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Our views 08 June 2023

Azhar is talking about global credit – sell in May?

5 min read

May was a month of bank holidays and some respite from talking about banks, with more talking about corporates interspersed with a shorter than expected US debt ceiling tussle.

Key indicators

  • Rates! It was a bad month for duration as government bonds sold off aggressively in the month, hurting investment grade (-0.9%) more than high yield (-0.6%).
  • Global high yield spreads ended the month at the 526bps mark, so pretty much where they started the year. High yield market yields also retraced back to 9%, 24bps wider on the month.
  • Global investment grade spreads are ending at 154bps, 3bps higher on the month and 22bps wider in yield at 5.1%, meaning these are back to unchanged on the year.
  • Huge focus on the ‘SLOOS’, a measure most of us credit nerds like to follow, became mainstream and even became an acronym. This Senior Loan Officer Opinion Survey is a measure of US bank lending (it surveys representatives of 80 US banks and 24 US branches of foreign banks) and certainly has previously correlated well with spreads; the measure showed increased tightening of standards and yet spreads were little impacted – is this the beginning of a decoupling of larger corporate public markets from the much smaller bank lending market? It’s a debate we’ve certainly been having as the credit markets are much changed from the past. One thing we are always wary about is the amount of specific inferences many make about credit indicators that are just a few decades old, just a reminder that the statement ‘unemployment/defaults always follow an increase in SLOOS’ or the more common ‘the inversion of the treasury curve always leads to a recession’ is a little like saying ‘an illness always leads to death’ – it’s the timing and scale that matters, not the sequencing and that’s where the data isn’t as good unfortunately. Our view remains that the timing is slower with the impact on defaults far more muted than prior periods.

Areas of focus

  • Yields continue to rise, increasing the tussle between yields and valuations.
  • New issuance abounds across all regions and rating levels (except CCC) as issuers use the relative stability in yields to extend out maturities.

Market news

  • In emerging markets – Turkish elections meant a continuity of bad economics with Erdoğan re-elected and volatility for Turkish corporates. However, the appointment of a market-friendly Finance Minister (Mehmet Simsek) provided some relief leading to a retracement of the initial sell-off. Politics also created volatility in Nigeria as sovereign and corporates rallied as new president Tinubu, elected in February, scrapped fuel subsidies – improving the country’s finances at the cost of more inflation. Both these rallies are indicative of a lot of bad news being priced into emerging markets, with good corporates being priced off volatile sovereigns – an area to watch as value emerges.
  • We had new issuance from a range of existing and new issuers. Notable names were First Quantum – a copper miner with operations in Panama and West Africa that raised $1.3bn at 8.625% to refinance bonds, Merlin Entertainments (the operators of European theme parks) raising €700m at 7.375% and Venture Global – a US LNG owner operator who raised $4bn in two tranches as they refinanced bank debt to enter the high yield market for the first time – the bonds priced at 8.125% and 8.375% respectively, with the issuer returning to borrow another $500m a week later. Issuance windows are clearly open, with plenty of demand for good new issuers and large existing issuers.
  • It was also a month where a whole array of issuers started to address what’s left of their maturity walls: EG Group (see below), Sabre (US travel technology provider) and Tele Columbus (German cable TV operator) all saw pretty significant rebounds as they outlined their plans to extend (mainly 2025) near-term maturities.

Credit story of the month

  • EG Group – This global operator of petrol stations has been a huge beneficiary of the low interest rate environment in gobbling up assets, almost entirely debt funded, and then very smartly monetising them via a strategy of adding convenience and food outlets. Unfortunately, their addiction to debt (the group has $10.1bn) wasn’t as well planned as others and 2025 is the maturity ‘wall’ for over 90% of this debt. Luckily for the owners (UK-based Issa brothers and private equity firm TDR) they also own Asda, one of the biggest UK supermarkets, and so the solution to the maturity wall is to sell most of the UK petrol forecourts to Asda at an amazing 12x multiple! What’s fascinating here is that EG now looks like it will be able to reduce its debt load and to fund an extension (even at up to 12% interest rates) as it has found a buyer, who has equity owners (themselves) who value these assets at a level which most would baulk at (Asda are arguing the acquisition is at a mere 7.7x multiple due to synergies).
  • For some time this year, we have been remarking on how valuations and yields don’t tally as equity valuations continue to hold up – implying that cost of capital longer term will be much lower than current market levels. This transaction could only work because the buyer was willing to see ‘through’ the market levels (albeit by synergies that others possibly can’t see). Unfortunately, the financing costs at Asda have now ballooned to double digits as well and with $4bn to refinance in 2026, this looks like a problem deferred rather than resolved.


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