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Completed 08 Jun 2017 11:12 PM EDT

Disseminated 09 Jun 2017 01:04 AM EDT


North America Credit Research
09 June 2017

High Grade Credit


Fundamentals: 1Q17
A Sector-by-Sector Review of Trends in Credit Ratios

US High Grade Strategy and


CDS Research
AC
Eric Beinstein
(1-212) 834-4211
eric.beinstein@jpmorgan.com
Dominique Toublan
(1-212) 834-2370
dominique.d.toublan@jpmorgan.com
Paul Glezer
(1-212) 270-8185
paul.x.glezer@jpmorgan.com
Alejandra Andrade
(1-212) 834-3220
alejandra.andrade@jpmorgan.com
J.P. Morgan Securities LLC

See page 70 for analyst certification and important disclosures.


J.P. Morgan 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.

www.jpmorganmarkets.com
This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Table of Contents
Summary discussion of credit metrics...................................3
Detailed discussion of credit metrics .....................................5
Automotive..............................................................................28
Cable/Satellite.........................................................................30
Capital Goods .........................................................................32
Chemicals ...............................................................................34
Consumer Products ...............................................................36
Diversified Media ....................................................................38
Energy .....................................................................................40
Food, Beverages and Tobacco..............................................43
Food/Drug Retail.....................................................................45
Healthcare ...............................................................................47
Metals and Mining ..................................................................49
Non-Food Retail......................................................................51
Pharmaceuticals .....................................................................53
Railroad/Shipping...................................................................55
Technology .............................................................................57
TelecomsDomestic .............................................................59
TelecomsYankee.................................................................61
Utilities ....................................................................................63
Methodology ...........................................................................65
Cross-Sector Comparisons of Credit Metrics ......................68

Source for all tables and charts: Capital IQ and J.P. Morgan.

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Summary discussion of credit metrics


Summary: 1Q17 credit fundamentals improved thanks to
stronger EBITDA growth, but leverage remains high and
interest coverage continues to weaken
A summary of 1Q17 fundamentals data shows a significant improvement versus
prior quarters. This has been driven by positive Revenue and EBITDA growth after
eight quarters of contraction (based on LTM data). Debt growth is still strong,
however, as companies continue share buyback programs and to fund M&A
transactions. For 1Q17 the results are flattered by easier comparables given 1Q16
weakness. Also a weaker dollar and the strong rebound in commodity prices from
one year prior all benefited revenue and EBITDA trends.

Exhibit 1: Credit Metrics Summary


OVERALL EX COMMODITIES
Y/Y Q/Q Y/Y
Q/Q Change Change 3yr Range Change Change 3yr Range Comment
Revenue growth turned positive after 2 years of
Revenue 2.3% 1.3% -11.1% - 1.6% 0.9% 2.2% -1.5% - 3.6%
contraction
EBITDA 3.3% 3.2% -10.2% - 3.2% 1.1% 1.9% -0.4% - 3.2% EBITDA followed the same trend as revenue
Debt
2.6% 8.5% 6.7% - 14.3% 2.7% 10.2% 6.9% - 15.6% Debt y/y growth decelerated to 9%
growth
Source: J.P. Morgan.

Exhibit 2: Credit Ratios Summary


OVERALL EX COMMODITIES
Y/Y 1Q17 Y/Y
1Q17 Level Change 3yr Range Level Change 3yr Range Comment
Profit Profit margins are toward the higher end of the 3-
27.9% 0.4% 27.1% - 28.2% 29.4% 0.1% 28.4% - 29.4%
Margin year range.
Leverage is up y/y with and ex commodities but is
Leverage 3.02x 0.1x 2.29x - 3.13x 2.85x 0.1x 2.37x - 2.90x
down q/q with and ex commodities
Interest Interest coverage weakened y/y and is at the
10.11x -1.1x 9.83x - 13.87x 10.43x -0.8x 10.43x - 12.30x
Coverage lower end of the post-crisis range.
Source: J.P. Morgan.

Revenue grew 2.3% q/q and 1.3% y/y (+0.9% q/q and +2.2% y/y excluding
commodities). This was the strongest q/q performance in 22 quarters and the
strongest y/y revenue growth in 11 quarters. EBITDA increased 3.3% q/q and 3.2%
y/y (+1.1% q/q and +1.9% Y/Y excluding commodities), the first y/y growth in 19
quarters. Profit margins improved 0.4%, and at 27.9% are at the higher end of the
23.9%-28.2% range post crisis.

Gross leverage and interest coverage both weakened Y/Y. However, they improved
Q/Q. The Y/Y weakness was driven primarily by deterioration in the Technology
sector while the Commodity related sectors posted improvements. Gross leverage
was up 0.1x y/y but down 0.1x q/q. Interest coverage is at 10.1x, down 1.1x y/y, but
up 0.1x q/q. Ex the commodity related sectors interest coverage is at 10.4x, the
lowest reading since 2010 but above pre crisis numbers.

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Exhibit 3: EBITDA improved after 19 quarters of negative growth Exhibit 4: Gross leverage fell q/q in part driven by commodity related
sectors
LTM EBITDA Y/Y Growth 3.2x Gross Leverage
25%
LTM EBITDA Y/Y (ex Energy, M/M) Y/Y Growth Gross Leverage ex Metals/Mining, Energy
20%
2.8x
15%
10%
2.4x
5%
0%
2.0x
-5%
-10%
1.6x
-15% 1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17
Source: J.P. Morgan

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Detailed discussion of credit metrics


The pace of deterioration slowed, and some metrics have
improved after strong results in 1Q17
To begin the analysis, note that comparables for our market were easier and the
effects of lower oil prices and a stronger dollar faded. The average price of oil
was 2% higher in the four quarters ending 1Q17 compared to the four quarters
ending in 1Q16. Also the trade weighted US Dollar was only 2% stronger.
Weak results in 1Q16 alongside an improvement in the two factors mentioned above
helped 1Q17 metrics significantly in relative terms.

Exhibit 1: The average price of oil was up from $45.1 in the 12 month Exhibit 2: The USD was 2% stronger in LTM 1Q17 vs LTM 1Q16 as the
period ending in 1Q16 to $47.9 in the 12 month period ending in 1Q17 USD appreciation faded in 1Q17
$ 108 USD TWI
70 WTI Price 106
Average: 103.8
60 104 Average: 102.1
Average: $47.9
Average: $45.1 102
50
100
40 98
96
30
94
20 92
Apr-15 Oct-15 Apr-16 Oct-16 Apr-15 Oct-15 Apr-16 Oct-16
Source: J.P. Morgan

LTM Revenue as of 1Q17 increased 1.3% y/y which is the largest increase in the
past 11 quarters. Since the biggest drawdown of -11% in 4Q15, the trend has been
improving, although revenue growth was still negative up until this quarter. Q/Q
revenue increased 2.3% as 1Q17 posted strong results for many of our sectors.

Excluding the commodity related sectors, revenue increased 2.2% y/y, the strongest
result since 1Q15.

The commodity related sectors continue to be a drag on overall numbers but to a


lesser extent than before. Energy had a revenue decline of 1.5% y/y (-$22bn) which
is an improvement from the deterioration seen in previous quarters. Metals and
Mining had a 5.2% decline, -$14bn y/y.

The biggest improvement in absolute terms was in Healthcare, with revenue up


$40bn, 5.7% y/y. The sector had strong operating performance supported by
advantageous commercial insurance trends for UnitedHealth, Anthem and Cigna.
Food/Drug Retail followed with Revenue up 5.7%, $25bn y/y. CVS led the increase
with revenue up $19bn y/y. This company has been able to monetize the synergies of
its acquisitions and has benefitted from strong consumer sentiment and trends.

In percentage terms, Yankee Telecoms, Cable and Transportation all had significant
increases of 8.3%, 8.0% and 6.0%. Deutsche Telekom and Telefonica posted good
results although partly the effect of a strong dollar also faded. In Cable/Satellite, both
Comcast and Charter posted strong growth of 9% and 6% due largely to robust HSD
and commercial revenue growth.

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

On the other hand, Technologys top line continues to be pressured with revenues
down $22bn, -3.6% y/y. Dell, Apple and IBM all had challenging quarters. For Dell
and IBM it is due to the headwinds the companies face in their legacy hardware
businesses. For Apple, it is attributable to the maturation of the smartphone market
and a transition to more diversified / services-oriented revenue streams.

Food and Beverage shows a decline of 3.3% (-$11bn). Part of this decline is driven
by our adjustment for Anheuser Busch figures post M&A. For companies which
have recently undergone an M&A transaction, we adjust the data series looking
backward by adding the data of the target and acquirer. Given the divestitures done
on both sides of this acquisition, it seems metrics worsened by more than they did.
The combined entity did not inherit the complete EBITDA of each part as some
revenue generating assets were divested. This effect should fade off a year after all of
the asset sales are complete.

Exhibit 3: Cable/TV Revenue growth has outperformed since 2012 Exhibit 4: Commodity sectors lead the largest Revenue y/y declines
but trends are improving
150 Cable/TV 125
Healthcare/HMOs
Food/Drug Retail
Transportation 100
Non-Food Retail
125
75
Energy
Metals/Mining
100 Chemicals
50 Telecoms - Yankees

75 25
1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Source: J.P. Morgan

Exhibit 5: Revenue growth was 1.3% q/q as trends improved in 1Q17 Exhibit 6: Revenue growth has turned positive y/y
1Q17 change LTM level

15% LTM Revenue Y/Y Growth ($mn) % ($mn)


Metals/Mining -14,252 -5.2% 257,379
LTM Revenue (ex Energy, M/M) Y/Y Growth
Technology -22,127 -3.6% 595,156
Food/Bev erages -10,742 -3.3% 316,359
10% Telecoms - Domestic -8,875 -2.9% 296,393
Energy -21,686 -1.5% 1,384,242
Div ersified Media 1,106 0.8% 144,983
Capital Goods 4,551 0.8% 568,753
5% Consumer Products 2,373 1.2% 199,156
Chemicals 2,075 1.3% 158,809
Non-Food Retail 14,535 1.7% 865,729
Pharmaceuticals/Medical Products 14,041 3.0% 476,758
0% Utilities 13,794 4.5% 320,825
Automotiv e 16,929 4.5% 389,458
Food/Drug Retail 24,555 5.7% 456,613
Healthcare/HMOs 40,361 5.7% 749,082
-5%
Transportation 9,752 6.0% 172,535
Cable/TV 9,059 8.0% 122,521
Telecoms - Yankees 21,271 8.3% 278,407
Industrials Total (ex Metals/Mining, Energy) 132,658 2.2% 6,111,537
-10%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 Industrials Total 96,719 1.3% 7,753,157
Second and third column show the change in 1Q17 vs 1Q17. The fourth column shows the
1Q17 level.
Source: J.P. Morgan

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

LTM EBITDA increased 3.2% y/y and 3.3% q/q. This is the best result in the past
19 quarters. This improvement in EBITDA trends translated into better credit metrics
overall after significant deterioration in the last couple of years. Excluding the
commodity related sectors, EBITDA grew 1.9% y/y and 1.1% q/q. The commodity
related sectors were a big driver of EBITDA improvement this quarter. The trend in
Energy turned, with EBITDA up 3.2%, $7bn, after falling consistently over the past
18 quarters. Metals and Mining was the biggest contributor to EBITDA growth this
quarter, up 48% ($15bn) y/y. The sector has benefitted from an improvement in
commodity prices as well as cost cutting efforts.

Pharmaceuticals/medical products continued to take the lead on EBITDA, with


numbers up $9bn, +5.7%. 10 out of the 14 Pharma companies in our report posted
increases in EBITDA. Large cap and Biotech names have experienced solid growth
in an LTM basis, although q/q results are flat. Healthcare also had improving trends
with EBITDA up $5bn, 12% y/y. EBITDA trends have followed revenue trends in
most cases.

Technology had the largest decline in EBITDA, down $11bn, -5.8% y/y. This sector
continues to have a challenging environment as product cycles mature. Domestic
Telecoms, Transportation, Diversified Media and Chemicals also experienced a
decline in EBITDA y/y. Domestic Telecoms had a decline of 4.4% ($4bn) driven by
Verizon as it faces top-line pressure from enhanced wireless competition. Diversified
Media had weakness in domestic advertising and higher content costs which
decreased EBITDA 2% y/y. Finally Chemicals struggled with less favorable fertilizer
prices and posted a decrease of 1.8%.

Exhibit 7: Cable/TV has had a corresponding trend in EBITDA relative Exhibit 8: Commodity related companies had the largest declines in
to Revenue, Autos has recovered significantly EBITDA y/y but improved in the previous quarters
175 Cable/TV 120
Healthcare/HMOs
Automotive
Food/Drug Retail 100
150 Utilities
80
125 Energy
60 Metals/Mining
Telecoms - Yankees
100 Food/Beverages
40
Capital Goods

75 20
1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17
Source: J.P. Morgan

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Exhibit 9: EBITDA growth was in part driven by the recovery in Exhibit 10: EBITDA had a significant increase of 3.2% y/y
Energy and Metals/Mining 1Q17 change LTM level

LTM EBITDA Y/Y Growth


($mn) % ($mn)
25%
Technology -10,891 -5.8% 176,243
LTM EBITDA Y/Y (ex Energy, M/M) Y/Y Growth
Transportation -1,754 -4.4% 38,320
20% Telecoms - Domestic -4,375 -4.4% 95,708
Div ersified Media -812 -2.0% 39,562
15% Chemicals -617 -1.8% 32,827
Food/Bev erages -942 -1.0% 92,368

10% Non-Food Retail 936 1.3% 71,229


Automotiv e 1,208 2.9% 43,012
Energy 6,559 3.2% 211,198
5%
Food/Drug Retail 1,431 3.6% 40,865
Consumer Products 2,158 5.4% 42,080
0% Capital Goods 4,390 5.5% 84,298
Pharmaceuticals/Medical Products 9,071 5.7% 166,846
-5% Utilities 8,343 7.8% 115,421
Cable/TV 3,175 8.2% 41,738

-10% Telecoms - Yankees 6,359 8.4% 82,438


Healthcare/HMOs 5,318 11.9% 50,043
Metals/Mining 15,438 47.5% 47,918
-15%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 Industrials Total (ex Metals/Mining, Energy) 22,999 1.9% 1,212,998
Industrials Total 44,996 3.2% 1,472,114
Second and third column show the change in 1Q17 vs 1Q16. The fourth column shows the
1Q17 level.
Source: J.P. Morgan

Profit margins improved slightly but are unchanged ex


commodities
Profit Margins remain range-bound in the 27.1% to 28.2% range since 1Q11.
Margins are currently at 27.9%, an improvement of 0.4% y/y. Excluding the
commodities sectors, Profit Margins are at 29.4%, up 0.1% y/y which is almost
unchanged.

Commodities are no longer a drag and margins have improved with the rebound in
EBITDA Energy profit margins of 21% are down 1.1% y/y but up 1.9% q/q. The
sector is finally seeing an improvement in EBITDA which has helped overall credit
metrics for the sector. Metals and mining had the largest improvement in our sample,
up 11.7% y/y to 37%. The sector has high margins compared to the index (28%) and
the current level is the highest since early 2012. Much of this recovery has been
driven by BHP Billiton with margins up 34%. The company has benefitted from a
rebound in commodity prices in particular iron ore, as well as productivity gains. All
the names in this sector had stable or improving margins however, with the exception
of Goldcorp.

Aside from the improvement in Metals and Mining, Consumer Products and Utilities
also had increases in profit margins of 1.6% and 1.5% respectively. Newell led the
increase in Consumer Products, up 3.2% as it monetizes synergies of the merger. The
rest of the sector also saw improvements in profit margins except for Clorox, down
1.1% on the year. Consumer Products has been cutting costs helping margins
improve for most issuers. The improvement in Utilities has been more idiosyncratic
in some cases cost cutting post M&A helping EBITDA trends.

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Technology had the largest decline in margins, down 240bp y/y to 31%. Technology
has seen deteriorating trends as headwinds in legacy hardware business and the
product cycle have been hitting bottom line. Apple, IBM and Intel had declines of
2.9%, 2.7% and 1.8% which drove the decline in the overall sector. Despite the
worsening metrics, Technology continues to have credit ratios above the index.
Transportation and Chemicals also had declines of 1.6% and 1.5%, respectively, as
both sectors have struggled with EBITDA.

Exhibit 11: Profit Margins remain range bound but have improved Exhibit 12: Profit margins are up modestly as positive EBITDA trends
help several sectors
30% Sector 1Q17 Level Y/Y Change Sector Weight

EBITDA/Revenue, LTM Technology 31% -2.4% 11%


Transportation 34% -1.6% 2%
Chemicals 21% -1.5% 2%
28% Div ersified Media 27% -1.3% 3%
Energy 21% -1.1% 16%
Telecoms - Domestic 32% -0.4% 6%
Non-Food Retail 9% -0.4% 4%
26%
Telecoms - Yankees 30% 0.0% 2%
Food/Beverages 32% 0.1% 9%
Capital Goods 14% 0.2% 6%
24% Healthcare/HMOs 9% 0.2% 3%
Cable/TV 35% 0.3% 3%
Pharmaceuticals/Medical Products 35% 0.4% 10%
Food/Drug Retail 17% 0.5% 3%
22% Automotive 12% 0.8% 3%
Utilities 37% 1.5% 12%
Consumer Products 21% 1.6% 2%
Metals/Mining 37% 11.7% 2%
20%
1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16 Industrials Total 28% 0.4% 100%

Source: J.P. Morgan

Exhibit 13: Sectors with the largest post crisis increases in margins Exhibit 14: Sectors with the largest post crisis decreases in margins
share either cost cutting or shareholder activism stories are commodity related sectors which have bounced back recently
8% Utilities 5%
Transportation
6% Automotive 0%
Consumer Products
Food/Beverages
4% -5%

2% -10%
Energy
Technology
0% -15% Metals/Mining
Non-Food Retail
Telecoms - Yankees
-2% -20%
1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Source: J.P. Morgan.

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Exhibit 15: Largest Profit Margin increases and decreases


Largest Margin
Increase Largest Margin Decline

3yr 1Q17 3yr 1Q17


1Q17 Margin Weight Contrib 1Q17 Margin Weight Contrib
# Issuer Margin Change ($mn) ution # Issuer Margin Change ($mn) ution
1 Allergan 44% 16% 22,180 0.2% 1 Microsoft Corp 33% -5% 65,756 -0.2%
2 ETP 21% 13% 18,760 0.1% 2 ConocoPhillips 24% -13% 22,707 -0.2%
3 EPD 20% 10% 20,465 0.1% 3 Anadarko 37% -24% 10,025 -0.1%
4 PG&E Corp 33% 9% 16,694 0.1% 4 Occidental Petro 31% -26% 9,204 -0.1%
5 AbbVie Inc 42% 4% 31,284 0.1% 5 Pfizer Inc 38% -7% 28,050 -0.1%
6 BRKHEC 39% 5% 24,041 0.1% 6 Verizon 33% -3% 59,483 -0.1%
7 General Motors 11% 3% 34,118 0.1% 7 Hess Corp 27% -28% 5,935 -0.1%
8 Southern Co 38% 5% 22,863 0.1% 8 Noble Energy Inc 36% -25% 5,760 -0.1%
9 Teva 33% 5% 18,534 0.0% 9 ABIBB 35% -2% 76,513 -0.1%
10 Cisco Systems Inc 31% 3% 27,790 0.0% 10 IBM 21% -6% 21,950 -0.1%
All Other Change -0.2% All Other Change 1.7%
Total Change 0.6% Total Change 0.6%

Note: Based on Y/Y LTM data. Source: J.P. Morgan, Capital IQ .

