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

    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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    Strikes Are Bad for the UK Economy? Go Figure

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

    It's a head-scratcher. According to the Office for National Statistics, some 467,000 working days were lost in November alone — and a total of 1.6 million in 2022, the most since 1990. This year is shaping up to be worse. We certainly feel poorer for it all, but with the rail sector comprising just 0.3% of GDP, it is not showing up in the data in a way that we can justifiably point a finger at it.

    Network Rail estimates lost ticket revenue to date from the strikes at £400 million ($500 million), but it is very tricky to measure what might well be a permanent loss of future revenue as commuters alter their behavior. Passenger numbers are still only about 80% of pre-pandemic levels. The Royal Mail also will struggle to recover business from the postal worker strikes. UKHospitality reckons there was £2.5 billion of lost trade due to the rail strikes. The picture will be worse in city centers but that will be counterbalanced in areas where commuters live.

    The Centre for Economic and Business Research estimates a £1.4 billion direct cost in lost working days over the past eight months. That seems suspiciously low, but compared to the U.K's £2.5 trillion annual GDP, the verifiable effects so far are basically a rounding error.

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    Crypto Lending Teeters Near Extinction After Genesis Collapse

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

    Being in the SEC’s cross hairs is likely to lead to a further shake-up of what little is left of the lending sector. 

    “There will be two different models in the future,” said Campbell Harvey, a finance professor at Duke University. “First, certain organizations will register with the SEC and sell these products as securities. Second, investors may do this on their own by putting their crypto into decentralized liquidity pools and earning a fee for that.”

    In decentralized finance, or DeFi, investors use software to automatically borrow and lend tokens, with positions being automatically liquidated if prices fall too low or they miss repayment deadlines. Some platforms such as Maple Finance organize pools where an operator can manage incoming investor funds and choose who to lend them out to, using due diligence to assess a borrower’s creditworthiness rather than asking for collateral. Such an approach has already lead to some defaults during the current crisis, in addition to plummeting volumes.

    Because these types of loans are conducted on public blockchains, the collapse in lending is more visible. The total amount of value locked on DeFi networks hit a peak of $181 billion in early December, according to data from DeFiLlama, and now sits at around $45 billion — tarnished by wavering demand, declining crypto prices and several spectacular failures.

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    Email of the day on volatility and the difference between trading versus investing

    Just six or seven days ago you commented that the recovery could go on for two to three months, now (apparently) you are waiting for the Vix to hit 50 so indicating a bottom of the market.

    Sometimes your commentary is as volatile as the markets you are reporting on!

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    Nearly 2% of Global Copper Supply at Risk in Peruvian Unrest

    This article from Bloomberg may be of interest. Here it is in full: 

    Protests in Peru are threatening to choke off access to almost $4 billion worth of copper just as China’s emergence from Covid lockdowns promises to boost demand. 

    Peru’s third-largest copper mine, Las Bambas, hasn’t dispatched copper concentrate since Jan. 3 due to security concerns. Glencore Plc’s Antapaccay is also facing restrictions. The mines, which share the same highway access to ports, together account for nearly 2% of the world’s copper output. 

    Unrest has rattled Peru since the ouster and arrest of former President Pedro Castillo, upending commodity supply chains from metals to organic coffee. The disruption comes at a particularly precarious moment for copper markets. Inventories stand at historically low levels while miners warn demand for the world’s most critical metal is poised to skyrocket with the growing electrification of vehicles.  

    Base-metal prices have been on a bull run since New Year’s after China, a top consumer, abruptly abandoned Covid-19 controls. Prices settled Wednesday at a seven-month high on the London Metal Exchange. Goldman Sachs Group Inc. predicts ongoing deficits and forecast a record price of $11,000 a ton within 12 months.

    Las Bambas, whose operator MMG Ltd. is controlled by state-owned China Minmetals Corp., has been the target of multiple demonstrations since it opened in 2016 as indigenous groups seek greater compensation for land and roads used by mining companies.

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    US Poised for Dutch, Japanese Help on China Chip Crackdown

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

    “I commend the Biden administration for working with our partners to apply export controls on equipment used to make advanced semiconductors and am eager to scrutinize the specifics of what comes out of these talks,” Texas Representative Michael McCaul, who chairs the House Foreign Affairs Committee, said in a statement to Bloomberg News. “A Republican Congress is ready to use its authorities to protect U.S. national security and defend human rights, should the outcomes not substantially match the controls currently in place.”

    McCaul is set to meet with Raimondo to discuss the matter on Thursday. It’s uncertain how long it will take the other countries to implement their measures. 

    “It could even be something which just happens without big announcements,” Rutte said in the interview. “It’s still not clear. It depends a bit on how the discussions with various countries will evolve.”

    After the US announcement in October, some American companies were forced to warn investors that they may lose out on billions of dollars in future China revenue. Since then, they’ve argued it also exposes them to losing market share, if overseas competitors are allowed to continue to operate in China relatively unrestricted.  

    Tokyo Electron has said the general clampdown on its Chinese customers is already hurting business, while ASML has said that demand elsewhere in the world for its most advanced products can make up for any revenue shortfall from China.

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    Eoin's personal portfolio: trading long stopped out and reversed, commodity long closed, bond investment position increased January 18th 2023.

    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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