Financial Distress and the Itch for Corporates to “Finesse the Corporate Structure” – Part I:.. Financial Distress and the Itch for Corporates to “Finesse the Corporate Structure” – Part I: Unrestricting and Transferring Assets
By Guest contributor: Matthew Milbourn, Credit Analyst
With the macroeconomic outlook uncertain on elevated inflation and recessionary fears, companies are feeling the stress as growth expectations are tapered, margins are pressured and refinancing ability gets called into question. Even more troublesome, lower-rated companies with floating-rate instruments will experience higher borrowing costs.
1 February 2023
Quick Comment
ECB hikes 50 bps with more to come
By Gareth Jandrell
As expected, we got another 50bp hike from the ECB. On top of that, Lagarde revealed an intention to do another 50bp hike in March. The Governing Counsel maintained its language to raise rates “significantly”, “at a steady pace” and “keeping interest rates at restrictive levels”. So one would be forgiven for thinking the ECB was still on a hawkish trajectory. Markets thought otherwise, reacting as if the ECB had just announced rate cuts, with euro-area bonds rallying hard and the euro weakening.
Clearly the market is desperate for a sign that the ECB will soon start slowing the pace of tightening, so part of the dovish reaction may come down to positioning. Lagarde describing inflation and growth risks as becoming more balanced will have also given confidence to bond investors. Nevertheless, this rally does look premature; headline inflation remains a long way from target, core inflation has yet to see any meaningful reduction, and, as we recently saw from Spain, core inflation can still surprise to the upside.
Not much more to add on European QT from what we already heard in the December meeting, other than reinvestments will be broadly proportional across APP portfolios and the ECB’s corporate bond portfolio (CSPP) reinvestments will be tilted towards issuers with a better climate credentials. How these credentials will be defined is still unclear as this is going to be driven by a mix of measures, ranging from absolute emissions to good disclosure practices. I suspect investors will be laser-focused on which bonds are bought and sold by the ECB each week to figure out who is on the naughty list.
Markets welcome a dovish pivot earlier than expected
By Laura Frost
The Fed raised rates by 25bps yesterday in line with market expectations. It wasn’t so much the hike that was perceived dovish but the statement that followed. It is clear the Fed is still focused on inflation but this is the most dovish tilt we have seen since the 2018/19 Fed pivot. It is also clear that we are closer to the end of the hiking cycle, but the data is split with this continuation of labour market strength giving more hope of a soft landing.
The ratio of job openings to unemployed rose back to 1.9 – a sign of continued strength in the labour market with job openings back to 11 million. If the Fed is truly data dependent, then Friday’s release of average hourly earnings and CPI will be interesting if they do not show what is expected. This may force the now dovish Fed to rethink their change in narrative.
Whilst Powell did say they needed “substantially more evidence that inflation is on a sustained downward path”, he didn’t push back on the possibility of 50bps cuts toward the end of 2023. These are in fact already priced into the market (along with a slightly lower terminal rate now at 4.9%). As I see this, the markets’ desperation for the duration trade is being gifted by a dovish Fed and this shift in overall narrative might just be telling us – once again – not to fight the Fed.
Meanwhile the ECB and BOE decision today potentially means further weakness for the USD, as the ECB has lead markets to think it is still on a hawkish path. However, the decision reminds us of one more key thing – not to rely on forward guidance.