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Our views 08 August 2023

Azhar’s crunching credit – Red hot July

5 min read

July was scorching hot in credit markets, spreads tightened aggressively with lower quality credit outperforming across the board. With the rates picture stable, credit spreads did the heavy lifting producing healthy returns.

Key indicators

  • High yield bonds outperformed investment grade bonds due to credit spread compression. Global high yield returned +1.6% and global investment grade 0.6%.
  • Rates were relatively stable with the 10-year US treasury moving by 12 basis points (bps) but the front end remaining stable.
  • High yield spreads tightened to 437bps, 30bps tighter on the month – CCCs were 71bps tighter, Single B bonds 30bps tighter and BB rated bonds 23bps tighter.
  • Investment grade spreads – tightened again by 13bps to 131bps, close to the 129bps year-to-date low seen back in February.
  • US high yield issuance has now hit $100bn after $7bn in July.

Areas of focus

  • We have had more innovative solutions in the market to refinance some more challenged names. Vivion, a European property company with over €1.4bn in 2024 and 2025 maturities (which had been trading at a cash price of 72 (a 30% yield to maturity) announced an exchange and consent offer to term out its maturities to 2028 and 2029 in return for a part cash payment (20 euro cents for the 2024s and 10 euro cents for the 2025s) and a new secured bond. This solution, kicking the can down the road, seems to be one bond holders welcomed and bonds rallied up to a cash price in the high 80s as a result.
  • The leveraged loan market has been unseasonably hot as well this year with the floating rate product defying doomsayers and healthcare issuer Select Medical turned to this market to ‘amend and extend’ its $2.1bn of 2025 term loan maturities out to 2027, paving the way for a refinance of its $1.2bn 2026 bond maturity. We also had Carnival Cruises tapping both bond and loan markets to refinance over $1.2bn of 2026 bond debt.
  • Creative solutions abound in a market well prepared for an economic slowdown, and this suggests to us that default rates in this cycle will be much lower than most expect.

Market news

  • There were notable new issues from Arconic Corp and Brand Industrial – two names we struggled to invest in.
  • Arconic Corp, a global manufacturer of aluminium sheets, is a new leveraged buy-out valuing the business at 6x Ebitda and levering the business 52% though the capital structure. Arconic issued $700m B+/B1 rated secured bond debt and $1.4bn via a new term loan.
  • Leverage for the business is thus a reasonable sounding 3.1x, but with end usage dominated by cyclical sectors (autos and construction) operating leverage for this nature of business is high so we found the market pricing of 8% for senior secured (or a spread of around 400bps) not quite attractive enough. The unsecured debt was retained by the sponsors (although they managed to reduce the unsecured by increasing the size of the senior debt by $225m). As we highlighted last month, a concern on the current leveraged buy-out vintages is the large equity cheque combined with relatively lax financial covenants – storing up issues for the future and this was a credit that had this as a significant red flag.
  • Brand Industrial was an interesting refinancing transaction which required the private equity owners to inject $1bn to reduce the debt burden to a 5.4x multiple (from 6.9x previously). Brand Industrial mainly installs scaffolding with a 15% market share in North America – the business had been struggling pre-Covid and that period has seen the company struggle to reverse the revenue decline. Even with the equity injection, we see free cash flow as negligible and so couldn’t justify an investment despite the 10.375% the company ended up paying for $1.3bn of new secured bonds. The company had debt maturing across 2024 and 2025 so it was another example of how equity sponsors proactively acting to refinance debt before the situation spirals out of control. We don’t see this a near-term default candidate, but we certainly think it will have far more challenges going forward.

Credit story of the month

Africa is not a region to invest in for the faint hearted. It is a varied, sometimes volatile, resource rich continent with supportive demographics that some investors struggle with due to unpredictable geopolitics. Our view on emerging market corporates is to look for corporates that can diverge from their underlying sovereigns so that we can make a clean assessment of credit and jurisdictional risk.

One credit we have followed for some time is Helios Towers, the pan-African telecom tower company, with operations across South Africa, Tanzania, the DRC, Ghana, Madagascar and now Oman. The telecom tower business is a great business to lend to: the business involves the ownership of telecom masts, from which space is leased to mobile companies over long-term contracts. Most mobile companies are happy to share masts and not own them as they adopt asset-light business models.

Helios has long-term contracts with high quality tenants whose business depends on this critical infrastructure. Given the currency risk in some of these countries, contracts are often pegged or redenominated to US dollar equivalents over time which helps mitigate potential currency volatility. Helios has been acquiring assets in new markets to increase its share of more hard currency pegged contracts from 65% to 73% of Ebitda, increasing predictability of cashflows for investors and reducing currency risk.

In developed markets, tower companies trade at huge multiples (20x Ebitda for American Tower for example) but Helios trades at a more muted 8x (which sounds far too low to us – even after taking account of the additional jurisdictional risks). The operating leverage inherent in these businesses allows them to deleverage fairly quickly, and Helios’ net leverage is on the right trajectory – falling to 4.8x from the post M&A peak of 5.1x, and is expected to keep falling towards the company’s target range of 3.5-4.5x. The debt trades at high single digit yields despite a December 2025 maturity, and has been volatile reflecting some of the moves of the underlying sovereigns it operates in. What we find interesting is that this is a credit that has operated in these markets for over 10 years and yet investors are still paid a risk premia more akin to a stressed company.

An interesting additional misperception is that emerging market credits may be less focused on ESG. Helios has a AAA rating from MSCI, and it also scores well on our proprietary ESG scoring and has put in place initiatives to reduce carbon intensity of the business (e.g. using solar power generators for towers). It’s a great example of understanding specific credit stories to find hidden gems.


This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.