Lookout Report - S&P Dow Jones Indices · Greek sovereign credit default swap (CDS) spreads spiked to new highs on both the trading days before (7,891 basis points [bps]) and after

A Tranquil U.S. Equity Market Reaction To Greece PartiallyReflects Rational Market Valuations

Greek sovereign credit default swap (CDS) spreads spiked to new highs on both the trading days

before (7,891 basis points [bps]) and after (7,192 bps) Greeks overwhelmingly rejected

European austerity terms. If the referendum had passed in the affirmative, much needed bailout

funds would have prevented Greece from defaulting on its €1.5 billion International Monetary

Fund debt payment due July 7. This illustrates the near-doubling of perceived Greek credit risk

from the prior 2015 CDS high of 4,339 bps recorded on June 17.

Broad sovereign credit contagion risks, meanwhile, remain largely contained. As of July 6, CDS

spreads for many countries, such as Portugal (221 bps), Italy (148 bps), and Spain (123 bps),

held within previously existing trading ranges that Global Markets Intelligence (GMI) Research

outlined in its previous Lookout Report (see "Greek Drama Drives The Market As Contagion

Risks And Volatility Remain Contained--For Now," published June 26, 2015) (see chart 1).

Lookout Reportfrom Global Markets Intelligence

July 10, 2015

Michael G Thompson

Managing Director

Global Markets Intelligence

(1) 212-438-3480

[email protected]

Robert A Keiser

Vice President


(1) 212-438-3540

[email protected]

The Lookout Report is a compendium

of current data and perspectives from

across S&P Capital IQ and S&P Dow

Jones Indices covering corporate

earnings, market and credit risks,

capital markets activity, index

investing, and proprietary data and

analytics. Published biweekly by the

Global Markets Intelligence research

group, the Lookout Report offers a

detailed cross-market and cross-asset

view of investment conditions, risks,

and opportunities.

Chart 1

Despite pre-opening indications in the futures market on July 6 that suggested a steep risk-off collapse in U.S. stocks, the

equity market actually stayed well-behaved in the immediate aftermath of the Greek referendum. The S&P 500 Index

closed at 2,068.76 on July 6, just under 3% lower than this year's settlement high of 2,130.82 recorded on May 21. The

initial restrained reactions in U.S. equities and European credit markets demonstrate the predominantly rational investor

reaction to the latest chapter in the ongoing Greek credit drama.

GMI also believes that fully valued--but still rational--equity market valuations are also helping buttress the U.S. stock

market despite elevated geopolitical and global macroeconomic uncertainty. These ambiguities can be tied to various

issues, such as the ongoing Greek bail-out negotiations, the Iran nuclear summit, the Chinese economic outlook and

related heightened volatility in Asian stock markets, and even the indeterminate outlook for U.S. monetary policy. But for

many investors, there still appears to be no alternative to high-quality U.S. stocks, as long as European sovereign credit

contagion risks remain suppressed and the U.S. economy continues to expand at the 2.25% GDP growth rate

characteristic of the recovery cycle since mid-year 2009.

Existing equity market valuations, however, rule out neither new 2015 highs for the market later this year or a 10%

near-term correction. Earlier this year, the U.S. equity market repeatedly topped out at a 17.5x forward price-to-earnings

(P/E) valuation ceiling. The market has now pulled back to a more affordable 16.5x multiple (see chart 2) due to sharply

lower stock prices as of July 8, and the chronological circumstance of moving 12-month forward earnings expectations

into the third quarter of 2015. GMI Research believes that the S&P 500 Index should remain within a 16x-18x P/E

A Tranquil U.S. Equity Market Reaction To Greece Partially Reflects Rational Market Valuations Lookout Report from Global Markets Intelligence

2

July 10, 2015

valuation band until present uncertainties diminish and the rates of U.S. and global GDP growth improve. Based on

current S&P Capital IQ consensus expectations for future S&P 500 corporate earnings, this P/E ratio-based trading

bracket implies an approximate range of 1,990 to 2,235 for the S&P 500 Index, with a central tendency toward 17x and

2,110 in the coming months, barring any major exogenous shocks to the broad market outlook.

