Azhar’s crunching credit: cars, oil and... mattresses

Economic data in December showed that global inflation is both sticky and above central bank targets, while economic growth is resilient. This is a narrative that justified current spreads (so they were broadly static).

Meanwhile government bond investors began to price in a delay in US rate cuts, driving government bond yields higher and steepening the yield curve.

Key indicators

• The US 10-year treasury yield widened by 40bps during the month to end at 4.57%.
• High yield outperformed investment grade bonds. Global investment grade bonds returned 1.27% (finishing the year with a +3.43% return) while global high yield returned 0.21% (and 8.92% for the full year).
• High yield spreads were 4bps wider at 324bps, CCCs were 17bps wider, while single Bs were 4bps wider and BBs were 2bps wider.
• Investment grade spreads ended tighter by 2bps at 89bps.
• The default rate was marginally (+0.1%) higher at 1.8%, this breaks down as US 1.5% (+0.1%), EU 3.5% (+0.8%) and emerging markets 2.1% (-0.4%). The gap between smaller issuers and larger issuers fell by 0.1% to 2.2% as the large-cap default rate increased by 0.2% to 0.7% while small-cap default rates increased by 0.1% to 2.9%.
• There was issuance of $26bn in global high yield bonds, $50bn in investment grade bonds and $30bn in leveraged loans. This takes high yield volume to $475bn for the full year. Total volume of investment grade ended at $1.45 trillion and loans at $500bn.

Index returns indicate December was a relatively sanguine month, but below the hood we saw some interesting stories.

These index returns indicate December was a relatively sanguine month, but below the hood we saw some interesting stories.

We have written about how public markets have been helped by private markets taking away some of the riskiest borrowers and we had news in the month that Constellation Automotive was considering an all-private refinancing of its bonds and loans. Constellation, the owner of ‘We buy any car’ (responsible for one of the most annoyingly catchy advertising jingles) is a car reseller and its loans and bonds have suffered from a volatile resale climate. The debt had traded well into distressed levels and this story led to the bonds and loans starting to price in a refinancing.

Tullow Oil (an oil exploration company with operations mainly in Africa) has come close to the brink of default on several occasions over recent years. The company’s bonds experienced dramatic moves in December partly as it lost its CEO and partly on rumours that it had lost a tax case against the Ghanian government. Rumours of a takeover from competitor Kosmos then began to circulate, which were denied the next day. The company’s subordinated debt due in March 2025 traded in a volatile range, ending the year down 12 points to end at a cash price of 85 cents. Since month end, the company has received news that it has won its tax dispute, and the bonds have now rebounded up 10 points into the 90s. It’s an interesting credit for 2025 as the company had already raised liquidity to repay the 2025 debt. However, temporal seniority may be impacted by the fact that the rest of the capital structure is all due to be repaid in 2026. One to watch.

And finally, the year ended (yes, a story on New Year’s Eve) with a significant legal ruling in the case of Serta Simmons, a mattress maker that restructured its debt back in 2021 and went on to file for bankruptcy two years later. This original restructuring was highly unusual in allowing a select group of lenders to extract greater value by acting in concert to ‘uptier’ assets and liabilities to a new priority ranking subsidiary (to the detriment of supposedly ‘pari passu’ lenders owning the same instrument). A court had ruled in support of this action back in mid-2023 to the surprise of many, (the judge who made this ruling later resigned because of links with a litigator, implying conflicts of interest in his role, but we will leave that for the Netflix drama that will surely follow this judgement to explore). This original judgement weakened documentation sufficiently that loan deals following this ruling had to alter the legal language to ensure a repeat wasn’t possible. But clearly the old legal documentation was still outstanding for many borrowers and in at least two high-profile cases the precedent of ‘uptiering’ was followed. This case settled on the meaning of the phrase ‘open market transactions’. For most, the common sense interpretation of this open market is the secondary market and not a set of lenders acting in concert, so it’s good to see that common sense has prevailed with this ruling.

It’s an important ruling as 2024 was a year where most defaults (80% in the US high yield market) came from so called ‘LMEs’ or ‘Liability Management Exercises’. This involves creditors taking enforced losses outside of the regular bankruptcy default process, mainly due to the volatile current cocktail of abundant liquidity meeting over leveraged businesses.

We see 2025 providing more of the same, as the recent moves in the rates market support the narrative that lower yields are not coming to the rescue anytime soon. And with high profile companies with large capital structures, such as Thames Water in the UK, Bausch Healthcare in the US and Altice France in Europe, all involved in discussions between creditors and owners, we expect 2025 to be a year of tussles between creditors with differing motivations and with owners.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.