Fixed income Alpha Discovery Cct. 2 2013
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Transcript of Fixed income Alpha Discovery Cct. 2 2013
Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.Not for distribution to the public. Copyright © 2013 by Standard & Poor’s Financial Services LLC (S&P). All rights reserved.
Fixed-Income Alpha DiscoveryThrough Cross Asset-Class Analysis
Ruben FalkSenior Director, Global Investment Management Product Segment
Rick Kanungo, CFA, FRMSenior Director, Enterprise Solutions
Jay Bhankharia, CFASenior Manager, Investment Management Product Segment
October 2, 2013
2 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Re-Thinking The Role Of Data, Models, And Analytics
• Information-driven investment managers are re-thinking the role of data, models, and analytics in their businesses
• When it comes to predicting the future accurately, a portfolio manager or investor should not miss an opportunity due to lack of
– Readily-accessible information required
– Full transparency on securities and issuers
– The ability to create rich scenarios utilizing new techniques and analyze the impacton portfolios
• What if certain equity strategy techniques were applied to fixed income portfolio management? Such as…
– Probability of defaults (PD) that incorporate equity price rankings
– Change in analyst expectations of earnings
– Price momentum (bond vs. equity)
For Fixed Income Portfolio Management
3 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Developing Bond Strategies Based On Credit And Equity Market Signals
• Universe of USD/U.S. bonds with PD coverage, duration of greater than six months, offering amount greater than $50 million, and amount outstanding greater than $25 million
– High yield 1,300 issues on average at any one time 500 of which with a unique associated public equity listing
– Investment grade 3,000 issues on average at any one time 1,600 of which with a unique associated public equity listing
– Includes subsequently retired and defaulted securities
• Back-test period– 02/28/2006 – 8/31/2013
• Transaction costs not directly considered
Two Hypothetical Case Studies
Source: S&P Capital IQ. Case Studies are provided for illustrative purposes only.
4 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Challenges To Approaching Such Work
• Depth and quality of financials and analyst estimates– Back-testing: Original filings vs. restatements
– Derived data and signals
– Market regimes
• Ability to quantify credit risk from various vantage points– Issuer credit ratings
– Determining probabilities of default
– Security to issuer, and issuer to corporate hierarchy linkages
• Access to market-based bond valuations
Access To Data, Models, And Analytics
5 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Critical To Enable A Proactive Bond Selection Methodology
Fundamentals
Connect to entity-level fundamental and
market data
• Compustat® GVKEY• CMA Entity ID • CUSIP/CINS Issuer ID“CC6”• D&B D-U-N-S® Entity Hierarchy• SIX Telekurs Parent GK Key• NAIC• TMC Company ID• CABRE• Markit™ Red Code• EDGAR® CIK Entity Code• ETFs
Credit Ratings
Connect to ratings and related research
• Standard & Poor’s• Moody’s• Fitch
Security Detail Sector Detail
Connect to entitysector categories
• GICS®
• Standard & Poor’sratings sectors
• SIC• NAIC
S&P Capital IQ Company ID – Ownership Relationship
Connecting Entities, Securities, Sectors And Information
Connect to terms and conditions, corporateactions and pricing
• CUSIP®
• CINS• ISIN• Symbols & Exchanges• Valor• QUICK• WKN/WPK• SEDOL
EstimatesResearch
and Transcripts
Indicesand
Derived Data
Securityand
Entity Reference
ValuationsRatings
andResearch
Fundamental and
SpecialtyAnalytics
Source: S&P Capital IQ.
6 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Enabling Use Of Bond, Equity, And Entity Data Sets
• Credit Rating• Bond Pricing**• Terms & Conditions• Market Activity
• Credit Rating• Probability of Default• Company Financials• Brokers’ Estimates*
• Equity Price• Brokers’
Estimates*
Leveraging S&P Capital IQ Linkages
• Credit Rating• Probability of default
Source: S&P Capital IQ. *S&P Capital IQ Estimates Data. **Provided by Standard & Poor’s Securities Evaluations, Inc. (SPSE), a subsidiary of McGraw-Hill Financial and part of S&P Capital IQ . SPSE is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC).
