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Yesterday's OB focused on Fraud, Creative Destruction and the exceptionally high levels of trust in the system...

One thing I didn't mention was the lack of risk premium priced into debt markets... ๐Ÿ‘‡

"Almost all fear of bankruptcy has been obliterated from debt markets even though the global economy is still struggling under the worst health crisis in a century."

$12.3 Trillion in Stimulus Killed the Debt Default Cycle
Almost all fear of bankruptcy has been obliterated from bond markets even though the global economy is still struggling.

Don't worry, I'm not going full permabear, it's just something else I'm watching...

Especially now the ratings agencies are 'catching up'...

โ€œRatings agencies have become comfortable with higher and higher leverage, thus companies are more and more happy to take advantage of it,โ€

Ratings companies are adjusting their rose-colored spectacles...


  • Fitch Ratings now says high-yield corporate bond defaults could amount to just 1% this year, the lowest rate since 2013
  • S&P Global Ratings also see defaults declining, contradicting some bleak predictions from the depths of the pandemic last year
  • Moodyโ€™s Investors Service expects defaults to fall to 4.2% over the next year, from an actual rate of 7.5% for the 12 months through March

Now, there's nothing wrong with ratings agencies upgrading these forecasts...

The worst case scenarios have been avoided so far...

Corporates are stuffing themselves at the cheap debt buffet while they can...


These riskier balance sheets don't seem to be losing their taste for leverage. Junk-rated U.S. companies set a record on Thursday for the most bonds ever sold in April, at close to $40 billion
This is the third straight banner month, and it's taken this yearโ€™s volume to nearly $190 billion.
That's 44% of the full-year total for 2020 - which was the biggest year ever for junk issuance.

I HAVE QUESTIONS:

  • Can these indebted companies outgrow their extra debt burden?
  • To what degree have ratings agencies taken future tax hikes into account?
  • How about increased input costs?
  • What if wages don't increase sufficiently for companies to pass these costs on?

I'm not trying to be that guy with the 'end is nigh' sandwich-board... ย 

I'm just trying to be realistic and at least consider the risks...

The way I see it, companies are likely to come under dual pressure in the medium term: reduced profits due to squeezed profit margins PLUS a higher tax on those (reduced) profits...

Did you consider that ratings agencies?! DID YOU?

They probably did... (he said hopefully)

Perhaps I'm under-rating the ratings agencies, it's not exactly an easy job...

I mean, how can you accurately rate these companies when they're reinventing themselves and/or changing their business models...? ๐Ÿ‘‡


BBG Article

โ€œThe city will be very different to before Covid,โ€
โ€œWe wonโ€™t be going back to the days of working in the office four of five days a week.
Flexible working is here to stay.โ€ - Pret CEO Christou

This recent survey of tech professionals suggests he may be right...

  • Only 14% of the 1,700 tech professionals surveyed want to go back to a company office full-time
  • Around one in four (26%) would like to work remote permanently
  • 60% are happy to work from the office occasionally and spend the rest of the week working from home

Much will depend on the industry and role, but the days of almost everybody working in company offices all of the time are definitively behind us...

Hybrid is the future...

Companies will need to adapt quickly, and Pret should be applauded for their efforts so far...

They've teamed up with Deliveroo, Just Eats & Uber Eats for deliveries and started marketing drinks in supermarkets.

They also started a subscription service mid-pandemic and are hoping to build customer loyalty...

Time will tell if they have made the right choice, but at least they're trying to get ahead...

As Darwin said:

โ€œIt is not the strongest of the species that survives but the most adaptable to change.โ€