Exhibit 16: Profit margin current level, change over the last three years and range over the last
three years
Profit Margins Percentage in 3y Range
Sector 3yr Min 3yr Max 1Q17 1Q14 1Q16 1Q17 3yr Range
Consumer Products 18% 21% 21%
Food/Drug Retail 17% 17% 17%
Metals/Mining 25% 37% 37%
Utilities 32% 37% 37%
Automotiv e 8% 12% 12%
Telecoms - Yankees 27% 30% 30%
Pharmaceuticals/Medical Products 32% 36% 35%
Food/Bev erages 30% 32% 32%
Healthcare/HMOs 8% 9% 9%
Transportation 29% 36% 34%
Telecoms - Domestic 30% 33% 32%
All 27% 28% 28%
Cable/TV 34% 35% 35%
Chemicals 19% 23% 21%
Capital Goods 14% 15% 14%
Energy 19% 26% 21%
Technology 31% 35% 31%
Div ersified Media 27% 28% 27%
Non-Food Retail 9% 10% 9%

Note: Based on Y/Y LTM data. Source: J.P. Morgan, Capital IQ

10

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Corporate cash balances increase as companies improve


working capital and issue debt
Cash increased $65bn (+5.9%) y/y, and $25bn (+2.2%) q/q. The biggest driver for
the increase was Technology, with cash up $38bn, 12% y/y. Microsoft had a $21bn
increase in cash as it issued debt in January for general corporate purposes. The
company has normalized onshore cash levels following the LinkedIn acquisition.
Healthcare had a $19bn increase in cash y/y driven by early timing of CMS premium
payments. Capital Goods had an increase in cash of $17bn, 29% y/y mainly driven
by CAT (+$3bn) and Honeywell (+$3bn). CAT grew revenue for the first time in the
past 9 quarters while Honeywell had an improvement in working capital after a weak
1Q16. Most of our sectors, 12 out of the 18, had increases in cash driven by different
purposes. In some instances, however, the increase in cash was driven by debt
issuance for several purposes.
Cash stabilized in the commodity related sectors with Energy cash up $3bn, 3%, and
Metals and Mining cash balances up $2bn, 7.2%. Both sectors have seen a turn from
deteriorating metrics as commodity prices stabilize and comps become easier.

Cash decreased the most for Food and Beverage -$46bn (-39%) as ABIBB completed
the Sab Miller acquisition using the cash on its balance sheet from the 1Q16 debt
issuance. Cash also decreased for Consumer Products, Transportation and Non-Food
Retail, -$6bn, -$3.6bn and -$3bn respectively. In the case of Consumer Products the
decrease was driven by the cash deployed by Newell to complete the Jarden
acquisition (-$7bn). Transportation had declines in UPS (-$2.5bn), UNP (-$1.5bn)
and CP (-$286mn). Non-Food retail had declines in 3 companies.

Exhibit 17: Cash balances increased y/y driven by Technology Exhibit 18: Cash levels increased $65bn, part of the improvement
$bn from 1Q16 was offset by deploying cash to complete transactions
1Q17 change LTM level
Cash
1,200 ($mn) % ($mn)
Food/Bev erages -46,256 -39.3% 71,578
Transportation -3,579 -25.6% 10,389
Consumer Products -6,009 -20.8% 22,842
Cable/TV -1,261 -15.4% 6,942
1,000
Non-Food Retail -3,300 -13.1% 21,919
Div ersified Media -594 -5.7% 9,816
Energy 3,412 3.2% 109,672
Pharmaceuticals/Medical Products 6,066 3.7% 169,095
800 Chemicals 1,085 6.9% 16,758
Metals/Mining 2,165 7.2% 32,208
Technology 38,492 12.0% 360,045
Automotiv e 6,215 13.5% 52,146
Telecoms - Domestic 3,473 21.6% 19,514
600 17,367 29.2% 76,770
Capital Goods
Telecoms - Yankees 14,061 29.7% 61,446
Healthcare/HMOs 19,017 30.9% 80,479
Utilities 5,812 52.6% 16,858
400 Food/Drug Retail 8,764 83.6% 19,253
Industrials Total 64,931 5.9% 1,157,731

Second and third column show the change in 1Q17 vs 1Q16. The fourth column shows the
1Q17 level.
200
1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16
Source: J.P. Morgan.

11

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Debt stabilized q/q but was up 8.5% y/y


Total debt grew at a slower pace than in the past two quarters, up 8.5% y/y
(+$313bn). Debt growth reached a peak of 14.3% growth in 3Q16 but growth has
since then decelerated to 11.1% in 4Q16 and 8.5% currently. M&A, buybacks and
dividends continue to drive the increase although at a lower rate. M&A issuance in
particular was only $19bn in 1Q17 compared to $67bn in 1Q16. We did expect
M&A related issuance to decline in 2017 but we are still pending several of the large
transactions we anticipated coming into this year. Excluding the commodity related
sectors, debt increased 10.2%, a significant increase, but a slower pace than in
previous quarters.

On a q/q basis debt increased by 2.6% ($102bn). Debt has been increasing quarterly
every quarter since 1Q10 except for 4Q16. Quarterly growth of 2.6% in 1Q17 is
lower than the 4% average seen from 1Q16-3Q16 but higher than the -1.3% decline
in 4Q16.

Technology continues to be largest driver for debt growth, up $102bn, 36% y/y.
Microsoft and Dell drove this increase up $37bn and $31bn respectively. Both
companies completed acquisitions in 2016 and Microsoft also continued to issue debt
in 2017 for general corporate purposes. Apple increased debt by $19bn as it
continues to fund buyback programs through debt. Utilities also had a significant
increase of $63bn, 12.9% as the sector continues to lever up partly due to
consolidation.

Energy increased debt this quarter $38bn, 6%, as the sector funds operations through
debt given limited cash flow and companies fund M&A with debt. In particular,
Enbridge increased debt $19bn as it acquired SE. Metals and Mining decreased debt
y/y by $18bn, 15% as the sector seeks to delever to retain IG ratings. Consumer
Products and Diversified Media had stable/ modestly declining debt down $1bn, -2%
and $357mn, -0.4% respectively.

Exhibit 19: The top 5 largest increases in debt are all tied to M&A Exhibit 20: Looking at the small increases, only Yankee Telecoms has
related issuance reduced debt since 2011
Technology 175 Telecoms - Yankees
425 Food/Drug Retail Metals/Mining
Telecoms - Domestic Non-Food Retail
375 Pharmaceuticals/Medical Products 150
Consumer Products
325 Transportation Automotive
125
275
225 100
175
75
125
75 50
1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17
Source: J.P. Morgan

Net debt increased 9.6% y/y, as debt growth outpaced cash growth. This is the
slowest pace since 1Q14. Q/Q net debt increased 3%, following the same trend as
debt growth. Technology also drove the increase in net debt as it increased $64bn
y/y. Utilities and Energy followed with increases in net debt of $57bn and $35bn.

12

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eric.beinstein@jpmorgan.com

Exhibit 21: Debt grew 8.5% yy the lowest rate since 4Q14 Exhibit 22: Most sectors increased debt over the year, although the
4.0 $tn pace stabilized
Debt
1Q17 change LTM level
Net Debt ($mn) % ($mn)
Metals/Mining -18,042 -14.7% 104,480
3.5
Non-Food Retail -3,636 -3.2% 110,099
Consumer Products -1,427 -1.7% 81,818
Div ersified Media -357 -0.4% 86,732
3.0 Healthcare/HMOs 1,122 1.1% 104,470
Telecoms - Domestic 9,935 3.9% 266,347
Telecoms - Yankees 9,722 4.1% 246,511
Food/Bev erages 15,259 4.5% 352,302
2.5
Energy 37,962 5.6% 710,865
Chemicals 4,364 6.1% 75,608
Automotiv e 2,786 6.5% 45,959
2.0 Cable/TV 9,236 8.0% 124,629
Capital Goods 15,997 10.0% 175,372
Transportation 8,548 11.9% 80,145
Utilities 62,575 12.9% 546,374
1.5
Pharmaceuticals/Medical Products 45,418 12.9% 396,392
Food/Drug Retail 11,655 14.6% 91,605
Technology 102,207 35.7% 388,290
1.0 Industrials Total 313,324 8.5% 3,987,996

Second and third column show the change in 1Q17 vs 1Q16. The fourth column shows the
1Q17 level.
0.5
1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16
Source: J.P. Morgan
Leverage stabilized q/q but increased y/y
Gross Leverage increased 0.13x y/y to 3.02x but fell 0.1x q/q. The lower rate of
debt growth of 8.5% and the strong EBITDA results up, 3.2% y/y, have helped
stabilize leverage metrics. Excluding the commodity sectors, leverage ticked up
0.11x y/y and fell 0.04x q/q.

Technology was the biggest driver of the leverage increase with leverage for the
sector up 0.6x y/y. Q/Q the sector had a decrease of 0.1x to 2.5x. Although the sector
has outstanding buyback programs that it funds through debt, several M&A
transactions have been completed last year and new ones have not been funded in
2017 so far. Except for Microsoft which had a significant deal for GCP, the rest of
the names had stable leverage q/q whereas Dell started the deleveraging process
decreasing leverage 3x q/q. Pharma also increased leverage up 0.4x y/y but only
0.1x q/q while Utilities had a 0.3x increase y/y and a 0.1x increase over the quarter.

Several sectors saw improvements in leverage driven by strong EBITDA trends,


deleveraging post M&A and stabilization of debt growth. Metals and Mining led the
decline with leverage down 2.3x y/y, -0.1x q/q. This sector has made a significant
effort to cut back debt to improve credit metrics and efficiency. Healthcare had a
decline of 0.2x y/y, -0.1x q/q as EBITDA grows for the sector after significant
consolidation in the space. Energy leverage declined by 0.1x y/y and more
importantly by 0.7x q/q as higher oil prices and easier comps benefit the sectors
bottom line and relative comparisons.

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eric.beinstein@jpmorgan.com

We continue to track deals from 2015 and 2016 to see the deleveraging path of
companies post M&A. Companies that completed deals in 2015 have had at least a
year to delever post the transactions. Allergan has decreased leverage 2.6x since
completing a deal in 1Q15. Reynolds and Newell have also delivered quickly with
leverage down 1.6x and 1.4x since the close. On average, companies have decreased
leverage 0.5x 5 quarters after completing transactions

Exhibit 23: Companies are deleveraging post M&A


1.2x 1.01x
1.0x
0.8x
0.6x
0.4x
0.2x
0.0x
-0.2x
-0.4x -0.18x
-0.6x -0.38x
-0.49x -0.49x -0.52x
-0.8x
From Previous Q +1Q +2Q +3Q +4Q +5Q
to Deal
Source: J.P. Morgan. Based on a sample of 11 large M&A transactions which closed in 2015 or 2016.

Over the past 5 years, looking at the largest 5 increases and decreases in
leverage, the largest increases share the same theme: M&A related issuance,
funding the business with debt in the case of Energy, and pursuing shareholder
friendly policies. Energy has seen the largest increase as it funds the business
through debt given the lack of cash flow generation. EBITDA trends have finally
stabilized however as oil prices recover. Technology and Pharma have pursued large
M&A deals as well as share buybacks. The only sector which has kept leverage
nearly unchanged is Autos.

Exhibit 24: Gross Leverage continues to rise y/y but declined from Exhibit 25: 9 out of 18 sectors had leverage decline or stabilize y/y
4Q16 Sector 1Q17 Level Y/Y Change Sector Weight
3.2x Gross Leverage Metals/Mining 2.04x -2.31x 2%
Gross Leverage ex Metals/Mining, Energy Healthcare/HMOs 2.16x -0.24x 3%
Telecoms - Yankees 3.00x -0.15x 2%
Div ersified Media 2.71x -0.12x 3%
2.8x Consumer Products 1.85x -0.10x 2%
Energy 3.85x -0.09x 16%
Cable/TV 3.20x -0.06x 3%
Non-Food Retail 1.98x -0.05x 4%
Capital Goods 2.07x 0.01x 6%
2.4x
Food/Drug Retail 3.38x 0.15x 3%
Food/Bev erages 3.33x 0.15x 9%
Telecoms - Domestic 2.79x 0.20x 6%
Chemicals 2.48x 0.21x 2%
2.0x Transportation 2.22x 0.23x 2%
Utilities 4.81x 0.28x 12%
Automotiv e 1.26x 0.31x 3%
Pharmaceuticals/Medical Products 2.77x 0.36x 10%
Technology 2.45x 0.59x 11%
1.6x
1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16 Industrials Total 3.02x 0.13x 100%

The first column shows the 1Q17 level. The second column shows the 1Q17 vs. 1Q16
change. The last column gives the sector weight in the index.
Source: J.P. Morgan

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eric.beinstein@jpmorgan.com

Exhibit 26: Largest Gross Leverage increases and decreases: 10 companies account for 1/2 of the rise in leverage over the past 3 years
Largest Leverage Largest Leverage
Increase Decline

1Q17 3yr 1Q17 1Q17 3yr 1Q17


Levera Leverage Weight Contrib Levera Leverage Weight Contrib
# Issuer ge Change ($mn) ution # Issuer ge Change ($mn) ution
1 Microsoft Corp 2.9x 2.2x 65,756 0.08x 1 Amgen Inc 2.8x -1.4x 20,630 -0.02x
2 Oracle Corp 3.3x 1.8x 47,594 0.05x 2 Thermo Fisher 3.7x -2.2x 9,572 -0.01x
3 ConocoPhillips 4.3x 3.3x 22,707 0.04x 3 PG&E Corp 3.1x -0.8x 16,694 -0.01x
4 Shell 2.7x 1.6x 38,991 0.03x 4 Newmont Mining 1.7x -2.2x 4,395 -0.01x
5 Actavis plc 4.9x 2.5x 22,180 0.03x 5 Glencore 4.1x -1.9x 4,709 0.00x
6 AT&T Inc 2.7x 0.6x 78,196 0.03x 6 McKesson Corp 1.9x -1.4x 5,505 0.00x
7 Teva 4.7x 2.6x 18,534 0.03x 7 Target Corp 1.9x -0.6x 9,842 0.00x
8 Chevron Corp 2.6x 2.0x 21,222 0.02x 8 Barrick Gold Corp 1.8x -0.9x 6,681 0.00x
9 AbbVie Inc 3.3x 1.4x 31,284 0.02x 9 NextEra Energy 4.3x -0.5x 10,851 0.00x
10 BP PLC 3.0x 1.3x 29,292 0.02x 10 Wal-Mart Stores 1.9x -0.2x 32,106 0.00x
All Other Change 0.39x All Other Change 0.80x
Total Change 0.74x Total Change 0.74x
Note: Based on 3yr LTM data. Source: J.P. Morgan, Capital IQ

Exhibit 27: Energy is finally recovering after significant leverage Exhibit 28: Over the past 5 years, some companies have increased
increase since 2012 debt prudently. Metals and Mining is in deleveraging mode
5.0x Energy Automotive Non-Food Retail
4.5x Technology 4.5x Consumer Products Cable/TV
Pharmaceuticals/Medical Products
4.0x Metals/Mining
Telecoms - Domestic
3.5x Chemicals 3.5x
3.0x
2.5x 2.5x
2.0x
1.5x 1.5x
1.0x
0.5x 0.5x
1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17
Source: J.P. Morgan

15

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Eric Beinstein North America Credit Research
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eric.beinstein@jpmorgan.com

Exhibit 29: Gross leverage current level, change over the last three years and range over the
last three years
Gross Leverage Percentage in 3y Range
Sector 3yr Min 3yr Max 1Q17 1Q14 1Q16 1Q17 3yr Range
Metals/Mining 2.04 4.64 2.04
Telecoms - Yankees 2.92 3.28 3.00
Healthcare/HMOs 1.90 2.59 2.16
Consumer Products 1.79 1.96 1.85
Div ersified Media 2.50 2.89 2.71
Non-Food Retail 1.92 2.04 1.98
Energy 1.92 4.59 3.85
Chemicals 2.00 2.63 2.48
All 2.28 3.13 3.02
Cable/TV 2.41 3.29 3.20
Capital Goods 1.42 2.12 2.07
Technology 1.13 2.51 2.45
Telecoms - Domestic 2.26 2.79 2.79
Automotiv e 0.88 1.26 1.26
Transportation 1.68 2.22 2.22
Utilities 4.18 4.81 4.81
Food/Drug Retail 2.59 3.38 3.38
Food/Bev erages 2.69 3.33 3.33
Pharmaceuticals/Medical Products 1.87 2.77 2.77

Note: Based on Y/Y LTM data. Source: J.P. Morgan, Capital IQ

Net Leverage moved less than Gross Leverage. Net Leverage was unchanged y/y at
2.4x. On a q/q basis however, net leverage declined 0.1x. Given a big improvement
in commodity related sectors, ex commodities, net leverage increased 0.03x y/y and
0.04x q/q. The themes were similar to leverage with Metals and Mining as well as
Energy posting decreases of 1.8x and 0.3x respectively. Healthcare also had
improving trends of -0.4x y/y. Tech and Pharma had the largest increases with net
leverage up 0.4x and 0.5x y/y.

Exhibit 30: Net Leverage fell from last quarter Exhibit 31: Net Leverage is unchanged y/y
2.6x
Sector 1Q17 Level Y/Y Change Sector Weight
2.5x Net Leverage Net Leverage ex Energy and M/M Metals/Mining 1.37x -1.78x 2%
2.4x Healthcare/HMOs 0.63x -0.42x 3%
2.3x Telecoms - Yankees 2.25x -0.27x 2%
Energy 2.94x -0.25x 16%
2.2x
Div ersified Media 2.45x -0.15x 3%
2.1x
Food/Bev erages 2.46x -0.10x 9%
2.0x Consumer Products 1.50x -0.09x 2%
1.9x Automotiv e -0.35x -0.06x 3%
1.8x Capital Goods 1.22x -0.05x 6%
Cable/TV 3.03x -0.02x 3%
1.7x
Food/Drug Retail 3.03x 0.00x 3%
1.6x
Non-Food Retail 1.76x 0.05x 4%
1.5x
Telecoms - Domestic 2.58x 0.16x 6%
1.4x Transportation 1.90x 0.21x 2%
1.3x Utilities 4.65x 0.23x 12%
1.2x Chemicals 2.01x 0.31x 2%
Technology -0.16x 0.44x 11%
1.1x
1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16 Pharmaceuticals/Medical Products 2.03x 0.54x 10%
Industrials Total 2.44x 0.01x 100%

Second column shows the 1Q17 level. The 3rd column shows the 1Q17 vs. 1Q16 change.
The last column gives the sector weight in the index.

Source: J.P. Morgan

16

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Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Exhibit 32: Largest Net Leverage increases and decreases


Largest Leverage Largest Leverage
Increase Decline

3Q16 3yr 3Q16 3Q16 3yr 3Q16


Levera Leverage Weight Contrib Levera Leverage Weight Contrib
# Issuer ge Change ($mn) ution # Issuer ge Change ($mn) ution
1 ConocoPhillips 3.8x 3.1x 22,707 0.04x 1 Thermo Fisher 3.5x -1.8x 9,572 -0.01x
2 AbbVie Inc 2.8x 2.1x 31,284 0.04x 2 PG&E Corp 3.0x -0.8x 16,694 -0.01x
3 Shell 2.2x 1.4x 38,991 0.03x 3 Newmont Mining 0.6x -2.4x 4,395 -0.01x
4 Medtronic Inc 2.4x 2.2x 23,355 0.03x 4 Target Corp 1.6x -0.9x 9,842 -0.01x
5 Teva 4.5x 2.6x 18,534 0.03x 5 Aetna Inc 0.5x -0.6x 11,372 0.00x
6 Halliburton Co 4.7x 3.8x 12,595 0.03x 6 Barrick Gold Corp 1.3x -0.9x 6,681 0.00x
7 Actavis plc 3.5x 2.0x 22,180 0.03x 7 Wal-Mart Stores 1.7x -0.2x 32,106 0.00x
8 Chevron Corp 2.2x 2.0x 21,222 0.03x 8 NextEra Energy 4.3x -0.5x 10,851 0.00x
9 Pfizer Inc 1.5x 1.3x 28,050 0.02x 9 Procter & Gamble 0.9x -0.5x 9,456 0.00x
10 AT&T Inc 2.4x 0.5x 78,196 0.02x 10 Devon Energy 2.6x -0.7x 6,587 0.00x
All Other Change 0.38x All Other Change 0.72x
Total Change 0.67x Total Change 0.67x
Note: Based on 3yr LTM data. Source: J.P. Morgan, Capital IQ

Exhibit 33: Net leverage current level, change over the last three years and range over the last
three years
Net Leverage Percentage in 3y Range
Sector 3yr Min 3yr Max 1Q17 1Q14 1Q16 1Q17 3yr Range
Healthcare/HMOs 0.63 1.20 0.63
Metals/Mining 1.37 3.34 1.37
Telecoms - Yankees 2.20 2.70 2.25
Non-Food Retail 1.69 1.84 1.76
Food/Bev erages 2.16 2.66 2.46
Div ersified Media 2.21 2.62 2.45
Energy 1.49 3.86 2.94
Consumer Products 1.32 1.60 1.50
Cable/TV 2.30 3.19 3.03
Telecoms - Domestic 2.12 2.67 2.58
All 1.76 2.56 2.44
Automotiv e -0.72 -0.29 -0.35
Capital Goods 0.75 1.27 1.22
Transportation 1.36 1.94 1.90
Food/Drug Retail 2.18 3.07 3.03
Technology -1.04 -0.13 -0.16
Utilities 4.04 4.65 4.65
Pharmaceuticals/Medical Products 0.72 2.03 2.03
Chemicals 1.47 2.01 2.01
Note: Based on Y/Y LTM data. Source: J.P. Morgan, Capital IQ

Though the trend has been an increase in leverage overall, lower rated
companies (ex commodities and utilities) have had a slight increase y/y of 0.1x
while A rated companies were flat. We can see the migration from low leverage to
higher leverage in the bar chart below. The majority of companies in 2012 were 1-2x
levered (37%) whereas now this has shifted to 2-3x (35%). The risk on the tails has
significantly increased driven by Energy, Utilities and companies completing
acquisitions. The recent rebound has helped the tails from the previous quarters as
oil prices stabilize, EBITDA improves and several companies delever post M&A.