Chart 2

Nonetheless, investors should consider the following potential permutations of current geopolitical and macroeconomic

circumstances:

• Under a scenario of renewed disappointing economic growth in Europe following significant debt forgiveness

concessions to Greece, credit contagion risks could escalate in the region if separatist movements in countries, such as

Spain and Portugal, respond to economic unease by demanding similar considerations from their creditors.

• A more protracted economic slowdown or even a recession in China as government efforts to transition China toward a

domestic consumption-driven economy progress more slowly than originally envisioned, resulting in renewed

deflationary forces across the globe.

• The U.S. dollar strengthens even further in response to the Greek/Europe debt resolution that ultimately disappoints

global investors. A strengthening dollar might impart additional downward pressure on crude oil and commodity

prices, driving risk-aversion in speculative-grade bonds as an asset class and within highly leveraged industries within

the energy sector in particular.

• A general slowdown in U.S. and global GDP growth sharply diminishes corporate earnings expectations. This would


3

July 10, 2015

force investors to accept a sub-16x P/E valuation for globally focused large-cap equities in response to what has been a

subpar economic recovery cycle since exiting the 2008/2009 global financial crisis.

For the moment, GMI Research is encouraged by the resumption of U.S. non-farm payroll growth in excess of 200,000

new jobs that occurred in May and June. This followed the prior slowdown in new job creation in March and April that

came on the heels of 12 consecutive months of better than 200,000 net new job gains occurring between March 2014 and

February 2015 (i.e., outside of the severe winter weather disrupted first quarters of 2014 and 2015). Excluding a

momentous increase in perceived sovereign credit risks across Europe, we view any prospective 5%-10% correction in

stock market prices as a buying opportunity that is supported by persistent improvement in underlying U.S.

macroeconomic fundamentals, as well as the still-attractive 2.0% dividend yield associated with the S&P 500 stock index.

Inside This Issue:

Macroeconomic Overview: A Tranquil U.S. Equity Market Reaction To Greece Partially Reflects Rational Market Valuations

Greek sovereign CDS spreads spiked to new highs on both the trading days before and after Greeks overwhelmingly

rejected European austerity terms. Broad sovereign credit contagion risks, meanwhile, remained contained. This

observation, combined with rational U.S. equity market valuations and healthy underlying U.S. macroeconomic

conditions, helped stabilize the equity market in the week following Greece's public referendum result.

Economic And Market Outlook: The S&P 500 Looks For A New Earnings Barometer

Alcoa unofficially kicked off earnings season on July 8 with mixed results. The aluminum producer beat on the top line

because of strength in its aerospace, automotive, and alumina businesses; however, it missed bottom-line estimates by

$0.02, which marks only the second time the company has missed earnings estimates in 14 quarters. Historically, Alcoa

has been considered a barometer for corporate earnings. But a dramatically changing economic landscape and the weight

of commodity pricing on this global manufacturer has changed that perspective. Thus, we can throw out the old adage:

"As Alcoa goes, earnings season goes."

S&P Dow Jones Index Commentary: Dividend Growth Might Have Slowed, But The Record Still Seems Feasible For U.S.

Domestic Common Issues

Given the current declared dividend policies of the underlying companies, a catastrophic event (or government action)

would be needed for companies not to pay out a record amount this year. Dividends continue to increase in 2015, but the

rate of growth has declined. Dividends still paint a positive picture as increases remain strong and with another record of

actual cash payments expected. The question at this point is: Will we extend the four-year run of double-digit growth in

actual payments? We should be close to that mark, and while the actual rate is relevant to the official record, it is a nice

neighborhood to be in.

Leveraged Commentary And Data: Loan Market Technicals Strengthen In June Amid Strong Repayments And A CLO Surge

Loan market technical conditions firmed in June amid strong repayments reduced the stock of loans outstanding, CLO

issuance surged before quarter-end, and loan mutual fund flows remained effectively neutral. As a result, loan prices

declined only marginally despite the latest Greek debt turmoil, which more significantly dented returns of other risk assets.

In June, the excess of visible capital formation over supply jumped to a three-month high of $15.3 billion from $4.7

billion in May. A lack of supply has been the big technical story of 2015.


