Junk debt rout sparks ‘bloodbath’ for credit investors

{"text":[[{"start":7.6,"text":"A prolonged rout in the riskiest parts of the global market for junk debt is sending shockwaves through credit markets, driving some of its most active investors to steep losses as lenders lose faith in the world’s most vulnerable corporate borrowers."}],[{"start":23.2,"text":"Rising global interest rates have exacerbated fears about the ability of heavily indebted companies to deal with AI disruption and high energy prices, while the European market has been hurt further by concerns about France’s fiscal health."}],[{"start":37.76,"text":"Spooked investors have dumped exposure to the market’s most distressed companies as a result, causing bond and loan prices to plummet for some of the largest high-yield borrowers in Europe and the US. Yields of CCC-rated borrowers — the lowest rung of junk debt — have climbed rapidly to more than 21 per cent in Europe and 18 per cent in the US as prices have plummeted, up from about 16 per cent and 15 per cent at the beginning of the year."}],[{"start":64.38,"text":"Investors holding the bonds — sometimes on a scale that makes selling out of their positions difficult — have been hit with steep losses."}],[{"start":70.8,"text":"“It’s a complete bloodbath,” said a portfolio manager at a large US hedge fund. “Everyone is scared of being in the next blow-up . . . being flat is the new up.”"}],[{"start":80.36,"text":"Meanwhile, aggressive tactics deployed by the cash-strapped owners of certain issuers of junk debt to shift assets beyond the reach of creditors have caused some prices to fall suddenly, adding fuel to the broader sell-off."}],[{"start":92.64,"text":"“We are now seeing a new reality — where [private equity owners] are deeply out of the money on their original investment and documentation is loose [leaving lenders exposed to assets being shifted], opening up a wider range of outcomes for creditors,” said Stefan Tsonev, founder and chief investment officer at Sternlight Capital Partners."}],[{"start":null,"text":"

"}],[{"start":113.36,"text":"The rout has driven some of the market’s largest and most aggressive funds, which often build concentrated positions in the debt of troubled companies, to losses this year."}],[{"start":122.68,"text":"Arini Capital Management, one of Europe’s fastest-growing credit hedge funds, has seen its flagship fund drop to a loss of 26 per cent this year. Meanwhile, multiple credit trading teams known as “pods” across large multi-strategy hedge funds have been forced to close, according to multiple people familiar with the matter."}],[{"start":143.14,"text":"Arini owns large stakes in the debt of distressed creditors such as luxury-car maker Aston Martin and Patrick Drahi’s Altice International, which have both plummeted this year after the companies struck aggressive deals removing assets from creditors’ reach. Arini’s large bets on the debt of US telecoms company Brightspeed have also deteriorated."}],[{"start":null,"text":""}],[{"start":163.72,"text":"The woes of such large funds have caused problems for the wider market, at times worsening price moves."}],[{"start":170.2,"text":"“The speed and severity of the sell-off in some of these distressed capital structures has resulted in several well-known special situation funds being forced to unwind positions aggressively, which has exacerbated the negative price action,” said Simon Matthews, senior portfolio manager at Neuberger Berman."}],[{"start":188,"text":"In Europe “there have been several high-profile issuers, especially within the telecommunications sector, where underperformance has been concentrated”, he added."}],[{"start":197.76,"text":"Prices of bonds and loans in Virgin Media’s £22bn debt pile have crashed this year, transforming the company from a relatively stable credit, with its highest-ranking debt trading at par, to one of the most troubled groups in the market."}],[{"start":211.48,"text":"London-based credit hedge fund Sona is among funds that have been hurt by the price move, as big holders of its debt."}],[{"start":218,"text":"The price of debt issued by Liberty Global’s Dutch mobile operator VodafoneZiggo has also fallen sharply."}],[{"start":224.8,"text":"While the yield investors demand to hold the weakest junk-rated issuers has widened, so has the gap between those companies and their higher-rated junk market peers. In Europe, the difference in yield investors demand for CCC-rated and BB-rated bonds has skyrocketed."}],[{"start":null,"text":""}],[{"start":240.78,"text":"“Higher-quality companies can generally absorb a higher risk-free interest rate because leverage remains manageable, interest coverage is healthy and market access remains available. CCC-rated borrowers have far less financial flexibility, and the market has taken notice,” Lotfi Karoui, multi-asset credit strategist at Pimco, wrote this week."}],[{"start":259.54,"text":"“With attractive all-in yields available higher in the quality spectrum, investors have less incentive to reach for incremental spread in CCCs.”"}],[{"start":272.27,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1793588159_3472.mp3"}