As there has been little activity on the markets in recent weeks, this Hebdo crédit will focus more on trends than on reviewing the week's events.

 

On the micro front, there is nothing particularly noteworthy to report. Issuers are publishing results that are more or less in line with credit expectations, are no longer able to reduce their debt but are also reluctant to propose a more aggressive financial policy to their shareholders given the uncertain environment and the cost of debt, which, although moderate, is potentially higher than the expected profitability of development projects. So if we are looking for some juicy news, we will find it more on the restructuring side, with three cases that attempted to move forward this week, showing how complex the job of distressed manager is and how different it is from that of bond or credit manager.

 

This week: 1. Thames Water, the British water operator (we have also had our share of French bankruptcies in this sector, and some private debt managers will remember Saur), obtained a reprieve thanks to a financial sleight of hand: 7.5 billion in debt written off, 3.15 billion in new equity injected, and creditors suddenly finding themselves shareholders against their will; 2. The famous Altice, which was able to validate the write-off of £8.6 billion in debt at the cost of massive dilution. 3. First Brands, which sought refuge in Chapter 11 after years of feeding the appetite of private debt funds with 19% coupons, making financial survival virtually impossible.

 

What do these cases have in common? Current shareholders are certainly being squeezed out or diluted, but creditors are not coming out on top either: they are recovering illiquid bits of capital or waiting patiently through endless proceedings. When interest rates were close to zero, agreeing to tie up capital in the hope of a hypothetical recovery was still justifiable. But with yields on traditional bonds currently between 3% and 5%, every month spent waiting for a haircut and a court-approved payment becomes a deadweight loss. Thanks to increasingly complex prospectuses, the long search for yield in the 2010s and the passive relaxation of constraints on issuers (which seems to be returning today), modern bankruptcies are no longer quick purges where bond creditors can recover part of their capital; they are long agonies in which creditors are often the ones who lose out, sometimes even more so than shareholders.

 

On the macro front, US news has been dominated by the federal shutdown: some government departments have closed, 750,000 civil servants have been furloughed, and the cost is estimated at 0.1 to 0.2 percentage points of GDP per week. This is further clouding investors' judgement. In Europe, the situation is just as uncomfortable: inflation is back up to 2.2% in the eurozone and 1.2% in France. But this inflation is not due to excess demand: it is imported, linked to multilateral trade and geopolitical tensions, rising commodity prices and the move upmarket by emerging producers, who are now charging more. In other words, it is a cost shock and a relative impoverishment of the eurozone against which the ECB is powerless. Whether it lowers its rates or not, it will have no effect on the price of imports. The structural problem remains the same: Europe has lost bargaining power and industrial weight, it is buying its inflation abroad and is struggling with its contradictions.

 

However, the financial markets ended the quarter on a high note, with completely contradictory assets rising at the same time. Gold, the asset of security and fear, reached nearly $3,900 an ounce (+47% since January), the Nasdaq, the index of risk and optimism, rose 11% over the quarter, and credit spreads hit rock bottom: everything seemed to be going well for investors on all fronts. This is enough to encourage issuers to rush to the primary market to place truckloads of debt while the music is playing. Oracle, for example, raised $18 billion, with an order book of $82 billion. September thus became the biggest month for IG issues since November 2022, with nearly $200 billion. High yield is following suit, with $48 billion issued in September, an all-time record. Even the riskiest issuers are finding buyers, as if investors were more afraid of missing the boat than of losing their money. This is reminiscent of past periods of excess in the 2000s, 2007, 2018 and 2021, when everyone wanted to buy tech or high yield just before the storm hit.

 

For bond investors, the conclusion is clear: it is better to avoid chasing illusions or end-of-cycle excesses and remain disciplined on credit, even if it means appearing overly cautious amid the general euphoria.

 

Matthieu BAILLY