17

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eric.beinstein@jpmorgan.com

Exhibit 34: BBB and A rated companies decreased leverage Q/Q Exhibit 35: Net leverage has ticked up in BBB rated companies
3.0x Gross Leverage ex Energy, M/M, Utilities - BBB 2.5x Net Leverage ex Energy, M/M, Utilities - A
Gross Leverage ex Energy, M/M, Utilities - A Net Leverage ex Energy, M/M, Utilities - BBB
2.0x
2.5x

1.5x
2.0x
1.0x

1.5x
0.5x

1.0x 0.0x
1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16 1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16
Source: J.P. Morgan

Exhibit 36: The majority of companies are now 2-3x levered Exhibit 37: The same trend is true in net leverage
40% 37% Gross Leverage - % of Debt 30% 27% Net Leverage - % of Debt
35%
35% 4Q12 1Q17 4Q12 1Q17
25% 23% 22% 23%
30%
20%
25% 22% 17%
20%
20% 15% 12%
16% 15% 15% 12%
14% 10% 10%
15% 8%
10% 7%
7% 7% 6%
10% 7% 4%
4% 4% 5% 3% 3% 3% 3%
5% 2% 3%

0% 0%
0-1x 1-2x 2-3x 3-4x 4-5x 5-6x 6x+ -2 - -1x -1 - 0x 0-1x 1-2x 2-3x 3-4x 4-5x 5-6x 6x+
Source: J.P. Morgan

Interest coverage has fallen to the lower end of the post


crisis range
Interest expense increased 11.2% y/y (+$15bn), a slower pace from the 12.5%
average increase of the previous 2 quarters but still significant. The increase has been
driven by larger debt balances. Interest expense lags debt growth, however, so we
should continue to see increases in interest expense going forward. YTD, maturing
bonds have had higher yields than new issues by 11bp. This is a decline from the
average 54bp seen in 2016. We expect this difference to compress as yields on new
issues rise.

Exhibit 38: We expect the difference between maturing and new issue coupons to decrease
3.00 % Avg Maturing - Avg Issued Coupon
2.50 2.23 2.39
1.85
2.00 1.61 1.47 1.66 1.66 1.48
1.50
0.78
1.00 0.54
0.13 0.15 0.11
0.50 0.25
0.00
-0.50 -0.24
-0.29
-1.00
-1.50
-1.36
-2.00
2001 2003 2005 2007 2009 2011 2013 2015 2017

Source: J.P. Morgan

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This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

On a sector level, Technology had the largest interest expense increase: up $3.3bn,
54% y/y. The sector has added debt in the past 12 months to complete acquisitions,
fund projects and share repurchase programs. Energy also had a large increase in
interest expense of $3.1bn y/y. The increase is a combination of higher costs and
higher debt. Investors demand larger coupons from sectors with significant
headwinds and this has been the case for Energy. Furthermore, the sector has had to
increase debt in order to fund operations given negative cash flows and complete
acquisitions. The third largest sector was Food and Beverage with interest expense
up $2bn (+19%) post the ABIBB acquisition of SAB Miller. Given the amount of
debt that was raised the increase in interest expense comes as no surprise.

Yankee Telecoms had the largest decrease of $647mn, 6%. This was driven by
Telefonica (-$1bn) as the company refinances debt at cheaper levels. Most
companies had increases however, and in 17 of our 18 sectors.

Exhibit 39: Interest expense is rising and we expect this to continue Exhibit 40: Interest expense was up 11.2%, a slower pace than in the
as rates rise previous quarter but still significant growth
1Q17 change LTM level
150 $bn ($mn) % ($mn)
Interest Exp Telecoms - Yankees -647 -6.3% 9,707
140 Telecoms - Domestic 89 0.9% 9,853
Chemicals 122 4.2% 3,029
130 Non-Food Retail 282 5.7% 5,226
Utilities 1,391 6.8% 21,821
Div ersified Media 256 7.3% 3,767
120
Pharmaceuticals/Medical Products 841 7.6% 11,971
Cable/TV 500 9.5% 5,752
110
Metals/Mining 505 11.2% 5,013
Transportation 329 11.4% 3,203
100 Consumer Products 264 12.9% 2,306
Capital Goods 729 13.1% 6,312
90 Energy 3,134 14.7% 24,499
Food/Drug Retail 424 15.3% 3,195

80 Healthcare/HMOs 676 18.5% 4,332


Food/Bev erages 2,011 18.5% 12,891
Automotiv e 357 21.9% 1,986
70
Technology 3,267 53.6% 9,364
Industrials Total 14,530 11.2% 144,228
60
1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16 Second and third column show the change in 3Q16 vs 3Q15. The fourth column shows the
3Q16 level.
Source: J.P. Morgan

19

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Exhibit 41: Interest coverage has stabilized in part due to the Exhibit 42: Interest coverage has deteriorated y/y but stabilized q/q
improvement in commodity related sectors Sector 1Q17 Level Y/Y Change Sector Weight
15x
Technology 17.55x -7.00x 11%
Automotiv e 30.65x -3.24x 3%
14x Transportation 12.55x -2.88x 2%
Energy 7.93x -2.35x 16%
Pharmaceuticals/Medical Products 13.92x -2.00x 10%
13x
Telecoms - Domestic 9.76x -0.65x 6%
Capital Goods 12.77x -0.54x 6%
12x Healthcare/HMOs 12.21x -0.44x 3%
Chemicals 11.27x -0.36x 2%

11x Food/Drug Retail 8.35x -0.36x 3%


Non-Food Retail 11.37x -0.32x 4%
Div ersified Media 7.35x -0.30x 3%
10x Cable/TV 7.32x -0.08x 3%
Utilities 5.26x 0.02x 12%
9x Telecoms - Yankees 8.61x 0.69x 2%
Food/Bev erages 9.04x 1.07x 9%
Consumer Products 22.71x 2.22x 2%
8x Interest Coverage
Metals/Mining 11.22x 2.69x 2%
Interest Coverage ex Energy, M/M
Industrials Total 10.11x -1.07x 100%
7x Second column shows the 1Q17 level. The 3rd column shows the 1Q17 vs.1Q16 change.
1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16 The last column gives the sector weight in the index.

Source: J.P. Morgan

Interest coverage is at 10.1x, down 1.1x y/y but a 0.05x improvement from the
recent low reached last quarter. This marks the first q/q increase in over 2 years. Ex
the commodity related sectors interest coverage is at 10.4x, the lowest reading since
2010. Although EBITDA improved materially, debt continues to grow and the effect
of the increase in interest expense is somewhat delayed.

On a sector level, unsurprisingly, Technology led the decline, down 7x to17.6x as


EBITDA trends were weak while the amount of debt issued by the sector continues
to increase on the back of shareholder friendly policies. However, a 17.6x interest
coverage for the sector continues to be strong compared to other sectors. Despite
some deterioration in credit metrics, several companies in this sector still have better
than average metrics and are excluded from our overall calculations (we exclude the
top and bottom 10% from our average credit ratios). Apple for example had a decline
of 40x y/y, yet EBITDA/Interest expense stands as 36x, which is still well above
other companies in our sample. Autos also had a large decline in interest coverage of
3.2x y/y, but still has interest coverage of 30.7x.

Energy interest coverage had a y/y decline of 2.3x to 7.9x, but q/q coverage
improved by 1.9x as EBITDA improved. Overall, most sectors had decreases in
coverage, 13out of 18 in our sample. Of the five stable or improving sectors, Metals
and Mining led the group with coverage up 2.7x to 11.2x. Consumer Products
followed with a large increase of 2.2x y/y to 22.7x.

Interest coverage improved for BBB rated companies by 0.4x y/y to 7.8x but
decreased for A rated companies by 0.2x y/y to 11.4x. Adjusting for commodity
related sectors and Utilities, coverage increased by 1.1x to 8.6x for BBB rated
companies while it declined by 0.8x to 14.7x for A rated companies.

20

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eric.beinstein@jpmorgan.com

The shift in the interest coverage distribution across issuers continues to show a
migration to lower coverage from higher rated companies on a y/y basis, the q/q
trend does show an improvement however. Currently, 44% of companies have
coverage ratios of 5-10x while this was 29% in 2012. The companies that have
migrated to the lower tail have been companies in the Energy and Utilities sectors as
well as companies completing M&A, so similar to what we observed for leverage
above. M&A worsens metrics significantly in the short term but improvements can
be seen with time if the deal is truly beneficial, allowing companies to monetize
synergies and deleverage.

Exhibit 43: Currently 44% of debt has coverage of 5-10x in our Exhibit 44: Interest coverage improved for lower rated companies
sample q/q
Interest Coverage - % of Debt Interest Coverage - All
50% 21x Interest Coverage - A
4Q12 1Q17
19x Interest Coverage - BBB
38%
40% 17x

30% 15x
24% 22% 13x
19% 20%
20% 11x
14% 12%13%
10% 10% 11%
7% 9x
10%
7x
0% 5x
0-5x 5-7.5x 7.5-10x 10-12.5x 12.5-15x 15x + 1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16
Source: J.P. Morgan

Exhibit 45: Largest Interest Coverage increases and declines


Largest Coverage Largest Coverage
Increase Decline

4Q16 3yr 4Q16 3Q16 3yr 3Q16


Covera Coverage Weight Contrib Covera Coverage Weight Contrib
# Issuer ge Change ($mn) ution # Issuer ge Change ($mn) ution
1 Dow Chemical 10.3x 3.3x 14,976 0.03x 1 Microsoft Corp 15.1x -247.8x 65,756 -8.70x
2 Amgen Inc 9.4x 1.9x 20,630 0.02x 2 OXY 11.4x -78.3x 9,204 -0.38x
3 Merck & Co Inc 21.6x 2.1x 18,566 0.02x 3 Husky Energy Inc 10.2x -224.0x 2,986 -0.36x
4 McKesson Corp 14.3x 6.0x 5,505 0.02x 4 ConocoPhillips 5.0x -28.4x 22,707 -0.34x
5 NextEra Energy 8.3x 3.0x 10,851 0.02x 5 BP PLC 19.0x -17.4x 29,292 -0.27x
6 Charter 5.3x 0.8x 37,800 0.02x 6 AbbVie Inc 10.1x -15.0x 31,284 -0.25x
7 Home Depot 13.2x 1.3x 22,533 0.02x 7 Apache Corp 6.6x -56.0x 8,314 -0.25x
8 PG&E Corp 7.0x 1.7x 16,694 0.01x 8 Oracle Corp 9.9x -8.8x 47,594 -0.22x
9 DTE 7.2x 1.9x 14,348 0.01x 9 FedEx Corp 16.5x -25.8x 11,166 -0.15x
10 Honeywell 23.9x 3.5x 7,526 0.01x 10 Teva 10.2x -14.1x 18,534 -0.14x
All Other Change -4.26x All Other Change 6.99x
Total Change -4.08x Total Change -4.08x
Note: Based on Y/Y LTM data. Source: J.P. Morgan, Capital IQ

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eric.beinstein@jpmorgan.com

Exhibit 46: Interest coverage current level, change over the last three years and range over the
last three years
Interest Coverage Percentage in 3y Range
Sector 3yr Min 3yr Max 1Q17 1Q14 1Q16 1Q17 3yr Range
Consumer Products 15.75 22.71 22.71
Telecoms - Yankees 6.85 8.61 8.61
Food/Bev erages 7.14 9.24 9.04
Utilities 4.94 5.43 5.26
Cable/TV 6.70 7.75 7.32
Automotiv e 25.91 34.96 30.65
Non-Food Retail 11.19 11.72 11.37
Telecoms - Domestic 9.30 11.23 9.76
Metals/Mining 7.76 27.50 11.22
Healthcare/HMOs 11.98 13.42 12.21
Div ersified Media 7.24 8.01 7.35
Energy 6.02 26.13 7.93
Transportation 12.26 16.43 12.55
All 10.06 14.18 10.11
Capital Goods 12.74 16.04 12.77
Chemicals 11.27 16.30 11.27
Food/Drug Retail 8.35 10.00 8.35
Pharmaceuticals/Medical Products 13.92 18.11 13.92
Technology 17.55 104.95 17.55

Note: Based on Y/Y LTM data. Source: J.P. Morgan, Capital IQ

Capex declined 9% y/y but was marginally up 2% excluding


the commodity sectors
Capex declined 9% y/y for a second consecutive quarter but was marginally up 2%
y/y excluding the Energy and Metals/Mining sectors. Commodity sectors continue to
cut Capex, with Metals and Mining cutting capex by 32% while Energy decreased
27%. This y/y comparison compares the LTM periods before and during the
commodities selloff so the changes will be extremely punitive. However on a q/q
basis Capex excluding the Energy and Metals/Mining sectors was marginally down
1%.
Outside of these two sectors Diversified Media has cut Capex by 11% driven by a
16% decline in capex in DIS (-$776mn). Other sectors to decrease Capex include
Transportation (-6%, -$1.2bn), Non Food Retail (-4%,-$772mn) and Chemicals (-
6%,-$718mn). However on the other side of the spectrum Technology, Pharma,
Automotive and Domestic Telecom companies have increased Capex substantially
by 15%, 10%, 6% and 5% y/y respectively. The increase in Tech has been driven in
large part by Dell which has increased Capex by 56% (+$3.7bn) and MSFT (+14%,
+$1.0bn).The increase in the Pharma sector was driven mainly by the $1.9bn
increase in Capex (+52%) at Roche Holdings, although there were increases in
Capex across most companies we cover in the pharma sector

22

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eric.beinstein@jpmorgan.com

Exhibit 47: Capex decreased 8.9% y/y, but was up 2.1% ex Exhibit 48: Sectors were on both ends of the spectrum in terms of
commodities sectors capex changes
700 1Q17 change LTM level
$bn $bn
($m n) % ($mn)
Capital Exp (lhs)
375 Metals/Mining -6,965 -31.5% 15,135
Energy -57,942 -27.3% 154,309
600 Div ersified Media -787 -11.3% 6,158
Transportation -1,193 -6.0% 18,603
Chemicals -718 -5.9% 11,435
325
Food/Bev erages -802 -4.6% 16,538
500 Non-Food Retail -772 -4.1% 18,116
Healthcare/HMOs -111 -2.2% 4,896
Cable/TV -98 -0.6% 15,779
275 Capital Goods -7 0.0% 14,902
400 Food/Drug Retail 18 0.2% 10,356
Utilities 770 0.7% 105,195
Telecoms - Yankees 363 1.0% 36,900
Consumer Products 247 3.1% 8,267
225
300 Telecoms - Domestic 2,050 5.1% 42,176
Pharmaceuticals/Medical Products 2,070 10.3% 22,153
Technology 5,128 15.3% 38,690
Industrials Total (ex Metals/Mining, Energy) 8,444 2.1% 409,769
200 175 Industrials Total -56,462 -8.9% 579,213
1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16
Second and third column show the change in 1Q17 vs 1Q16. The fourth column shows the 1Q17
level.
Source: J.P. Morgan

Exhibit 49: Automotives had the largest increase in Capex since 2012 Exhibit 50: Energy and Metals and Mining have cut capex due to
pressure from commodity prices
Automotive
300 Cable/TV 150
Technology
250 Utilities 125
Pharmaceuticals/Medical Products
200 100

150 75
Metals/Mining
100 50 Energy
Non-Food Retail
50 25 Capital Goods
Consumer Products
0 0
1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17
Source: J.P. Morgan

Looking at the top 5 largest increases in Capex since 2012, Automotive, Cable/TV
and Tech round out the top 3 largest increases. In Cable/TV, Comcast has invested in
Capex heavily over the recent past with the growth in fiber optic cable. The 5 sectors
with the lowest Capex growth have been stable or have had large declines due to
pressures from commodity prices.

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eric.beinstein@jpmorgan.com

Cash paid to shareholders continues to decline as


companies curtail share buybacks
Cash to Shareholders is down 6.0% (-$36bn) y/y driven mostly by declines in
commodities sectors. Commodity sectors have been driving the decrease as Energy
was down 28% (-$19bn) and Metals/mining was down 51% (-$6bn). Excluding the
commodities sectors, cash to shareholders was down 2.2% (-$12bn). On a q/q basis
cash to shareholders is about flat, down by just 0.1% (-0.8% ex commodities), as the
reductions in payouts mostly happened in 2016 in response to the commodity selloff.
Declines in cash to shareholders have been almost exclusively driven by a reduction
in share buybacks, not by a change in dividends. This corresponds to the usual trend,
with dividend payment more stable than share buybacks. Total share buybacks are
down 17.0% driven mostly by the commodities sectors. The Energy sector has turned
into net issuers of equity. Excluding the commodities sectors, share buybacks were
down 10.4%. On the other hand, dividends have increased 1.4%y/y (+6.2%y/y ex
commodities). Some of the large Energy companies have not only eliminated share
repurchases but also cut down on dividends. Dividends decreased by 12.7%y/y (-
$9.6bn) for Energy and $61.0%y/y (-$8.6bn) for Metals/Mining.
Excluding the commodities sectors, share buybacks were down 2.2% y/y, driven
mostly by Capital Goods (-47%, -$18bn) and Technology (-23%, -$17bn). In Tech,
Oracle, Dell, Apple, and Microsoft led with the largest declines in share buybacks.
Cash to shareholders increased for only four sectors: Pharma/Medical Products
(41.3%, +$33bn), Food/Beverages (39.5%, +$14bn), and Yankee Telecoms (90.9%,
+$6bn) and Domestic Telecoms (11.0%, $2bn). In Pharma, about half the increase
was driven by Allergan as the company bought back about $12bn of stock in 4Q16.
In Food/Beverages, the large ($10bn) 3Q15 equity issuance from Kraft Heinz has
fallen out of the last twelve months calculation.
A-rated Non-Financial issuers have dramatically reduced Cash to Shareholders,
down 13.1% y/y and 2.4% q/q. This ratings tranche is mainly made up of Utilities,
Food/Beverages, Energy and Pharma/Medical Products issuers. On the other hand,
BBB-rated Non-Financial Cash to Shareholders has increased 2.4% y/y and 3.1%
q/q. Lastly, Cash to shareholder at highly rated companies was down 1.5% y/y but
was about flat over the quarter.
Exhibit 51: Lower share repurchases are driving lower cash to Exhibit 52: The decline in cash to shareholders has been driven by
shareholders, as dividend payouts increased over a year Single-A rated companies
700 $bn Share Buybacks 320 $bn Cash to Share - A - All Industries
Cash to Share - BBB - All Industries
600 Dividends 270 Cash to Share - AAA/AA, Ex Energy

500 220

400 170

300 120

200 70

100 20

0 -30
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17
Source: J.P. Morgan

24

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eric.beinstein@jpmorgan.com

Exhibit 53: Cash to shareholders has been declining, driven mostly Exhibit 54: Ex-Commodities, Capital goods and Tech drove the
by the commodities sectors decline in cash to shareholders
700 $bn 1Q17 change LTM level
Cash to Shareholders ($mn) % ($mn)
Metals/Mining -5,645 -50.5% 5,540

600 Cable/TV -4,515 -49.2% 4,671


Utilities -7,669 -42.0% 10,588
Chemicals -8,078 -41.3% 11,503
Automotiv e -5,403 -32.9% 11,030
500
Energy -18,775 -28.3% 47,667
Capital Goods -16,584 -27.6% 43,394
Div ersified Media -4,990 -20.1% 19,880
400
Transportation -2,371 -13.3% 15,455
Technology -14,436 -12.8% 98,158
Food/Drug Retail -1,330 -5.0% 25,259
300 Consumer Products -774 -3.7% 20,295
Healthcare/HMOs -410 -2.6% 15,149
Non-Food Retail -638 -1.8% 35,344
200 Telecoms - Domestic 2,223 11.0% 22,511
Food/Bev erages 14,105 39.5% 49,841
Pharmaceuticals/Medical Products 33,124 41.3% 113,347
100 Telecoms - Yankees 6,131 90.9% 12,873
1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16 Industrials Total -36,036 -6.0% 562,504

Second column shows the 1Q17 level. The 3rd column shows the 1Q16 vs 1Q17 change. The
last column gives the LTM level.
Source: J.P. Morgan

Exhibit 55: Cash to shareholders has declined in some of the sectors Exhibit 56: Sectors with limited cash flow generation have decreased
with the largest increase in the past 5 years cash to shareholders in the past 5 years
Automotive Telecoms - Yankees
Technology 200 Metals/Mining
700 Food/Drug Retail Energy
Non-Food Retail Cable/TV
600 Utilities
Pharmaceuticals/Medical Products 150
500
400 100
300
200 50
100
0 0
1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17
Source: J.P. Morgan

Looking at the top 5 largest increases and decreases in cash to shareholders, Autos
has returned the most cash though recently the trend has turned. Technology has also
had a large increase as companies complete share buyback programs to enhance
shareholder returns. The largest decline was in Yankee Telecoms as Vodafone and
Telefonica curtailed cash to shareholders. Metals and Mining and Energy have been
sectors with limited cash flow generation which have cut cash to shareholders as a
response to the challenging environment in the past few years.

