Aggressive liability management activity pushes defaults higher

Aggressive liability management activity pushes defaults higher

At a Glance

  • Higher default rate driven by a growing trend of aggressive liability management activity among over-levered issuers, increasing the risk of balance sheet restructuring events
  • Bifurcation of credit rating buckets continues with CCCs trading at very distressed levels. Given the spread difference between CCCs and single Bs is close to +1,300bps and a 31-point difference in price, from a valuation perspective the more severe outlook is largely priced-in
  • Our forward 12-month and 24-month par-weighted default forecasts are now in line with the long-run average speculative grade default rate

Our par-weighted default rate forecast for European High Yield is 4.0% for the forward 12-month period and 8.3% for the forward 24-month period. Excluding hybrid issuers, the default rate increases to 4.7% over 12 months and 9.6% over 24 months. This compares to a LTM (last 12 months) default rate, to December 2023, for Europe of 3.5% , and a recent peak through the Covid-19 pandemic of 6.9% . For context, Moody’s calculates a long-run average global speculative grade cumulative default rate of 4.1% and 8.2 % over 12 and 24 months respectively.

Our headline forecast is notably higher versus six months ago, increasing from 3.9% to 8.3% over the forward 24-month period. The increasing prevalence of aggressive liability management exercises (LME) has been the primary driver of this, with a number of issuers announcing plans to proactively address their capital structures – for example, SFRFP and Intrum. This has had the effect of pulling forward restructuring activity and, as a result, we now take a more cautious near-term view of over-levered issuers’ default prospects, even if there is not an immediate liquidity trigger.

We believe this elevated default risk for over-levered credits is largely priced-in at the market level. The spread pick-up for CCCs versus single-Bs is close to 10-year wides at +1,300bps (circa twice the 10-year average), while in price terms there is a circa 31-point differential. While our par-weighted 24-month default expectation is 8.3%, it falls to 6.3% when weighted by market value.

Sector commentary (also see Figure 1)

TMT The sharp increase is mostly driven by two specific situations in the form of Atos, which is included in Technology, and Altice France (Telecoms). Atos has entered a conciliation process with stakeholders as it failed to dispose of assets and faces increasing liquidity needs. Altice France is a different story: the main shareholder has raised the spectre of a discounted liability management exercise, effectively holding off using proceeds from asset sales to delever the company until creditors agree to discounted exchanges.

Real estate The increased default forecast largely reflects issuers moving closer to maturity walls. Adler Group, Peach and SBB stand out here.

Leisure An improvement in the leisure default estimate is largely attributable to Spanish firm Codere being removed post March 2024’s announced notice of restructuring. Aside from this, the gaming subsector has proved relatively resilient to date.

Capital goods The forecast uplift relates to two over-leveraged issues in the packaging space: Ardagh Group, which includes the ARGID, ARDFIN and AMPBEV tickers, and Klöckner Pentaplast. We consider both to have unsustainable capital structures, but previously viewed the default risk to be lower due to the amount of time left to maturity. However, in March it was reported that Ardagh had hired advisers to review liability management options. Apollo, a private equity firm, has since provided a stop-gap facility to deal with Ardagh’s 2025 maturity. However, the group has a large volume of maturities in 2026 and 2027 which could be problematic. Klöckner was also recently rumoured to have hired advisers.

Financial services The increased default expectation within financial services is primarily driven by the debt-collector issuers Intrum and Lowell. In the case on Intrum, the company has confirmed it intends to undertake some form of LME and we expect this to result in a discounted debt exchange. We also see this as a risk for Lowell, given challenged market access, and note that all its bonds mature within our 24-month forecast period.

Retail The retail forecast has improved slightly. This is primarily due to EG Group’s successful refinancing in 2023. There has also been a general improvement in the default outlook for a selection of higher quality issuers including Avolta, Co-op and M&S.

Utilities The increase in default risk in the sector is driven by Thames Water whose Kemble bonds have now defaulted.  However, we see that situation as idiosyncratic.

Figure 1: Columbia Threadneedle HY default forecast (12- and 24-month, sector & rating bucket)
Forecast chart I
Forecast chart II

Source: Columbia Threadneedle Investments’ analysis, as at April 2024

9 May 2024
Tom Southon
Tom Southon
Senior Analyst, High Yield
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Aggressive liability management activity pushes defaults higher

1 All commentary from company reports, as at May 2024. Mention of a stock is not a recommendation to buy or sell

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