Topic: Market commentary

A word with the CRO: Webinar replay available on demand

The on‑demand replay of “Credit Ratings 101: A Word with the Chief Risk Officer” is now available to watch here.

In this exclusive session, Richard Hunter, Chief Risk Officer of Fitch Ratings, introduces the fundamentals of credit ratings. The webinar covers:

  • What credit ratings are and why they matter
  • How ratings are determined, including the key analytical pillars and processes
  • The role ratings play across today’s financial markets
  • Practical insights to help both newcomers and seasoned professionals deepen their understanding

Richard’s perspective brings foundational concepts to life with real‑world context and thought leadership from one of the industry’s leading experts. Whether you’re just starting to explore credit ratings or seeking to sharpen your expertise, this replay provides a concise, high‑value learning experience.

Watch on demand now and don’t miss the opportunity to engage with essential insights on credit ratings.

Covenants 101: Webinar replay available on-demand

The webinar Covenants 101: Decoding Bond and Loan Covenants is now available to watch on-demand here.

The webinar, led by Covenant Review’s Head of High Yield Research, Scott Josefsberg, and Senior Loan Covenant Analyst, Ian Feng, provided an overview of bond and loan covenants, with a focus on practical understanding and analysis, and differences between the asset classes.

Capex Questions for the European Real Estate Market.

The “Euro Real Estate Primer: Capex Questions” report from CreditSights provides insights for credit analysts and real estate market enthusiasts, highlighting significant trends and strategic considerations

This primer highlights a range of current real estate capex strategies from a broad range of real estate companies CreditSights cover, alongside key sustainability trends that are shaping the real estate landscape, offering valuable insights for those analyzing credit and market dynamics.

You can view the full report here. Note that a CreditSights account may be required to view the document.

Overall, the European real estate market is evolving towards more sustainable and economically viable practices, driven by a combination of regulatory frameworks, tenant demands, and broader economic conditions. The capex strategies also reflect the need for companies to maintain property quality while balancing cash flow needs.

Key findings:

  • Real estate capex strategies: Reducing capex to a minimum level is not a sustainable long-term strategy given the impact on portfolio quality, and a demand for improved energy efficiency of building stock.
  • Energy efficiency and sustainability: Energy efficiency upgrades are emphasized as crucial, driven by regulatory demands and added value. Energy efficiency and sustainability criteria are driving purchase prices, whilst sustainability is becoming a pivotal factor in tenant demand, particularly within the B2B sectors like offices, retail, and logistics.
  • Development approaches: The primer explores development strategies, identifying achieving a 150-200 bp yield on cost (YoC) over cap rates as a good rule of thumb to balance risk effectively, although this differs across different projects and companies.
  • Expensed maintenance costs: Within the companies covered, in 2023, expensed maintenance costs relative to standing portfolio value ratios varied significantly, ranging from 20 bp to 190 bp, with an average of 0.60 bp.

For more insight into the European property market, you can also view our webinar ‘Picking Apart the European Property Problem’ with Mary Pollock, Head of Real Estate at CreditSights.

AI hype vs reality

The report ‘Technology: AI hype versus the reality’ from CreditSights provides a comprehensive analysis of the current landscape of artificial intelligence, focusing on the gap between expectations and actual performance. You can read the full report here. Note that a CreditSights account may be required to access the report.

For credit analysts, understanding the financial and strategic implications of AI investments is crucial. Analyzing a company’s AI strategy can provide insights into its long-term viability and growth prospects. Credit analysts should assess the financial health, strategic focus, and potential risks associated with AI investments, including technological obsolescence and regulatory challenges. By doing so, analysts can better evaluate the creditworthiness and future stability of companies navigating the AI landscape.

Key findings:

  • Innovation and adoption of generative AI is high. However, the revenue opportunity does not seem to justify the near-term investments. Issues around AI to be addressed include hallucinations, guardrails to protect the user experience, copyright infringements, security and privacy concerns. Cost is another aspect – although that is expected to come down over time driven by improved GPU efficiency and availability, amongst other factors.
  • In the race to beat the competition, budgets have opened up indiscriminate spending towards gen-AI. For most companies, it will be hard to justify the ROIC, not least for those whose internal development efforts will not lead to mass adoption.
  • Tech companies are racing to have the most advanced LLMs (large language models), whilst other companies are racing to adopt AI to stay ahead of the competition – or through fear of falling behind the competition. Capex as a percentage of revenue was more than 20% for Microsoft and just shy of 20% for Meta in 1Q24, with the expectation for capex in the top hyperscalers (Amazon, Microsoft, Google and Meta) to surpass $200bn in 2024.
  • AI hype has translated in higher market caps for the big tech companies, since early 2023. Earnings growth (some driven by gen-AI) and multiple expansion has driven this, along with earnings growth from other, non-AI related factors. Nvidia, where earnings growth has been driven particularly by gen-AI, now has a market cap nearly as large as Microsoft and Apple.
  • Enterprise software has had limited success with monetization associated with gen-AI. Long term the preferred approach appears to be combining proprietary data with third party LLMs in order to create unique and differentiated services, although the article authors do not expect a step-function change in growth that justifies the infrastructure buildouts taking place in 2024.

