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

    Rising Defaults in Private Credit Seen Cutting Into Fundraising

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    Fitch Ratings expects lenders to broadly recover less on loans to small to mid-sized companies, compared with average recovery expectations in 2017. It forecasts that for about 64% of loans it rates, investors would recover between 30 cents and 70 cents on the dollar in a default, up from around 25% of the loans five years ago.   

    The rising expectations for low recoveries stem from weakening contractual lender protections over the years, Fitch report said. Though those protections have grown a bit stronger this year, most outstanding loans were made before this year. On top of that, leverage is high in many transactions. 

    “These capital structures were not constructed with 4% to 5% base rates in mind. Rising rates will hurt free cash flows and eat into companies’ liquidity,” said Lyle Margolis, head of private credit at Fitch Ratings.

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    China Is Likely Seeing 1 Million Covid Cases, 5,000 Deaths a Day

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    China is likely experiencing 1 million Covid infections and 5,000 virus deaths every day as it grapples with what is expected to be the biggest outbreak the world has ever seen, according to a new analysis.

    The situation could get even worse for the country of 1.4 billion people. This current wave may see the daily case rate rise to 3.7 million in January, according to Airfinity Ltd., a London-based research firm that focuses on predictive health analytics and has been tracking the pandemic since it first emerged. There’ll likely then be another surge of infections that will push the daily peak to 4.2 million in March, the group estimated.

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    Brazil's Annual Inflation Eases to Lowest Since March 2021

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    Still, central bankers are now focused on medium-term inflation expectations. “What matters now are estimates for 2024 and 2025, which are much more impacted by fiscal concerns than inflation,” said Laiz Carvalho, an economist at BNP Paribas. 

    Spending Bill
    Indeed, some of President-elect Luiz Inacio Lula da Silva’s cabinet picks have fanned investor concerns over a rise in public debt during his administration.

    This week, congress approved a proposal that gives the 77-year-old leftist leader an additional 168 billion reais ($32 billion) to spend in 2023. The bill was watered down from a previous version that would have cleared the way for extra spending for two years, providing some relief to financial markets.

    Brazil’s central bank has warned that possible changes to fiscal rules may fuel inflation by diluting the impact of its aggressive cycle of interest rate increases. Analysts surveyed by the monetary authority see consumer prices above target through 2025.

    In an interview with Bloomberg News this week, former Brazilian central bank chief Arminio Fraga said injecting a large fiscal stimulus at a time of tight labor markets and high inflation “makes no sense.” 

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    'Die Hard' Tower Lacks Christmas Cheer as Debt Deadline Looms

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    Debt markets are increasingly sorting US leveraged loans into two categories: money good, and distressed. 

    A growing proportion of prices in the market are either very high, or very low. About 5% of the market is trading under 80 cents on the dollar, a share that has more than doubled since June, according to a JPMorgan Chase & Co. analysis. And more than half the market is trading above 96 cents on the dollar, an amount that has also more than doubled.  

    With more loan prices reaching extremes, companies that run into any sort of difficulty can see their loans plunge quickly. That can translate to surging borrowing costs, boosting the chance of corporations defaulting. 

    “This puts the worst companies at risk, as they’ll have a harder time refinancing,” said Roberta Goss, senior managing director and head of the bank loan and collateralized loan obligations platform at Pretium Partners LLC, in an interview.  

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    Tesla Offers $7,500 Discount in Rare Move to Lift Deliveries

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    Tesla Inc. is offering US consumers $7,500 to take delivery of its two highest-volume models before year-end, adding to indications the carmaker is struggling with demand.

    The discount on new Model 3 sedans and Model Y sport utility vehicles is double what the company was offering earlier this month. It mirrors an anticipated change in how much of a tax credit certain consumers will be eligible for early next year.

    It’s highly unusual for Tesla to offer such perks, as Elon Musk has for years enforced a no-discounts policy. The company also departed from its chief executive officer’s insistence against spending on traditional advertising last month by promoting its wares on a local television shopping channel in China. Tesla also has cut prices and production in that market this quarter.

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    Dirty Energy Is the Lone Junk Winner in Credit's Brutal Year

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    Junk-bond investors had almost no way to avoid losses this year, and shunning dirty energy only made the pain deeper. The best return -- one of very few gains -- was in coal, highlighting challenges for investors who need to perform but also want to be sustainable.

    Junk’s 11% loss this year -- the worst since the global financial crisis -- was led by communications and consumer non-cyclical bonds, down 15% and 13%, respectively. Energy performed best in the US high-yield index, down about 5% overall.

    Coal -- albeit a very small chunk of the corporate bond market -- is up 3.2%, while oil and gas services debt gained 1.7%. That compares with a global credit market that’s down double digits in most market segments this year, with particularly steep losses for longer-dated debt.

    Credit markets are forecast to see a broad-based rebound next year and with many sectors trading cheap to history, junk energy probably won’t be the best again in 2023. But so long as oil prices stay supported by conflict and reopening, it should at least be a buttress for bond portfolios likely to take another beating from inflation next year.

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    China To Correct Past 'Mistaken' Housing Policies

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    China will roll out supportive measures for the property market in order to correct past “mistaken” policies aimed at curbing the sector’s growth, according to the head of a top economic think tank in the country.

    “It seems like the government is going to put forward more concrete measures,” said Yao Yang, the dean of the National School of Development at Peking University, in an interview. “The government has to at least stop the decline of the housing market. There are encouraging signs of it.”

    Top officials including President Xi Jinping pledged in a policy meeting last week to support housing demand in 2023. “That is a code word for promoting the housing sector again,” Yao said.

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