McGraw Hill 4Q15 Earnings Call Notes

McGraw Hill Financial (MHFI) Douglas L. Peterson on Q4 2015

Global bond issuance declined 26% in 4Q

“Let’s take a look at issuance. The two largest markets, the U.S. and Europe, both declined capping a weak second half of the year for issuance. Fourth quarter issuance in the U.S. was down across the board. Investment grade decreased 17%, high yield 41%, public finance was down 21% and structured finance also declined 26% with the only bright spot being RMBS. In Europe, investment grade decreased 15%, high yield down 10% and structured finance increased 11% with declines in every asset class offset by growth in covered bonds. The rest of the world had even weaker issuance with Asia declining 47% and the Americas outside the U.S. declining 46%. In total, global bond issuance declined 26% outpacing the 20% decline in the third quarter.”

Recent volatility probably overstates likelihood of a slump

“monetary policy continues to provide a tailwind to economic expansion. Recent stock market volatility probably overstates the likelihood of a slump in global growth this year.”

January has been a continuation of issuance trend

“In January, we saw a continuation of that trend. The total corporate governance issue was down about 26%. Financial institutions were down about 56% but we put together our forecast which you saw on slide 26 which shows about 1% decrease in 2016. We put that together with the combination of looking at the markets, what we expect to see from market issuance, scanning the market with investment banks and corporate banks, et cetera.”

Issuance appetite is related to spreads

“Spreads have recently widened significantly especially in the lower end of the credit spread. CCC type credits are obviously more distressed credits and below, have increased by over 400 basis points. They’re at a 1,225 spread range whereas the AAA, AA level is still around 100, 110 basis points. It barely budged over the year. In fact, as you’ve seen, U.S. Treasuries have tightened. So the spread issue, where we see spreads going, there’s a lot of volatility right now. We think that also plays into it, people’s appetite for going out. It’s not really related to the base rate. It’s related to the spread.”

ECB wants to have more active capital markets in Europe

“we expect that over time in Europe is going to be increased structured finance. This is something that ECB is trying to implement. They want to have a more active capital markets”

Capital requirements for banks will lead to a larger decrease in non-investment grade issuance

“n addition, there’s another very important global trend about financial institutions. They’re all looking at optimal capital structure in addition to the new rules related to capital and there’s this TLAC which is total loss absorbing capacity which is basically senior bonds which have a certain level of subordination to other senior debt depositors that we expect that banks are going to be issuing. So in general, we think that there will be increases in structured finance, increases in financial services and financial institutions, likely decrease in overall corporate issuance globally but probably a larger decrease in noninvestment grade overall especially at the spread levels which I mentioned earlier. ”