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More corporate defaults lie ahead in 2024, warns Fitch – Industry roundup: 29 December

Expect more corporate defaults in 2024, says Fitch

There will be an increase in corporate defaults on both sides of the Atlantic in 2024 as the impact of tighter central bank policy will continue to work its way through the US and European economies, Fitch Ratings cautioned.

However, the ratings agency expects a much shallower Federal Reserve pivot than that anticipated by US markets. It forecasts that US interest rates will fall by 75 basis points through next year, taking the Fed Funds rate to 4.75%. 

But despite hopes for a pivot from central banks around the world, high borrowing costs will continue to be a burden on corporations over the year ahead.

“Stressed bond and loan issuers appear increasingly operationally challenged, generate low or negative [free cash flow], and/or cannot organically grow EBITDA to reduce high debt burdens,” Fitch comments in its latest report.

Since the end of 2022, total 12-month defaults among US bond and loan issuers jumped from 1.6% to 3.04% for leveraged loans, and 1.35% to 2.99% for high-yield bonds.

Through October 2023, the year has been marked by127 corporate debt defaults, 13% above the five-year average, as borrowing costs have come close to tripling for some firms compared to previous years.

But in 2024, defaults could rise to a rate of 3.5%-4.0% for leveraged loans, Fitch estimates. It expects high-yields bond defaults to reach 5.0%-5.5%, over six times the default rate among all such issuers in 2021.

Zombie firms, illustrated by the bankruptcy in November of WeWork – once valued at US47 billion, but which accrued US2.9 billion of debt – are particularly vulnerable, given their lack of cash on hand to handle borrowing needs.

“The higher default rate expectations for 2024 reflect ongoing macroeconomic headwinds, including the impact of still high interest rates and a slowdown in the US economy in 2024 relative to 2023," the agency said. "However, Fitch does not forecast a recession for the US in 2024.”

Wall Street has also warned of a coming wave of bankruptcies. Bank of America expectsUS$46 billion in distressed high-yield debt in  2024, expecting defaults to accelerate to 3.4%.


Investment banks “facing talent crunch”

A key theme of 2023 has been job cuts in investment banking last seen in the aftermath of the 2008 global financial crisis, reports Financial News.

In addition to the losses that followed the takeover of Credit Suisse by UBS last March, Citigroup, Goldman Sachs and Morgan Stanley have all stripped out thousands of roles as they adjusted headcount to match a slumping M&A market that has seen investment banking fees drop by 19% this year after a torrid 2022.

But amid the carnage, the paper reports that banks have seen an opportunity to capitalise on the “dislocation” in the market. Job cutting has extended beyond the annual trimming of underperformers, and highly-regarded bankers have become available. Meanwhile, top dealmakers have managed to prise out bankers that would not have entertained a move in a better market.

“Attracting and retaining high-performing talent remains a challenge for most large commercial banks, given their ability to generate higher returns in more profitable and lower-risk business lines away from investment banking,” Dominic Lester, head of investment banking for Europe, the Middle East and Africa at Jefferies, told the paper. The bank has added scores of senior dealmakers this year.

“This provides an opportunity for pure-play investment banking firms... to take advantage of competitor dislocation to invest in future growth and expansion,” he added.

“We have invested heavily in our franchise and are very happy with the talent that has joined us in 2023,” said Henrik Johnsson, co-head of European investment banking at Deutsche Bank. The demise of Credit Suisse presented the German bank with an unprecedented opportunity to hire senior bankers at a discount rate.

Senior dealmakers in Europe are predicting a rebound in activity next year, and many firms have been reluctant to cut investment banking teams too deep, reports Financial News In 2021, amid an unprecedented surge in deals, banks were forced to turn away work as the lacked enough people. With few anticipating a downturn in 2022, banks over-hired and often locked in top dealmakers on big pay packets and guaranteed bonuses, only to cut back again this year.


UK economy should avoid recession next year, say economists

The UK’s economy is likely to avoid a recession in 2024 and strengthen in the second half of the year as consumers benefit from falling inflation and the easing of a lengthy cost-of-living crisis, according to Bloomberg.

In aggregate, the 52 economists that it surveyed believe the Treasury and the Bank of England will engineer a soft landing for the economy next year, with growth of 0.3% and a recession averted.

Prime Minister Rishi Sunak must call an election by January 2025 and If the economy is to decide the outcome his best chance appears to wait until the summer, judging by forecasts for the year ahead. While those readings signal that the UK will join Germany at the bottom of the Group of Seven growth table, next year also is expected to deliver an advance in real incomes for consumers after the worst inflation shock in three decades.

“The outlook is far rosier for 2024 than expected 12 months ago,” said Barret Kupelian, chief economist at the consulting firm PwC.

Sunak and Chancellor of the Exchequer Jeremy Hunt have been laying the groundwork for a growth-enhancing consumer boom, scheduling a budget statement on March 6 to highlight the centrepiece of their agenda.

Nearly one in three of the economists who submitted quarterly forecasts to the Bloomberg survey expect a contraction in the fourth quarter of 2023. That would put the UK in recession under the common definition of two consecutive quarters of negative growth, after estimates published on 22 December showed that the UK economy shrank 0.1% in Q3 as consumers tightened their belts.

