Finance

Altice France's Credit Woes Send Shockwaves Through CLO Market

In a recent development that could have far-reaching implications for the credit industry, Altice France has signaled a potential crisis for creditors by threatening to cut repayments. This announcement has triggered a series of events, including a rating downgrade that has had a direct impact on the market for Collateralized Loan Obligations (CLOs).

Rating Downgrade Stirs the Debt Market

As a consequence of Altice France's ominous warning to creditors, the company has faced a significant ratings downgrade, falling to CCC status. This downgrade spells trouble for managers of CLOs, investment vehicles that package loans and sell them as bonds, including those loans from companies like Altice. The downgrade places certain CLO managers at risk of exceeding the threshold of high-risk debt they are permitted to hold.

"If Altice's loans continue to lose their value, CLO managers must consider liquidating other CCC-rated assets that fetch a higher price on the market," said Pratik Gupta, a strategist at Bank of America Corp. He hinted at this potential outcome prior to the actual downgrade. Gupta's analysis hints that approximately 13% of U.S. CLOs might have already crossed their limits due to Altice's credit cut, assuming that managers have not yet intervened.

To navigate back within permissible risk levels, some managers could feel compelled to offload debt at considerably reduced prices, especially if other tallies rated similarly face concurrent downgrades. An extension of this distress within the CLO market could strangle the real economy; it would obstruct the efforts of higher-risk businesses to refinance, an already daunting task given the recent upsurge in interest rates.

Investors are advised to exert extra caution concerning sizeable exposures with a B3 rating, one notch above the perilous C category, say Citigroup Inc. strategists, including Maggie Wang. Debt securities issued by companies such as ION Trading and Stada, associated with Nidda Healthcare Holding GmbH, are among these B3-rated exposures commonly held by CLO investors. A spokesperson for Stada has opted not to comment on this matter.

The Turnaround in Risk Sentiment

The growing pains of the CLO market are indicative of a dramatic change in risk sentiment. Accelerated CLO sales commenced the year, propelled by an "everything rally" that boosted credit demand severely, with investors transitioning up the risk ladder in search of yields ahead of the anticipated Federal Reserve interest rate cuts.

This surge in demand arose amidst deteriorating credit metrics among subprime borrowers. Apollo Global Management Inc. underscored a troubling trend: firms have less revenue available to service their debt. A rising share of B or CCC-rated loan issuers are operating with negative cash flows, according to Bruce Karsh, Oaktree Capital Management's Chief Investment Officer, referencing a Bank of America study.

Although typically, a single loan being downgraded does not impair a CLO's capacity to dispense investment returns, the magnitude of Altice's obligations—where Altice France itself bears debts around €24 billion—produces substantial market tremors. A CCC rating is synonymous with a heightened likelihood of default, casting a shadow on the company's financial stability.

Gunther Stein, the head of U.S. performing credit at Sound Point Capital Management, spoke on the Bloomberg Credit Edge podcast about the challenges now faced by the market, highlighting that larger institutions likely have considerable holdings in several vulnerable names. "We have to carefully manage our portfolios and ideally be ahead of the curve in distancing ourselves from these positions," he noted.

A Week of Market Checkpoints

The past week has seen a remarkable $530 billion in U.S. high-grade corporate bond sales, marking the busiest initial quarter in history. This investor frenzy for comparatively high yields comes with an anticipation of rate reductions by the Federal Reserve.

A confession from Thames Water Utilities Ltd.'s parent company shook the debt market. The company disclosed that without an extension granted by lenders, it stands unable to refinance or settle a loan worth £190 million due on April 30, an event that could lead the parent company towards administration.

In another arena, as European and British banks rush to repay colossal loans from the Covid era, they find themselves increasingly dependent on issuing covered debt to meet their funding needs, leading some market watchers to ponder whether the market is nearing a saturation tipping point.

Meanwhile, Home Depot has announced investor expectations to incur $12.5 billion in debt, an endeavor to finance the acquisition of building-products distributor SRS Distribution Inc.

In media, Paramount Global's debt rating has descended to speculative grade by S&P Global Ratings, who pointed out cash flow pressures from the decline in the company's broadcast and cable TV businesses.

Shimao Group Holdings Ltd., a defaulted Chinese developer, is caught in a creditor tussle as their key creditor group has called on all bondholders to dismiss the proposed restructuring plan, intensifying the standoff.

Consequently, buoyant credit markets have prompted banks to re-evaluate their forecasts. JPMorgan Chase & Co. has reduced its year-end projection for U.S. investment-grade bond spreads, capitulating to the "overwhelming" demand as the supply moderates. The bank now projects a 95 basis points spread on the JPMorgan JULI index by the end of 2024, an adjustment from a previously expected 125 basis points.

Deepening the trend, Deutsche Bank signaled its anticipation for U.S. high-grade bond spreads to compress to 75 basis points in the forthcoming three to six months, a narrower forecast than the 90 basis points envisaged in February. The German bank also foresees euro-denominated high-grade spreads to hit 95 basis points, which is 19 basis points down from current levels, and predicts euro high-yield spreads will tighten by 50 basis points to 300 basis points within the same timeframe.

Recent Personnel Shuffles in the Credit Market

John Aylward's hedge fund, Sona Asset Management, has attracted Lee Hope to serve as a managing director on its European leveraged finance team, part of the firm's strategic expansion.

The Bank of Nova Scotia has tapped Andreas Pierroutsakos, a managing director from JPMorgan Chase & Co., to spearhead leveraged finance origination—a move confirmed by individuals privy to the matter.

UBS Group AG is strengthening its team by adding Jake Webster in an effort to rejuvenate its sovereign, supranational, and agency debt capital markets business, according to insiders.

Citigroup's longstanding figurehead, David Trahan, who led the North American investment-grade debt syndicate, recently parted ways with the financial conglomerate.

News from Bank of America Corp. reveals that Steve Monahan, an essential piece of the U.S. debt private placement process, will be retiring after a long career spanning nearly four decades. Mark Williams, a loyal servant to the bank for 27 years, has been named as the successor—a detail confirmed by an internal memo seen by Bloomberg.

Final Remarks

This summation of recent events in the debt market and personnel shifts within the industry has been reported with due recognition to Bloomberg L.P. for its insights.

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In conclusion, these series of events serve as a tap on the shoulder for the credit market, emphasizing the need for vigilant portfolio management and strategic foresight among investors and financial professionals alike. As the market dynamics shift in the backdrop of Altice France's recent credit debacle, the landscape is sure to remain eventful for those in the trenches of debt and finance.

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