4

July 10, 2015

R2P Corporate Bond Monitor

In North America, economic conditions remained fairly stable, which is indicative of healthy domestic demand; however,

weak overseas demand continued to weigh on the economy. The unemployment rate fell to 5.3% from 5.5% in June,

representing a seven-year low, though a reduction in the labor force partially caused the decrease. Wage growth,

conversely, remained flat. In Europe, the emphasis remains on Greece's potential exit after the Greek public voted "no" in

a referendum to agree with the eurozone's austerity demands. This left the nation and the eurozone on a knife-edge

regarding a new deal.

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

The first half of 2015 had the weakest amount of IPO proceeds with less than $16.7 billion in new issues. Compare that to

another weak period, second half of 2012 with $10.3 billion. The beginning of 2015 represents the slowest start of the

year since 2010 when $6.5 billion in IPOs came to market. Looking to the second half of the year, the prospects for a

strong rebound are mixed. After an extremely strong pace of M&A activity in the first half of 2015, we expect a modest

gain in deal value in the second half, according to a historic review. Specifically since 1998, U.S. announced M&A deal

value has averaged a 4.7% advance in the second half of the year from the preceding first half.

Economic And Market Outlook: The S&P 500 Looks For A New Earnings Barometer

North America

Alcoa Inc. (Alcoa) unofficially kicked off earnings season on July 8 with mixed results. The aluminum producer beat on

the top line because of strength in its aerospace, automotive, and alumina businesses; however, it missed bottom-line

estimates by $0.02, which marks only the second time the company has missed earnings estimates in 14 quarters.

Historically, Alcoa has been considered a barometer for corporate earnings. But a dramatically changing economic

landscape and the weight of commodity pricing on this global manufacturer has changed that perspective. Thus, we can

throw out the old adage: "As Alcoa goes, earnings season goes."

With Alcoa fading out, the financials sector could replace it as an earnings barometer partly because it provides a good

perspective on the economic environment given its dependence on businesses and consumers for loan demand, as well as

interest rate movements in achieving profitability. Furthermore, reporting early is key to being an early-season predictor.

The sector and specifically the banks will dominate the earnings calendar in the second week of reporting season as

JPMorgan Chase & Co., Wells Fargo & Co., BlackRock Inc., Bank of America Corp., The Goldman Sachs Group Inc.,

and Citigroup Inc. announce their results. The information technology sector could also be considered an Alcoa

replacement as it has the largest weighting in the index with regards to not only earnings but also in determining market

direction. Therefore, we'll be keeping a close eye on the sector as earnings unfold.

Current second-quarter 2015 estimates for the S&P 500 remain rather pessimistic at $28.42, a 4.4% decrease in earnings

year-over-year. If estimates hit their mark, this will be the first decline in growth since the third quarter of 2009. Excluding

the 60.9% decline from the energy sector, S&P 500 growth is expected to be 3.4%.


5

July 10, 2015

Chart 3


6

July 10, 2015

Chart 4

As second-quarter results come in, we are placing a greater focus on future growth, which drives the market. Four sectors

are expected to propel the majority of second half growth. The consumer discretionary sector leads with 14.6% and

14.3% projections in the third and fourth quarters, respectively. That is well ahead of the -1.3% and 2.9% growth rates

anticipated for the S&P 500 in the same periods. Only financials and telecommunication services come close with

approximately a 10% average in the second half.


7

July 10, 2015

Table 1

Second Half Earnings Per Share Growth By Sector

Third quarter (%) Fourth quarter (%) Fiscal-year 2015 (%)

Consumer discretionary 14.63 14.27 11.09

Consumer staples 0.03 3.65 1.26

Energy (59.43) (40.66) (54.96)

Financials 9.81 10.77 10.80

Health care 7.89 9.49 10.95

Industrials 3.72 3.16 3.81

Information technology 3.97 0.83 3.73

Materials (0.39) 5.25 1.98

Telecommunication services 6.29 14.98 6.97

Utilities 2.47 6.38 2.08

S&P 500 (1.27) 2.92 0.07

Source: S&P Capital IQ.