If you are interested in learning more about AI, you may like the following webinars:

Staying competitive with the latest AI applications

Generative AI: Credit implications for the tech sector

Building a career in the age of AI

Private Debt is Here to Stay in European LevFin

Private debt has solidified its role as an alternative asset class, with providers offering benefits such as more leverage, privacy, and certainty of execution compared to traditional banking options.

The recent report ‘Private Debt Is Here to Stay in European LevFin, but Competition Intensifies’, from Fitch Ratings, highlights how increased competition means that private debt direct lending will need to adapt to normalized conditions. The report discusses a number of challenges and changes that will impact private debt in the future:

  • Scarcity of new buyout deals means that all credit providers will now compete for the same financing opportunities. This may force private debt funds to look to existing issuers, and cooperate with syndicated lenders, in providing first-lien unitranche co-existing with first-lien TLB and senior secured notes.
  • Fitch Ratings expects private debt providers to retain pricing power in the less competitive part of the European leveraged credit market that targets smaller issuers.
  • Fitch Ratings suggests collateralised loan obligations (CLOs) of private debt will arrive in Europe soon, as providers seek funding flexibility, allowing them to use more leverage to compete on lower coupons and meet return expectations.
  • In Europe, private debt funds are forming clubs of lenders among themselves and their limited partners (LPs) to underwrite large leveraged buyouts (LBOs).
  • As LPs increase their exposure to private debt, many will require credit ratings for regulatory purposes.
  • Central banks’ rate cuts may mean that debt providers need to add more leverage on assets with lower coupons, or move out the risk spectrum to garner higher yields, or to maintain excess returns as those achieved in 2022-2023, when rates were high.

For the full report, follow this link. Please note that a Fitch Ratings account may be necessary to access the report.

2024 Primer on the U.S. Leveraged Finance Market

The “2024 Primer on the U.S. Leveraged Finance Market”, published by Fitch Ratings, offers a deep-dive analysis into the complexities and nuances of the U.S. leveraged finance market.

This comprehensive overview focuses on key factors influencing risk and opportunity for market participants such as corporate bond and loan underwriters and investors, CLO investors, corporate debt issues, private equity sponsors and regulators.

The primer includes a detailed overview of leveraged loans – what they are, what are the different types, their characteristics and their components. The document is a valuable resource for navigating the complexities of the levfin arena, providing a comprehensive understanding of the current state and forward look of the market.

To read the full document follow this link. Please note that a Fitch Ratings account may be necessary to access the report.

Key Findings

  • Market dynamics: The report reveals a deteriorating outlook for the leveraged finance sector in 2024, attributed to restricted access to capital markets and higher for longer interest rates. Highly leveraged issuers are pinpointed as particularly vulnerable under these conditions. However there are signs of improvement in high yield issuance volume.
  • Default rates: The forecast is for an uptick in default rates across high yield (HY) and leveraged loan (LL) markets, underpinned by the dual pressures of escalated interest obligations and stunted economic growth.
  • Default rates: An anticipated rise in default rates for high yield and leveraged loans is forecasted, driven by an increased interest expense burden coupled with a projected economic slowdown. Default rates for leveraged loans are expected to exceed historical averages.
  • Sectoral analysis: A granular breakdown pinpoints healthcare, telecoms, leisure and entertainment, broadcasting and media, retail, and technology sectors as critical arenas contributing significantly to anticipated default volumes.
  • Market activity: A resurgence in refinancing and repricing activity marks a proactive response to impending maturity walls, while private credit markets have shown positive growth for issuers unable to access the public credit markets. Meanwhile, CLO issuance activity has remained steady despite market challenges.
  • Private credit and private equity: The report delves into the growth of direct lending in light of the heightened banking regulations in the aftermath of the financial crisis. In addition, there is commentary on the US private equity market, where fundraising volumes remain flat as market activity contracts due to inflationary pressures and increases in interest rates.