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eric.beinstein@jpmorgan.com

The Earnings Payout Ratio (Cash to shareholders / EBITDA) fell 4.1% y/y to
33.7% after peaking in 3Q15 at 38.7%. The largest increases and decreases in
Earnings Payout mirror the trends in Cash to Shareholders meaning that EBITDA
changes y/y were not a big explanatory factor. Excluding commodities the earnings
payout came down 3.7% to 36.9%. Capital Goods leads the declines ex commodities
sectors as its Earnings Payout Ratio fell 23% to 46%. This is followed by Chemicals
(-22% to 31%) and Cable/TV (-14% to 6%). Pharma/Medical Products, Healthcare,
Yankee Telecoms and Domestic Telecoms were the only sectors that increased the
Earnings Payout Ratio

Exhibit 57: The payout ratio (cash to shareholders/EBITDA) has Exhibit 58: Changes in the Earnings Payout Ratio have been more
been declining for the past 3 quarters influenced by Cash to Shareholders than EBITDA
40% Earnings Payout Ratio Sector 1Q17 Level Y/Y Change Sector Weight
Metals/Mining 11% -37% 2%
Capital Goods 46% -23% 6%
35% Chemicals 31% -22% 2%
Cable/TV 6% -14% 3%
Div ersified Media 45% -14% 3%
30% Automotiv e 26% -13% 3%
Technology 52% -9% 11%
Transportation 34% -8% 2%
25% Energy 22% -6% 16%
Utilities 12% -5% 12%
Consumer Products 46% -2% 2%
20%
Food/Drug Retail 50% -2% 3%
Non-Food Retail 47% -2% 4%
Food/Bev erages 50% -1% 9%
15%
Telecoms - Domestic 23% 3% 6%
Telecoms - Yankees 15% 7% 2%
Healthcare/HMOs 26% 7% 3%
10%
1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16 Pharmaceuticals/Medical Products 61% 10% 10%
Industrials Total 34% -4% 100%

Second column shows the Y/Y change from 1Q16 to 1Q17. The 3rd column shows the 1Q17
sector weight.
Source: J.P. Morgan

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eric.beinstein@jpmorgan.com

Exhibit 59: Earnings Payout Ratio current level, change over the last three years and range over
the last three years
Earnings Payout Ratio Percentage in 3y Range
Sector 3yr Min 3yr Max 1Q17 1Q14 1Q16 1Q17 3yr Range
Pharmaceuticals/Medical Products 39% 61% 61%
Telecoms - Yankees 9% 17% 15%
Food/Drug Retail 30% 59% 50%
Food/Bev erages 42% 58% 50%
Healthcare/HMOs 13% 43% 26%
Non-Food Retail 34% 64% 47%
Energy 18% 29% 22%
Telecoms - Domestic 20% 30% 23%
Consumer Products 42% 55% 46%
Cable/TV 0% 25% 6%
Utilities 12% 18% 12%
Transportation 34% 45% 34%
All 34% 39% 34%
Automotiv e 26% 46% 26%
Capital Goods 46% 72% 46%
Chemicals 31% 65% 31%
Div ersified Media 45% 80% 45%
Metals/Mining 11% 64% 11%
Technology 52% 62% 52%
Note: Based on Y/Y LTM data. Source: J.P. Morgan, Capital IQ

27

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Eric Beinstein North America Credit Research
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eric.beinstein@jpmorgan.com

Automotive
Jonathan Rau, CFA AC (212) 834-5237; jonathan.d.rau@jpmorgan.com

We expect the confluence of increased incentive spending, declining used vehicle prices, forecasted growth in off-lease
volumes, higher interest rates, and slightly elevated inventory levels to pressure the rate of light vehicle sales in the US in
2017. Negative investor and press sentiment is likely to persist, and some production cuts, particularly in the passenger car
segment, are possible later this year. While we believe that new car sales likely peaked in 2016 (at a record 17.6mm SAAR),
we do not expect the YTD decline in sales volumes to materially accelerate given a still supportive economic backdrop.
Gasoline prices remain low (positive from a vehicle mix perspective), employment trends continue to improve, and
consumer confidence is historically strong. Increasing reliance on financing to purchase vehicles, longer loan terms,
historically low interest rates, and growing reliance on leasing have all supported US consumer preferences for more
expensive vehicles, resulting in average transaction prices growing at a faster rate than average monthly payments.

Balance sheets remain conservative, and importantly so given the cyclical, competitive, and capital intensive nature of the
industry. OEMs and suppliers alike boast low leverage, ample liquidity, and pension burdens significantly below pre-crisis
peak levels. In recent years, credit metrics have improved on the OEM side, but have deteriorated among the suppliers, as
these companies utilize ample balance sheet capacity (in addition to free cash flow) to fund M&A activity and increased
shareholder returns. Longer term, an evolving industry landscape, including the development of autonomous vehicles,
proliferation of mobility platforms, and adoption of alternative energy propulsion techniques, presents additional
uncertainty.
Debt in JULI Revenue EBITDA Debt Earnings Payout
# Issuer ($mn) Share ($bn) ($bn) ($bn) Leverage Int Cov Profit Margin Ratio
1 Ford Motor Co 38,968 47% 143 13 17 1.3x 13.4x 9% 21%
2 General Motors Co 34,118 41% 160 18 11 0.6x 30.3x 11% 25%
3 Harley-Davidson Inc 4,130 5% 6 1 7 5.9x 39.2x 21% 53%
4 Delphi Automotive PLC 1,650 2% 17 3 4 1.3x 20.4x 18% 26%
5 Magna International Inc 1,467 2% 37 4 3 0.8x 41.6x 11% 27%
Sector Summary 82,403 100% 389 43 46 1.3x 30.6x 12% 26%

Change
Revenue EBITDA Debt Leverage Int Cov Profit Margin Earnings Payout
# Issuer (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) Ratio (y/y chg)
1 Ford Motor Co -1% -12% 25% 0.4x -5.1x -1% -4%
2 General Motors Co 9% 13% 3% -0.1x -4.1x 0% -12%
3 Harley-Davidson Inc -5% -12% -2% 0.6x -30.5x -2% -76%
4 Delphi Automotive PLC 10% 20% -8% -0.4x 1.8x 2% -36%
5 Magna International Inc 11% 19% -4% -0.2x -5.7x 1% -6%
Sector Summary 5% 3% 6% 0.3x -3.2x 1% -13%

LTM Revenue and EBITDA are up 5% and 3% y/y for the sector. However, Revenue and EBITDA fell for Ford Motor
by 1% and 12% y/y respectively. Ford is the largest automotive issuer in terms of debt.
Debt was up 6% y/y with the 25% increase in debt at Ford Motor Co being a major driver (at the automotive level, as
this analysis excludes the FinCo debt). Gross Leverage increased 0.3x to 1.3x which is about the highest level since
4Q13.
Interest Coverage is down 3.2x y/y to 30.6x. The sector tends to run a high level of Interest Coverage owing to its
cyclical nature. Post crisis, the average level of Interest Coverage is 25x and has ranged between 6.3x and 35.6x. Harley
Davidson saw a notable decline as interest expense increased related to debt issuance and EBITDA decreased.
Profit Margins rose by 1% y/y to 12% for the sector. Currently, Profit Margins are near the higher end of the range for
the past 5 years. The five year range is 8%-12% while the average is 10%.
Cash to Shareholders is down 32.4%. Share buybacks are down 50.8% while dividends were down 12.3% (lower y/y
supplemental dividend at Ford). The Earnings Payout Ratio is down 13% and has fallen among all of the 5 largest
companies.

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eric.beinstein@jpmorgan.com

Exhibit 1: Sector Constituents Exhibit 2: Revenue


10% Quaterly % change in Revenue
Debt outst
Sector ($mn) Share 8% Rolling 4 quarter change in Revenue
1. Ford Motor Co 38,968 47%
2. General Motors Co 34,118 41% 6%
Harley-Davidson Inc 4,130 5%
Delphi Automotive PLC 1,650 2% 4%
Magna International Inc 1,467 2% 2%
Cummins Inc 1,083 1%
Total 82,403 100% 0%

-2%

-4%
1Q12 1Q13 1Q14 1Q15 1Q16 1Q17
Exhibit 3: EBITDA Exhibit 4: Debt
Quaterly % change in EBITDA 50
Rolling 4 quarter change in EBITDA 48 Debt ($bn)
20%
46
15%
44
10% 42
40
5%
38
0% 36
34
-5%
32
-10% 30
1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 5: Cash to Shareholders Exhibit 6: Gross and Net Leverage


20 2 Gross Leverage
18 Cash to Shareholder ($bn)
1.5 Net leverage
16
14 1
12 0.5
10
8 0
6 -0.5
4
2 -1
0 -1.5
1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 7: Interest Coverage Ratio Exhibit 8: Profit Margins


12%
35x Profit Margin
11%
33x
10%
31x

29x 9%

27x 8%

25x 7%
Interest coverage
23x 6%
1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

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eric.beinstein@jpmorgan.com

Cable/Satellite
Brian Turner AC (212) 834-4035; brian.m.turner@jpmorgan.com

We maintain our Overweight recommendation on the HG Cable/Satellite sector. Overall operational themes are generally
unchanged; the video and telephony businesses remain under pressure, while residential high-speed data and commercial
services are growing market share(s) and have good pricing power. We continue to view the broadband pipe as an
increasingly valuable asset and a hedge against over-the-top (OTT) risks. Importantly, while top lines could suffer as video
consumption transitions to OTT, we believe cash flow is unlikely to be negatively impacted. The latter is due to high
incremental margins on high-speed data and the much lower margins and higher capital intensity on the video business
(programming costs/set-top box capex).

Largest issuers in the sector


Levels
Debt in JULI Revenue EBITDA Debt Earnings Payout
# Issuer ($mn) Share ($bn) ($bn) ($bn) Leverage Int Cov Profit Margin Ratio
1 Comcast 44,110 54% 82 27 62 2.3x 9.0x 33% 27%
2 Charter 37,800 46% 40 15 63 4.3x 5.3x 36% -18%
Sector
Summary 81,910 100% 120 41 123 3.2x 7.0x 34% 4%
Change
Debt
Revenue EBITDA (y/y Leverage Int Cov Profit Margin Earnings Payout
# Issuer (y/y chg) (y/y chg) chg) (y/y chg) (y/y chg) (y/y chg) Ratio (y/y chg)
1 Comcast 9% 7% 11% 0.1x -0.2x -1% -6%
2 Charter 6% 11% 5% -0.2x 0.0x 1% -24%
Sector Summary 8% 8% 8% -0.1x -0.1x 0% -14%

The sector revenue and EBITDA both picked up by 8% over the last year, with profit margins unchanged y/y.
Leverage decreased 0.1x over the year as the increase in debt was nearly offset by rising EBITDA.
Interest coverage fell marginally as companies issue more debt, and the cost of debt rose. For Charter, coverage was
unchanged while the move was only -0.2x y/y at Comcast.
The earnings payout ratio has been falling over time and is down 14% Y/Y. Charter in particular has issued equity in the
last couple of quarters to finance its acquisition of Time Warner Cable and Bright House Networks.
Capex was almost unchanged (-0.6%), compared to the increases of 7.8% and 11% seen the previous quarters

30

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Exhibit 1: Sector Constituents Exhibit 2: Revenue


Debt outst 30% Quaterly % change in Revenue
Sector ($mn) Share
1. Comcast Corp 44,110 54% 25% Rolling 4 quarter change in Revenue
2. Charter Communications 37,800 46%
Total 81,910 1 20%

15%

10%

5%

0%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 3: EBITDA Exhibit 4: Debt


18% Quaterly % change in EBITDA 130
Debt ($bn)
16% Rolling 4 quarter change in EBITDA 120
14%
110
12%
10% 100
8% 90
6%
80
4%
2% 70
0% 60
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 5: Cash to Shareholders Exhibit 6: Gross and Net Leverage


20
18 Cash to Shareholder ($bn) 3.4 Gross Leverage Net leverage
16 3.2
14 3
12
10 2.8
8 2.6
6
2.4
4
2 2.2
0 2
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 7: Interest Coverage Ratio Exhibit 8: Profit Margins


8x 38%
Interest coverage Profit Margin
8x 37%

7x 36%

7x 35%

6x 34%

6x 33%

5x 32%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

31

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Capital Goods
Ginger Chambless AC (212) 834-5481; virginia.chambless@jpmorgan.com

We recommend investors Underweight the Capital Goods sectors: HG Manufacturing and Aerospace & Defense. Our UW
on Manufacturing is based on rich relative valuation, mixed end market fundamentals, stepped up M&A activity and more
aggressive financial policies. The sector is high quality and heavily weighted toward single A issuers. Our Underweight on
Aerospace & Defense is driven by rich valuation, as sector fundamentals are solid and improving overall. The sector is also
weighted towards single A issuers. We have seen some M&A in the sector, with also a leaning towards more shareholder
friendly policies.

Largest issuers in the sector


Levels
Debt in JULI Revenue EBITDA Debt Earnings Payout
# Issuer ($mn) Share ($bn) ($bn) ($bn) Leverage Int Cov Profit Margin Ratio
1 United Technologies Corp 18,379 13% 58 10 25 2.4x 8.7x 18% 52%
2 Caterpillar Inc 18,337 13% 36 5 10 1.9x 9.4x 14% 36%
3 Deere & Co 17,789 13% 23 2 5 2.0x 9.6x 10% 31%
4 Siemens AG 16,414 12% 90 12 41 3.5x 9.2x 13% 30%
5 Lockheed Martin Corp 15,136 11% 48 6 14 2.4x 9.3x 13% 67%
Sector Summary 141,647 100% 569 84 175 2.1x 12.8x 14% 46%

Change
Revenue EBITDA Debt Leverage Int Cov Profit Margin Earnings Payout
# Issuer (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) Ratio (y/y chg)
1 United Technologies Corp 3% 0% 7% 0.2x -1.9x 0% -28%
2 Caterpillar Inc -12% 3% 3% 0.0x 0.4x 2% -34%
3 Deere & Co -5% 5% 0% -0.1x 0.8x 1% -76%
4 Siemens AG 10% 28% 33% 0.1x 0.1x 2% -24%
5 Lockheed Martin Corp 0% -6% -7% 0.0x -3.2x -1% -8%
Sector Summary 0.8% 5.5% 10% 0.0x -0.5x 0% -23%

LTM Revenue and EBITDA are up 0.8% and 5.5% y/y for the sector respectively. Revenues increased for 10 out 15
companies in our analysis while EBITDA was up for 13 out of 15 companies in our analysis. Profit Margins rose by
0.2% over the year to 14.3%. Profit Margins for the sector have remained in a narrow range of 13.6%-14.8% over the
past 5 years.
Leverage across the sector was unchanged this year as the increase in debt (10%) was balanced by a rise in EBITDA
(5.5% y/y). Leverage increased the most at United Technologies, reflecting a slight EBITDA decline and modestly
higher debt levels.
Interest coverage fell as companies take on more debt, and the cost of debt rises. Coverage fell the most for 3M Co by
7.9x, while it slipped 3.2x and 1.9x for Lockheed Martin Corp and United Technologies respectively.
The earnings payout ratio has been falling in the sector and is down 23% Y/Y. It was down by 76% Y/Y in Deere & Co
as the company halted share buybacks. All of the five largest companies had a decline in their payout ratios as buybacks
fell by $18bn for the sector.

32

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Exhibit 1: Sector Constituents Exhibit 2: Revenue


12% Quaterly % change in Revenue
Sector Debt outst ($mn) Share 10%
1. United Technologies Corp 18,379 13% Rolling 4 quarter change in Revenue
8%
2. Caterpillar Inc 18,337 13%
3. Deere & Co 17,789 13% 6%
4. Siemens AG 16,414 12% 4%
5. Lockheed Martin Corp 15,136 11%
6. Boeing Co 8,417 6% 2%
7. Honeywell International Inc 7,526 5% 0%
8. Northrop Grumman Corp 6,590 5% -2%
9. 3M Co 6,074 4%
10. BAE Systems PLC 5,499 4% -4%
11. Other 21,486 15% -6%
Total 141,647 100% 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17
Exhibit 3: EBITDA Exhibit 4: Debt
Quaterly % change in EBITDA 180
17% Debt ($bn)
Rolling 4 quarter change in EBITDA 170

12% 160
150
7%
140

2% 130
120
-3%
110
-8% 100
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 5: Cash to Shareholders Exhibit 6: Gross and Net Leverage


70 2.5
Cash to Shareholder ($bn) Gross Leverage Net leverage
60 2
50
1.5
40
1
30

20 0.5

10 0
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 7: Interest Coverage Ratio Exhibit 8: Profit Margin


18x 16%
Interest coverage Profit Margin
17x 15%

16x 14%

15x 13%

14x 12%

13x 11%

12x 10%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

33

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Chemicals
Michael Pace AC (212) 270-6530; michael.pace@jpmorgan.com

We maintain our Neutral recommendation on the Chemicals sector. We believe the continued fundamental deterioration
(particularly in fertilizers), rating agency downgrades, and M&A financing have largely been priced into spreads. Given the
pending transactions within the sector, we expect a fairly sizable amount of new issue over the course of the rest of the year.
The looming consolidation, in our view, will likely bring a wave of improved profitability and focus on integration/synergy
realization vs shareholder enhancement and incremental acquisitions. We also think the removal of supply overhang will
allow investors to focus more on bottoms up analysis and relative value opportunity vs. technicals and deal scrutiny.

Largest issuers in the sector


Levels
Debt in JULI Revenue EBITDA Debt Earnings Payout
# Issuer ($mn) Share ($mn) ($mn) ($mn) Leverage Int Cov Profit Margin Ratio
1 Dow Chemical Co/The 14,976 29% 51 9 21 2.3x 10.3x 18% 30%
2 EI Du Pont de Nemours & Co 7,920 16% 25 5 10 2.0x 14.4x 21% 37%
3 LyondellBasell Industries NV 7,568 15% 31 6 9 1.5x 13.3x 19% 59%
4 Praxair Inc 6,354 12% 11 3 9 2.7x 21.1x 33% 27%
5 Monsanto Co 5,295 10% 14 4 9 2.2x 9.6x 29% 20%
Sector Summary 51,067 100% 159 33 76 2.5x 11.3x 21% 31%

Change
Revenue EBITDA Debt Leverage Int Cov Profit Margin Earnings Payout
# Issuer (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) Ratio (y/y chg)
1 Dow Chemical Co/The 8% 4% 24% 0.4x 0.7x -1% 2%
2 EI Du Pont de Nemours & Co 1% 28% 6% -0.4x 2.8x 4% -46%
3 LyondellBasell Industries NV -1% -14% -2% 0.2x -8.0x -3% -24%
4 Praxair Inc 2% 0% 0% 0.0x 0.1x -1% -9%
5 Monsanto Co 6% 6% 2% -0.1x 0.9x 0% -85%
Sector Summary 1% -2% 6% 0.2x -0.4x -2% -22%

LTM Revenue growth y/y was 1% while LTM EBITDA growth y/y was -2%. Revenue growth has been negative for the
past 9 quarters and EBITDA growth has been negative for the past 5 quarters.
Debt growth of 6% was mostly driven by a 24% increase in debt at Dow. Dow bought Corning in 2016 and so took
Cornings ~$4.5bn of debt. Gross Leverage is up 0.2x y/y at 2.47x. This was driven by a 6% increase in debt and a 2%
decline in the EBITDA y/y.
Profit Margins at 22% are on the high side of the range since 2012 of 18.5% to 22.6%.
Cash to Shareholders has fallen by 41% y/y as shareholder activism in the sector has subsided. Share buybacks in the
sector are down 70% y/y. This has also resulted in the Earnings Payout Ratio falling 22% y/y to 35% which is the lowest
value since 2013.

