。2 North America Credit Research 21 February 2019 Eric Beinstein (1-212) 834-4211 eric.beinstein@jpmorganTable of Contents The BBB market has grown rapidly, more so than the BB market....4 The drivers of rating deterioration within High Grade credit include low borrowingcosts and significant M&A..5 Downgrades from HG to HY over the past two years been the lowest two years since20006 Approach 1: The historical downgrade pattern predicts about $108bn/4.6% of BBBdebt could fall to HY each year........8 Approach 2: Market pricing suggests $137bn/5.8% of BBB debt is priced in therange of BB debt.....9 Approach 3: Our analysts believe the risk of downgrade to HY for the largest issuersis below that implied by either the historical approach or the market-based approach .....11 Our forecast is that $40bn will fall from HG to HY in 2019, $60bn in 202011 A sector by sector review of the top 50 BBB credits...........12 Other credits not in the top 50 BBB issuer list with significant fallen angel risk......23 3 North America Credit Research 21 February 2019 Eric Beinstein (1-212) 834-4211 eric.beinstein@jpmorganThe 50 largest BBB rated non-Financial bond issuers The table below, sorted from most to least amount of index debt, shows each issuer’scurrent rating profile, the amount of index debt, the probability of downgrade overthe next 2 and 3 years assuming the historical downgrade rates prevail, and theprobability of downgrade to HY implied bybond spreads. The methodology for thesecalculations is described in this note. IssuerSector 4-6yrBondspread Moody's/ S&P/Fitch IndexRating IndexDebt ($bn) Historical downgrade probabilitySpread implieddowngradeprobability 2Yavg 3Yavg 2Y avg+1std dev 3Y avg+1std dev AT&T IncTelecoms117Baa2/BBB/A-BBB955%8%10%14%<15% Anheuser-Busch Cos LLCConsumer95Baa1/A-/BBBBBB+803%5%7%10%<15% Verizon Communications IncTelecoms77Baa1/BBB+/A-BBB+723%5%7%10%<15% CVS Health Corp Health & Pharma118Baa2/BBB/-BBB665%8%10%14%<15% GE Capital International Funding CoCap Goods179Baa1/BBB+/BBB+BBB+463%5%7%10%<15% General Motors Financial Co IncAutomotive198Baa3/BBB/BBBBBB415%8%10%14%45-60% Charter Communications OperatingMedia Ent193Ba1/BBB-/BBB-BBB-3824%34%38%49%30-45% United Technologies Corp Cap Goods90Baa1/BBB+/WDBBB+343%5%8%11%<15% AbbVie IncHealth & Pharma118Baa2/A-/-BBB335%8%10%14%<15% Ford Motor Credit Co LLCAutomotive294Baa3/BBB/BBBBBB335%8%10%14%90% Cigna Corp Health & Pharma113Baa2/A-/BBB-BBB335%8%10%14%<15% Energy Transfer Operating LPEnergy158Baa3/BBB-/BBB-BBB-3024%34%38%49%<15% BAT Capital Corp Consumer155Baa2/BBB+/BBBBBB295%8%10%14%<15% Kinder Morgan IncEnergy123Baa2/BBB/BBB-BBB285%8%10%14%<15% Amgen IncHealth & Pharma87Baa1/A/BBBBBB+253%5%7%10%<15% Dow Chemical CoBasic Industries105Baa2/BBB/NRBBB244%6%9%12%<15% MPLX LPEnergy139Baa3/BBB/BBB-BBB-2318%26%29%38%<15% Kraft Heinz Foods CoConsumer128Baa3/BBB/BBB-BBB-2224%34%38%49%<15% Enterprise Products OperatingEnergy92Baa1/BBB+/BBB+BBB+213%5%7%10%<15% Fox Corp Media Ent99Baa2/BBB/-BBB214%6%8%11%<15% Williams Cos Inc/TheEnergy130Baa3/BBB/BBB-BBB-2121%30%33%44%<15% Bayer US Finance II LLCHealth & Pharma146Baa1/BBB/A-BBB+203%5%7%10%<15% Celgene Corp Health & Pharma104Baa2/BBB+/-BBB205%8%10%14%<15% Dell International LLC / EMCTechnology180Baa3/BBB-/BBB-BBB-1924%34%38%49%15-30% Union Pacific Corp Transport73Baa1/A-/-BBB+193%5%7%10%<15% Vodafone Group PLCTelecoms134Baa1/BBB+/BBB+BBB+183%5%7%10%<15% McDonald's Corp Retail77Baa1/BBB+/BBBBBB+183%5%7%10%<15% Shire Acquisitions InvestmentsHealth & Pharma120Baa2/BBB+/-BBB175%8%10%14%<15% Anthem IncHealth & Pharma92Baa2/A/BBBBBB165%8%10%14%<15% Abbott LaboratoriesHealth & Pharma65Baa1/BBB/WDBBB165%8%10%14%<15% Allergan