Bond
Bond Issuer
Public Entity
Primary Equity Issue
7 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Case Study Universe Vs. Benchmarks
Investment Grade – Total Returns
Source: S&P Capital IQ’s ClariFI. Information as of 8/31/2013. For illustrative purposes only. Note: JNK=SPDR ETF tracking the Barclays High Yield Very Liquid Index. LQD=iShares ETF tracking the Markit iBoxx USD Liquid Investment Grade Index. Universe returns are aggregated geometrically from individual bond returns and weighted by amount outstanding. Universe refers to information provided on slide 3. Past performance is no guarantee of future results.
High Yield – Total Returns
3/1/20
06
8/2/20
06
1/3/20
07
6/6/20
07
11/7/
2007
4/9/20
08
9/10/2
008
2/11/2
009
7/15/2
009
12/16
/2009
5/19/2
010
10/20
/2010
3/23/2
011
8/24/2
011
1/25/2
012
6/27/2
012
11/28
/2012
5/1/20
13-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
LQD (ETF) Universe
3/3/20
08
6/23/2
008
10/13
/2008
2/2/20
09
5/25/2
009
9/14/2
009
1/4/20
10
4/26/2
010
8/16/2
010
12/6/
2010
3/28/2
011
7/18/2
011
11/7/
2011
2/27/2
012
6/18/2
012
10/8/
2012
1/28/2
013
5/20/2
013
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
JNK (ETF) Universe
8 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Case Study 1Bond Returns vs. Bond Risks
Return Risk
• Market Risk– Interest Rate: Eff. Duration– Volatility: 20-day σ of bond prices
• Credit Risk– Daily Probability of Default
• (Lack of) Market Activity– Daily Market Activity Score
Yield-to-Maturity
Evaluated bond price, Yield-to-Maturity, and Market Activity Scores are provided by Standard & Poor’s Securities Evaluations, Inc. (SPSE), a subsidiary of McGraw-Hill, and a part of S&P Capital IQ and a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SPSE’s advisory services include evaluated pricing and model valuation of fixed income securities, valuations of OTC derivatives, and analyses of certain U.S. and European fixed-income securities using its proprietary Risk-to-Price scoring methodology. Products and Services provided by SPSE may not be available in all countries or jurisdictions.
9 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Probability Of Default (PD) Factors
Fundamental
Market
• GDP Change %• Industry delinquency rates• Industry median Y-o-Y change in sales
• Distance to default• 1-year stock price rank
• Debt/EBITDA• FFO/Total debt• EBITDA/Interest expense• EBITDA/Revenue• Assets• (Current Assets – Inventories)/Current liabilities
Macro/Industry
Elements Incorporated Factor Categories
Source: S&P Capital IQ.* Standard & Poor’s Ratings Services is analytically and editorially independent from any other analytical group within McGraw Hill Financial.
S&P Capital IQ’s PD measure went up sharply in the weeks prior to a Standard & Poor’s CreditWatch Negative action*
Entity Name CountryPD 7 weeks
prior to Watch Neg
(%)
PD 1 day prior to
Watch Neg (%)
PD Increase
(%)
Rating when put on Watch
CreditWatch Date
Eventual Rating
Eventual Rating
Action Date
Rating Action Days
CreditWatch
Dun & Bradstreet Corp. (The) USA 0.02 0.05 237 A- 5/23/2012 BBB+ 7/13/2012 51 NEGThompson Creek Metals Co. USA 0.04 0.08 137 B+ 3/6/2012 B- 5/7/2012 62 NEGChesapeake Energy Corp. USA 0.13 0.32 134 BB 4/26/2012 BB- 5/15/2012 19 NEGDigital Generation Inc. USA 0.52 1.08 109 BB- 7/18/2012 B+ 9/10/2012 54 NEGCentral European Distribution Corp. USA 9.74 18.16 86 CCC+ 6/8/2012 CCC 11/16/2012 161 NEGNavistar International Corp. USA 3.54 6.33 79 B+ 6/7/2012 B 7/9/2012 32 NEGPatriot Coal Corp. USA 11.11 17.63 59 CCC 5/23/2012 D 7/10/2012 48 NEG
10 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Does Bond Yield Efficiently Capture Risk?