Analysts and investors are usually bullish in the second half of the year, but given the outsized double-digit growth

projected for the consumer discretionary group, as well as its index's impressive price outperformance, upbeat guidance

needs to be provided for the third quarter (and second half). The consumer discretionary index has appreciated 5.6%

year-to-date versus a 0.6% decline in the S&P 500. The auto retailers, cruise lines, and fast food/quick service restaurants

are expected to lead 2015 earnings growth for the sector. Companies such as General Motors Co., Ford Motor Co., Royal

Caribbean Cruises Ltd., and Darden Restaurants Inc. will be the ones to watch as they release second-quarter results.

Their sentiment regarding the consumer and the outlook will determine where S&P 500 earnings and the market could go,

making this group the best new barometer as we navigate second-quarter earnings, in our opinion.

Europe

The Greek situation continues to concern global markets. The country now has until July 12 to secure a third bailout from

its creditors and prevent a eurozone exit. Currently, the country owes €3.0 billion in debt to the European Central Bank

by July 13. Although global markets are presently subdued (see the Macroeconomic Overview above), the situation could

lead to significant market volatility.

Earnings growth for the Euro 350 is expected to be 10.8% in 2015 (versus 9.4% a month ago) and 11.6% in 2016 (versus

12.4% a month ago).

Eight of 10 sectors are expected to report growth this year. Impressively, double-digit growth is expected from seven

sectors with information technology (25.7% growth) leading the charge for the third year in a row. The consumer

discretionary (24.7%) sector, financials (20.2%), industrials (17.4%), and telecommunication services (16.4%) follow

with robust growth rates as these sectors and the overall economy are expected to benefit from the region's quantitative

easing program. Health care, utilities, and consumer staples round out the positive growth sectors with growth of 13.1%,

10.2%, and 9.7%, respectively. Energy (-32.5%) and materials (-0.5%) are the only sectors projecting a decline in growth.


8

July 10, 2015

Table 2

CY 2015 And 2016 EPS And Growth Rate

--CY 2015-- --CY 2016--

EPS (€) Growth (%) EPS (€) Growth (%)

Consumer discretionary 127.66 24.70 144.43 13.10

Consumer staples 158.99 9.70 172.26 8.30

Energy 81.50 (32.50) 100.09 22.80

Financials 73.32 20.20 80.64 10.00

Health care 127.34 13.10 139.37 9.40

Industrials 108.48 17.40 120.18 10.80

Information technology 61.40 25.70 72.55 18.10

Materials 138.84 (0.50) 163.94 18.10

Telecommunication services 74.92 16.40 81.59 8.90

Utilities 94.48 10.20 96.18 1.80

S&P 350 97.86 10.80 109.17 11.60

CY--Calendar year. EPS--Earnings per share. Source: S&P Capital IQ.

Contact Information: Lindsey Bell, Senior Analyst--Global Markets Intelligence, [email protected].

S&P Dow Jones Index Commentary: Dividend Growth Might Have Slowed, But The Record StillSeems Feasible For U.S. Domestic Common Issues

Given the current declared dividend policies of the underlying companies in the S&P 500, a catastrophic event (or

government action) would be needed for companies not to pay out a record amount this year.

However, dividend payment increases have experienced a recent drop:

• The second quarter of 2015 had 562 dividend increases compared with 696 increases during the second quarter of

2014, a 19.3% decrease.

• For the 12-month period ended June 2015, 3,092 issues increased their payments, down from 3,134 in the prior

12-month period, a 1.3% decrease.

On the flip side, dividend decreases (defined as either a decrease or suspension) have increased:

• In second-quarter 2015, 85 companies decreased dividends compared to 57 in second quarter of 2014.

• For the 12-month period ended June 2015, 389 companies decreased their dividend payments, up from 254 decreases in

the prior 12-month period.

The percentage of non-S&P 500 domestic common issues paying a dividend rose slightly to 48.7% from the 48.6% during

first-quarter 2015 and the 47.1% rate in second-quarter 2014. This group's weighted dividend yield increased to 2.59%

from the previous quarter's 2.51% and the 2.44% at the end of the second quarter of 2014.

Energy continues to be the weak point for dividends as it represented 45% of all dividend cuts for the U.S. equity market

during the quarter with trusts and limited partnerships becoming volatile and inconsistent in their payments.

Within the large-cap S&P 500, 421 issues (83.9%) of the 502 issues currently pay a dividend. All 30 members of the Dow

Jones Industrial Average pay a dividend.

