Azhar’s crunching credit – Volatility grows, setting off bond rally

Volatility increased throughout the month with growth fears leading to a government bond rally and a widening of spreads.

Key indicators

• The US 10-year treasury yield tightened by 33 basis points (bps) during the month to end at 4.21%.
• Investment grade bonds outperformed high yield bonds. Global investment grade bonds returned +1.53% whilst global high yield returned +0.86%.
• High yield spreads were 16bps wider at 320bps, CCCs were 52bps wider, whilst single Bs were 17bps wider and BBs were 13bps wider.
• Investment grade spreads ended wider by 4bps at 90bps.
• The default rate was marginally (-0.2%) lower at 1.7%, this breaks down as US 1.4% (-0.2%), EU 3.4% and emerging market 1.7% (-0.2%). The gap between smaller issuers and larger issuers fell by 0.4% to 2.0% as the large cap default rate was unchanged at 1.0% whilst small cap default rates fell by 0.4% to 3.0%.

We had issuance of $37bn in global high yield bonds ($110bn year-to-date), $148bn in investment grade bonds ($333bn year-to-date) and $51bn in leveraged loans ($110bn year-to-date). 

As sceptical credit investors we are very focused on the downside as well as the upside of new technologies and this month we had an interesting story with Getty Images coming to credit markets to help fund its merger with rival Shutterstock.

Equity market valuations are something we keep a keen eye on, and soaring valuations most recently driven by ‘everything AI’ are an interesting phenomenon. As sceptical credit investors we are very focused on the downside as well as the upside of new technologies and this month we had an interesting story with Getty Images coming to credit markets to help fund its merger with rival Shutterstock. 

Getty Images, founded in 1995, had consolidated the stock photograph market over the last 30 years. This merger with the similar sized Shutterstock means that the combined company will have $1.8bn in revenues and be worth a combined $3.6bn. Getty has ridden recent financial market trends by listing via SPAC in 2022 (at an unsurprising high valuation) but the rise of hundreds of AI-generated content providers initially providing content ‘free’ has created a real negative threat. Unsurprisingly some of these providers have used Getty/Shutterstock owned content and so in May 2023 Getty initiated legal proceedings against one startup, ‘Stability AI’, seeking $1.7bn in damages, alleging that the start-up trained its image generation model on copyrighted media. The implications of this case are significant with a full trial in the summer of this year.

Getty raised $1.05bn to refinance existing debt that was coming due in February 2026, issuing €440m in a euro term loan at a margin of 600bps and $580m in a US dollar fixed term loan at a coupon of 11.25%.

We have had a dearth of ‘fallen angels’ (investment grade issuers that are downgraded to high yield) and so it’s a welcome event for the global high yield market.

Another significant story in the month was the downgrade of Nissan. We have had a dearth of ‘fallen angels’ (investment grade issuers that are downgraded to high yield) and so it’s a welcome event for the global high yield market. Nissan has been troubled in recent years, with sales down 28% over the last decade (most significantly in the US market) and its credit rating slipping from A to BB+. Nissan’s $9.5bn of debt was joined with $7bn of debt from chemical maker Celanese helping to grow the overall global high market by $50bn, the most in a month since the Covid period.

And finally, another troubled ex-investment grade issuer, Walgreens Boots Alliance, clinched a sale to private equity firm, Sycamore Partners for $10bn. A decade ago, the company had an equity market capitalisation of $94bn. With net debt having grown from the $11bn a decade ago the enterprise valuation has shrunk from $106bn to just $40bn (with a net $29bn of debt currently) whilst its EBITDA has only fallen from $6.8bn to $6.5bn over the same period. We expect Sycamore to break up the company and look forward to the Boots term loan to come. 

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