is the largest, though Albertsons Cos. Inc., Hilton Worldwide,

and Engility Holdings Inc. are also chipping away at their institutional exposure through the bond market.

Looking past August, a handful of sizable deals are on the forward calendar--Change Healthcare Holdings Inc.'s merger

with McKesson's Technology Solutions business, Nexstar Broadcasting Group Inc.'s acquisition of Media General Inc.,

and the leveraged buyout of Thomson Reuters Corp.'s Intellectual Property & Science business are among them--but the

M&A calendar remains light relative to historical standards at $26.5 billion and below the 52-week average of $39.2

billion.

On the bright side, the supply/demand equation isn't as anemic as it was at the end of June. As of Aug. 3, LCD tracked

about $3.8 billion of net new supply poised to hit the market--a calculation that subtracts all pending repayments from

LCD's gross forward calendar--versus a roughly $9.1 billion deficit at the end of June.--Staff reports.

R2P Corporate Bond Monitor

The U.S. economy showed signs of cooling in a quiet week of economic data, extending the mixed signals we've become

accustomed to lately. Meanwhile, credit markets continued to tighten, albeit at a much slower pace. The Fed again

reiterated that it needs to see more strengthening, and not just in the labor market, before raising rates which, in our view,

indicates that a rate rise is unlikely in the coming months. Retail sales disappointed, registering no growth in July

following a 0.8% rise in June. In fact, excluding autos, retail sales declined 0.3% in the month indicating weaker

supermarket and building materials spending, along with consumer cyclical areas, such as restaurants and sportswear

sales. Surprisingly, July's industrial production figures fared better, growing 0.7% following June's 0.4% rise, with

manufacturing driving the gain and vehicle production standing out. However, the report is at odds with other recent

reports on the non-services segment of the economy (July's Institute for Supply Management and June's durable goods

orders), and it remains to be seen whether the indicator can continue to show gains going forward.

In Europe, the economic recovery progressed slowly with some upbeat data. Manufacturing data picked up slightly, and


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August 19, 2016

credit markets continued to grind tighter in response to European Central Bank policy; the recent Bank of England

stimulus package, which saw an interest rate cut of 25 basis points; and quantitative easing plans, which included

corporate credit. Industrial production increased 0.6% in June, rebounding from a 1.2% contraction in May and

continuing the eurozone's yo-yo recovery. The positive production news was followed by a rebound in construction as

output rose (on an annual basis) for the first time in four months in June. Construction output rose 0.6% following a

0.4% decline in May, with civil engineering and building construction increasing the most. Despite the positivity, we

prefer not to draw conclusions on the eurozone's manufacturing state yet as we opt to wait for more months of growth,

which indicates a sustained recovery in the segment.

The corporate bond market continues to exhibit strong positive returns as spreads (as measured by the option-adjusted

spread [OAS]) continue to tighten in North America and Europe. Risk-reward profiles (as measured by average

Risk-to-Price scores) improved despite tightening credit spreads in the month ended July 29, 2016, stabilizing from larger

deteriorations in recent months.

In both regions, credit market spreads (as measured by the OAS) tightened, but the drop in credit risk levels (as measure

by the probability of default) hasn't been as pronounced as in recent months in North America, while it has improved in

Europe, supporting overall risk-reward profiles. Market risks (as measured by bond-price volatility) also improved in the

month, adding further support to the overall risk-reward profile in North American and European credit markets.

Table 5

North America Risk-Reward Profiles By Sector*

Scores (%) OAS (bps) PD (%) BP Vol. (%)

Consumer discretionary (3) (14) (0.020) (0.138)

Consumer staples 1 (3) 0.013 (0.086)

Energy (1) (3) (0.209) (0.376)

Financials 4 (11) 0.001 (0.043)

Health care (0) 1 0.360 (0.104)

Industrials 8 (12) 0.233 (0.125)

Information technology 17 (12) (0.093) (0.108)

Materials 12 (12) (0.194) (0.288)

Telecommunications services 4 (18) 0.039 (0.135)

Utilities (10) (8) 0.807 (0.108)

Average 3 (9) 0.094 (0.151)

*One-month average Risk-to-Price score and components changes to Aug. 12, 2016. OAS--Option-adjusted spreads. bps--Basis points.