• Hypothesis: Yields may not be representative of risk profile
• Build a dynamic model of risk implied yield by cross-sectionally regressing the observed yield against PD, duration and bond price volatility
• Risk Implied Yield = Intercept + a*PD + b*Duration + c*Volatility
Methodology And Hypothesis
• Rank universe into five quintiles according to the factor score
• Looking for the largest positive divergence between yield and risk-implied yield
Please note: a, b, c are regression coefficients. Quintile 1 = highest score and quintile 5 = lowest scores.
Risk-Implied Yield =f (PD, Duration, Volatility)
Yield-to-Maturity:Corresponding to evaluated price
Difference = Opportunity?
11 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Example: Evaluate Two Bonds Through Risk Implied Yield Similar At Face Value, Different Upon Investigation
Category Feature Quintile 1 (Attractive) Quintile 5 (Unattractive)
Descriptive Information
Issuer Unum Group Capital One Financial Corp
Offering Amount $350 Million $1 Billion
Coupon 7.125% 7.375%
Seniority Senior Notes Senior Notes
Maturity Date 9/30/2016 5/23/2014
Risk Analysis
S&P Rating Services Long-Term Credit Rating BBB BBB
Duration 4.8 2.76
PD .0346% .0665%
Volatility .005 .004
ReturnsYield 3.94% 2.08%
Risk Implied Yield 3.53% 2.95%
Yield – Risk Implied Yield 0.41% 0.87%
Source: S&P Capital IQ Risk Solutions and Standard & Poor’s Securities Evaluations, Inc. As-of April 30, 2011. For illustrative purposes only.
12 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Consistent Outperformance Of Investment-Grade Strategy
Source: S&P Capital IQ’s ClariFI. Information as of 8/31/2013. For illustrative purposes only.Note: Cumulative spread is the cumulative geometric sum of one-month spreads between bonds in Quintile 1 and Quintile 5 as ranked by the “Yield - Risk Implied Yield” score and equally weighted.
4/1/20
06
10/1/
2006
4/1/20
07
10/1/
2007
4/1/20
08
10/1/
2008
4/1/20
09
10/1/
2009
4/1/20
10
10/1/
2010
4/1/20
11
10/1/
2011
4/1/20
12
10/1/
2012
4/1/20
13-20%
0%
20%
40%
60%
80%
100%
First Quintile IG Index
Investment Grade Long Only Strategy –Quintile 1 Performance vs. Benchmark
Investment-Grade Cumulative Spreads –Quintile 1 Minus Quintile 5
4/1/20
06
10/1/
2006
4/1/20
07
10/1/
2007
4/1/20
08
10/1/
2008
4/1/20
09
10/1/
2009
4/1/20
10
10/1/
2010
4/1/20
11
10/1/
2011
4/1/20
12
10/1/
2012
4/1/20
130%
200%
400%
600%
800%
1000%
1200%
80
90
100
110
120
130
140
150
160
170
180
Top-Bottom Spread Universe (RHS)
13 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Ineffective Signal For High-Yield
Source: S&P Capital IQ’s ClariFI. Information as of 8/31/2013. For illustrative purposes only. Past performance is not indicative of future results.Note: Cumulative spread is the arithmetic sum of one-month spreads between bonds in Quintile 1 and Quintile 5 as ranked by the “Yield - Risk Implied Yield” score and equally weighted
4/1/20
06
10/1/
2006
4/1/20
07
10/1/
2007
4/1/20
08
10/1/
2008
4/1/20
09
10/1/
2009
4/1/20
10
10/1/
2010
4/1/20
11
10/1/
2011
4/1/20
12
10/1/
2012
4/1/20
13-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
60
80
100
120
140
160
180
200
220
240
260
Top-Bottom Spread Universe (RHS)
High-Yield Cumulative Spreads –Quintile 1 Minus Quintile 5
High-Yield Long-Only Strategy –Quintile 1 Performance Vs. Benchmark
4/1/20
06
10/1/
2006
4/1/20
07
10/1/
2007
4/1/20
08
10/1/
2008
4/1/20
09
10/1/
2009
4/1/20
10
10/1/
2010
4/1/20
11
10/1/
2011
4/1/20
12
10/1/
2012
4/1/20
13-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
160%
First Quintile HY Index
14 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Market-Activity Score
For corporate and government bonds, market-activity scores are based on trades from FINRA’s Trade Reporting and Compliance Engine® (TRACE®) and Xtrakter, and quotes from Xtrakter Quotes, S&P Capital IQ Quote, Tullet Prebon Government Bonds, and (planned for 1Q 2014) ISDA (Japan Securities Dealers Association).
