Top Research & Insights of 2019

Key Takeaways:

• The observations and descriptions in this ESG Risk Atlas are designed to support the application of our ESG Evaluations Analytical Approach. 
  
  
• For more information on our ESG Evaluation Analytical Approach please see here.
  
  
• Please note that the ESG Risk Atlas is not a component of our credit rating methodologies.
  
  

Our Climate Week 2019 video analyzed how ESG is accelerating progress for a most sustainable future.

Key Takeaways:

• Cryptocurrencies are digital currencies that use encryption techniques to regulate the generation of units of currency and verify the transfer of funds. They have attracted a significant amount of attention from the market over the past 12 months. Cryptocurrencies are independent from central banks, and the risk of them infiltrating the traditional financial systems, exposing them to a possible bubble burst, is raising eyebrows at regulators.
  
  
• If cryptocurrencies become an asset class, the impact on financial services firms will be more gradual. That is because we believe that their future success will largely depend on the coordinated approach of global regulators and policymakers to regulate and enhance market participants' confidence in these instruments. More importantly, we believe that blockchain technology could be a positive disrupter for various financial value-chains. If widely adopted, blockchain could have a meaningful and lasting impact on the celerity, traceability and cost of financial transactions.
  
  
• In our view, cryptocurrencies do not meet the basic two requisites of a currency: An effective mean of exchange and an effective store of value.

Key Takeaways:

• Cash and investments held by S&P Global Ratings' universe of rated U.S. nonfinancial corporate issuers rose by 10% to $1.9 trillion in 2016 as the rich get richer: The top 1% control more than half of this cash pile.
  
  
• But rising debt, now at a collective $5.1 trillion for the 99%, is a concern: Adjusted leverage for both investment-grade and speculative-grade issuers is near decade highs and, conversely, the cash-to-debt ratio near decade lows.
  
  
• At the same time, tax reform that facilitates the repatriation of roughly $1.1 trillion in cash held offshore would likely spur a wave of share repurchases, leading to lower cash balances and potentially weaker credit metrics.
  
  
• To be sure, the top 1% have more than enough cash to repay their total debt of about $750 billion. But for the other 99%, credit risk remains. These issuers hold just $875 billion in cash against a whopping $5.1 trillion in debt, putting their cash-to-debt ratio at just 17%—the lowest since the 16% seen in 2008.
  
  

Our video on COP25 detailed the kickoff of the climate talks in Madrid this December and showcased our recent research on climate risk.

Analysis of executive biographies suggests that one driver of superior results by females may be that females are held to a higher standard. Overall, the attributes that correlate with success among male executives were found more often in female executives.

This finding refutes the commonly held belief in ‘token’ female executives.

Key Takeaways:

• Virtual banking is fanning the competitive flames in Asia-Pacific banking. New indigenous entrants in many Asia-Pacific countries—including in China, Hong Kong, Taiwan, Australia, Singapore, Japan, Korea, and India—have either already begun operations or are expected to become functional in the next year or so. As more bank regulators across the region develop the infrastructure to manage and supervise virtual banks we expect this trend will continue.
  
  
• To date, this development has not caused any noteworthy changes to our outlooks for banking sector country risks across the region. 
  
  
• Our current base case is that virtual banking may not lead to rating or outlook changes for Asia-Pacific banks over the next two years. Over a longer time horizon, however, as virtual banking strategies take hold and further disrupt the traditional bank sector, the potential for ratings differentiation is greater. 
  
  

Key Takeaways:

• U.S. - Buoyed by expected low unemployment and continued GDP growth, 2019 U.S. structured finance issuance is likely to remain in the same neighborhood as last year, with the anticipated growth in RMBS largely canceled out by the likely contraction in CLO volume from record levels. This is not factoring in the expected decline in CLO reset/refi volume, due to the dynamics of prevailing liability spreads.
  
  
• EUROPE - On most measures, we expect aggregate European structured finance credit performance to be positive in 2019. That said, the default rate will likely remain somewhat elevated compared with the pre-2008 time frame, but likely lower than its 1% long-term average.
  
  
• CHINA - Continued normalization of growth, reduced liquidity due to policy-driven credit adjustments, uncertainty from the trade tensions with the U.S., and the rate hike environment outside China may pose threat to the performance of some industries. That said, we believe securitization remains largely shielded by conservative asset selection and transactions' repayment structures.
  
  
• LATIN AMERICA - Credit conditions remain challenging in Argentina and investor confidence in Mexico has weakened since the inauguration of Andres Manuel Lopez Obrador. Meanwhile, in Brazil, market participants have reacted positively to the election of Jair Bolsonaro, but they remain cautious given the macro scenario.