Within the mid-cap S&P 400 and small-cap S&P 600, 70.5% and 54.2%, respectively, pay dividends.


9

July 10, 2015

Index-level yields continue to vary greatly with large-caps at 2.09%, mid-caps at 1.54%, and small-caps at 1.34%. For

paying issues, the yields across market-size classifications continue to be compatible with each other with large-caps at

2.45%, mid-caps at 2.18%, and small-caps at 2.26%.

Dividends continue to increase in 2015, but the rate of growth has declined as year-to-date posted 1,577 increases

compared with 1,686 for the same period in 2014 and 1,267 in 2013. Dividends still paint a positive picture as increases

remain strong and with another record of actual cash payments expected.

The question at this point is: Will we extend the four-year run of double-digit growth in actual payments? We should be

close to that mark, and while the actual rate is relevant to the official record, it is a nice neighborhood to be in.

Table 3

Quarterly Dividends

Period No. of positive dividend actions No. of negative dividend actions

Q2 2015 562 85

Q2 2014 696 57

Q2 2013 591 65

Q2 2012 505 37

Q2 2011 444 21

Q2 2010 335 34

Q2 2009 233 250

Q2 2008 455 97

Q2 2007 542 18

Q--Quarter. Source: S&P Dow Jones Indices

Table 4

Annual Dividends

No. of positive dividend actions No. of negative dividend actions

12 months ended June 2015 3,092 389

12 months ended June 2014 3,134 254

2013 2,895 299

2012 2,887 275

2011 1,953 101

2010 1,729 145

2009 1,191 804

2008 1,874 606

2007 2,513 110

2006 2,617 87

2005 2,518 84

2004 2,298 62

2003 2,162 104

2002 1,756 135

2001 1,668 205

2000 1,886 137

1999 2,125 144

Source: S&P Dow Jones Indices


10

July 10, 2015

Contact Information: Howard Silverblatt, Senior Index Analyst--S&P Dow Jones Indices, [email protected].

Leveraged Commentary And Data: Loan Market Technicals Strengthen In June Amid StrongRepayments And A CLO Surge

Loan market technical conditions firmed in June amid the following:

• Strong repayments reduced the stock of loans outstanding,

• Collateralized loan obligation (CLO) issuance surged before quarter-end, and

• Loan mutual fund flows remained effectively neutral.

As a result, loan prices declined only marginally despite the latest Greek debt turmoil, which more significantly dented

returns of other risk assets.

Table 5

Returns

June 2015 (%) Year-to-date (%)

S&P/LSTA Index (0.42) 2.83

BAML High-Yield Master (1.53) 2.49

10-year Treasury (1.91) (0.51)

S&P 500, including dividends (1.94) 1.24

BAML High-Grade Corp. (1.64) (0.46)

BAML--Bank of Americal Merrill Lynch. Sources: S&P Capital IQ LCD and Bank of America Merrill Lynch.

In June, the excess of visible capital formation over supply jumped to a three-month high of $15.3 billion from $4.7

billion in May.


11

July 10, 2015

Chart 5

A lack of supply has been the big technical story of 2015 (see chart 6). In June, the amount of S&P/LSTA Index loans

outstanding fell to a four-month low of $835.9 billion from $839.2 billion in May. Furthermore, in the first half of 2015,

the universe of index loans expanded by just $853 million a month, on average, down from $12.5 billion in 2014.


12

July 10, 2015

Chart 6

This snail-like pace of net new supply creation reflects lackluster new-issue activity, on the one hand, and the still strong

pace of repayments on the other. In June, arrangers allocated and broke to market $16.5 billion of new institutional loans

compared with $22.6 billion of index repayments. In the first half of 2015, moreover, average monthly break

volume--sans repricings/refinancings--was $14.9 billion, compared with $21.9 billion in 2014, and monthly repayments

declined only slightly to $14.2 billion from $15.7 billion.


13

July 10, 2015

Chart 7

On the demand side of the technical ledger, CLO volume bounced back to a three-month high of $12.7 billion in June,

from $5.7 billion in May, as managers and arrangers took advantage of weaker prices in the secondary market to fill

warehouses and print new vehicles before quarter-end.


