GLOBAL CORPORATE BOND CARNAGE AWAITED

 

The biggest question of the Day is when and how the stimulus will save the Bond market carnage?  The global market is going to face a mixed bag of situations where many of them will get default and many of them will be in high demand.  More the Debt of GDP of a country the guiding factor will be the corporate conditions and economic growth outlook prospect which will pull the trigger. As lockdown extends and there is a delay in the next stimulus decision the corporate risk at global level increases.  The epicentre of the problem can be any country likewise European companies or the U.S or any other emerging economy which are really under stress. The 2^nd wave of covid is going to be a tough call on the global debt market provided actions are not taken for control of the covid. The more powerful the 2^nd wave becomes the more lockdown and broken up phases of the different economies will come forward creating pressure on the different asset class.  The corporate debt profile is risky and scary for the bondholders.

The U.S-Corporate Scenario  

In the US so far this year, 45 businesses, each with over $1 billion in liabilities, have already gone bankrupt and this will double by the year-end. The shocking part is the SME segment where 50% of companies now consider themselves under severe financial strain and millions have indicated they may have shut their doors for good.  Easy money cannot buy long term fortunes. It’s true that the personal income of the US has gone up and people have enough money and they can survive for a few months but the corporate condition is hollower than ever before.

The European Corporate Scenario

As per McKinsey out of the 70% of the SMEs one out of 5 are under default risk where layoff is on the cards followed with 28% feared that they have to cancel growth projects. In aggregate, more than half felt their businesses may not survive longer than 12 months. If revenues were to remain steady, 55% of SMEs could shut down by September 2021, a figure that rises to 77% if revenues worsen. Overall, 80 per cent weighed the economy as somewhat weak to extremely weak.  Hence the impact of shutting down from SME to Mid-size companies and bond defaults are at a risky level.

 The current rosy period of the Global equity markets would be short-lived if the covid numbers keep climbing and creating a bleak global economic outlook. 2021 H1 is at risk based on the current scenario since the vaccination process and control of the diseases are two different aspect state-owned enterprises (SOEs) come under credit stress.  The debt market epicentre is currently now china-state-owned enterprises (SOEs) which are under credit stress. Although it is true that China will take adequate measures to protect the collapse of the debt but that will cost the economy in the long run too. But the risk is with the low end of the curve where companies not backed by anyone. Last but not the least the ratings of these bonds are very much questionable.

 The biggest immediate blow which is coming is from china where the bond defaults will soar and will create contagion impact on the global markets.  The bond market crisis is so big that even negative yields are in high demand as immediate cash-flows are required to pay the short term. It’s true that central banks, sovereign wealth funds and global asset managers spanning Europe, Asia and the United States jumped into the China bond offering. European investors accounted for 85% of the 15-year debt and about two-thirds of the shorter-dated bonds, according to Deutsche Bank.

 State-owned miner Yongcheng Coal and Electricity defaulted on a 1 billion yuan ($151.9million) bond last week. This week government-backed chipmaker Tsinghua Unigroup, which missed payment after failing to extend its deadline for repayment, and another default by state-owned Huachen Automotive Group — a Chinese joint venture partner of BMW. Over $6bn in bond sales cancelled across China as default scare spreads.

 China’s onshore bond market is worth $13 trillion, the world’s second-largest. As per S&P rating Yongcheng Coal and Electricity default could cross-default by its parent company Henan Energy and Chemical Industry to the tune of ($7.6 billion). China’s Ministry of Finance sold US$4.74 billion of euro-denominated sovereign debt and this also China’s first negative-yielding bond since returning to international debt markets in 2017. Foreign investors held about 3 trillion yuan (US$457 billion) of Chinese bonds at the end of October.

 The scary part is that self-funding will be banned and hence default risk intensifies which will create an impact on the $457 billion foreign holdings. Companies will be banned from buying their own debt issuance or using related entities to buy up issuance using the issuer’s own capital. Hence those bonds going to mature in 2021 are now at a very high level of risk.

The corporate debt problem will be the real game-changer behind the market and different asset class. Indian markets are also not left alone they will also face problems which are yet to identified or sitting like hidden TIME BOMBS.