34

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Exhibit 1: Sector Constituents Exhibit 2: Revenue


Debt outst Quaterly % change in Revenue
20%
Sector ($mn) Share
1. Dow Chemical Co/The 14,976 29% 15% Rolling 4 quarter change in Revenue
2. EI Du Pont de Nemours & Co 7,920 16% 10%
3. LyondellBasell Industries NV 7,568 15%
4. Praxair Inc 6,354 12% 5%
5. Monsanto Co 5,295 10% 0%
6. Agrium Inc 4,607 9%
7. Eastman Chemical Co 3,760 7% -5%
8. Potash Corp of Saskatchewan 587 1% -10%
Total 51,067 100%
-15%
-20%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 3: EBITDA Exhibit 4: Debt


46% Quaterly % change in EBITDA 80
Debt ($bn)
Rolling 4 quarter change in EBITDA 75
36%

26% 70

16% 65

6% 60

-4% 55

-14% 50
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 5: Cash to Shareholders Exhibit 6: Gross and Net Leverage


30 3.5
Cash to Shareholder ($bn) Gross Leverage Net leverage
25 3
20
2.5
15
2
10

5 1.5

0 1
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 7: Interest Coverage Ratio Exhibit 8: Profit Margins


24%
18x Interest coverage Profit Margin
23%

16x 22%
21%
14x
20%
12x 19%
18%
10x
17%
8x 16%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

35

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Consumer Products
Ginger Chambless AC (212) 834-5481; virginia.chambless@jpmorgan.com
We recommend investors Underweight HG Consumer Products. While underlying credit fundamentals are strong, the sector
trades rich and M&A event risk is elevated. Currency has been a top-line headwind given the globally diversified sales for
many of the HG CPG companies. Profit margins have been expanding due to cost cutting, productivity gains and lower input
costs. Despite the strong credit fundamentals, we believe the combination of tight spreads and M&A event risk will cause
the sector to underperform the overall market in 2017.
Largest issuers in the sector
Levels
Debt in JULI Revenue EBITDA Debt Earnings Payout
# Issuer ($mn) Share ($bn) ($bn) ($bn) Leverage Int Cov Profit Margin Ratio
1 Newell Rubbermaid Inc 10,422 27% 15 2 11 4.6x 4.9x 16% 16%
2 Procter & Gamble Co/The 9,456 25% 65 18 30 1.7x 35.8x 27% 56%
3 Unilever NV 6,125 16% 59 10 18 1.9x 15.5x 17% 44%
4 Kimberly-Clark Corp 4,877 13% 18 4 8 1.9x 12.7x 23% 50%
5 Colgate-Palmolive Co 4,038 11% 15 4 6 1.5x 47.1x 29% 52%
Sector Summary 38,225 100% 199 42 82 1.9x 22.7x 21% 46%

Change
Revenue EBITDA Debt Leverage Int Cov Profit Margin Earnings Payout
# Issuer (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) Ratio (y/y chg)
1 Newell Rubbermaid Inc 3% 29% -2% -1.4x -2.0x 3% 71%
2 Procter & Gamble Co/The -1% 2% -7% -0.2x 5.6x 1% -15%
3 Unilever NV 5% 10% 7% 0.0x 0.4x 1% 0%
4 Kimberly-Clark Corp -1% 5% -2% -0.1x -0.5x 1% -2%
5 Colgate-Palmolive Co -3% 2% -2% -0.1x -47.2x 2% -4%
Sector Summary 1.2% 5.4% -2% -0.1x 2.2x 2% -2%

LTM Revenue growth y/y was 1.2% and LTM EBITDA growth y/y was +5%. EBITDA grew at all of the five largest
companies for the sector in our analysis. Profit Margins for the sector were up 2% to 21% as cost cutting initiatives
continue to take hold. Profit Margins are at their highest level of the post crisis range of 17.3%-20.7%.
Gross leverage for the sector is at 1.9x, down 0.1x from its post crisis peak of 1.96x in 1Q16. Debt growth was down 2%
over the year. Debt level declined for 4 out of the five largest companies for the sector.
Interest Coverage at 22.7x is the highest it has been post crisis. The metric is up 2.2x y/y and has ranged between 11.4x-
22.7x in the post crisis period. This is in contrast to interest coverage for the HG Non-Financial market which is 10.7x.
Cash to Shareholders is down 4% y/y reversing the trend of y/y growth over the past 3 quarters. This was driven by a
sharp decline in share buybacks. Share buybacks were down 20% y/y while dividends continue to grow in the low single
digit range. Dividends for the sector have grown between 2-6% y/y for each of the quarters during the last four years.
The Earnings Payout ratio is down modestly as EBITDA for the sector grew while the Cash to Shareholders declined
over the year.

36

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Exhibit 1: Sector Constituents Exhibit 2: Revenue


Debt outst 8% Quaterly % change in Revenue
Sector ($mn) Share
6% Rolling 4 quarter change in Revenue
1. Newell Rubbermaid Inc 10,422 27%
2. Procter & Gamble Co/The 9,456 25% 4%
3 Unilever NV 6,125 16%
4 Kimberly-Clark Corp 4,877 13% 2%
5 Colgate-Palmolive Co 4,038 11%
6 Whirlpool Corp 1,850 5% 0%
7 Clorox Co 1,457 4%
-2%
Total 38,225 100%
-4%

-6%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 3: EBITDA Exhibit 4: Debt


10% Quaterly % change in EBITDA 90
8% Debt ($bn)
Rolling 4 quarter change in EBITDA 85
6%
80
4%
2% 75
0% 70
-2%
65
-4%
-6% 60
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 5: Cash to Shareholders Exhibit 6: Gross and Net Leverage


30 2
28 Cash to Shareholder ($bn) 1.9 Gross Leverage Net leverage
26 1.8
24 1.7
22 1.6
20 1.5
18 1.4
16 1.3
14 1.2
12 1.1
10 1
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 7: Interest Coverage Ratio Exhibit 8: Profit Margins


23x 22%
Interest coverage Profit Margin
22x
21%
21x
20%
20x
19x 19%
18x
18%
17x
17%
16x
15x 16%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

37

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Diversified Media
Brian Turner AC (212) 834-4035; brian.m.turner@jpmorgan.com
We maintain our Underweight recommendation on Diversified Media as the sector continues to face heightened scrutiny
given the pressure on advertising revenue coupled with linear subscriber erosion. We prefer media credits with higher
quality content (sports/live events and hit shows) and lower advertising exposure given the secular changes/challenges in the
industry. Overall, we note strong free cash flow profiles and (relatively) solid balance sheet positions, although the latter has
been weakening from stock buybacks and modestly sized M&A. Pending sector M&A could entice others to pair-up, but we
note largely controlled companies, which makes M&A difficult. We expect modest new supply going forward with
companies such as Viacom ($1.3bn), Discovery ($650mm), and Disney ($4bn across two issuances) having issued new debt
YTD.

Largest issuers in the sector


Levels
Debt in JULI Revenue EBITDA Debt Earnings Payout
# Issuer ($mn) Share ($bn) ($bn) ($bn) Leverage Int Cov Profit Margin Ratio
1 Time Warner Inc 22,466 31% 30 9 23 2.7x 6.3x 29% 32%
2 Walt Disney Co/The 13,208 18% 56 17 22 1.3x 38.6x 31% 51%
3 Viacom Inc 11,756 16% 13 3 13 4.4x 4.7x 22% 12%
4 CBS Corp 8,850 12% 14 3 9 2.8x 7.6x 24% 103%
5 Discovery Communications Inc 6,472 9% 7 2 8 3.3x 6.8x 37% 49%
Sector Summary 73,217 100% 145 40 87 2.7x 7.4x 27% 45%

Change
Revenue EBITDA Debt Leverage Int Cov Profit Margin Earnings Payout
# Issuer (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) Ratio (y/y chg)
1 Time Warner Inc 5% 7% -2% -0.2x 0.1x 0% -26%
2 Walt Disney Co/The 1% -1% 3% 0.0x -23.6x -1% -13%
3 Viacom Inc -1% -24% 1% 1.1x -1.2x -7% -41%
4 CBS Corp -5% -6% 10% 0.4x -1.1x 0% 26%
5 Discovery Communications Inc 2% 2% 1% -0.1x -0.3x 0% 8%
Sector Summary 1% -2% 0% -0.1x -0.3x -1% -14%

The sector revenue increased by 1% and EBITDA decreased by 2% over the year. The pace of growth in revenue has
slowed down over the past few quarters. Viacom saw a sharp decline of 24% in EBITDA over the year due to
advertising headwinds and poor performance from its film unit. Margins declined by 1% to 27% y/y but continued to
remain towards the higher end of the 5 year range of 24.3%-28.1%.
Leverage declined by a marginal 0.1x y/y to 2.7x over the year as debt remained unchanged but EBITDA declined by
2%.
Interest coverage for the sector fell 0.3x y/y to 7.4x. Time Warner Inc was the only company in the sector for which
interest coverage ratio did not decline.
The earnings payout ratio declined by 14% Y/Y to 45% driven by declines for the 3 largest issuers in the sector.

38

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Exhibit 1: Sector Constituents Exhibit 2: Revenue


Debt outst 10% Quaterly % change in Revenue
Sector ($mn) Share
1. Time Warner Inc 22,466 31% 8% Rolling 4 quarter change in Revenue
2. Walt Disney Co/The 13,208 18%
3. Viacom Inc 11,756 16% 6%
4. CBS Corp 8,850 12%
5. Discovery Communications Inc 6,472 9% 4%
6. Thomson Reuters Corp 5,326 7%
7. Omnicom Group Inc 5,138 7% 2%
8. Twenty-First Century Fox Inc 0 0%
Total 73,217 100% 0%

-2%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 3: EBITDA Exhibit 4: Debt


Quaterly % change in EBITDA 90
16% Debt ($bn)
Rolling 4 quarter change in EBITDA 85
80
11%
75
70
6%
65

1% 60
55
-4% 50
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 5: Cash to Shareholders Exhibit 6: Gross and Net Leverage


30
Cash to Shareholder ($bn) 2.9 Gross Leverage Net leverage
25 2.7
20 2.5

15 2.3
2.1
10
1.9
5
1.7
0 1.5
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 7: Interest Coverage Ratio Exhibit 8: Profit Margins


10x 30%
Interest coverage Profit Margin
10x 29%
9x 28%
9x 27%
8x 26%
8x 25%
7x 24%
7x 23%
6x 22%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

39

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Energy
Matthew A. Anavy, CFA AC (212) 834-3568; matthew.a.anavy@jpmorgan.com
We maintain our Overweight rating on the Pipeline, Midstream, MLP sub-sector as we continue to see value in the space
and expect rising hydrocarbon volumes through the year to lend further support to sub-sector fundamentals. We would
expect further spread compression in a range-bound commodity price environment on the back of improving fundamentals,
and believe the new administration will continue to support midstream infrastructure development. Midstream companies
remain focused on balance sheet strength and healthy distribution coverage to support IG ratings, and have taken various
actions ranging from lowering capex requirements through JVs and project deferrals, issuing equity and hybrids, and
corporate simplification.

We remain Neutral on the Integrated, E&P, Refining, and Services sub-sectors. E&Ps have benefited from a recent modest
recovery in commodity prices and plan to increase activity in 2017 to support production and cash flow growth. E&Ps are
planning for service cost inflation of up to ~15%, though we do not expect this to translate into significant outperformance
of the servicers space. We have seen several of the large services providers calling a bottom of activity levels during 1Q17:
SBL, HAL, and BHI all expect North America to lead the recovery while International markets may follow late in 2017.
However, customers plan to primarily allocate capital to short-cycle shale investments. Integrateds have also benefited from
improved Upstream earnings though shareholder return remains a significant call on cash, partially offset by large asset
sales programs underway at several of the companies. Refiners plan to continue growing their MLPs to support significant
shareholder return, and notably MPC is accelerating drop-downs to MPLX and reviewing its ownership of Speedway
following activist pressure.

Largest issuers in the sector


Levels
Debt in JULI Revenue EBITDA Debt Earnings Payout
# Issuer ($mn) Share ($bn) ($bn) ($bn) Leverage Int Cov Profit Margin Ratio
1 Royal Dutch Shell PLC 38,991 10% 257 40 92 2.3x 8.5x 13% 31%
2 BP PLC 29,292 8% 200 21 62 3.0x 19.0x 10% 24%
3 Kinder Morgan Inc/DE 25,214 6% 13 7 38 5.6x 3.3x 46% 15%
4 ConocoPhillips 22,707 6% 26 8 24 2.9x 5.0x 24% 24%
5 Chevron Corp 21,222 5% 119 23 45 2.0x 28.3x 15% 44%
Sector Summary 390,208 100% 1,384 211 711 3.9x 7.9x 21% 22%

Change
Revenue EBITDA Debt Leverage Int Cov Profit Margin Earnings Payout
# Issuer (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) Ratio (y/y chg)
1 Royal Dutch Shell PLC 4% 19% 13% -0.1x -2.2x 5% -12%
2 BP PLC -3% -6% 9% 0.6x -4.6x 0% -5%
3 Kinder Morgan Inc/DE -5% -7% -9% -0.1x -0.1x -2% -5%
4 ConocoPhillips -3% 17% -17% -1.2x -0.1x 6% -37%
5 Chevron Corp -2% -7% 7% 0.3x -17.4x 1% -3%
Sector Summary -2% 3% 6% -0.1x -2.3x -1% -6%

LTM Revenue decreased by 2% while EBITDA increased by 3% y/y. However, both revenue (+9% q/q) and EBITDA
(+18% q/q) were up over the quarter driven by a recovery in commodity prices.
Debt increased by 6%, which is less than the HG Non-Financial universe debt growth of 10.%. Companies across the
sector have focused on balance sheet strength and several have reduced gross debt with asset sale proceeds, equity
issuances and retained excess cash flow.
Gross Leverage has decreased materially over the quarter, down 0.7x to 3.9x. Gross leverage continues to remain
towards the higher end of post crisis range of 1.6x to 4.6x but has significantly declined from its peak reached in 3Q16
driven by a improvement in EBITDA levels.
Interest coverage for the sector has improved over the quarter but is still worse than in 1Q16. Interest coverage declined
by 2.3x over the year to 7.9x but has improved by 0.8x from its post crisis low of 7.1x reached last quarter. This is the
first quarter in the past 3 years when the sector saw an improvement in interest coverage on a quarter on quarter basis.

40

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Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Profit Margins for the sector declined by 1% y/y to 21% but were up 0.4% from last quarter. Companies have also
limited capex by reducing activity levels, deferring projects, and forming JVs, and LTM capex accordingly declined by
27.3% y/y.
Cash to Shareholders declined by 28% YoY as many companies lowered dividends, suspended share repurchase
programs, or both. Additionally, several have issued equity over the last year to help reduce debt and fund capex and
acquisitions. The Earnings Payout Ratio ticked down by 6%.

Exhibit 1: Sector Constituents Exhibit 2: Revenue


Debt outst 34% Quaterly % change in Revenue
Sector ($mn) Share
1. Royal Dutch Shell PLC 38,991 10% 24% Rolling 4 quarter change in Revenue
2. BP PLC 29,292 8% 14%
3. Kinder Morgan Inc/DE 25,214 6%
4. ConocoPhillips 22,707 6% 4%
5. Chevron Corp 21,222 5%
6. Enterprise Products Partners LP 20,465 5% -6%
7. Exxon Mobil Corp 19,109 5%
8. Energy Transfer Partners LP 18,760 5% -16%
9. StatoilHydro ASA 14,377 4%
-26%
10. TransCanada Corp 14,186 4%
11. Other 165,9885 53% -36%
Total 390,208 100% 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 3: EBITDA Exhibit 4: Debt


Quaterly % change in EBITDA
28% 690 Debt ($bn)
Rolling 4 quarter change in EBITDA
18% 640
8% 590
-2% 540
-12% 490

-22% 440

-32% 390

-42% 340
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 5: Cash to Shareholders Exhibit 6: Gross and Net Leverage


110 5
Cash to Shareholder ($bn) Gross Leverage Net leverage
100 4.5

90 4
3.5
80
3
70
2.5
60
2
50 1.5
40 1
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

41

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Exhibit 7: Interest Coverage Ratio Exhibit 8: Profit Margins


30%
31x Interest coverage Profit Margin
28%
26x
26%
21x
24%
16x
22%

11x 20%

6x 18%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

42

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Food, Beverages and Tobacco


Ginger Chambless AC (212) 834-5481; virginia.chambless@jpmorgan.com
We recommend investors Underweight the HG Food/Beverage and Tobacco sectors. While underlying credit fundamentals
are strong, the sectors trade rich and M&A event risk is high. Revenue trends have been muted as contributions from pricing
and mix have been offset by slight volume declines. Profit margins have been expanding due to cost cutting, productivity
gains and lower input costs. Currency has been a headwind to reported results, but is not a material credit concern.
Significant M&A in the beer sector during 2016 should result in a focus on deleveraging over the next couple of years for
ABInbev and Molson Coors. Pending M&A in the tobacco sector could result in some issuance as well as the potential for
future deleveraging. We believe the combination of tight spreads and event risk will cause the sectors to underperform the
overall market in 2017.
Largest issuers in the sector
Levels
Debt in JULI Revenue EBITDA Debt Earnings Payout
# Issuer ($bn) Share ($bn) ($bn) ($bn) Leverage Int Cov Profit Margin Ratio
1 Anheuser-Busch InBev NV 76,513 36% 49 17 123 7.0x 3.4x 36% 42%
2 PepsiCo Inc 27,084 13% 63 12 39 3.1x 9.2x 20% 53%
3 The Kraft Heinz Company 24,035 11% 26 8 33 4.3x 6.4x 29% 50%
4 Philip Morris International Inc 20,731 10% 27 12 31 2.7x 10.9x 43% 56%
5 Coca-Cola Co/The 15,985 8% 41 11 48 4.2x 14.3x 28% 69%
Sector Summary 213,087 100% 316 92 352 3.3x 9.0x 32% 50%

Change
Revenue EBITDA Debt Leverage Int Cov Profit Margin Earnings Payout
# Issuer (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) Ratio (y/y chg)
1 Anheuser-Busch InBev NV -15% -17% 2% 1.3x -3.6x -1% -6%
2 PepsiCo Inc 0% 3% 10% 0.2x -2.8x 1% -14%
3 The Kraft Heinz Company 17% 5% 30% 0.8x 1.1x -3% 151%
4 Philip Morris International Inc 2% 4% 5% 0.0x 0.8x 1% -1%
5 Coca-Cola Co/The -7% -7% 1% 0.3x -7.7x 0% 5%
Sector Summary -3% -1% 5% 0.2x 1.1x 0% -1%

The sector had a decline in Revenue of 3% y/y and a decline of EBITDA of 1% y/y. Anheuser Busch struggled with
sales in Brazil and was also hurt by our M&A adjustment. We add up levels for the 2 companies combined pre meger,
but post-merger the companies divested assets resulting in a lower combined revenue and EBITDA. We expect this to
fade a year after all of the asset sales are complete. Profit Margins for the sector were unchanged at 32% However, Profit
Margins for the sector remain towards the higher end of their post crisis range of 28-32%.
Leverage for the sector increased by 0.2x to 3.3x. Gross leverage for the sector is at the highest level for the ratio since
the first quarter of 2000 at least as companies issue debt for M&A.
Interest coverage for the sector rose by 1.1x over the year to 9.0x as Kraft Heinz had significant EBITDA increase
continuing to monetize synergies post the merger. Interest expense for the sector increased by 19% y/y with the most
significant increase at ABIBB.
The earnings payout ratio declined 1% Y/Y as 3 companies in our sample decreased their payout ratio. Cash to
shareholders increased 40% over the year driven by an increase in share buybacks of $13bn.