PriceStaleness
Number of Market Makers
• Number of Trades over a rolling 30 business day period
• Number of Quotes over a rolling 30 business day period
• Number of market makers over a rolling30 business day period
• Number of business days since a security was last traded
• Number of business days since a security was last quoted
Number of Trades and
Quotes
Elements Incorporated Factor Categories
15 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Model Performance Does Not Appear To Be Diminished By Lack Of Market-Activity
Source: S&P Capital IQ’s ClariFI. Information as of 8/31/2013. For illustrative purposes only. Past performance is not indicative of future results.
High Yield: Risk Implied Yield – Quintile
Mar
ket-A
ctiv
ity
Scor
e
1 2 3 4 5 60%
10%20%30%40%
Market-Activity Score Distribution(1=Most Activity 5=Least Activity 6=No Score)
Investment Grade High Yield
Investment-Grade: Risk-Implied Yield – Quintile
Mar
ket-A
ctiv
ity
Scor
e
16 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Case Study 2:
• Credit Rating• Probability of Default• Credit Ratios• Equity Value to Book Value• Dividend Yield
• Price momentum (bond vs. equity)• Analyst expectations (earnings) Alpha Factors
Using Risk And Alpha Factors To Determine Outperformance
Risk Factors
17 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Credit-Quality Regimes In The Equity Market
Source: S&P Capital IQ’s Alpha Factor Library. Information as of 8/31/2013. For illustrative purposes only.
18 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Risk Factors As Bond Selection Signals
Source: S&P Capital IQ’s ClariFI. Information as of 8/31/2013. For illustrative purposes only.Cumulative spread is the cumulative geometric sum of 1-month spreads between bonds in Quintile 1 and Quintile 5 as ranked by the individual factors and equally weighted. Past performance is not indicative of future results.
High-YieldCumulative Quintile Spreads
Investment-GradeCumulative Quintile Spreads
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
60
80
100
120
140
160
180
200
220
240
2/1/20
06
11/1/
2006
8/1/20
07
5/1/20
08
2/1/20
09
11/1/
2009
8/1/20
10
5/1/20
11
2/1/20
12
11/1/
2012
-30%
-20%
-10%
0%
10%
20%
30%
40
60
80
100
120
140
160
180
Descending Ratings
Interest Cov Descending
PD (Bond)
Book to Price
Universe (RHS)
19 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Dividend Yield: Another Risk Factor?High-Yield Universe
Source: S&P Capital IQ’s ClariFI. Information as of 8/31/2013. For illustrative purposes only. Past performance is not indicative of future results.
Annualized ReturnHigh (Q1) vs. Low (Q5) Dividend Yield Cumulative Spreads
Q1 Q2 Q3 Q4 Q50%
2%
4%
6%
8%
10%
12%
14%
2/28/2006 – 8/31/2013
2/1/20
06
8/1/20
06
2/1/20
07
8/1/20
07
2/1/20
08
8/1/20
08
2/1/20
09
8/1/20
09
2/1/20
10
8/1/20
10
2/1/20
11
8/1/20
11
2/1/20
12
8/1/20
12
2/1/20
13-40%
-20%
0%
20%
40%
60%
80%
Q1-Q3 Q5-Q3 PD (Bond)
20 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Bond Alpha Factors?Equity Price Momentum and Analyst Earnings Revisions
Source: S&P Capital IQ’s ClariFI. Information as of 8/31/2013. For illustrative purposes only. Past performance is not indicative of future results.
