(Bloomberg) — In 2022, after the Federal Reserve began raising interest rates at the fastest pace in decades, some leading U.S. companies pledged to reduce their debt burdens. Those days may now be over.
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BBB-rated companies increased their share buybacks in the latest quarter for the first time since early 2023 and accelerated capital expenditure growth after five quarters of slowdown, according to strategists at Barclays Plc.
Dividend growth also accelerated, strategists such as Dominique Toublan and Bradford Elliott wrote in a note on Friday. Meanwhile, interest costs are rising faster than a key measure of profits.
Add it all up and it appears that companies are becoming friendlier to shareholders and less friendly to bondholders.
“While there are no signs of impending duress, it appears that the fundamental picture is likely past the peak of this credit cycle,” the strategists wrote on Friday, with weaker investment-grade companies turning away from “prudent balance sheet management” and focus on shareholders. payouts and accelerated capital expenditures.
Corporate bond investors have been racking up debt all year, pushing valuations to near multi-decade highs and pushing spreads on investment-grade corporate bonds to near their tightest since the 1990s. The Barclays analysis underlines how market prices can become increasingly disconnected from the fundamental credit picture.
That doesn’t mean there will be a big sell-off anytime soon. Gains are still relatively strong. Companies at risk of downgrading, i.e. at the A and BBB credit rating level, have generally reduced their debt levels, according to Barclays strategists.
If corporate bonds were to become much weaker, companies’ financial condition should continue to deteriorate and demand for these securities should fall significantly, says Seamus Ryan, director of credit research at GW&K Investment Management.
“To see a valuation reset from here, I think we really need a catalyst,” Ryan said.
Torsten Slok, chief economist at Apollo Global Management, thinks credit fundamentals remain robust and interest rates will continue to help attract inflows, he wrote in a note earlier this month. But with valuations already high, especially for less liquid corporate bonds, it makes sense for investors to switch to more liquid corporate bonds or less liquid private credits.
One reason for the increase in capital investment is artificial intelligence, which requires huge investments from utilities and energy companies, many of which have BBB ratings. Another likely source of weakening balance sheets is the expected uptick in mergers and acquisitions given incoming US President Donald Trump’s business agenda, with dealmaking likely to increase companies’ influence.
“Signs that animals’ minds are becoming higher are already present,” wrote Toublan’s team at Barclays. “We think next year these trends will continue.”
Production Note: Credit Weekly returns January 4.
Weekly overview
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The Federal Reserve cut rates by a quarter of a percentage point and said it was slowing the pace of future rate cuts, sending risk markets reeling. Yields on US junk bonds reached their highest level since August. Spreads on high-quality bonds reached their highest level since late November.
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Firms on Wall Street are debating whether U.S. high-quality corporate bond sales could set a record in 2025, with just over $1 trillion of bonds set to mature.
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Private credit companies want to do more than provide business loans. The largest are laying the groundwork for financing everything from auto loans and home mortgages to chip manufacturing and data centers, in an effort to increase the size of the market by trillions.
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U.S. hybrid bond issuance reached a record $35.6 billion this year, and strategists predict it will rise 7% to a new high in 2025. These are the types of bonds that CVS Health Corp. sold in early December – they have characteristics of both debt and equity.
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The ailing real estate company New World Development Co. from Hong Kong has fallen to record lows in credit markets as concerns grow over its ability to service a debt burden greater than that of peers.
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Apollo Global Management said a thriving segment of private lending is already a $20 trillion industry and the market as a whole could reach $40 trillion within the next five years.
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Party City Holdco Inc. plans to file for bankruptcy possibly within two weeks, in a process that could lead to the liquidation of its stores.
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Big Lots Inc. expects not to complete the planned sale of its operations to private equity firm Nexus Capital Management LP, putting the discount retailer that employs more than 27,000 people at risk of liquidation.
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Swiss Re AG, Tokyo Marine Holdings Inc., AXIS Capital Holdings Ltd and AXA SA are among the providers of $3 billion in private sector credit risk insurance to the World Bank Group, which is looking to expand its lending to emerging economies. .
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Italy’s Ferrovie dello Stato Italiane SpA will receive a €2 billion ($2.1 billion) loan from Intesa Sanpaolo SpA, which will allow the state-controlled railway company to finance maintenance and strengthen infrastructure.
In motion
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Blackstone Inc. hired Andie Goh, who was most recently at Ares Management, and Jack Ervasti, who was from KKR & Co. came, to cover investment-grade deals, as the world’s largest expansion of alternative asset managers continues its expansion into private credit.
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Barclays Plc has hired Bjorn Andersen, a leveraged loan and high-yield bond banker, from Nordea.
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Former Silver Point Capital managing director Manjot Rana is joining insurer National Life Group to boost its private lending offering.
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Credit Agricole SA has appointed Olivier Gavalda to replace outgoing Chief Executive Officer Philippe Brassac
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KKR & Co. has hired Yoshi Takemoto as Managing Director to lead the company’s Global Wealth Solutions platform in Japan
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