43

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Exhibit 1: Sector Constituents Exhibit 2: Revenue


Debt outst
Sector ($mn) Share 15% Quaterly % change in Revenue
1. Anheuser-Busch InBev NV 76,513 36%
2. PepsiCo Inc 27,084 13% Rolling 4 quarter change in Revenue
10%
3. The Kraft Heinz Company 24,035 11%
4. Philip Morris International Inc 20,731 10%
5. Coca-Cola Co/The 15,985 8% 5%
6. Altria Group Inc 14,293 7%
7. Reynolds American Inc 12,719 6%
0%
8. Diageo PLC 5,933 3%
9. General Mills Inc 5,119 2%
10. Kellogg Co 5,021 2% -5%
11. Other 5,654 3%
Total 213,087 100%
-10%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17
Exhibit 3: EBITDA Exhibit 4: Debt
Quaterly % change in EBITDA 350
15% Debt ($bn)
Rolling 4 quarter change in EBITDA 330

10% 310
290
5%
270
0% 250
230
-5%
210
-10% 190
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 5: Cash to Shareholders Exhibit 6: Gross and Net Leverage


60 3.5
Cash to Shareholder ($bn) Gross Leverage Net leverage
50 3
40
2.5
30
2
20
1.5
10

0 1
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 7: Interest Coverage Ratio Exhibit 8: Profit Margins


12x 33%
Interest coverage Profit Margin
11x
32%
10x
31%
9x
30%
8x

7x 29%

6x 28%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

44

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Food/Drug Retail
Ginger Chambless AC (212) 834-5481; virginia.chambless@jpmorgan.com

We recommend investors Neutral weight Food/Drug Retail. The credit profile of the sector has deteriorated over the past
couple of years due to higher leverage for M&A (CVS, Walgreens, Kroger) and more aggressive financial policies
(McDonalds). Due to some associated negative rating actions, the sector is now solidly BBB. Food/Drug Retail trades
roughly in line with the overall index.
Largest issuers in the sector
Levels
Debt in JULI Revenue EBITDA Debt Earnings Payout
# Issuer ($mn) Share ($bn) ($bn) ($bn) Leverage Int Cov Profit Margin Ratio
1 CVS Caremark Corp 25,857 37% 179 13 27 3.1x 8.6x 8% 50%
2 McDonald's Corp 15,003 22% 24 9 27 3.7x 7.8x 47% 94%
3 Walgreen Co 14,449 21% 116 8 19 4.1x 6.7x 10% 18%
4 Kroger Co/The 10,585 15% 115 6 14 3.0x 8.9x 6% 32%
5 Starbucks Corporation 3,294 5% 22 5 4 2.1x 14.2x 28% 45%
Sector Summary 69,187 100% 457 41 92 3.4x 8.3x 17% 50%

Change
Revenue EBITDA Debt Leverage Int Cov Profit Margin Earnings Payout
# Issuer (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) Ratio (y/y chg)
1 CVS Caremark Corp 12% 6% 0% -0.2x 0.0x -1% 6%
2 McDonald's Corp -4% 5% 17% 0.2x -0.7x 3% -22%
3 Walgreen Co 0% -3% 35% 0.6x -0.7x 0% -8%
4 Kroger Co/The 5% 2% 16% 0.3x -0.4x 0% 17%
5 Starbucks Corporation 9% 10% 32% 0.0x 0.3x 0% -17%
Sector Summary 6% 4% 15% 0.2x -0.4x 0% -2%

Revenue for the sector increased 6% Y/Y while EBITDA has picked up slightly less at 4% Y/Y. McDonalds was the
only company in the sector to record a decline in revenues, due to continued refranchising of its restaurants as well as
currency headwinds. Margins for the sector increased by 0.5% to 17%. Margins have remained stable between 16.1-
17.5% since the crisis.
Leverage rose by 0.2x to 3.4x as the increase in debt outpaced the rising EBITDA. Debt for the sector grew at 15% y/y
with debt growing for all companies in the sector apart from CVS. Debt levels were flat over the year for CVS.
Interest coverage fell as companies took on more debt, and the cost of debt rose. Interest coverage ratio rose for
Starbucks and was flat for CVS but declined for every other company in the sector.
The earnings payout ratio decreased by 2% Y/Y and 4% Q/Q to 50%. Earnings payout ratio decreased the most for
McDonalds while it increased the most for Kroger.

45

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Exhibit 1: Sector Constituents Exhibit 2: Revenue


Debt outst 12% Quaterly % change in Revenue
Sector ($mn) Share 10%
1. CVS Caremark Corp 25,857 37% Rolling 4 quarter change in Revenue
2. McDonald's Corp 15,003 22% 8%
3. Walgreen Co 14,449 21% 6%
4. Kroger Co/The 10,585 15% 4%
5. Starbucks Corporation 3,294 5%
Total 69,187 100% 2%
0%
-2%
-4%
-6%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 3: EBITDA Exhibit 4: Debt


12% Quaterly % change in EBITDA 100
10% Debt ($bn)
Rolling 4 quarter change in EBITDA 90
8%
80
6%
70
4%
60
2%
50
0%
-2% 40

-4% 30
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 5: Cash to Shareholders Exhibit 6: Gross and Net Leverage


30
Cash to Shareholder ($bn) 3.4 Gross Leverage Net leverage
25 3.2
20 3

15 2.8
2.6
10
2.4
5
2.2
0 2
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 7: Interest Coverage Ratio Exhibit 8: Profit Margins


11x 18%
Interest coverage 18% Profit Margin
11x 18%
10x 17%
17%
10x 17%
17%
9x 17%
9x 16%
16%
8x 16%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

46

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 30 November 2016
eric.beinstein@jpmorgan.com

Healthcare
Brett G. Gibson AC (212) 270-7484; brett.g.gibson@jpmorgan.com
We recommend a Neutral for Healthcare Services. Pending M&A in Managed Care has taken a break (for now) with
ANTM deciding not to appeal a court decision against the proposed CI acquisition. However, the sector remains uncertain
with a legal battle pending over the ANTM/CI deal break fee and continued Healthcare reform headlines on Capitol Hill.
Both ANTM and CI have also publicly expressed interest in pursuing strategic alternatives as well, and it appears that
shareholder returns across the sector are likely to increase y/y in the wake of these recent deal breaks. That said, we take
solace in steady Commercial segment trends and believe these names will be able to weather any market changes resulting
from regulatory actions as they are likely to be involved in finding new solutions. Separately, we continue to be comfortable
with Distributor exposures as we see companies maintaining strong credit profiles despite some concerns around generic
market trends and some degree of additional competition in core businesses. Also contributing to the view, we anticipate
limited issuance and M&A in 2017 for the subsector.
Largest issuers in the sector
Levels
Debt in JULI Revenue EBITDA Debt Earnings Payout
# Issuer ($mn) Share ($bn) ($bn) ($bn) Leverage Int Cov Profit Margin Ratio
1 UnitedHealth Group Inc 26,801 32% 189 16 34 2.1x 14.5x 8% 21%
2 WellPoint Inc 11,882 14% 87 6 17 2.9x 8.0x 7% 9%
3 Express Scripts Holding Co 11,754 14% 100 7 16 2.1x 10.4x 7% 33%
4 Aetna Inc 11,372 14% 63 6 9 1.6x 8.5x 9% 64%
5 McKesson Corp 5,505 7% 199 4 9 1.9x 14.3x 2% 56%
Sector Summary 83,880 100% 749 50 104 2.2x 12.2x 9% 26%

Change
Revenue EBITDA Debt Leverage Int Cov Profit Margin Earnings Payout
# Issuer (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) Ratio (y/y chg)
1 UnitedHealth Group Inc 14% 24% 1% -0.5x 0.3x 1% 3%
2 WellPoint Inc 8% 7% -1% -0.2x -0.2x 0% -13%
3 Express Scripts Holding Co -1% 7% -6% -0.3x -2.6x 1% -92%
4 Aetna Inc 3% 6% 21% 0.2x -5.5x 0% 53%
5 McKesson Corp 4% -5% 5% 0.2x 1.2x 0% 18%
Sector Summary 6% 12% 1% -0.2x -0.4x 0% 7%

The sector has had steady revenue increase in the 1-2% range for the past 4 quarters, with a 6% Y/Y growth in revenues,
driven by United Health Group (+14%, Y/Y). EBITDA has grown +12% Y/Y, but increased by only 1% Q/Q.
UnitedHealth had significant EBITDA growth due to the impressive performance our of its Optum services unit.
Debt increased marginally by 1% Y/Y, but decreased by 9% over the quarter (we note that the majority of this decline is
due to a Special Mandatory Redemption of Aetna bonds). Humana was the only company with a significant rise in debt
(26% Q/Q) as the company releveraged its balance sheet in the wake of the failed combination with AET.
Leverage decreased slightly, (0.2x Y/Y) as EBITDA continued to pick up while the increase in debt was marginal.
Interest coverage fell marginally, -0.4x Y/Y. This was mainly driven by Aetna (-5.5x, Y/Y) and Express Scripts (-2.6x,
Y/Y). McKessons interest coverage increased by 0.2x in that time period.
The overall earnings payout ratio increased by 7% Y/Y. Anthem and Express Scripts saw decreases of 13% (Y/Y) and
92% (Y/Y) respectively while Aetna and McKesson Corp increased their payout ratios by 53% (Y/Y) and 18% (Y/Y)
respectively.

47

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Exhibit 1: Sector Constituents Exhibit 2: Revenue


Debt outst 14% Quaterly % change in Revenue
Sector ($mn) Share
12% Rolling 4 quarter change in Revenue
1. UnitedHealth Group Inc 26,801 32%
2. WellPoint Inc 11,882 14% 10%
3. Express Scripts Holding Co 11,754 14%
8%
4. Aetna Inc 11,372 14%
5. McKesson Corp 5,505 7% 6%
6. Laboratory Corp of America Holdings 4,782 6%
7. CIGNA Corp 4,624 6% 4%
8. Humana Inc 3,703 4% 2%
9. Quest Diagnostics Inc/DE 3,457 4%
Total 83,880 100% 0%
-2%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 3: EBITDA Exhibit 4: Debt


Quaterly % change in EBITDA 120
18% Debt ($bn)
Rolling 4 quarter change in EBITDA 110
100
13%
90
80
8%
70

3% 60
50
-2% 40
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 5: Cash to Shareholders Exhibit 6: Gross and Net Leverage


20 3
18 Cash to Shareholder ($bn) Gross Leverage Net leverage
2.5
16
14 2
12 1.5
10
8 1
6 0.5
4
2 0
0 -0.5
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 7: Interest Coverage Ratio Exhibit 8: Profit Margins


16x 10%
16x Interest coverage Profit Margin
15x
10%
15x
14x
14x 9%
13x
13x
9%
12x
12x
11x 8%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

48

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Metals and Mining


Brian Turner AC (212) 834-4035; brian.m.turner@jpmorgan.com

We maintain our Overweight recommendation given a more supportive commodity price environment and recent proactive
balance sheet deleveraging. Management teams have also focused on cost reductions which should help insulate relative
profitability should we see incremental stress in underlying metal prices. Spreads have tightened YTD (from a ~97bps to
~77bps discount to the JULI), but have recently been under a bit of pressure given declining prices for iron ore and, to a
lesser extent, nickel and zinc. While levels are certainly less compelling today vs. a year ago, we think fundamentals
continue to be supportive and support the higher level sector recommendation. The commodity strategists recently lowered
their base metal price estimates for 2017 by 2-9% (ex. aluminum) depending on the specific metal due to expected looser
2H market conditions. Precious metal prices are expected to increase into year-end, and 2017 price estimates were raised by
1-2%, while iron ore forecasts were reduced by 9% to $67/t given the mark-to-market. Our economists recently increased
their forecast for 2017 China real GDP growth to 6.7%.

Largest issuers in the sector


Levels
Debt in JULI Revenue EBITDA Debt Earnings Payout
# Issuer ($mn) Share ($bn) ($bn) ($bn) Leverage Int Cov Profit Margin Ratio
1 Rio Tinto PLC 10,873 26% 34 14 18 1.3x 15.4x 40% 20%
2 BHP Billiton Ltd 10,201 24% 34 16 34 2.2x 12.0x 46% 13%
3 Barrick Gold Corp 6,681 16% 9 4 8 1.8x 7.2x 49% 2%
4 Glencore Funding LLC 4,709 11% 153 8 33 4.1x 4.8x 5% 1%
5 Newmont Mining Corp 4,395 10% 7 3 5 1.7x 9.9x 37% 3%
Sector Summary 42,078 100% 257 48 104 2.0x 11.2x 37% 11%

Change
Revenue EBITDA Debt Leverage Int Cov Profit Margin Earnings Payout
# Issuer (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) Ratio (y/y chg)
1 Rio Tinto PLC 1% 17% -24% -0.7x 1.8x 6% -27%
2 BHP Billiton Ltd 2% 293% -11% -7.4x 6.2x 34% -123%
3 Barrick Gold Corp -1% 18% -15% -0.7x 2.2x 8% -1%
4 Glencore Funding LLC -9% 8% -14% -1.1x 0.3x 1% 11%
5 Newmont Mining Corp -7% 12% -19% -0.7x 2.4x 6% 1%
Sector Summary -5% 48% -15% -2.3x 2.7x 12% -37%

The revenue decreased 5% Y/Y across the sector. Metals and Mining has been steadily declining since 3Q14.
EBITDA rose 48% Y/Y due to a 293% increase in BHP Billiton Ltd. EBITDA has been negative in the sector since
3Q14, turning positive in 3Q16 owing to an 82% Q/Q increase in BHP Billiton. Ex BHP Billiton however, the majority
of our sample has also seen a positive EBITDA change this quarter (5 out of the remaining 6 companies). Margins
increased 12% Y/Y, again due to a 34% Y/Y increase in BHP Billiton. BHP has benefitted from a rebound in
commodity prices, in particular iron ore as well as an increase in productivity.
Leverage decreased by 2.3x due to a decrease in debt (-15% Y/Y) and increase in EBITDA. Leverage reduced
significantly for BHP Billiton, -7.4x Y/Y.
Interest coverage rose by 2.7x y/y owing to EBITDA increase in BHP Billiton.
The earnings payout ratio fell 37% Y/Y due to a sharp decline in the payout ratio in BHP Billiton (-123% Y/Y). Payout
ratio decreased Y/Y for the top three companies in the sector but increased for Glencore and Newmont.

49

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Exhibit 1: Sector Constituents Exhibit 2: Revenue


Debt outst 34% Quaterly % change in Revenue
Sector ($mn) Share
1. Rio Tinto PLC 10,873 26% 24% Rolling 4 quarter change in Revenue
2. BHP Billiton Ltd 10,201 24%
3. Barrick Gold Corp 6,681 16% 14%
4. Glencore Funding LLC 4,709 11%
5. Newmont Mining Corp 4,395 10% 4%
6. Nucor Corp 3,132 7%
7. Goldcorp Inc. 2,086 5% -6%
Total 42,078 100%
-16%

-26%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 3: EBITDA Exhibit 4: Debt


70% Quaterly % change in EBITDA 160
Debt ($bn)
Rolling 4 quarter change in EBITDA 150
50%
140
30% 130
120
10%
110
-10% 100
90
-30% 80
-50% 70
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 5: Cash to Shareholders Exhibit 6: Gross and Net Leverage


20 5
Cash to Shareholder ($bn) Gross Leverage Net leverage
15 4.5
10 4
5 3.5
0 3
-5 2.5
-10 2
-15 1.5
-20 1
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 7: Interest Coverage Ratio Exhibit 8: Profit Margins


87x 49%
Interest coverage Profit Margin
77x
44%
67x
57x 39%
47x
37x 34%
27x
29%
17x
7x 24%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

50

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Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Non-Food Retail
Ginger Chambless AC (212) 834-5481; virginia.chambless@jpmorgan.com
We recommend investors Underweight the HG Non-Food Retail sector. This is based on rich relative value, as credit
profiles have been stable on generally steady retail sales and earnings. The composition of the sector is weighted towards
high quality issuers (WMT/TGT/HD/LOW > 75% of the index) with the more cyclical department stores comprising a
much smaller percentage.
Largest issuers in the sector
Levels
Debt in JULI Revenue EBITDA Debt Earnings Payout
# Issuer ($mn) Share ($bn) ($bn) ($mn) Leverage Int Cov Profit Margin Ratio
1 Wal-Mart Stores Inc 32,106 38% 488 33 46 1.9x 11.3x 7% 39%
2 Home Depot Inc 22,533 26% 96 16 23 1.8x 13.2x 17% 63%
3 Lowe's Cos Inc 13,640 16% 67 7 16 2.5x 9.9x 12% 59%
4 Target Corp 9,842 12% 69 7 13 1.9x 9.4x 11% 59%
5 Macy's Inc 5,171 6% 25 3 7 2.9x 7.1x 12% 20%
Sector Summary 85,503 100% 866 71 110 2.0x 11.4x 9% 47%

Change
Revenue EBITDA Debt Leverage Int Cov Profit Margin Earnings Payout
# Issuer (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) Ratio (y/y chg)
1 Wal-Mart Stores Inc 1% -1% -8% -0.1x -0.4x 0% 3%
2 Home Depot Inc 6% 11% 9% -0.1x 1.1x 1% -4%
3 Lowe's Cos Inc 11% 0% 4% 0.1x -1.2x -1% -3%
4 Target Corp -5% -3% -10% -0.1x -2.1x 0% -4%
5 Macy's Inc -5% -14% -12% 0.1x -0.8x -1% -40%
Sector Summary 2% 1% -3% -0.1x -0.3x 0% -2%

LTM Revenue and EBITDA grew 2% and 1% y/y. Despite poor 1Q17 results from some of the sector constituents, the
overall level of LTM Revenue and EBITDA is the highest it has been since 2000.
Debt is down marginally 3% y/y and Gross Leverage fell by 0.1x to 2.0x over the same time horizon. Gross leverage has
been extremely stable post crisis averaging 2.0x with a range of 1.91x to 2.08x. Gross leverage remained relatively
stable for all companies in our analysis
Interest coverage for the sector fell by 0.3x y/y to 11.4x. Post crisis, the ratio has averaged 11.5x within a narrow range
of 10.85x and 11.92x.
Profit margin for the sector was marginally lower over the year, down 0.1% at 9.3%. Profit Margins for the sector have
been quite stable post crisis with a range of 9.3% to 10.8%. The sector has one of the lowest Profit Margins compared to
other sectors in our overall universe.
LTM Cash to Shareholders was down 2% y/y. Dividends were up 5% though Share Buybacks were down 5%. The
Earnings Payout Ratio is down 2% y/y with the ratio decline at 5 out of 6 companies in our analysis. Earnings payout
ratio declined most significantly at Macys as the company pulled back on share repurchase activity in the midst of weak
operating results.