PD--Probability of default. BP Vol.--Bond-price volatility. Source: S&P Global Market Intelligence.

Table 6

Europe Risk-Reward Profiles By Sector*


Consumer discretionary 6 (8) 0.017 (0.108)

Consumer staples 22 (1) 0.006 (0.066)

Energy 22 (1) (0.047) (0.082)

Financials 11 (7) (0.028) (0.096)

Health care 5 (16) (0.011) (0.091)

Industrials 22 (12) (0.003) (0.140)

Information technology 19 (33) 0.031 (0.374)

Materials 23 (25) (0.040) (0.198)


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August 19, 2016

Table 6

Europe Risk-Reward Profiles By Sector* (cont.)


Telecommunication services 9 (6) (0.015) (0.082)

Utilites (0) (12) 0.027 (0.058)

Average 14 (12) (0.006) (0.129)

*One-month average Risk-to-Price score and components changes to Aug. 12, 2016. OAS--Option-adjusted spreads. bps--Basis points.

PD--Probability of default. BP Vol.--Bond-price volatility. Source: S&P Global Market Intelligence.

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

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

[email protected].

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

IPOs

The restaurant industry has had a particularly mixed bag for IPOs. First, no new IPOs in the restaurant industry have

come to market this year. According to S&P Global Market Intelligence data, the last restaurant industry IPO to price in

the U.S. was an $88.2 million issue by Dallas-based steakhouse chain Fogo de Chao Inc., which debuted in mid-June

2015. Second, of the dozen restaurant industry IPOs brought to market in the past three years, six have gained ground

while another six have dropped in value. Of those recently priced restaurant IPOs, the leading performer is Dave &

Buster's Entertainment Inc., which has gained nearly 174% from its October 2014 debut. Another factor showing the

sluggish state of the restaurant industry in the IPO realm is the fact that the forward calendar for new issues shows no new

offerings from the industry.

Table 7

Recent Priced Restaurant Industry IPOs

Effective date Issuer Total transaction value (mil. $) Price per share ($) Recent price ($) Change

10/09/2014 Dave & Buster's Entertainment Inc. 94.12 16.00 43.82 173.88

04/10/2014 Zoe's Kitchen Inc. 87.50 15.00 36.08 140.53

12/11/2013 Aramark 725.00 20.00 37.28 86.40

01/29/2015 Shake Shack Inc. 105.00 21.00 36.79 75.19

06/11/2015 Wingstop Inc. 110.20 19.00 31.88 67.79

11/13/2013 Del Taco Restaurants Inc. 150.00 10.00 10.70 7.00

10/03/2013 Potbelly Corp. 105.00 14.00 12.96 (7.43)

07/24/2014 El Pollo Loco Holdings Inc. 107.14 15.00 13.73 (8.47)

05/07/2015 Bojangles' Inc. 147.25 19.00 16.73 (11.95)

11/19/2014 The Habit Restaurants Inc. 90.00 18.00 15.03 (16.50)

06/18/2015 Fogo de Chao Inc. 88.24 20.00 12.78 (36.10)

05/01/2014 Papa Murphy's Holdings Inc. 64.17 11.00 6.11 (44.45)

Source: S&P Global Market Intelligence.

M&A

Announced M&A deal value in 2016 involving U.S.-based targets is approaching the $1 trillion mark. According to S&P

Global Market Intelligence data, over $933 billion in announced deals has occurred this year led by the health care sector,


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which has had more than $177 billion in transactions, followed by financials' $166 billion and information technology's

$141 billion. Another favorable sign for dealmaking is a recent flurry of billion-dollar or greater sized deals this month. In

the first 16 days of August, 16 U.S. M&A deals of $1 billion or more have been announced. Should that trend continue

for the balance of the month, it would be reasonable to see August 2016 top the best month so far this year, May, which

had 25 transactions worth this amount or more. Among recently announced big deals include Cintas Corp. entering into a

definitive agreement to acquire G&K Services Inc. for $1.9 billion in cash on Aug. 15, Mid-America Apartment

Communities Inc. agreeing to acquire Post Properties Inc. for $4.9 billion on Aug., and Arch Capital Group Ltd. entering

into a definitive agreement to acquire the mortgage-guaranty unit of American International Group Inc. for $3.4 billion in

cash and preferred stock on Aug.

