A normally dull corner of the UK investment market is teetering, highlighting potential problems ahead for inflation-exposed corporate debt.
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Thames Water, Britain’s largest water supplier, is in talks with government officials over its options for dealing with its debt load of more than £14 billion ($17.8 billion) . Its burden has become more onerous largely because of its use of inflation-linked bonds, which account for more than half of its senior debt and have remained high in the UK.
As central banks raise rates to tame inflation, companies have been immediately hit in at least two ways: they’re paying more interest on their floating-rate debt and their inflation-linked bonds are rising. There is more than $1.8 trillion of this type of debt in circulation around the world that has been sold in the capital markets, most of which is leveraged loans, but also floating rate bonds. company and inflation-linked securities.
The outlook for much of this debt is worsening, with Fitch Ratings citing inflation uncertainty as one of the reasons for raising its default rate forecast for US leveraged loans to up to 4 .5% this year compared to a January forecast of as little as 2.5% . BNP Paribas analysts this week advised clients to sell leveraged loans in the US rated B- due to high interest charges from some companies.
Companies that rely on variable-rate debt will be “heavily affected” by the higher rate environment for longer, said Michael Koehler, credit strategist at Landesbank Baden-Wuerttemberg. He expects most other companies to come out relatively unscathed.
Now the struggles of Thames Water have shifted the spotlight to British utilities. More than half of the £60.6bn ($80bn) of debt issued by water companies in England and Wales is indexed to inflation, according to Ofwat, the sector regulator .
UK companies account for almost a third of inflation-linked corporate securities globally. Only Brazilian companies are bigger borrowers in the space.
The blow to public services could have been cushioned by using derivatives to hedge against spiraling inflation, but several companies failed to do so. Many private equity firms have also been hurt by their decision to opt out of hedging arrangements which, for much of the past decade, could have protected companies at very little cost.
Read more: Hedge failure hammers private equity as cost of debt soars
Granted, the majority of the global corporate debt market is made up of fixed-rate bonds that will only become painful when the time comes to refinance them.
Yet companies with high levels of variable-rate and inflation-linked debt may end up in need of relief the most and may be left with few options to resolve their problems.
“In a higher rate environment, we consider private credit and loans to be more vulnerable than public credit because their financing terms are more often variable rate and they have fewer financing alternatives,” Elisa said. Belgacem, senior credit strategist at Generali Investments.
Review of the week
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The three-month London interbank offered rate for the dollar was last set on June 30, ending 50 years as the global benchmark.
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Ken Griffin’s market-making powerhouse, Citadel Securities LLC, is challenging Wall Street banks on their own turf as it enters the world of multi-billion dollar corporate debt.
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Foreign borrowers are raising a record amount of yuan debt in China as lower interest rates and looser rules boost the appeal of a market designed to help internationalize the national currency.
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Middle Eastern cash, Greek banks and a UK fintech company: New investors dive into the $1.3 trillion secured loan bond market, tempted by some of the highest yields in more than a year decade.
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Canadian pensions are piling up in private debt, but there could be more private credit troubles to come.
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Bonds issued by Indian companies saw their largest inflow of foreign capital in five years, the biggest sale of low-quality local currency debt ever by Goswami Infratech Pvt. – attracted a multitude of foreign investors attracted by the high yield offered.
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A feel-good rally that took yields on the world’s lowest-rated bonds to a four-month low has come to an abrupt end.
Moving
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Oaktree Capital Management has named Robert O’Leary and Armen Panossian as joint managing directors, selecting two veterans to lead the company from the first quarter of next year. Jay Wintrob will leave after nearly a decade as Oaktree’s first CEO.
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Credit market veterans Michael Goldstein and Josh Neren are leaving BDT & MSD Partners, the advisory and investment firm backed by Michael Dell, and turning a fund they co-lead into a new venture, according to people with knowledge of the business. subject.
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Clarke Adams, managing director and head of US leveraged finance syndicate at Morgan Stanley, has left the bank, according to people familiar.
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Jefferies Finance LLC has hired Vincent Ingato of ZAIS Group LLC as managing director, according to people familiar. He will be portfolio manager for secured loan bonds in his new role, one of the people said.
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Bank of Nova Scotia credit trader Alex Lederman is leaving the Canadian lender, according to people familiar.
–With help from Taryana Odayar and Dan Wilchins.
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