Daily Update: Capital Markets Stay Challenging As Maturity Wall Looms
Today is Friday, May 5, 2023, and here’s your curated selection of essential intelligence on financial markets and the global economy from S&P Global. Subscribe to be notified of each new Daily Update.
Capital markets have experienced a challenging year. Issuance remains steeply down compared with 2021, volatility has been strong in the secondary market, defaults are up and companies have been reluctant to refinance at higher interest rates. Ruth Yang and Chris Porter of S&P Global Ratings took the temperature of ailing capital markets in their Capital Markets View – Q1, 2023.
At the top line, issuance has fallen back sharply from the high-water mark of 2021. Although underwriters signaled increasing activity early in the first quarter, they have since gone quiet as the high interest rate, high inflation environment persists.
“It was a window of opportunity,” said Ruth Yang, global head of thought leadership at S&P Global Ratings. “People wanted to get a bunch of things done if they could do things to raise capital while the market was relatively optimistic, and things were looking pretty good. They got deals out.”
The market sentiment seems to be that interest rates will start to come down in 2023. But experts caution that even if central banks begin to lower rates, these are unlikely to return to 2021 levels. As higher rates persist, capital markets and issuance will likely remain slow through the end of this year and even into 2024. In this challenging environment, defaults have crept up and spread across multiple sectors. While the actual default rate is below 7%, speculative-grade debt is under greater scrutiny from investors.
Many corporates negotiated debt during the previous low interest rate environment. However, those loans will begin to mature soon, with the majority due in 2025 and 2026. Corporate treasurers are incentivized to renegotiate debt before the final year of maturity, since lenders will command higher rates if they know maturity is imminent.
“Time is not our friend here,” said Yang. “The longer this goes on, the more it becomes really, really challenging for borrowers, and it’s hard to see what the exit ramp is in this high interest rate and slowly lowering inflation environment.”
Direct lending, also known as private credit, could be the silver lining to this dark cloud. Private credit markets have demonstrated the ability to take on larger deals. In some cases, this has allowed issuers to step away from the public credit markets. A few direct lenders are reselling loans among themselves, creating a secondary market for private debt. This is a process called syndication. Some investment banks are looking into formalizing the secondary market for private debt. However, syndication is not always possible because some loan documentation doesn’t allow for reselling the debt.
Despite the positive news in private credit markets, returns appear to be getting pinched in some markets. “In my mind, the direct lenders need to show to their investors that they’re going to get a better return than going into other forms of credit,” said Chris Porter, head of private equity, loan and collateralized loan obligation business development for EMEA at S&P Global Ratings. “However, I think what is happening in Europe is that there are now so many direct lenders that there’s competition for debt and therefore the pricing is coming down when they lend.”
Today is Friday, May 5, 2023, and here is today’s essential intelligence. The next edition of the Daily Update will be published Tuesday, May 9.
Written by Nathan Hunt.
Economy
Romania Successfully Accelerates EU Funds Absorption In 2022; 2023 May Be Challenging
S&P Global Market Intelligence’s 2023 annual projections for Central Europe and the Balkans show GDP growth decelerating across the region, amid tighter monetary policy and weaker external demand. Against these headwinds, EU funding inflows, including under the RRF, are expected to support fixed investments in several countries. This support is quite substantial for Romania. The country's national RRF plan was endorsed by the European Commission in September 2021, amounting to EUR29.2 billion, or 12.2% of GDP, of which EUR14.9 billion are in loans and EUR14.2 billion in grants.
— Read the article from S&P Global Market Intelligence
Capital Markets
Banks Grow Cautious On CRE, Raising Questions For Borrowers And Policymakers
Banks' rising caution about commercial real estate loans will increase stress on borrowers and could pressure policymakers to intervene. Investors have increased their scrutiny in recent weeks of loans tied to commercial real estate properties, especially office buildings, as they probe bank balance sheets for weakness following the failures of Silicon Valley Bank and Signature Bank. Banks, in turn, have tightened underwriting. Analysts say the trend is likely to continue and could produce ripple effects that span years.
—Read the article from S&P Global Market Intelligence
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Global Trade
Russian Seaborne Crude Exports Hit 12-Month High As Indian Imports Surge
Russian seaborne crude exports rose 8% on the month in April to a 12-month high as Indian refiners snapped up record volumes of discounted Russian oil displaced from Europe due to sanctions, according to tanker tracking data. Russia-origin seaborne crude exports averaged 3.76 million b/d in April, the highest since April 2022 and 22% above average pre-war levels of 3.1 million b/d, according to S&P Global Commodities at Sea data. India imported almost 2 million b/d of Russian crude in the month, the data shows, a 14% jump on March and a fresh record high for Russian crude flows into the country.
—Read the article from S&P Global Commodity Insights
Sustainability
Battery Stampede Spurs Sunny Storage Economics In ERCOT
In unison with the region's fast-expanding solar and wind generation fleets, utility-scale battery energy storage in the Electric Reliability Council of Texas Inc. service territory is projected to grow exponentially over the next decade. Aiding this growth are storage economics that are forecast to be relatively healthy. The S&P Global Market Intelligence Power Forecast shows battery energy storage systems in some parts of ERCOT reaching 80% of a full equity return for investors.
—Read the article from S&P Global Market Intelligence
Energy & Commodities
Ferrous Scrap, Metallics Markets Gear Up For Low-Emissions Steel Shift
Ferrous scrap markets are eying an increasingly broader role in steel sector decarbonization as a move to expand electric arc furnace steelmaking in Europe, North America and Asia gathers pace with a stronger need for high purity scrap and direct-reduced iron. Recycled steel scrap grades and metallic iron products, along with new plant investments, may enable EAF and blast furnace steelmakers to produce higher quality steel grades while cutting carbon emissions.
—Read the article from S&P Global Commodity Insights
Technology & Media
Global Tech's Shift From China: The Effects By Firm
Global tech is investing heavily to reduce its reliance on China. Deepening geopolitical strains, controls on tech exports to China and supply outages during the pandemic have prompted companies to diversify production. S&P Global Ratings believes the transition will be modestly credit negative for the global tech firms it rates for three to five years. Dispersed manufacturing won't be as efficient as utilizing giant factories in China, which maximize economies of scale and draw on established supplier networks, infrastructure, and talent. Some companies may retain redundant capacity in China in case they encounter production hiccups while ramping up new sites.
—Read the report from S&P Global Ratings