Early 2024 will be touch-and-go as well, according to Dan Hanson, senior UK economist at Bloomberg Economics. The UK will “tread a fine line between stagnation and contraction in the first half,” he said.


Turkey hikes monthly minimum wage by 49%

Turkish government bonds have fallen and the lira (TRY) hit a new record low after a 49% increase in the national minimum wage. The move threatens to fuel inflation and puts investors on alert for pre-election populist measures from President Recep Tayyip Erdogan.

The government raised the net minimum wage for 2023 to TRY17,002 liras (US$578) per month, a level which Goldman Sachs and Morgan Stanley had suggested would force the central bank to further tighten monetary policy. Turkey’s central bank has raised interest rates via seven consecutive increases from 8.5% to 42.5% in recent months.

The minimum wage is the base salary of more than a third of Turkey’s workforce and serves as a reference for other pay deals. The decision was closely watched by credit rating agencies and investors, who are anxious for authorities to stick to the orthodox policies adopted after a May election returned Erdogan to power.

The swing back to orthodoxy — particularly the aggressive interest-rate rises deployed to rein in inflation — has been luring foreign investors back to Turkey.

However, the lira has slid this week and on Thursday approached 30 per dollar. The yield on Turkey’s two-year government bonds jumped 120 basis points, and 10-year borrowing costs rose 23 basis points, a stark contrast with year-end rallies across most other emerging markets.

“There is the potential for very strong returns from Turkish assets in 2024, as long as they stick to credible economic policy,” said Daniel Wood, a portfolio manager at William Blair International.

“Investors will see the upcoming local elections in March as critical to negotiate in order to add further credibility and reassurance that Turkey will not U-turn on policy this time around.”


Nigeria’s competition watchdog fines BAT US$110 million

Nigeria’s competition authority has announced a final resolution to an investigation into British American Tobacco (BAT) in the country that resulted in a US$110 million fine.

The Nigerian Federal Competition and Consumer Protection Commission (FCCPC) said in a statement that the investigation, which began in August 2020, was into a “broad range of anti-competitive conduct, including abuse of dominance, seeking to frustrate competitors” and penalising retailers for “providing equal platforms for product display of competitors”.

In addition to the fine, BAT Nigeria also agreed to be monitored for two years. The commission said that this would ensure that the company’s practices were “more consistent with compliance with prevailing competition laws/regulations and tobacco control efforts”.

“The investigation has been known about for some time, and there will be an element of relief that there’s clarity in the outcome,” commented Sophie Lund-Yates, lead equity analyst at financial services firm Hargreaves Lansdown.The tobacco giant stood accused of abuse of dominance, including penalising retailers that offered the same platform to competitors. The sheer size of British American means probes like this are a constant possibility.

“The inherently sticky nature of revenue means paying the fine won’t cripple the group and will serve more as a slap on the wrist than a derailment of the investment case. Larger concerns for investors centre around the long-term take up and regulatory landscape for next generation products, which include things like vapes and heated tobacco.”


Hopes for Bitcoin ETF trading launch on 15 January as decision approaches

The cryptocurrency community is keenly awaiting the decision from the US Securities and Exchange Commission (SEC) on whether to approve or deny applications for a Bitcoin exchange traded fund (ETF).

Industry experts and analysts are speculating on the potential impact of the decision for the leading cryptocurrency. Blockchain expert and “renowned Bitcoin maximalist” Fred Krueger is among the more optimistic voices and recently declared “We’re two weeks away from the biggest event in the history of Bitcoin. On 8 to 10 January, the ETF should get approval. It should start trading as early as 15 January. This is going to change everything.”

If Krueger’s optimistic forecast is realised it would enable anyone with a brokerage account to easily invest in Bitcoin. He also states that the potential inflow of new capital into the ETF, distinct from traditional cryptocurrency exchanges such as Coinbase, could herald a new era of mainstream adoption and investment.

His views are shared by crypto analyst Dan Rover, who believes that Bitcoin could surge to US$200,000 or more if the proposed BlackRock Spot ETF receives SEC approval.

Rover points out that BlackRock, the world’s largest asset manager, boasts an impressive ETF approval rate of 99.8%, having faced only one rejection in its history. Larry Fink, the CEO of BlackRock has publicly expressed a favourable view of Bitcoin, referring to it as “digital gold” and emphasising its potential role in diversifying investment portfolios.

The submission of applications by other major asset management firms such as Vanguard and Fidelity for their own Bitcoin spot ETFs further indicate a growing interest and confidence in the cryptocurrency market.


US smaller firms step up use of business credit cards

Small and medium-sized businesses (SMBs) in the US have stepped up their usage of business credit cards in recent months, according to the latest quarterly survey by PYMNTS Intelligence and business data provider Enigma.

“Managing cash flow is an essential aspect of running a small- to medium-sized business, and business credit cards can be a valuable tool,” they note.

“In October, 22% of Main Street SMBs used business credit cards to face contingencies, while 15% did the same in July, and 18% did so in April. Business credit cards were used more than any other working capital solutions, such as business loans or merchant cash advances for all three months.”