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Eric Beinstein North America Credit Research
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eric.beinstein@jpmorgan.com

Exhibit 1: Sector Constituents Exhibit 2: Revenue


Debt outst 10% Quaterly % change in Revenue
Sector ($mn) Share
1. Wal-Mart Stores Inc 32,106 38% 8% Rolling 4 quarter change in Revenue
2. Home Depot Inc/The 22,533 26%
3. Lowe's Cos Inc 13,640 16% 6%
4. Target Corp 9,842 12%
5. Macy's Inc 5,171 6% 4%
6. Costco Wholesale Corp 2,212 3%
Total 85,503 100% 2%

0%

-2%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 3: EBITDA Exhibit 4: Debt


10% Quaterly % change in EBITDA 120
Debt ($bn)
8% Rolling 4 quarter change in EBITDA 115

6% 110
105
4%
100
2%
95
0% 90
-2% 85
-4% 80
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 5: Cash to Shareholders Exhibit 6: Gross and Net Leverage


40 2.5
Cash to Shareholder ($bn) 2.4 Gross Leverage Net leverage
35 2.3
30 2.2
2.1
25 2
1.9
20
1.8
15 1.7
1.6
10 1.5
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 7: Interest Coverage Ratio Exhibit 8: Profit Margins


12x 12%
12x Interest coverage Profit Margin
12%
12x
11%
11x
11x 11%
11x 10%
11x 10%
11x
9%
10x
10x 9%
10x 8%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

52

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Pharmaceuticals
Brett Gibson AC (212) 270-7484; brett.g.gibson@jpmorgan.com

We divide our view of the overall Pharma/Devices space into three subsectors. We hold a Neutral view for Biotech and
Generics as we believe potential repatriation efforts could benefit Biotech companies (though reform now appears less
likely in 2017), but we see that offset by branded drug pricing trends, increased levels of scrutiny from Washington, and
potential for changes in the system. On the Generics side, we take a cautious view of fundamentals thanks to continued price
deflation, little possible benefit from repatriation, and aggressive delevering plans which may be difficult to achieve.
Separately, we still rate Large-Cap pharma an UW as tight valuations and concerns over branded pricing leave us with a
cautious view of the subsector, though possible tax repatriation could benefit it and issuers should generally maintain strong
balance sheets regardless. In Medical Devices we carry a Neutral view as M&A and shareholder returns have become more
of a priority across our coverage universe there and possible healthcare reform could weaken utilization trends, though
operating performance has been and should continue to be fair from a credit markets standpoint.
Largest issuers in the sector
Levels
Debt in JULI Revenue EBITDA Debt Earnings Payout
# Issuer ($mn) Share ($bn) ($bn) ($bn) Leverage Int Cov Profit Margin Ratio
1 AbbVie Inc 31,284 13% 26 11 37 3.3x 10.1x 42% 93%
2 Pfizer Inc 28,050 11% 53 20 44 2.2x 16.7x 38% 56%
3 Medtronic Inc 23,355 10% 29 9 32 3.7x 8.1x 30% 75%
4 Actavis plc 22,180 9% 15 7 32 4.9x 5.2x 44% 236%
5 Amgen Inc 20,630 8% 23 12 34 2.8x 9.4x 53% 49%
Sector Summary 244,035 100% 477 167 396 2.8x 13.9x 35% 61%

Change
Revenue EBITDA Debt Leverage Int Cov Profit Margin Earnings Payout
# Issuer (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) Ratio (y/y chg)
1 AbbVie Inc 10% 11% 17% 0.2x -1.6x 0% -16%
2 Pfizer Inc 3% 2% 12% 0.2x 0.4x -1% -3%
3 Medtronic Inc 1% 0% 3% 0.1x 1.8x 0% 23%
4 Actavis plc -12% -13% -25% -0.8x -0.3x 0% 236%
5 Amgen Inc 3% 10% -1% -0.3x -0.3x 3% 7%
Sector Summary 3% 6% 13% 0.4x -2.0x 0% 10%

The increase in revenue (+3%, Y/Y) was on a higher side relative to the past few years, led by AbbVie (post-
Stemcentryx) and Amgen on continued strong product performance. EBITDA growth has also shown a similar trend
over the last 4 quarters, with a 6% Y/Y increase in the last quarter led by the same names but offset by Allergan
following the divestiture of its generics business to Teva.
Leverage grew by 0.4x as debt grew by 13% over the year, outpacing EBITDA growth. AbbVie had the largest
percentage increase in debt out of the top 5 companies, with funding for Stemcentryx and issuance overseas driving a
17% increase.
Increases in debt and interest expense resulted in lower interest coverage for the sector. Interest coverage fell by 2.0x
Y/Y to 13.9x, driven mainly by AbbVie on the back of increased debt issuance (-1.6x, Y/Y).
The earnings payout ratio increased 10% (Y/Y) in the last quarter, notably up 236% Y/Y for Allergan as the company
deployed much of the proceeds from the sale of its generics business to TEVA.

53

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Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Exhibit 1: Sector Constituents Exhibit 2: Revenue


Debt outst 16% Quaterly % change in Revenue
Sector ($mn) Share 14%
1. AbbVie Inc 31,284 13% Rolling 4 quarter change in Revenue
12%
2. Pfizer Inc 28,050 11%
3. Medtronic Inc 23,355 10% 10%
4. Actavis plc 22,180 9% 8%
5. Amgen Inc 20,630 8% 6%
6. Merck & Co Inc/NJ 18,566 8% 4%
7. Teva Pharmaceutical Industries Ltd 18,534 8%
2%
8. Johnson & Johnson 16,708 7%
9. Novartis AG 16,597 7% 0%
10. AstraZeneca PLC 11,673 5% -2%
11. GlaxoSmithKline PLC 11,044 5% -4%
Total 244,035 1 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 3: EBITDA Exhibit 4: Debt


17% Quaterly % change in EBITDA 400
380 Debt ($bn)
Rolling 4 quarter change in EBITDA
12% 360
340
7% 320
300
2% 280
260
-3% 240
220
-8% 200
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 5: Cash to Shareholders Exhibit 6: Gross and Net Leverage


120 3
Cash to Shareholder ($bn) Gross Leverage Net leverage
110
2.5
100
2
90
80 1.5
70
1
60
50 0.5

40 0
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 7: Interest Coverage Ratio Exhibit 8: Profit Margins


20x 36%
Interest coverage Profit Margin
19x 36%

18x 35%
35%
17x
34%
16x
34%
15x 33%
14x 33%
13x 32%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

54

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Railroad/Shipping
Mark Streeter AC (212) 834-5086; mark.streeter@jpmorgan.com
Our recommendation on the HG Railroad sector is Neutral. Comps have gotten easier, and sentiment seems to have
bottomed out: the S5RAIL equity index has rallied 70% from the low reached on 25-Jan-16, far outpacing the broader
markets 28% increase over that time frame (SPX). YTD, the rail index is up almost double the markets gain (rails up
>13% versus the broader market at 7.1%). Fundamentals across various markets remain vulnerable to commodity price
volatility and the stronger U.S. dollar. Lower natural gas prices and high stockpiles are a headwind to domestic utility coal
shipments, although the export coal story has improved. FX hurts metals volumes among other commodities while lower
crude oil prices have driven a reduction in drilling activities although frac sand is picking up. And the negative mix shift
as rails transport more lower-margin intermodal cargo and less higher-margin commodity carloads remains a headwind as
well. Pricing trends in a softer truckload and weaker volume environment are another source of concern. Another lingering
concern for the sector is a slowing or even reversal of the trend for shippers to choose rail over truck lanes. While we doubt
the rails will give back much of share gained from trucks over the last several years during the higher fuel environment
(especially given the ongoing shortage of truck drivers and the more onerous regulations negatively impacting truck
operator efficiency), the reality is that lower diesel prices make truck lanes more competitive on the margin (something
NSC and KSU specifically cited on calls in 2016).
We reiterate our Neutral recommendation on the HG Freight sector. UPS and FDX have for the most part adjusted to the
shift from higher margin international priority lanes to less expensive, slower shipping options. Both of these companies
will benefit from growth in e-commerce long term although the cost pressures to adjust to surging volumes in the short run
remains a focus. Both are also focused on (partially) debt financed M&A and are using any excess cash flow to increase the
return of capital to shareholders through share buybacks. In trucking, anemic freight growth, driver turnover, and
oversupply of tractors remain headwinds but the upcoming ELD compliance deadline should reduce capacity on the margin.

Largest issuers in the sector


Levels
Debt in JULI Revenue EBITDA Debt Earnings Payout
# Issuer ($mn) Share ($bn) ($bn) ($bn) Leverage Int Cov Profit Margin Ratio
1 FedEx Corp 11,166 21% 58 8 15 1.9x 16.5x 14% 13%
2 Union Pacific Corp 9,565 18% 20 10 19 1.9x 9.2x 47% 54%
3 CSX Corp 8,610 17% 11 5 12 2.5x 5.7x 43% 36%
4 Norfolk Southern Corp 8,177 16% 10 4 12 2.7x 5.3x 41% 34%
5 United Parcel Service Inc 7,996 15% 62 8 17 2.3x 19.6x 12% 65%
Sector Summary 51,957 100% 173 38 80 2.2x 12.6x 34% 34%

Change
Revenue EBITDA Debt Leverage Int Cov Profit Margin Earnings Payout
# Issuer (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) Ratio (y/y chg)
1 FedEx Corp 16% 7% 74% 0.7x -7.8x -1% -21%
2 Union Pacific Corp -4% -4% -1% 0.0x -1.8x 0% 0%
3 CSX Corp -1% 3% 7% 0.1x 0.0x 2% 1%
4 Norfolk Southern Corp -3% 2% 3% 0.0x -0.1x 2% -3%
5 United Parcel Service Inc 5% -23% 11% 0.7x -9.1x -5% 15%
Sector Summary 6% -4% 12% 0.2x -2.9x -2% -8%

Revenue for the sector increased 6% Y/Y driven mainly by a 16% increase in revenue at FedEx. Fedex revenue
increased due to yield growth in all segments. Excluding FedEx, revenue for the sector was up 1% Y/Y. On the other
hand, EBITDA was down 4% Y/Y (-7% Y/Y ex FedEx) with EBITDA declining the most for UPS.
Leverage increased by 0.2x as debt levels increased by 12% while EBITDA for the sector declined. Debt levels
increased the most at FedEx (+74% Y/Y, +$6.3bn).
Interest coverage fell as companies issue more debt, and the cost of debt rises while EBITDA levels declined. Interest
coverage ratio for the sector was down 2.9x to 12.6x y/y. Interest coverage ratio for the sector is at its weakest level
since 2011. Interest expense for the sector increased by 11% y/y.
Capex declined by 6% Y/Y. Capex has declined over the past few quarters after increasing by double digits in each
quarter of 2015.

55

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Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Exhibit 1: Sector Constituents Exhibit 2: Revenue


Debt outst 13% Quaterly % change in Revenue
Sector ($mn) Share
1. FedEx Corp 11,166 21% Rolling 4 quarter change in Revenue
2. Union Pacific Corp 9,565 18% 8%
3. CSX Corp 8,610 17%
4. Norfolk Southern Corp 8,177 16% 3%
5. United Parcel Service Inc 7,996 15%
6. Canadian Pacific Railway Ltd 3,453 7%
-2%
7. Ryder System Inc 2,990 6%
Total 51,957 100%
-7%

-12%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17
Exhibit 3: EBITDA Exhibit 4: Debt
28% Quaterly % change in EBITDA 90
85 Debt ($bn)
23% Rolling 4 quarter change in EBITDA
80
18%
75
13% 70
8% 65
3% 60
55
-2%
50
-7% 45
-12% 40
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 5: Cash to Shareholders Exhibit 6: Gross and Net Leverage


20
18 Cash to Shareholder ($bn) 2.4 Gross Leverage Net leverage
16 2.2
14 2
12
10 1.8
8 1.6
6
1.4
4
2 1.2
0 1
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 7: Interest Coverage Ratio Exhibit 8: Profit Margins


17x 38%
Interest coverage 37% Profit Margin
16x
15x 36%
14x 35%
34%
13x
33%
12x
32%
11x 31%
10x 30%
9x 29%
8x 28%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

56

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Technology
Brian Turner AC (212) 834-4035; brian.m.turner@jpmorgan.com
We maintain our Underweight recommendation on the Technology sector with spreads at ~25bps through the JULI, and we
believe there is little upside for the sector given fundamental deterioration. The jury is out on the way in which secularly
challenged companies have attempted to offset operational weakness; the combination of M&A and deleveraging efforts has
created heightened execution risks, and management teams may be forced to shift to more equity-centric financial policies
should equity pressure persist. The prospect of a repatriation holiday on overseas cash is particularly relevant for Tech
companies, but its too early to tell the likelihood & timing of such a measure being passed; should a holiday occur, we
would expect it to have a mixed impact on Tech credit as the greater cash access could result in a boost in share repurchases
and US-based M&A, while also limiting the need for incremental debt issuance and affording companies with a
deleveraging lever.

Largest issuers in the sector


Levels
Debt in JULI Revenue EBITDA Debt Earnings Payout
# Issuer ($mn) Share ($bn) ($bn) ($bn) Leverage Int Cov Profit Margin Ratio
1 Microsoft Corp 65,756 25% 87 29 84 2.9x 15.1x 33% 86%
2 Apple Inc 62,752 24% 220 70 99 1.4x 36.4x 32% 67%
3 Oracle Corp 47,594 18% 37 17 54 3.3x 9.9x 44% 35%
4 Cisco Systems Inc 27,790 10% 49 15 32 2.2x 18.3x 31% 56%
5 Dell Inc 22,329 8% 62 6 50 8.5x 3.4x 10% -63%
Sector Summary 265,396 100% 595 176 388 2.4x 17.6x 31% 52%

Change
Revenue EBITDA Debt Leverage Int Cov Profit Margin Earnings Payout
# Issuer (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) Ratio (y/y chg)
1 Microsoft Corp 0% -1% 80% 1.3x -10.4x -1% -6%
2 Apple Inc -3% -11% 24% 0.4x -39.3x -3% 5%
3 Oracle Corp 1% 11% 35% 0.6x -0.6x 4% -45%
4 Cisco Systems Inc -2% 0% 14% 0.3x -4.9x 1% 3%
5 Dell Inc -22% -21% 158% 5.9x -5.7x 0% -80%
Sector Summary -4% -6% 36% 0.6x -7.0x -2% -9%

Technology had the largest declines in revenue in absolute terms amongst all the sectors, down $22bn (-3.6%). Dell and
Apple led the decline with revenues down 22% and 3% y/y respectively. Technology had a difficult year with EBITDA
down $11bn (-6%) as Apple, IBM and Dell all posted weak results in an LTM basis. Revenue and EBITDA declines y/y
in Technology were driven by continued headwinds the companies face in their legacy hardware businesses as well as
product cycle shifts.
Leverage increased by 0.6x y/y to 2.4x, its highest levels since 2000 at least. Y/Y Leverage ratio increased or was about
flat for all the companies in the sector. Debt increased considerably y/y by 36%, with increases across the board.
Microsoft Inc had a debt increase of 80% (+$37bn) due to the Linkedin acquisition while Dell had an increase in debt of
158% (+$31bn) due to the EMC acquisition.
The increase in debt was reflected in the increase in interest expense. Interest expense increased by nearly 54% Y/Y to
$9.4bn, its highest levels since 2000 at least. As a result of this, Interest coverage ratio for the sector fell drastically,
down 7.0x to 17.6x.
The earnings payout ratio fell 9% Y/Y to 52%. Increases in payout ratio at Apple Inc and Cisco were more than offset
by a 45% decline in the payout ratio at Oracle Corp and 80% decline at Dell.

57

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

Exhibit 1: Sector Constituents Exhibit 2: Revenue


Debt outst Quaterly % change in Revenue
Sector ($mn) Share 22%
1. Microsoft Corp 65,756 25% Rolling 4 quarter change in Revenue
2. Apple Inc 62,752 24% 17%
3. Oracle Corp 47,594 18%
12%
4. Cisco Systems Inc 27,790 10%
5. Dell Inc 22,329 8%
7%
6. International Business Machines Corp 21,950 8%
7. Intel Corp 17,225 6% 2%
Total 265,396 100%
-3%

-8%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 3: EBITDA Exhibit 4: Debt


28% Quaterly % change in EBITDA
370 Debt ($bn)
23% Rolling 4 quarter change in EBITDA
320
18%
13% 270

8% 220
3%
170
-2%
120
-7%
-12% 70
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 5: Cash to Shareholders Exhibit 6: Gross and Net Leverage


3
120 Cash to Shareholder ($bn) Gross Leverage Net leverage
2.5
2
100
1.5
80 1
0.5
60
0
40 -0.5
-1
20 -1.5
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 7: Interest Coverage Ratio Exhibit 8: Profit Margins


38%
Interest coverage Profit Margin
217x 37%
36%
167x 35%
34%
117x
33%

67x 32%
31%
17x 30%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

58

This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

TelecomsDomestic
Brian Turner AC (212) 834-4035; brian.m.turner@jpmorgan.com
We maintain our Overweight recommendation. Spreads of the largest operators remain wide relative to the broader credit
universe given fundamental headwinds in the wireless space as well as the speculation of large-scale M&A between
wireless & cable/media companies. We believe current trading levels (~50bps wide of the JULI vs. an average of 32bps
over the past two years) more than adequately price in the principal concerns/risks as the largest operators (1) appear to be
stemming recent sub losses through unlimited offerings, (2) are seeking to gain an advantage in preparing for the roll-out of
5G over the next several years, (3) are actively diversifying their streams of revenue generation, and (4) are likely to be
cognizant of credit ratings given the sheer size of their debt burdens. Absent any transformative deals, we think U.S.
telecom should outperform given levels.
Largest issuers in the sector
Levels
Debt in JULI Revenue EBITDA Debt Earnings Payout
# Issuer ($mn) Share ($bn) ($bn) ($bn) Leverage Int Cov Profit Margin Ratio
1 AT&T Inc 78,196 54% 163 51 137 2.7x 10.3x 32% 24%
2 Verizon Communications Inc 59,483 41% 124 41 117 2.9x 9.4x 33% 23%
3 Rogers Communications Inc. 6,953 5% 10 4 13 3.4x 7.0x 37% 19%
Sector Summary 144,632 100% 296 96 266 2.8x 9.8x 32% 23%

Change
Revenue EBITDA Debt Leverage Int Cov Profit Margin Earnings Payout
# Issuer (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) Ratio (y/y chg)
1 AT&T Inc 0% 3% 3% 0.0x -0.9x 1% 3%
2 Verizon Communications Inc -6% -13% 6% 0.5x -0.4x -3% 4%
3 Rogers Communications Inc. -1% 0% -5% -0.2x 0.3x 0% -1%
Sector Summary -3% -4% 4% 0.2x -0.6x 0% 3%

The sector had a 3% decrease in revenue Y/Y. EBITDA also declined 4% Y/Y for the sector, Verizons 13% Y/Y
decrease was partially offset by AT&T, which saw an increase in EBITDA by 3% Y/Y. Margins were unchanged and
the sector has been in the 30-33% range over the last 10 years.
Leverage increased by 0.2x as debt increased by 4% while EBITDA fell by 4% Y/Y.
Interest coverage fell by 0.6x Y/Y. For AT&T it fell by 0.9x while it fell by 0.4x for Verizon.
The earnings payout ratio increased by 3% Y/Y mainly driven by a 3% increase in payout by AT&T and increased by
4% for Verizon while it declined by 1% for Rogers.

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eric.beinstein@jpmorgan.com

Exhibit 1: Sector Constituents Exhibit 2: Revenue


Debt outst 6% Quaterly % change in Revenue
Sector ($mn) Share 5%
1. AT&T Inc 78,196 54% Rolling 4 quarter change in Revenue
4%
2. Verizon Communications Inc 59,483 41%
Rogers Communications Inc 6,953 5% 3%
Total 144,632 100% 2%
1%
0%
-1%
-2%
-3%
-4%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 3: EBITDA Exhibit 4: Debt


8% Quaterly % change in EBITDA 270
6% Debt ($bn)
Rolling 4 quarter change in EBITDA 250
4%
230
2%
0% 210
-2% 190
-4%
170
-6%
150
-8%
-10% 130
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 5: Cash to Shareholders Exhibit 6: Gross and Net Leverage


40 3
Cash to Shareholder ($bn) 2.8 Gross Leverage Net leverage
35 2.6
30 2.4
2.2
25 2
1.8
20
1.6
15 1.4
1.2
10 1
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 7: Interest Coverage Ratio Exhibit 8: Profit Margins


15x 34%
Interest coverage Profit Margin
34%
14x
33%
13x
33%
12x 32%
32%
11x
31%
10x
31%
9x 30%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

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eric.beinstein@jpmorgan.com

TelecomsYankee
Brian Turner AC (212) 834-4035; brian.m.turner@jpmorgan.com
We maintain our Neutral recommendation on the Yankee Telecom sector. Yankee Telecoms have tightened marginally vs
the JULI YTD (from a ~33bps to ~23bps discount). Our Neutral view is supported by a modest improvement in
fundamentals, select debt reduction initiatives, and our view on the credit markets more broadly.
Largest issuers in the sector
Levels
Debt in JULI Revenue EBITDA Debt Earnings Payout
# Issuer ($mn) Share ($bn) ($bn) ($bn) Leverage Int Cov Profit Margin Ratio
1 Deutsche Telekom AG 14,348 29% 85 23 73 3.2x 7.2x 27% 8%
2 Telefonica SA 10,633 21% 60 19 72 3.9x 8.3x 31% 18%
3 Orange SA 10,070 20% 46 13 36 2.6x 8.3x 30% 15%
4 Vodafone Group PLC 9,842 20% 57 18 50 2.8x 9.5x 31% 21%
5 BT Group PLC 4,891 10% 31 10 17 1.7x 12.5x 31% 21%
Sector Summary 49,784 100% 278 82 247 3.0x 8.6x 30% 15%

Change
Revenue EBITDA Debt Leverage Int Cov Profit Margin Earnings Payout
# Issuer (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) Ratio (y/y chg)
1 Deutsche Telekom AG 15% 19% 11% -0.2x 1.0x 1% 1%
2 Telefonica SA 20% 9% 17% 0.3x 3.0x -3% 17%
3 Orange SA 7% 9% 0% -0.2x 1.2x 1% 2%
4 Vodafone Group PLC -8% 0% -12% -0.4x -2.2x 3% 10%
5 BT Group PLC 10% -1% -7% -0.1x -0.6x -3% 4%
Sector Summary 8% 8% 4% -0.1x 0.7x 0% 7%

Both LTM revenue and EBITDA for the sector grew at 8% y/y. 4 out of 5 companies in our analysis saw a positive y/y
change in revenue and EBITDA levels. Vodafone was the only company in the sector where revenue declined over the
year while BT Group was the only company to have a y/y decline in EBITDA levels. Profit margins for the sector
remained about flat at 30% as revenue and EBITDA grew at a similar pace.
Leverage decreased marginally by 0.1x y/y to 3.0x with only a 4% increase in debt over the year. Leverage for the sector
has remained quite stable over the past 5 years ranging between 2.85x and 3.28x.
Interest expense fell by 6% y/y with a 31% decrease in Telefonica's interest expense due to lower coupons on refinanced
debt and currency effects. Falling interest expense resulted in interest coverage increasing by nearly 0.7x to 8.6x. Interest
coverage ratio is at its highest level since 2003.
The earnings payout ratio rose 7% y/y with the ratio increasing for all the companies in the sector. Cash to shareholders
was up 91% y/y for the sector.

