26.01.18

Snapshots has not found any inspiration from the world’s leaders in Davos. We asked Amazon’s Alexa for inspiration and heard some great existential quotes from the eccentric British philosopher, Alan Watts.

Telecoms

Unfortunately, Alexa does not provide credit research yet so we still have to do our own.  It always helps to start looking where large volumes of debt creation has or is taking place. The current credit cycle has seen some aggressive debt funded M&A by the telecom industry as it tries to dominate in the convergence of broadband, television, wireless and content. The telecom industry is now battling for content with the seemingly bottomless pockets of the technology FANGs. There has been a fierce price war for customers in France and the US. And all this, on top of further outlays that will be required to fund infrastructure for 5G networks and Internet of Things as we push further into a digital world.

There is a growing pile of stressed telecom debt in the bond markets. This is currently coming from the dying business models of fixed line regional operators in the US and not the new digital telecom operators. As ever, we are watching the industry for any sudden changes in operating performance.

“Cause I went from negative to positive and it’s all good”*

We said that 2017 would mark the end of ultra-loose central bank policies. The stock of negative yielding fixed income securities has reacted and already fallen by $1trillion to $7.5trillion according to Bloomberg and Barclays data. We expect this trend to continue. At the moment, it is not having any effect on the pricing of risky credit, although we note persistent outflows in the high yield markets over the first three weeks of this year.

Consumer Debt

Default rates in (unsecured) consumer finance loans and credit cards are continuing to climb in the UK. This is in contrast to mortgage default rates (secured lending). Mortgage regulation was introduced after the financial crisis which has made mortgages “safer” with strict affordability tests and stress tests.

The Bank of England is worried by the unsecured trend and closed its consultation on persistent credit card debt recently. New rulings are expected by the end of this quarter. We continue to monitor developments in the modelling assumptions of credit card portfolios (so called Effective Interest Rates) and also the modelling assumptions used by the booming debt collector market (so called Effective Remaining Collections). Analysis of these modelling assumptions are causing some lively debates around the trading desk!

*The Notorious B.I.G. – Juicy –  1994 – Bad Boy Records LLC

Good luck.

Asif Godall
Co-Chief Investment Officer