10.08.18

Snapshots is using the August lull and out of office replies to think about the bigger picture.

Dancin’ in September

It has been a weak year for the credit markets with negative returns across most sectors (with the exception of loans and parts of the ABS market).  As regular readers know, we took a cautious stance to the broad market in Q4 of last year when the Fed started to reduce its balance sheet.  We saw this as a signal for tighter liquidity conditions this year.  Turkey is the latest poster casualty of these tighter liquidity conditions.

The ECB will begin slowing balance sheet purchases in September and stop net purchases by December of this year.  The Bank of Japan is the last of the three large central banks to change policy which it tweaked this week by raising the allowable ceiling for 10-year Japanese government bond purchases.

The net effect of the Fed, ECB and Bank of Japan is that the global flow of central bank purchases will turn negative in the final quarter of this year even if the absolute stock (the size of their balance sheets) stays large.  We therefore think tight liquidity conditions are here to stay.

The good news is interest rates are still relatively low.  This means interest rate coverage ratios are still in the comfortable zone for most borrowers despite higher levels of corporate leverage.

M&A

The value of global M&A deals announced this year is the largest since records began in 1980.  We are expecting two of these deals to come to the credit markets for financing in September, notably the $17.3bn Thomson Reuters acquisition and the $11.6bn Akzo Nobel speciality chemicals spin-out.  Elon Musk is also planning (or wishing) to take Tesla private in a $80bn deal.  We are not sure who will provide him credit against its loss making and cash burning enterprise even if they love its cars.

There have been two notable M&A failures with NXP/Qualcomm and RiteAid/Albertsons which demonstrates the high risks in the current market.

Good luck as we head into the final quarter of the year.

Asif Godall
Co-Chief Investment Officer