Table 8

Announced 2016 U.S. Mergers And Acquisitions*

Number of transactions by sector Value by sector

Sector No. Sector (Mil. $)

Energy 299 Energy 71,977.92

Materials 363 Materials 98,813.05

Industrials 1,448 Industrials 83,087.61

Consumer Discretionary 1,514 Consumer Discretionary 73,093.58

Consumer Staples 371 Consumer Staples 34,821.50

Healthcare 1,006 Healthcare 177,584.95

Financials 4,039 Financials 166,191.81

Information Technology 1,439 Information Technology 141,190.03

Telecommunication Services 60 Telecommunication Services 4,743.75

Utilities 137 Utilities 68,030.02

No Primary Industry Assigned 579 No Primary Industry Assigned 13,982.05

Most active buyers/investors by number of transactions Most active buyers/investors by total transaction size

Company No. Company Total transaction size (mil. $)

Physicians Realty Trust 18 Bayer AG 65,135.62

Carter Validus Mission Critical REIT II Inc. 15 Abbott Laboratories 39,269.55

STAG Industrial Inc. 11 Shire PLC 36,219.87

BRT Realty Trust 9 Microsoft Corp. 29,350.56

Terreno Realty Corp. 9 NextEra Energy Inc. 18,400.0

CareTrust REIT Inc. 8 Analog Devices Inc. 15,657.82

Gramercy Property Trust Inc. 8 Transcanada Pipeline USA Ltd. 14,006.81

Farmland Partners Inc. 7 Quintiles Transnational Holdings Inc. 13,548.54

Industrial Property Trust Inc. 7 Danone 12,539.62

Jones Lang LaSalle Income Property Trust Inc. 7 Great Plains Energy Inc. 12,193.75

Number of deals by transaction ranges

Range No.

Greater than $1 billion 115

$500 million-$999.9 million 84

$100 million-$499.9 million 454

Less than $100 million 3,365

Undisclosed 7,237


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Table 8

Announced 2016 U.S. Mergers And Acquisitions* (cont.)

M&A statistics

Total deal value (mil. $) 933,516.26

Average deal value (mil. $) 212.12

Average total enterprise value/revenue 5.26

Average total enterprise value/EBITDA 15.94

Average day-prior premium (%) 155.36

Average week-prior premium (%) 158.67

Average month-prior premium (%) 218.23

*Canceled transactions may be included in these statistics. M&A--Mergers and acquisitions. Source: S&P Global Market Intelligence.

Debt

A midsummer slowdown in the number of security identifier requests likely spells a corresponding near-term drop-off in

fixed income underwriting. According to information provided by Committee on Uniform Security Identification

Procedures (CUSIP) Global Services, for the week ended Aug. 12, for the six debt asset classes featured below, 513 CUSIP

orders were handled and processed, down from 1,065 orders in the preceding week. In fact, five of the six asset classes

saw a drop in CUSIP orders in the past weekly reports with domestic corporate debt CUSIP orders falling to 124 from 547

while municipal CUSIP requests fell to 24 from 342. In the aftermath of these results, only two of the six profiled asset

classes have experienced year-over-year gains in CUSIP orders: municipal CUSIPs with a 4.1% advance and long-term

municipal note identifiers with a nearly 36% jump.

Table 9

Selected Debt CUSIP Requests

Week ended Aug. 12 Week ended Aug. 5 2016 YTD 2015 YTD Change (%)

Domestic corporate debt 124 547 5,685 6,437 (11.68)

Municipal bonds 247 342 10,221 9,821 4.07

Short-term municipal notes 16 41 733 846 (13.36)

Long-term municipal notes 6 33 347 256 35.55

International debt 68 46 1,466 1,907 (23.13)

PPN domestic debt 52 56 1,250 1,254 (0.32)

Total 513 1,065 19,702 20,521 (3.99)

CUSIP--Committee on Uniform Security Identification Procedures. PPN--Private placement number. YTD--Year-to-date. Source: CUSIP Global

Services.

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


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Documents

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