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eric.beinstein@jpmorgan.com

Exhibit 1: Sector Constituents Exhibit 2: Revenue


Debt outst 9% Quaterly % change in Revenue
Sector ($mn) Share
1. Deutsche Telekom AG 14,348 29% Rolling 4 quarter change in Revenue
2. Telefonica SA 10,633 21% 4%
3. Orange SA 10,070 20%
4. Vodafone Group PLC 9,842 20% -1%
5. BT Group PLC 4,891 10%
Total 49,784 100%
-6%

-11%

-16%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 3: EBITDA Exhibit 4: Debt


Quaterly % change in EBITDA 300
7% Debt ($bn)
Rolling 4 quarter change in EBITDA 290
280
2%
270
-3% 260
250
-8% 240
230
-13%
220
-18% 210
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 5: Cash to Shareholders Exhibit 6: Gross and Net Leverage


50
45 Cash to Shareholder ($bn) 3.4 Gross Leverage Net leverage
40 3.2
35 3
30
25 2.8
20 2.6
15
2.4
10
5 2.2
0 2
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 7: Interest Coverage Ratio Exhibit 8: Profit Margins


9x 34%
Interest coverage Profit Margin
33%
9x
32%
8x
31%
8x 30%
29%
7x
28%
7x
27%
6x 26%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17
.

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eric.beinstein@jpmorgan.com

Utilities
Larry Liou AC (212) 834-9455; larry.liou@jpmorgan.com
We maintain our Neutral on HoldCos, Overweight on OpCos and Neutral on GenCos. YTD, the Utilities sector has
underperformed the broader index. YTD, holding companies have tightened 7bp and operating companies are flat; while
generating companies have tightened 24bp.
In terms of earnings contribution for utilities, first quarter results are typically a major contributor to annual earnings.
Overall, utilities were largely insulated from the first quarters mild weather as the detrimental effects to earnings were
offset by previously authorized rate case decisions. Thematically, first quarter earnings focused heavily how the evolving
role of state and federal regulators as it specifically pertains to intervention in competitive power markets, fuel diversity and
generation mix.
Fundamentally, key themes in the sector remained generally unchanged. As a way to offset persistently weak load growth,
utilities continue to seek innovative regulatory mechanisms and legislative measures to expand their regulated rate base.
Further, M&A of non-traditional utility businesses that increase growth opportunities, such as midstream assets, remains a
persistent trend. HG gencos have been the primary beneficiaries of state generation- specific subsidies. However, we could
see a shock for gencos if the legislative measures are dismissed during pending lawsuits. We continue to view the
generation sector negatively given the backdrop of depressed power prices and generation oversupply.
Largest issuers in the sector
Levels
Debt in JULI Revenue EBITDA Debt Earnings Payout
# Issuer ($mn) Share ($bn) ($bn) ($bn) Leverage Int Cov Profit Margin Ratio
1 Duke Energy Corp 35,634 12% 23 10 53 5.1x 5.4x 45% 16%
2 Berkshire Hathaway Energy Co 24,041 8% 18 7 38 5.6x 4.0x 39% 0%
3 Dominion Resources Inc/VA 23,682 8% 12 6 36 5.9x 5.7x 50% -6%
4 Exelon Corp 22,882 8% 33 9 37 4.1x 5.6x 28% 10%
5 Southern Company 22,863 8% 22 8 49 5.9x 5.4x 38% -18%
Sector Summary 289,516 100% 321 115 546 4.8x 5.3x 37% 12%

Change
Revenue EBITDA Debt Leverage Int Cov Profit Margin Earnings Payout
# Issuer (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) (y/y chg) Ratio (y/y chg)
1 Duke Energy Corp 0% 13% 19% 0.3x 0.1x 5% -25%
2 Berkshire Hathaway Energy Co -1% 1% -2% -0.1x 0.3x 1% 0%
3 Dominion Resources Inc/VA 9% 15% 24% 0.4x -0.2x 3% -25%
4 Exelon Corp 15% 14% 5% -0.4x -2.6x 0% -1%
5 Southern Company 25% 22% 64% 1.5x -1.9x -1% -42%
Sector Summary 4% 8% 13% 0.3x 0.0x 2% -5%

Revenue for the sector increased by 4% Y/Y, mainly driven by Southern Company and Exelon Corp, which saw 25%
Y/Y and 15% Y/Y growth in their revenues respectively. We note that SOs increase was largely due to the closing of
the AGL Resources acquisition in July 2016. EBITDA increased by 8% Y/Y with about three fourth of the names,
including the 5 largest names in the sector shown above, reporting an increase in EBITDA.
Leverage increased by 0.3x as debt levels increased at a much faster pace than EBITDA. Debt levels increased the most
at Southern Co (+64% Y/Y). Again, SO had the increase debt from the AGL Resources acquisition as well as increased
financing activity at SO Power.
The earnings payout ratio decreased by 5% Y/Y to 12%. The payout ratio decreased the most for Southern Company (-
42% Y/Y) followed by Duke Energy (-25% Y/Y) and Dominion Resources (-25% Y/Y).
Total Cash for the sector increased by 53% Y/Y and 18% Q/Q after declining by 27% last quarter.

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eric.beinstein@jpmorgan.com

Exhibit 1: Sector Constituents Exhibit 2: Revenue


Debt outst 8% Quaterly % change in Revenue
Sector ($mn) Share 6%
1. Duke Energy Corp 35,634 12% Rolling 4 quarter change in Revenue
4%
2. Berkshire Hathaway Energy Co 24,041 8%
3. Dominion Resources Inc/VA 23,682 8% 2%
4. Exelon Corp 22,882 8% 0%
5. Southern Company 22,863 8% -2%
6. PG&E Corp 16,694 6% -4%
7. NextEra Energy Inc 10,851 4%
-6%
8. Xcel Energy Inc 10,694 4%
9. Edison International 10,138 4% -8%
10. Consolidated Edison Co of New York Inc 10,001 3% -10%
11. Duke Energy Corp 35,634 12% -12%
Total 289,516 100% 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 3: EBITDA Exhibit 4: Debt


12% Quaterly % change in EBITDA
Debt ($bn)
10% Rolling 4 quarter change in EBITDA 520
8%
470
6%

4% 420

2%
370
0%

-2% 320
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 5: Cash to Shareholders Exhibit 6: Gross and Net Leverage


20
18 Cash to Shareholder ($bn) 4.9 Gross Leverage Net leverage
16 4.7
14
4.5
12
10 4.3
8 4.1
6
3.9
4
2 3.7
0 3.5
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Exhibit 7: Interest Coverage Ratio Exhibit 8: Profit Margins


6x 38%
6x Interest coverage Profit Margin
37%
6x
36%
5x
5x 35%
5x 34%
5x 33%
5x
32%
4x
4x 31%
4x 30%
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

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eric.beinstein@jpmorgan.com

Methodology
The goal of this publication is to analyze credit quality and credit metrics over time.
To accomplish this we compare fundamental credit metrics of the current High Grade
corporate bond issuers with the spread history of those bonds using the following
methodology:

The credit metrics for each company are weighted for their current weight
in the JULI index, held constant over time. The current weights are used
throughout the full nine-year history. In this way each chart shows the trend for a
specific ratio that is comparable over time. For example, if a debt/equity ratio for
a sector is currently 10 and five years ago it was 15, one can conclude with this
methodology that this metric has improved for the companies one is investing in
today. The data are not distorted by the changes in the index composition over
time (e.g., a company with a high debt/equity ratio being downgraded out of the
index in the interim period). Due to this methodology, the data for Ford, for
example, which fell out of the index in 2005, is not included in the analysis, even
for data shown from 2004 and prior.
Spread histories for each sector and in total are also based on the current
index composition held constant back through 2000. In this way, if a chart
shows that the spread of a sector is 100bps today and it was 150bps five years
ago, one can conclude that the spread-tightening was due to lower spreads for the
current credits in the index. It is not distorted because a higher-spread company
fell out of the index over the intervening five years or because a better-credit-
quality company issued more debt.
Spread histories shown in this report differ from the JULI index. The JULI
index average spread is based on a regularly changing portfolio of credits. When
new bonds are issued that meet the JULI index eligibility criteria they contribute
to the index average spread. Similarly, when a credit is downgraded it falls out of
the index. When analyzing the index trends in total, composition changes are
usually minor, but at the sector level they can be more significant. As our goal is
to compare the fundamentals of the credits in the index today with the spread
history of those credits, we believe using only the spreads on bonds in the index
today is best.
The JULI spread history and our Constant Composition spread history are
shown together in the exhibit below. We observe that index averages and trends
are similar, but there are some small differences. The JULI spread history shows
a sell-off in March 2005 due to the auto company downgrades and then a rally in
June 2005 when the companies were removed from the index. The Constant
Composition index shows a smaller bump in the data in 2005 as Ford is not part
of the current index composition and is therefore not included in this index spread
history chart. Still, the sell-off in 2Q05 affected the market broadly as the
Constant Composition index excluding Ford also widened over the period.

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eric.beinstein@jpmorgan.com

Exhibit 1: The Constant Composition index shows the spread history of only the current bonds in
the index. The JULI averages all bonds historically in the index
550 JULI Constant Composition
JULI
450

350

250

150

50
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Source: J.P. Morgan.

The data sources for the analysis include J.P. Morgan analysts, SNL
Financial, and Capital IQ. J.P. Morgan analysts have vetted the data and helped
clean up or explain divergences for mergers or other events. These are
highlighted in the commentary in each sector, which is included thanks to their
participation.
Summary sections include analysis and exhibits organized around
Industrials and Financials. For industrials, six credit metrics are shown for each
of the Industrial and Utility sectors discussed. Some of these metrics are not
commonly a focus for each sector but are included so that the summary metrics
can be analyzed. The sector-based analysis provides a brief summary of the
complex trends occurring in each sector, and we refer clients to the extensive
research from our industry sector credit analysts for more detail and insight. The
appropriate analysts name is included on the sector pages.

A few industrial sectors are not included in this document, though they are
represented in the JULI index: Yankee Banks, Financial Companies, Airlines,
Paper/Packaging and Building Materials.. In total these sectors represent 17% of the
index. The exclusion of the credit metrics for these sectors from the summary
therefore has little bearing on the broader credit trends.

Exhibit 2: Industrial and Utility Credit Ratios Analyzed


Ratios
Gross Debt / EBITDA
Net Debt / EBITDA
EBITDA / Interest Expense
EBITDA / Revenue
Cash to Shareholders / EBITDA
Source: J.P. Morgan.

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eric.beinstein@jpmorgan.com

The JULI index is the J.P. Morgan US Liquid Index, an index of High Grade
US corporate bonds that meet the following criteria:

Issue size: At least $300 million.


Maturity: Greater than 13 months and less than 31 years.
Type: Bullet bonds only. No embedded options aside from make-whole calls.
No convertibles, refundables, extendables and perpetuals.
Coupon: Fixed coupon only.
Currency: USD denominated only.
Issuer: Corporate only.
Rating: with ratings available from all three rating agencies (Moodys, S&P and
Fitch) must be rated BBB- or higher by two of the three agencies. Bonds rated by
two rating agencies must be rated BBB- or higher by both. Bonds rated by a
single rating agency must be rated BBB- or above.
Amount outstanding: At least $300 million.

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eric.beinstein@jpmorgan.com

Cross-Sector Comparisons of Credit Metrics


Exhibit 1: 4Q16 Credit Fundamentals
Net Debt / EBITDA / Interest EBITDA / Cash to Shareholders /
Debt / EBITDA
Sector EBITDA Expense Revenue EBITDA
Automotive -0.4x 1.3x 30.6x 11.6% 25.7%
Cable/TV 3.0x 3.2x 7.3x 34.5% 6.2%
Chemicals 2.0x 2.5x 11.3x 20.9% 30.7%
Consumer Products 1.5x 1.9x 22.7x 20.7% 46.1%
Diversified Media 2.5x 2.7x 7.4x 27.1% 45.4%
Energy 2.9x 3.9x 7.9x 20.8% 22.4%
Food Drug Retail 3.0x 3.4x 8.3x 17.5% 50.1%
Food/Beverages 2.5x 3.3x 9.0x 31.8% 49.9%
Healthcare/HMOs 0.6x 2.2x 12.2x 8.6% 25.9%
Manufacturing and Aerospace & Defense 1.2x 2.1x 12.8x 14.3% 46.1%
Metals/Mining 1.4x 2.0x 11.2x 36.5% 10.7%
Non-Food Retail 1.8x 2.0x 11.4x 9.3% 46.7%
Pharmaceuticals 2.0x 2.8x 13.9x 35.3% 60.9%
Railroad/Shipping 1.9x 2.2x 12.6x 34.2% 34.0%
Technology -0.2x 2.4x 17.6x 31.4% 51.7%
Telecoms - Domestic 2.6x 2.8x 9.8x 32.4% 23.5%
Telecoms - Yankees 2.2x 3.0x 8.6x 29.6% 15.3%
Utilities 4.6x 4.8x 5.3x 37.4% 12.2%
Source: Capital IQ and J.P. Morgan.

Exhibit 2: Difference from Previous Quarter, 4Q16


Net Debt / EBITDA / Interest EBITDA / Cash to Shareholders /
Debt / EBITDA
Sector EBITDA Expense Revenue EBITDA
Automotive 0.1x 0.1x 1.2x 0.3% -5.5%
Cable/TV 0.0x 0.0x 0.4x 0.1% 2.0%
Chemicals 0.0x 0.0x -0.5x -0.3% -2.1%
Consumer Products 0.0x 0.0x 1.7x 0.6% -0.1%
Diversified Media 0.2x -0.1x 0.1x -0.2% -5.4%
Energy -0.8x -0.7x 1.9x 1.9% 2.1%
Food Drug Retail 0.0x 0.1x 0.0x 0.2% -3.7%
Food/Beverages 0.1x 0.3x 0.3x 0.1% 0.5%
Healthcare/HMOs -0.2x -0.1x -0.3x 0.0% 6.2%
Manufacturing and Aerospace & Defense 0.1x 0.0x -0.3x -0.2% -0.9%
Metals/Mining 0.0x -0.1x 0.2x 0.3% -0.4%
Non-Food Retail 0.0x 0.0x -0.3x -0.1% -3.6%
Pharmaceuticals 0.4x 0.1x -0.2x -0.3% 1.0%
Railroad/Shipping 0.0x 0.0x 0.3x -0.1% -4.1%
Technology 0.0x -0.1x -0.5x 0.1% -3.4%
Telecoms - Domestic 0.1x 0.2x -0.1x 0.0% 0.6%
Telecoms - Yankees -0.1x 0.1x 0.2x 0.3% 4.3%
Utilities 0.0x 0.1x -0.1x 0.7% 0.3%
Source: Capital IQ and J.P. Morgan.

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Exhibit 3: Difference from Year Ago, 1Q16


Net Debt / EBITDA / Interest EBITDA / Cash to Shareholders /
Sector Debt / EBITDA
EBITDA Expense Revenue EBITDA
Automotive -0.1x 0.3x -3.2x 0.8% -13.4%
Cable/TV 0.0x -0.1x -0.1x 0.3% -14.4%
Chemicals 0.3x 0.2x -0.4x -1.5% -21.8%
Consumer Products -0.1x -0.1x 2.2x 1.6% -2.5%
Diversified Media -0.1x -0.1x -0.3x -1.3% -13.9%
Energy -0.2x -0.1x -2.3x -1.1% -6.4%
Food Drug Retail 0.0x 0.2x -0.4x 0.5% -2.4%
Food/Beverages -0.1x 0.2x 1.1x 0.1% -0.6%
Healthcare/HMOs -0.4x -0.2x -0.4x 0.2% 6.5%
Manufacturing and Aerospace & Defense 0.0x 0.0x -0.5x 0.2% -23.5%
Metals/Mining -1.8x -2.3x 2.7x 11.7% -37.4%
Non-Food Retail 0.0x -0.1x -0.3x -0.4% -1.6%
Pharmaceuticals 0.5x 0.4x -2.0x 0.4% 9.8%
Railroad/Shipping 0.2x 0.2x -2.9x -1.6% -7.7%
Technology 0.4x 0.6x -7.0x -2.4% -9.0%
Telecoms - Domestic 0.2x 0.2x -0.6x -0.4% 3.1%
Telecoms - Yankees -0.3x -0.1x 0.7x 0.0% 6.5%
Utilities 0.2x 0.3x 0.0x 1.5% -5.0%
Source: Capital IQ and J.P. Morgan.

Exhibit 4: Difference from Last Recession, 3Q09


Net Debt / EBITDA / Interest EBITDA / Cash to Shareholders /
Sector Debt / EBITDA
EBITDA Expense Revenue EBITDA
Automotive -3.2x 5.1x 29.9x 12.4% 14.7%
Cable/TV -0.3x -0.3x 2.7x -3.2% -54.8%
Chemicals -1.7x -1.9x 4.4x 5.7% 15.0%
Consumer Products 0.0x -0.1x 10.4x 2.5% 14.6%
Diversified Media 0.6x 0.1x 0.4x 5.3% 31.9%
Energy 1.1x 1.8x -10.5x -0.3% 7.9%
Food Drug Retail 0.6x 0.7x -0.6x 1.2% 30.3%
Food/Beverages 0.7x 1.3x -0.2x 4.5% 17.1%
Healthcare/HMOs 0.7x 0.5x 0.5x 0.5% 8.0%
Manufacturing and Aerospace & Defense 0.4x 0.4x -1.0x 2.4% 13.8%
Metals/Mining 0.2x -0.2x -27.1x 4.9% 41.4%
Non-Food Retail 0.0x -0.1x 0.9x 0.0% 33.9%
Pharmaceuticals 1.6x 1.3x -2.8x 7.4% 29.1%
Railroad/Shipping 0.1x 0.1x 4.1x 6.4% 21.2%
Technology 1.2x 1.8x -116.6x -0.4% 21.0%
Telecoms - Domestic 1.0x 1.0x -2.1x -0.7% 1.0%
Telecoms - Yankees -0.1x 0.3x 2.3x -3.5% -7.4%
Utilities 0.7x 0.7x 0.7x 7.8% 1.0%
Source: Capital IQ and J.P. Morgan.

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Eric Beinstein North America Credit Research
(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

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Explanation of Credit Research Valuation Methodology, Ratings and Risk to Ratings:
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We use the following ratings for bonds (issues) and issuers: Overweight (over the next three months, the recommended risk position is
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designation is not a rating or a recommendation.

For CDS, we use the following rating system: Long Risk (over the next three months, the credit return on the recommended position is
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companys cash flow and leverage metrics, for example.

J.P. Morgan Credit Research Ratings Distribution, as of April 03, 2017


Overweight Neutral Underweight
Global Credit Research Universe 25% 59% 16%
IB clients* 62% 62% 58%
Note: The Credit Research Rating Distribution is at the issuer level. Please note that issuers with an NR or an NC designation are not included in the
table above.
*Percentage of investment banking clients in each rating category.

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(1-212) 834-4211 09 June 2017
eric.beinstein@jpmorgan.com

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eric.beinstein@jpmorgan.com

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