Azhar’s crunching credit – January kicks year off with a bang

The year has begun with many of last year’s themes playing through – spread resilience and some rate volatility ultimately leading to an environment where carry dominated.

Key indicators

• The US 10-year treasury yield compressed 1 basis point (bps) during the month to end at 3.91% after widening to 4.17% intra-month before rebounding.
• High yield bonds outpaced investment grade bonds. Global investment grade returned +0.06% and global high yield +0.41%.
• High yield spreads were 1bps tighter at 401bps, CCCs were 18bps tighter, single Bs unchanged and BBs 1bps tighter.
• Investment grade spreads tightened by 4bps to 113bps.
• The default rate fell in the month by 0.1% to 2.7% – this breaks down as US 2.3% (-0.1%), Europe 1.5% and emerging markets 6.9% (both unchanged).
• The month of January saw an unexpected amount of high yield new issuance with $32.5bn issued. This is the highest monthly new issuance since September 2021 with the issuance split 26% BB, 64% single B rated and 10% CCC rated companies.

Credit stories

January started with a bang for DISH bondholders. DISH is a US satellite TV and aspiring mobile business run by maverick owner Charlie Ergen and has been overloaded with debt for some time – a concern for a business that has been in structural decline and needs capital for this change of business. The company announced that a new entity was being created with the merger into EchoStar, some existing spectrum assets moved in to allow potential new debt to be raised to create a liquidity bridge to refinance existing bonds at a significant discount to par value – the aim of this convoluted transaction being to cut the $22.7bn debt by $3.8bn.

For some time, we have been talking about how larger capital structures have many more options to defer default and DISH is one where the combination of valuable spectrum assets, weak covenants and a savvy owner was the perfect cocktail for this reshuffling of assets. In the long term this will weaken recovery prospects for non-consenting bondholders and likely increase overall default probability, with the bonds reacting accordingly with longer bonds down 13 points (from 51 cents to just 38) and shorter maturity bonds stable.

In Europe, risk appetites are heating up and we saw United Group open January’s market with a €300m preferred in kind (PIK) bond at 10% alongside an initial €950m of regular senior issuance to extend maturities. United Group, as an owner and operator of media and telecom assets predominantly across Eastern Europe, had cleared out its shorter-dated maturities with the sale of some assets earlier last year. PIK issuance is a phenomenon normally reserved for the hottest of credit markets and the ease of the issuance of this instrument is the clearest indicator yet that high yield markets are resoundingly open for all types of issuance this year.

And finally, we had Grifols, a Spanish blood plasma product maker, suffer a short seller attack alleging accounting irregularities and bad corporate governance, leading to a significant fall in the public equity (-46% at one point before rebounding to end the month down 33%) and the bonds (down 12 points, before ending the month down 6 points to 86 cash price and a yield of 7.3%, +180bps on the month). The company had just announced an asset sale and was quick in its response, indicating that it would be repaying debt with said proceeds and that the short seller had defamed the company. As the month rumbled on and stock and bonds remained at lows, Spanish regulators started to investigate the claims, the company announced governance changes – removing family members from executive positions and announced a new CEO.

So, the year has started with coercive debt moves, aggressive debt issuance and accounting allegations – it’s never quiet in credit!

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