High YieldCumulative Quintile Spreads
Investment GradeCumulative Quintile Spreads
2/1/20
06
10/1/
2006
6/1/20
07
2/1/20
08
10/1/
2008
6/1/20
09
2/1/20
10
10/1/
2010
6/1/20
11
2/1/20
12
10/1/
2012
6/1/20
13-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
40
60
80
100
120
140
160
180
1M Price Momen-tum1M Bond Momen-tum3M Rev FY2Universe (RHS)
2/1/20
06
8/1/20
06
2/1/20
07
8/1/20
07
2/1/20
08
8/1/20
08
2/1/20
09
8/1/20
09
2/1/20
10
8/1/20
10
2/1/20
11
8/1/20
11
2/1/20
12
8/1/20
12
2/1/20
13-50%
0%
50%
100%
150%
200%
250%
300%
70
90
110
130
150
170
190
210
230
250
21 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Effectiveness Of Analyst Expectations In Equity Markets Around The World
Source: S&P Capital IQ’s Alpha Factor Library. Information as of 8/31/2013. For illustrative purposes only.
Unattractive Attractive
22 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Case-Study: Summary Of Key Performance Measures
• All the strategies outperformed their respective benchmarks although risk implied yield worked best for investment grade and equity-price momentum best for High Yield
• The long-short spreads were higher than the active returns for IG which implies there was value in the strategies both with regard to which bonds to buy and which to sell. Equity momentum worked well on a one-month holding period but its value decayed after that.
• Turnover was significantly higher for the equity-price momentum than for the risk-implied yield strategies. This is reinforced by increased effectiveness of longer holding periods only for risk-implied yield
Source: S&P Capital IQ’s ClariFi. Note: Annualized active return is the annualized excess return of the respective equal weighted First Quintile strategies vs. the respective universe indices. Annualized Q1-Q5 Spread is the average spread between Quintile 1 and Quintile 5. Annualized turnover is the average turnover of the respective First Quintile strategies. For illustrative purposes only. Past performance is not indicative of future results.
Strategy AnnualizedActive Return
AnnualizedQ1–Q5 Spread
AnnualizedTurnover
Investment Grade 1m 6m 1m 6m 1m 6m
Risk-implied yield 5% 4% 10% 7% 52% 8.6%
6M Equity-Price Momentum 3% 1% 5% 1% 80% 13%
High Yield
6M Equity-Price Momentum 5% 2% 7% -4% 81% 13%
23 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Case-Studies Findings
• The equity market appears to contain signals which may favorably informbond selection
– PDs (equity price volatility, leverage on equity market value)
– Equity-price momentum
• The risk implied yield methodology appears to consistently add value as a bond selection strategy for U.S. investment-grade bonds. This result does not appear to be influenced by recent market regimes and or indicators of market activity
• Equity-price momentum on its own appears to work well as a bond selection signal both in the Investment Grade and High Yield universes, however with very high turnover
• Analyst-expectation signals also appear to add value to bond selection particularly for high-yield
• More traditional equity market signals such as book-to-price or dividend yield appear to act more like risk factors for the purpose of bond selection
Summary
24 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Concluding Thoughts
• Both equity and fixed-income investors may benefit from systematic components to create a disciplined and efficient investment process
– Traditional fundamental-investment processes can be enhanced by quantitative techniques backed up with relevant data sets, security linkages, and history
• Model portfolios may in some cases be investable using a quantitative process, but in other cases simply serve as a way of supplementing
– Security selection
– Portfolio monitoring
• S&P Capital IQ provides integrated data and desktop solutions to answer these needs
25 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
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