Funding SCSHealth & Pharma139Baa3/BBB/BBB-BBB-1624%34%38%49%<15% Enel Finance International NVUtilities185Baa2/BBB+/A-BBB+153%5%7%10%15-30% Southern Co/TheUtilities103Baa2/BBB+/BBB+BBB+143%5%7%10%<15% CSX Corp Transport90Baa1/BBB+/-BBB+143%5%7%10%<15% Enbridge IncEnergy114Baa2/BBB+/BBB+BBB+143%5%7%10%<15% Discovery Communications Media Ent149Baa3/BBB-/BBB-BBB-1324%34%38%49%<15% Northrop Grumman Corp Cap Goods82Baa2/BBB/BBBBBB135%8%10%14%<15% FedEx Corp Transport95Baa2/BBB/-BBB135%8%10%14%<15% Becton Dickinson and CoHealth & Pharma117Ba1/BBB/BBB-BBB-1324%34%38%49%<15% Telefonica Emisiones SATelecoms139Baa3/BBB/BBBBBB135%8%10%14%<15% Sabine Pass Liquefaction LLCEnergy165Baa3/BBB-/BBB-BBB-1324%34%38%49%<15% AstraZeneca PLCHealth & Pharma93A3/BBB+/BBB+BBB+133%5%7%10%<15% Lockheed Martin Corp Cap Goods60Baa1/BBB+/BBB+BBB+133%5%7%10%<15% Lowe's Cos IncRetail98Baa1/BBB+/-BBB+123%5%7%10%<15% American Tower Corp Telecoms116Baa3/BBB-/BBBBBB-1124%34%38%49%<15% Duke Energy Corp Utilities88Baa1/BBB+/BBB+BBB+113%5%7%10%<15% FirstEnergy Corp Utilities122Baa3/BBB-/BBB-BBB-1115%22%25%33%<15% Crown Castle International Telecoms123Baa3/BBB-/BBBBBB-1122%32%35%46%<15% Exelon Corp Utilities120Baa3/BBB-/BBB-BBB-118%12%14%20%<15% Keurig Dr Pepper IncConsumer134Baa2/BBB/-BBB115%8%10%14%<15% Sum of top 501,2319714117423453 Overall BBB Non Fins ex-EM2,341210305367494137 Source: J.P. Morgan. As of 14thFebruary, 2019.Note: In case of multiple ratings for different bonds for the issuer we display the rating of the largest bond from the largest capital structure of the issuer. Theprobability of downgrades are calculated on a bond by bond level and aggregated to the issuer level.4 North America Credit Research 21 February 2019 Eric Beinstein (1-212) 834-4211 eric.beinstein@jpmorganThe BBB market has grown rapidly, more so than the BBmarket The risk to both High Grade and High Yield bond markets from the rapidgrowth in BBB rated debt remains a key question for credit investors, and oneoften cited in HG for those who are cautious on the market.It is an obviousquestion given the rapid growth in BBB rated debt and the rise in corporate leverage,both of these trends arenot been matched in the BB market. Currently (as of YE18) there is $2.8tr of BBB rated debt in our JULI index(excluding Emerging Market issuers).This is 51% of the index.Non-Financials are$2.3tr of this and Financials are $488bn.61% of non-Financial debt is now ratedBBB, up from 49% in 2011.The rapid growth of the HG market and BBB subsetofit in particularhas not been matched in High Yield. The BBB market is currently 4.8x times larger than the BB market, up from3.6x times 5 years ago and 2.9x times 10 years ago.Therefore, if there is asignificant amount of BBB debt downgraded to BB it will have large implications forboth HG and HY bond investors. Exhibit 1: The amount of BBB rated debt has increased by 5.3xsince 2007, while BB debt hasincreased 2.3x.The BBB market is now 4.8times larger than the BB market Source: J.P. Morgan, excludes EM issuers Exhibit 2: The High Grade Non-Financialbond market has grown rapidly over the past few years,driven by BBB rated debtSource: J.P. Morgan 0 500 1000 1500 2000 2500 3000 2000200220042006200820102012201420162018 BBB Outstanding DebtBB Outstanding Debt$bn 225223299373399402585587 345512530542 557594695 944 313354 418464657616 729 794 307363 377365 398540 506402 279277 346425 375359 446426 149171 170162 258282 331315 174 205246 273 333415 370370 1,8712,105 2,3862,603 2,9773,207 3,6623,837 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 20112012201320142015201620172018= AA- A+ A A- BBB+ BBB BBB- $bn 883 2,325 。。。。。。