During November, corporate credit spreads in the US gave back some of the gains they made since early summer as the average spread in the Morningstar Corporate Bond Index widened out 11 basis points to +147.
The financial sector continued to outperform; it only widened out 6 basis points compared with the industrial sector, which widened 16 basis points, and the utilities sector, which widened out 18 basis points.
Credit spreads in Europe, however, tightened 5 basis points over the month to +145. As seen in the chart below, this is the first time since June 2011 that the average credit spread in our European Corporate Bond Index was tighter than that of the US Corporate Bond Index.
Compared with earlier this year, day-to-day trading last week was influenced more by US as opposed to European issues. While the market seemed to stabilise by the end of the week, liquidity was fleeting intraweek as risk-on and risk-off volatility was driven by US politicians' statements regarding the status of the fiscal cliff negotiations. One minute plenty of bids were present, and then the market immediately dried up the next minute.
The new issue market was active as issuers for which Morningstar provides credit ratings priced approximately $25 billion of debt. While we would typically expect the pace of new issuance to slow in December as CFOs and portfolio managers prepare for year-end, this year may be different.
We may see a flurry of new issues before year-end as companies reporting to US accounting principles evaluate debt-funded special dividends in order to return cash to shareholders before the Unites States raises its income tax rate on dividends.
Already, we have heard that this week's new issue calendar looks to be at least another $25 billion with the risk to the upside if the desire to issue special dividends gains further traction.
As we teeter on the edge of the potential fiscal cliff, which could result in significant dividend income tax increases, several companies have recently tapped the debt market to fund special dividends. 
Carnival (CCL) is one such example. The cruise company reports its earnings in US dollars and recently issued debt on the heels of a special dividend announcement.
We expect to see more of this activity over the next month, ahead of the fiscal cliff dividend income tax increases. The threat is temporary in nature, however, and any announcement would come before year-end.
While our long-term credit opinion of this particular company did not change as a result of the special dividend, we are concerned that other companies that may not be so comfortably within their credit ratio targets could issue special dividends at the expense of their balance sheets.
Carnival issued a $500 million, 5-year deal last week, and while it has near-term debt maturities that it needs to refinance, we believe this debt issuance was driven by its recent announcement of a special dividend (around $300 million).
Our credit thesis for Carnival includes the assumption that the firm would return cash to shareholders and maintain a BBB credit profile, and we do not expect this special dividend to alter that view. While inherently volatile because of operating leverage required to service contractual obligations, Carnival is positioned to produce strong normalised cash flows, in our opinion, as it generates more operating cash flow than is required to support new ship builds.
We estimate free cash flow over the next five years will be close to $9.5 billion, leading to a Cash Flow Cushion of around 1 times, despite the firm's hefty debt and debt-like obligations. However, we also forecast roughly $6.5 billion in share repurchases and dividends over the same period, and we expect Carnival will refinance some debt to carry out these shareholder-friendly activities. Still, we are comfortable with the firm as an investment-grade credit, as its leverage is just under 3 times, where we expect it to remain.