The Q4 survey drew from a survey of more than 500 Main Street SMB players across the United States. The study explored the key challenges and opportunities associated with the digital transformation these businesses are facing as well as their access to credit and financial sources.

The study looked at firms with annual revenue between US$150,000 and US$10 million from five different segments: retail trade, construction, professional services, consumer services and hospitality.

The study found that around half of Main Street SMBs had access to credit in October. Among reviewed financing sources, business credit cards emerged as the preferred option to manage cash flow. Using these cards to finance purchases, businesses could conserve cash reserves by strategically planning payments based on cash flow.


Kenya scraps Eurobond buyback plan

Kenya has abandoned a plan to buy back a portion of a US$2 billion eurobond, sidestepping a potential default on the terms of the debt, which mature next June.

The East African nation paid US$68.7 million in interest on the bond, which “underscores Kenya’s steadfast dedication to meeting external obligations,” said Cabinet Secretary Njuguna Ndung’u. The government will pay the principal on maturity, according to the statement, which made no mention of its pledge to repurchase US$300 million of the notes.

President William Ruto’s government backed away from the plan to repurchase early — meant to allay investor concerns about its ability to pay — as some money managers and credit assessors raised concern that the move could be seen as a technical default.

“The final interest payment on this eurobond is scheduled for the last week of June 2024, alongside the repayment of the principal amount of US$2 billion,” Ndung’u said.

Ruto initially announced the plan to buy back as much as half of the debt, but government officials reduced the target to US$500 million, and then US$300 million, which sends mixed signals according to some investors.

“The inconsistency in the messaging is concerning,” said Thato Mosadi, a fixed-income strategist at investment bank Jefferies. “However, we remain confident about the future trajectory of multilateral inflows that will help Kenya settle its outstanding principal on the 2024 eurobond.”

The yield on the notes due June 2024 was 13.36% by 19:07 p.m. in Nairobi, the lowest since 22 November. Yields have dropped for three consecutive days, the longest streak since 21 November.

Investors have been concerned about Kenya’s ability to make the bullet payment given the nation’s debt burden amid rising energy and food import bills. The country had US$6.7 billion of foreign-exchange reserves as of 21 December.

Kenya expected a loan from pan-African lender Trade and Development Bank mid-December that it intended to spend on the repurchase, central bank Governor Kamau Thugge told reporters earlier this month. Other than that facility, the National Treasury was also counting on some inflows from the International Monetary Fund (IMF) in January.


Commerzbank’s economists assesses the Euro as it turns 25

The single European currency, aka the Euro, was launched on 1 January 1999, although for the first three years it was effectively an “invisible” currency used only for accounting purposes and electronic payments until the launch of coins and banknotes three years later.

Next Monday marks the 25th anniversary of the launch and Commerzbank’s economists have taken a brief look back at the currency.

“Among the four major currencies, the Euro has performed well since its launch,” they comment. “Even taking into account the recent period of high inflation, the inflation target has only been narrowly missed overall; the Euro is as strong against its trading partners as the lower inflation rate relative to these countries would suggest. The real economic impact of exchange rate fluctuations is therefore minimal.

“Of course, the Euro is not a competitor to the US Dollar. It cannot match the significant strength of the USD in the years since the financial market crisis, nor can it seriously compete with the Greenback as the world's leading currency.”

Not surprisingly, the UK’s euro- sceptical Daily Express pointed out this week that the currency has not been adopted by all Europeans. “The official currency in every European country may surprise you, with only half using the Euro. Europe is home to 746.4 million people in 50 nations, with more than 200 languages spoken across the continent,” the newspaper noted.

“Unsurprisingly, the most commonly used currency is the Euro, used by 25 countries. Most of those entering the European Union are expected to join the currency if they meet certain criteria. Among the 25 other countries not using the Euro are Albania, Hungary and Switzerland, using currencies such as the Let, the Forunt and the Swiss Franc.”


Nigeria nears groundbreaking deal to supply gas to South Africa

Nigeria’s liquefied natural gas producer, Riverside LNG, has revealed that it is in talks to supply gas to South Africa, in what would be the first such deal between the two countries.

The company earlier this year signed a gas-export partnership agreement with Johannes Schuetze Energy Import of Germany and is now looking for deals on the continent, Chief Executive Officer David Ige said in an interview in the capital, Abuja.

“We’d probably very early in the year close out another segment of the market, an off-take for South Africa,” added Ige, a former executive at the state-owned Nigeria National Petroleum Corp  “There’s a massively evolving gas market in the region, anything around 3,000 nautical miles of Nigeria. So that covers southern Africa, western Africa, all to northwest Europe and to the Caribbean and South America broadly.

“A lot of those countries are looking to go gas. We see a huge opportunity for Nigeria in being a trading hub.”

Ige would not disclose additional details regarding the discussions with South African counterparts, citing confidentiality clauses. The company is also exploring opportunities in Liberia and Cameroon.

Nigeria boasts the largest gas reserves in Africa. The country is projected to dominate the African natural gas and LNG supply market from 2023 to 2027 as the use of fossil fuels is steadily phased out globally.

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