(Bloomberg) — The corporate bond market seems surprisingly jaded with the risk of an economic downturn right now.
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US job growth is slowing and consumer spending looks increasingly weak. While blue-chip U.S. companies remain healthy overall, some early signs of trouble are emerging, including rising costs and pressure on profit margins, Citigroup analysts including Daniel Sorid wrote this week.
So far, investors have not necessarily taken this into account. Growing demand for investment-grade global debt has reduced the extra yield it pays over government bonds, or spreads, to the lowest since March, when the U.S. regional banking crisis hit global credit markets. credit.
“The rate hikes that the economy is digesting will start to show up in the income statements of quality companies,” said David Knutson, chief investment officer at Schroders Plc. “The economy will continue to slow gradually, and a slowing economy generally means wider spreads.”
Any downturn would be painful for companies that have racked up huge amounts of cheap debt in recent years. As companies refinance themselves, these borrowings are likely to become a cornerstone. According to an analysis by Bloomberg Intelligence last month, more than $500 billion of BBB-rated bonds, two notches above junk status, are at risk of global downgrades.
Weaker measures
“Cash flow metrics and margins were weaker across virtually every industry,” said Joel Levington, director of credit research at BI, after looking at nearly 1,450 issuers. “If trading trends continue, you end up with lower leverage metrics like debt/Ebitda. And that could have ratings implications.
More companies downgraded to junk status would also make it harder for existing companies with speculative credit ratings to raise funds and could potentially lead to increased defaults.
UBS Group AG forecast last month that defaults on leveraged loans and junk bonds would reach 8% and 6%, respectively, by early 2024.
Even top-notch corporate executives appear to be bracing for a downturn in the economy. Citigroup analysts point out that redemptions as a percentage of earnings before interest, taxes, depreciation and amortization are already down, as are dividends relative to the same metric.
more conservative
“Trends in shareholder returns suggest that IG companies are becoming more conservative in using cash ahead of a possible downturn,” the analysts wrote.
Others are more positive about the outlook. “The well-telegraphed impending recession that has yet to materialize has led many companies to remain cautious in their growth plans and balance sheets, leaving them better positioned than we would usually see at the end of the cycle,” said Travis King, Head of US Investments. quality companies at Voya Investment Management.
Yet Apollo Global Management Inc. economist Torsten Slok points to an increase in recent weeks in the number of companies with liabilities of $50 million or more seeking bankruptcy protection, a sign that the cycle of default may have started in the broader credit market.
“Maybe the interest rate hikes are starting to kick in,” he said, adding that “the Fed is having success in slowing the economy.”
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State-backed builder Sino-Ocean’s dollar bonds nearly halved in a week after its shareholders set up a task force to review its debt and hired a financial adviser.
Moving
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Wells Fargo & Co. has hired two high-yielding salespeople from Credit Suisse Group AG, namely Brian Harris and Emma Bramson.
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UBS Group leveraged loan saleswoman Teresa Debenedictis has left the Swiss lender after working there for more than 25 years.
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Royal Bank of Canada corporate credit trader Adam Russell has left the bank, while three new recruits have joined the European debt capital markets team, including Alex Ulrich and Eugen Eichwald in Frankfurt.
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