14

July 10, 2015

Chart 8

Surging CLO issuance more than offset the fact that retail investors withdrew $1.2 billion from loan mutual funds that

report weekly to Lipper FMI in June--the most red ink since January--after putting $388 million to work in the category in

May.


15

July 10, 2015

Chart 9

The other technical factor that moved positively in June is bid-wanted-in-competition volume, which slowed to a

four-month low of $600 million, from a year-to-date peak of $1.0 billion in May.


16

July 10, 2015

Chart 10

The market's underlying technical strength allowed loan prices to remain stable in June despite weakness across the capital

markets. It also allowed clearing yields to remain near their recent lows.


17

July 10, 2015

Chart 11

Nonetheless, repricing activity climbed down in June to $10.8 billion from May's 26-month high of $36.6 billion as

investor fatigue with such issuer-friendly executions set in amid June's more-volatile macro environment.


18

July 10, 2015

Chart 12

Looking ahead, the Greek debt situation will exert a major pull on all risk assets, including loans, though loans may

continue to be buffered somewhat by technical trends that remain positive.

For one thing, the calendar of merger and acquisition (M&A)-related loans contracted to $41 billion on July 1 from a

recent post-credit-crunch high of $50.8 billion a month earlier. And there is less here than meets the eye. Sources say that

the jumbo Charter Communications Inc. and Avago Technologies Finance Pte. Ltd. deals are likely to be substantially

smaller than the original financing commitment outlined as issuers opportunistically tap all available financing sources in

the capital markets.


19

July 10, 2015

Chart 13

At the same time, managers continue to harvest large-scale repayments that need to be put back to work in the asset class.

The latest example is H.J. Heinz Co.'s roughly $6.38 billion of institutional loans, which the issuer extinguished as part of

its merger with Kraft Foods Group Inc. that closed on July 2. That followed Biomet Inc.'s repayment of its $2.8 billion

term loan B in late June.

With supply likely to remain constrained in the near-term, managers worry that repricings will perk up again unless the

macro situation worsens, causing the CLO engine to stall or retail investors to step up redemptions. Participants are also

unenthusiastic about the prospects for the home stretch of 2015. In general, they expect the second half to mirror the first

and be marked by periods of accelerated opportunistic deal-making when conditions are ripe; muted leveraged buyout

activity for the reasons already discussed; and a handful big-ticket strategic M&A trades--some of which are currently

being screened, arrangers note--that will be key contributors to supply, as well as fee income on the sell-side.

Follow Steve on Twitter for an early look at LCD analysis, plus market commentary.

Contact Information: Steve Miller, Managing Director--Leveraged Commentary And Data,

[email protected].


20

July 10, 2015

R2P Corporate Bond Monitor

In North America, economic conditions remained fairly stable, which is indicative of healthy domestic demand; however,

weak overseas demand continued to weigh on the economy. The unemployment rate fell to 5.3% from 5.5% in June,

representing a seven-year low, though a reduction in the labor force partially caused the decrease. Wage growth,

conversely, remained flat.

Furthermore, confidence rose in June, according to the Conference Board, to 101.4 from 95.4 in May, driven by optimism

regarding jobs and income. The report also hinted toward a rise in spending as the "present situation" component of the

index rose significantly. Institute of Supply Management (ISM) manufacturing data continued the slow but steady rebound

in the sector since March as the index rose to 53.5 from 52.8 because of growth in new orders. The ISM

nonmanufacturing index showed a modest rise in activity with a recording of 56.0, up from 55.7. However, both segments

of the economy continued to show the drop in export demand because new overseas orders slowed in both ISM reports.

Elsewhere, factory orders data showed further decreases in new orders and shipments.

In Europe, the emphasis remains on Greece's potential exit after the Greek public voted "no" in a referendum to agree

with the eurozone's austerity demands. This left the nation and the eurozone on a knife-edge regarding a new deal.

Meanwhile, data releases pointed to marginal improvements as retail sales rose 0.2% month-over-month in June,

following a 0.7% rise in May because of food, drink, and tobacco increases. Inflation remained positive in June despite

falling slightly to 0.2% from 0.3% in May. The latest data and the Eurozone Future Inflation Gauge (EZFIG), which

trended higher, indicated that the European Central Bank's bond purchasing stimulus was having the desired effect.

