The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site. Please see our Subscription Terms and Conditions.


All material subject to strictly enforced copyright laws. © 2021 Euromoney, a part of the Euromoney Institutional Investor PLC.
Opinion

Worsening risk, new investors and the absent canary

There have been plenty of compelling reasons to go short credit as an asset class this year. Investment-grade corporates are under threat from leveraged takeover by huge private equity funds; at the lower end of the credit spectrum, the easy availability of cheap credit even to risky B-rated borrowers has stretched leverage ratios to unsustainable levels.

Over the summer, rising rates threatened to drain liquidity and easy money from the financial markets. Now, as the year ends, economists are fixated on the horrible US housing market and debating whether the economic landing will be hard or soft.

It’s all bad news for credit... and yet.

And yet, credit spreads have ground in all year. Why? Because most investment-grade corporates are in very rude financial health. Profits are strong, spending on capex or M&A has not risen at an alarming rate, cash and liquidity is high. Investors and lenders want to put on assets.

So it is important to remember, though, that the day of reckoning has not been averted: it has merely been delayed. Even though shorting credit this year has generally been a costly mistake, with spreads now once again at or close to historically tight levels, valuations rich, the economic outlook uncertain, announced M&A and LBO volumes rising, the only thing harder to be than a credit bear is a credit bull.

When the inevitable blow-ups come, common sense would suggest that it will be the weaker, more highly leveraged credits that explode first, especially if the economic slowdown is worse than expected, earnings decline sharply and equity markets turn volatile and weak.

You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.

SUBSCRIBE ONLINE TODAY

Unlimited access to Euromoney.com and Asiamoney.com

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually

FREE 7 DAY TRIAL

Unlimited access to Euromoney.com and Asiamoney.com, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors

LOGIN NOW

Already a user?

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree