Comment of the Day
6th March 2023
Eoin Treacy
Video commentary for March 6th 2023
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: crude oil rebounds again from intraday low on speculation the Permian basin will peak in the next five years. Banks, high yields spreads and leveraged loans point to a benign outcome, inverted yields curve suggest recession is inevitable, the epicentre of risk is in frontier markets and commercial property.
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China's Cautious Growth Target Limits Help to World Economy
This article from Bloomberg may be of interest to subscribers. Here is a section:
China set a modest economic growth target of around 5% for the year, with the nation’s top leaders avoiding any large stimulus to spur a consumer-driven recovery already underway, suggesting less of a growth boost to an ailing world economy.
Premier Li Keqiang announced the goal for gross domestic product in his final report to the Communist Party-controlled parliament, which kicked off its annual meeting on Sunday. Economists had expected a more ambitious target of above 5% following a rebound in consumer spending and industrial output after the end of coronavirus restrictions.
Having missed the GDP goal last year by a wide margin for the first time ever, a more cautious aim this year could restore Beijing’s credibility and give President Xi Jinping and a line up of new top economic officials more room to focus on long-term policies.
Eoin Treacy's view
5% growth is a lower headline figure than many expected and suggests China is unlikely to supply the same volume of credit as many developed markets did in the aftermath of the pandemic. That’s also the message from the credit impulse chart which peaked well below the cycle peaks of the last decade.
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Germany's Sleepy Savings Banks Play Wall Street With LBO Bets
This article from Bloomberg may be of interest to subscribers. Here is a section:
LBO lending offered Germany’s savings banks a higher-margin business in the years when ultra-low interest rates were crimping the amount they could earn from retail loans. It also opened up a new customer base in the form of acquisitive private equity firms and gave them a way to maintain historical ties with local businesses being taken over.
“Nearly half of the family-owned businesses in the Cologne-Bonn region will undergo a generational change in the next few years,” said Uwe Borges, head of corporate banking at Sparkasse KölnBonn, one of Germany’s biggest savings banks with an LBO book in the high double-digit millions of euros. “Where there are no successors, leveraged buyouts are an option.”
His comments are echoed by Kai Scholze, a board director at Kreissparkasse Esslingen-Nürtingen, who said his bank operates LBO financing in part because it doesn’t want to lose customers that get acquired to competing banks. “The margins are of course higher in this business than with corporate financing, but this is also associated with a higher risk.”
Eoin Treacy's view
The generational change question is something every economy is dealing with because the baby boomer generation is aging out of management positions. Many of those businesspeople were instrumental in building thriving companies that occupy important niches in the broader economy. Compensating people for a lifetime of commitment to building a business is in no way cheap.
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JPMorgan Is in Direct Lending for the 'Long Run'
This interview of Kevin Foley, Global Head of Debt Capital Markets at JPMorgan. Here is a section.
80% of the leveraged finance market does not have a maturity until 2026 or beyond, so they have a lot of runway, a lot of liquidity, you got a well telegraphed recession as you talked about, they are cutting expenses and conserving cash. They are well set up to buy themselves time to see how this market unfolds…you just don’t have that crunch. We are coming off the greatest financing wave in history and so maturity has been pushed out and this plays out in that 80% stat I referenced.
Eoin Treacy's view
This is one of the most important topics in the debt markets today. Higher rates are obviously troubling for the holders of debt but you don’t get system problems until the borrowers have to pay to refinance and struggle.
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Eoin' personal portfolio in-the-money stop triggered in commodity position
One of the questions subscribers ask most often is how to find details of my open trades. To make it easier I will simply repost the latest summary on a daily basis until there is a change.
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© 2023 Eoin Treacy
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