Regardless of fairly stable domestic data, challenges in overseas markets led to a slight deterioration in risk-reward profiles

in North America for the month ended July 2, 2015, as credit risks outweighed continued spread widening in corporate

bond markets. Credit risk (as measured by the probability of default) increased in the month, which more than offset

wider spreads across the board as market risks remained fairly stable.

Europe's overall risk-reward profiles slightly improved in the month led mainly by widening spread levels. Both credit and

market risks remained flat in spite of the political challenges in the past few weeks.

For more of our market views and sector credit opinions, please see our monthly Fixed Income Strategy, "Euro Signals

Improve Despite Potential Greek Tragedy; Weak Spots Continue To Hold Back U.S. Fed Action," published June 30,

2015.


21

July 10, 2015

Table 6

North American Risk-Reward Profiles By Sector*

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

Consumer discretionary 4 9 0.268 (0.036)

Consumer staples 1 12 0.132 0.016

Energy (7) 24 0.159 0.000

Financials (3) 4 0.003 (0.004)

Health care (3) 4 0.016 (0.006)

Industrials (8) 13 0.238 (0.010)

Information technology (10) 7 0.001 (0.007)

Materials (2) 23 0.132 (0.015)

Telecommunications services (3) 15 0.014 (0.020)

Utilities (9) 17 (0.014) (0.030)

Average (4) 13 0.095 (0.011)

*One-month average risk-to-price score and components changes to July 2, 2015. OAS--Option-adjusted spreads. bps--Basis points.

PD--Probability of default. BP Vol.--Bond-price volatility. Source: S&P Capital IQ.

Table 7

Europe Risk-Reward Profiles By Sector*

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

Consumer discretionary (5) 34 (0.010) 0.058

Consumer staples 4 15 (0.004) 0.007

Energy 19 20 (0.023) (0.066)

Financials (0) 12 0.008 0.003

Health care (11) 5 0.009 (0.027)

Industrials 6 13 (0.001) (0.011)

Information technology 2 14 (0.008) (0.037)

Materials 3 (13) (0.016) (0.029)

Telecommunication services 0 21 0.011 (0.006)

Utilites 11 15 (0.010) (0.001)

Average 3 14 (0.004) (0.011)

*One-month average risk-to-price score and components changes to July 2, 2015. OAS--Option-adjusted spreads. bps--Basis points.

PD--Probability of default. BP Vol.--Bond-price volatility. Source: S&P Capital IQ.

Fabrice Jaudi, Vice President--Global Markets Intelligence, [email protected].

Kunaal Vora, Credit Research Analyst, London +44(0)207 176 8317; [email protected].

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

IPOs

The first half of 2015 had the weakest amount of IPO proceeds with less than $16.7 billion in new issues. Compare that to

another weak period, second half of 2012 with $10.3 billion. The beginning of 2015 represents the slowest start of the

year since 2010 when $6.5 billion in IPOs came to market. Looking to the second half of the year, the prospects for a

strong rebound are mixed. On one hand, second half IPO underwriting activity has historically averaged an 88% jump in

second half volume from the first half since 1998. However, for first halves with at least $10 billion in underwriting, the

subsequent semiannual period has registered a nearly 15% drop in proceeds. One catalyst for a second half surge may


22

July 10, 2015

come from technology firms that decide to float an IPO. Such companies include Uber Technologies Inc., which recently

announced that it is seeking financing up to $1 billion from Chinese investors, and Airbnb Inc., which announced that it

has received $1.5 billion in equity funding from new investors.

Table 8

IPOs Priced In The U.S.

First half of the year (bil. $) Second half of the year (bil. $) Change (%)

1998 4.76 5.40 13.45

1999 8.78 19.28 119.59

2000 13.30 12.63 (5.04)

2001 15.97 11.00 (31.12)

2002 10.47 4.81 (54.06)

2003 0.97 6.15 534.02

2004 10.03 9.22 (8.08)

2005 10.41 8.58 (17.58)

2006 11.58 14.23 22.88

2007 15.61 17.73 13.58

2008 22.05 0.59 (97.32)

2009 2.00 16.52 726.00

2010 6.54 24.62 276.45

2011 21.61 9.78 (54.74)

2012 25.43 10.32 (59.42)

2013 18.51 29.30 58.29

2014 31.75 49.76 56.72

2015 16.64 N.A. N.A.

