Credit Market Daily #65

28-December-2022

Good Morning!

This is a brief note from me this morning given that we are in “Twixtmas” and markets and newsflow will be relatively quiet.

Looking at last week’s performance rates remained pressured by supply and the surprise move by the BoJ with thin trading cited as a reason for outsized moves.

Spot the difference – Equity up on the period 19th to 28th December

Asset Class	EUR	GBP	USD
High Yield	-27 bps	-6 bps	-32 bps
Investment Grade	-91 bps	-67 bps	-165 bps
Equity*	+78 bps	+144 bps	+64 bps
Rates**	-269 bps	-97 bps	-199 bps

Tesla stock’s tumble over the last few trading sessions is another canary in the coal mine. (The Gilt wobble, housing, consumer confidence crypto and FTX are other canaries)

For reference see the below comparison of Tesla’s market cap vs. the next 10 largest Auto manufacturers and also their deliveries vs. the next 10 largest Automakers.

This data comes from the WolfStreet Report and was around the peak of Tesla’s valuation.

Post Tesla’s slide its market cap is now standing at $344.5bn.

I am not saying that Tesla’s market cap cannot get back up to $1.1tn, more that I think the stock is a sign of the animal spirits markets have enjoyed as central banks created asset bubbles with QE.

Some bubbles will pop, some will deflate and some are likely to endure.

Tesla’s slow puncture gathers pace – decline in market cap

Monetary policy tightening around the globe is going to drive investors to question valuations vs. fundamentals.

Where fundamentals are challenged – e.g. Automakers heading into a recessionary environment and valuations are stretched – e.g. Tesla any normalisation is going to be, and has been epic.

This goes for Credit too – aggressively priced and weakly documented deals of the ’19-21 period benefitting from access to cheap capital are likely to see similar challenges to their valuations.

A 4.5x levered deal that originally came with a 9x EV/EBITDA “post synergy” valuation probably seemed “fine” given the implied equity cushion and expectation for growth.

Going into ’23 with weakening operational performance and an EV/EBITDA of 5x such a credit is not the sure thing it was 2 years ago and that 6% coupon is not looking so great.

The big gotcha here though is that most companies have termed out their maturities and so even in a distressed situation where operationally they have hit the buffers, they have time on their side.

Refinancing catalysts for defaults will be few.

Clearly, markets can force a restructuring if fundamentals need them to, but having seen “zombie” companies continue to shamble on I am not calling time on them yet.

’23 will be more about fundamentals, and as credit spreads widen relative value will become even more important.

Mind the Valuation / Fundamentals Gap.

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Performance

High Yield

Investment Grade

Rates

Equities