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David Fuller and Eoin Treacy's Comment of the Day
Category - Fixed Income

Adani Debts Enter Spotlight as Dollar Bond Coupon Deadlines Loom

This article from Bloomberg may be of interest to subscribers. Here is a section:

There has been no suggestion that the Adani entities would struggle to make these payments, and Adani has flagged interest coverage ratios that show it has the wherewithal to meet such obligations.

But Hindenburg’s report last week alleging “accounting fraud” along with its short position in Adani’s US-traded bonds and non-Indian-traded derivatives has put the debt in the spotlight. Some of the notes have fallen to distressed levels below 70 cents on the dollar that generally show mounting concern about creditworthiness. The securities extended declines Monday after a rebuttal by the Indian conglomerate and as Hindenburg followed with its own response.



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Email of the day on inflation and interest rates hikes

In a recent article, Joseph Stiglitz argues that the current inflation is primarily due to the supply-side shock of the Covid crisis and to shifts in the demand patterns. His view is that the rate of inflation has already peaked - it is 1% higher now than in June 2022. He claims that the rise in interest rates has been largely passed on to consumers via higher prices and that any future interest rate rises would be inflationary.



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The Fed's Preferred Inflation Gauge Cooled...or Did It?

This article from Barron’s may be of interest. Here is a section: 

But in a Nov. 30 speech at the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, Powell said he was watching something even more specific -- not core PCE, but core services PCE less housing. "[This] may be the most important category for understanding the future evolution of core inflation," Powell said at the time.

That isn't just specific, it is super specific. Core PCE already strips out food and energy. Core services PCE strips out food, energy, and the cost of physical goods. Powell wants to remove housing as well because "as long as new lease inflation keeps falling, we would expect housing services inflation to begin falling sometime next year," he explained.

When Powell refers to core services PCE less housing, he is really talking about the job market. "Because wages make up the largest cost in delivering these services, the labor market holds the key to understanding inflation in this category," he said. "Thus, another condition we are looking for is the restoration of balance between supply and demand in the labor market."



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Private Equity's Loved Assets Turn Problem Children in Downturn

This article from Bloomberg may be of interest to subscribers. Here is a section: 

“In terms of just the macro and company performance, I think it will be much more muted as people capture the inflationary pressures,” he said. “Private equity M&A activity I think will be dampened.”

Concerns around portfolio company performance were not the only challenges up for discussion in the south of France, with private equity firms struggling to secure the debt financing they need to do big deals and juice returns and facing more competition when raising funds. 

The chief economist at German insurer Allianz SE, Ludovic Subran, said the industry had “nowhere to hide” when markets turned last year. “The private equity world has not been immune or has not defied gravity,” he said.

Banks pulling back from lending on buyouts was described as a “new reality” by Francois Jerphagnon, head of Ardian Expansion, in an interview with Bloomberg TV. This will open up an opportunity for private credit funds to step in, others said.

“There is much more interest in private credit and infrastructure where you do have that hedge against inflation and that hedge against rising rates,” said Richards at Pantheon.

Blackstone’s Eapen said private credit providers are in “the middle of a golden age” and that last year had been one of his business’s biggest ever for deploying capital. 



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Spared in 2020, Debt-Heavy Companies Cede Control to Creditors

This article from Bloomberg may be of interest to subscribers. Here is a section: 

Many junk-rated companies will require urgent funding. They may struggle to find it at a time when investors’ demand for sky-high premiums has effectively shut public capital markets as a refinancing avenue for the most stressed firms.

While default rates are expected to increase, it may not immediately become a flood of failures. A large chunk of high-yielding debt has weak investor safeguards — loose covenants that mean highly indebted firms will be able to delay engaging with creditors until further down the line. 

Moody’s forecasts the global default rate for high-yield companies will increase to 4.9% by November, up from 2.9% a year earlier. In a “severely pessimistic scenario,” however, the rate could go up to 12.6%, it said in a report published last month. 



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Bain Veteran Says 20% Private Equity Returns Have Decades to Run

This article from Bloomberg may be of interest to subscribers. Here is a section: 

“The private equity model works,” he said in a Bloomberg TV interview at the World Economic Forum in Davos on Wednesday. “It puts capital to work with experts that really help drive these companies.”

Pagliuca said private equity has “absolutely not” peaked and will still be able to deliver the standard 18% to 20% rate of return in the coming decades. 

“We’ve maintained those returns now every decade for 40 years,” he said. “It’s a great business model.”
Buyout firms are readjusting to an environment of higher interest rates that’s making it harder to finance deals and juice returns by loading companies with cheap debt. Valuations have tumbled in both the public and private markets.

Rising rates are bringing a reckoning for those firms that invested heavily in speculative technology companies at super-high multiples, according to Pagliuca. Bain has largely steered clear of this market and its portfolio is doing “pretty well,” he said.



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Saudi Arabia Says Days of Unconditional Foreign Aid Are Now Ove

This article from Bloomberg confirms what I was hearing at the Future Minerals Forum last week. Here is a section: 

As part of its deal with the IMF, Egypt agreed to shrink the footprint of all state-run enterprises, including “military-owned companies,” and committed to allow for a more flexible exchange rate.

“We are also looking at our region, and we want to be a role model for the region,” Al-Jadaan said. “We are encouraging a lot of the countries around us to really do reforms,” he said.

 



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BOJ Jolts Financial Markets But Risk of a Bigger Shock Remains

This article from Bloomberg may be of interest. Here is a section: 

The Bank of Japan’s decision to keep its settings unchanged Wednesday gave global investors a modest jolt, leaving markets from the yen to Treasuries at risk from a potentially larger shock if officials opt to shift policy in the future.

Standing pat caught some traders by surprise, but it’s unlikely to douse speculation that the BOJ will normalize policy as inflation in Japan accelerates and Governor Haruhiko Kuroda nears the end of his term. It suggests just a temporary setback to bets on a stronger yen and a bond selloff as analysts say it’s still a question of when — not if — the central bank exits its yield-curve control policy.

Indeed, while Japan’s currency at one stage slumped more than 2% against the dollar in the wake of the decision, it clawed back some ground as the session proceeded, helped by a swath of US economic data that dented the greenback. Japanese government bonds surged as traders covered short positions and stocks pushed higher. US Treasury yields declined.



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Email of the day on the US debt ceiling

Thanks for the interesting comments about Saudi - I spent a couple of years working in Riyadh in the late eighties.

On a different subject do you see the re-occurrence of the US debt ceiling with the Senate's inability to pass (anything...) creating any problems?



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Summers Sees 'Tumult' in 2023 With Reckoning for Bond Market

This article from Bloomberg may be of interest to subscribers. Here is a section: 

“I suspect tumult” for markets in 2023, Summers told Bloomberg Television’s “Wall Street Week” with David Westin. “This is going to be remembered as a ‘V’ year when we recognized that we were headed into a different kind of financial era, with different kinds of interest-rate patterns.” 



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