N.A.--Not available. Source: S&P Capital IQ.

M&A

After an extremely strong pace of M&A activity in the first half of 2015, we expect a modest gain in deal value in the

second half, according to a historic review. Specifically since 1998, U.S. announced M&A deal value has averaged a 4.7%

advance in the second half of the year from the preceding first half. Additionally, U.S. M&A activity hasn't declined in the

second six months of the year since 2009 when deal value dropped by 19%. Furthermore, three of the past five

semiannual periods have seen double-digit percentage increases.

To date, more than $93 billion in U.S. M&A deals have crossed the wire in the third quarter led by Aetna Inc., which

entered into a definitive agreement to acquire Humana Inc. for $34.5 billion in cash and stock on July 2, 2015, and

insurer ACE Ltd., which agreed to acquire Chubb Corp. for $28.3 billion in cash and stock on July 1, 2015. Given this

quick start to third quarter deal activity, the prospects for a second-half gain in M&A proceeds look promising.

Table 9

Announced U.S. Merger And Acquisition Transactions

First half of the year proceeds (bil. $) Second half of the year proceeds (bil. $) Change (%)

1998 822.5 637.6 (22.48)

1999 707.5 549.1 (22.39)

2000 936.9 789.3 (15.75)

2001 372.3 356.9 (4.14)


23

July 10, 2015

Table 9

Announced U.S. Merger And Acquisition Transactions (cont.)

2002 192.4 256.9 33.52

2003 173.0 335.9 94.16

2004 422.1 380.5 (9.86)

2005 581.1 493.3 (15.11)

2006 692.3 701.3 1.30

2007 836.9 561.4 (32.92)

2008 465.3 362.4 (22.11)

2009 400.9 328.4 (18.08)

2010 419.1 420.9 0.43

2011 501.1 505.0 0.78

2012 367.8 548.6 49.16

2013 482.7 625.2 29.52

2014 646.3 866.1 34.01

2015 1,008.2 N.A. N.A.

N.A.--Not available. Source: S&P Capital IQ.

Debt

The number of security identifiers sought among several debt assets classes reduced in June. According to Committee on

Uniform Security Identification Procedures (CUISP) Global Services, total CUSIP orders in upcoming domestic corporate

debt offerings declined to 698 orders in June from 1,004 orders in May. That result placed first-half 2015 domestic

corporate debt CUSIP orders in a negative state to year-earlier results as 5,011 orders were handled compared with 5,073

in the first half of 2014.

Table 10

Selected Debt CUSIP Requests

June May 2013 2012 Change (%)

Domestic corporate debt 698 1,004 5,011 5,073 (1.22)

Municipal bonds 1,513 1,527 8,308 6,009 38.26

Short-term municipal notes 191 93 584 606 (3.63)

Long-term municipal notes 58 13 183 270 (32.22)

International debt 297 300 1,618 1,378 17.42

PPN domestic debt 274 122 1,085 1,090 (0.46)

Total 3,031 3,059 16,789 14,426 16.38

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

Services. Source: S&P Capital IQ.

Contact Information: Rich Peterson, Senior Director--Global Markets Intelligence, [email protected].


24

July 10, 2015

About S&P Capital IQ and S&P Dow Jones Indices Research & Analytics

S&P Capital IQ Research & Analytics


Provides event-driven, multi-asset class market commentary and analysis; model development, and investment

advisory services.

Research

Provides global company and funds research including insight into the performance of the world's leading

investment funds.

Leveraged Commentary and Data

Delivers insight into the leveraged loan market through a combination of data, commentary, analysis, and

real-time news.

S&P Dow Jones Indices

The world's leading index provider maintaining a wide variety of investable and benchmark indices to meet an

array of investor needs.

To learn more about S&P Capital IQ's Lookout Report, please see:

https://www.spcapitaliq.com/our-thinking/research.html?category=LookoutReport.


25

July 10, 2015

Documents

Lookout Report - S&P Dow Jones Indices · Greek sovereign credit default swap (CDS) spreads spiked to new highs on both the trading days before (7,891 basis points [bps]) and after