yields back up with implications for wider market

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Major whif!

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Behind The Curtain

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The Apollo Premium

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Alls Well That Does Not End Well

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A Maturing LME

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Our take:

As Apollo Chief Economist Torsten Sløk observed, “Out-of-court distressed exchanges reshuffled priority without reducing debt loads.”

We have long recognized the value destruction inherent in LMEs, but the market finally appears to be emerging from its “capital solutions” hangover. Former proponents of aggressive LMEs now find themselves constrained by increasingly restrictive post-restructuring documents—and confronting the painful reality that such transactions often merely delay an inevitable Chapter 11 while diminishing recoveries along the way.

The LME market is maturing. We are gradually moving beyond the Wild West era of Serta and Incora and toward quieter, more consensual solutions—most notably, negotiated handovers of corporate equity and amend-and-extend transactions.

The Exodus Quantified

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Our take:

It seems that BSL is winning the new money war. That $138 billion buyout pipeline, roughly $92 billion in the US and $46 billion in Europe, is getting syndicated rather than privately placed, and direct lending LBO financing has seemingly slumped. The tighter spreads in BSL backed by strong CLO demand creates an attractive backdrop. Direct lenders are not shrinking, though; they are expanding into hyperscalers, asset-backed loans, and now the non-sponsor universe. Chasing yields never ends well....

Do Restructurings Still Cut Debt?

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Too Close to Call

The ECB raises 25 basis points this week, pencil it in.

The Fed is next, on September 16, with futures pricing a 60% probability of a quarter point hike. The Fed's decision will be highly influenced by this weeks PPI print (Thursday) and CPI reported on Friday. July CPI was 3.4% with core at 2.5%. PCE, the Fed's preferred gauge, was 3.7% with core at 3.3%. At Jackson Hole, Chair Warsh described solid growth, a stable labor market, with sticky inflation and financial conditions that are not yet restrictive.

It is a close call. My call is they hike. The next meeting will be October 28, which sits too close to the midterms, which means the Fed will push its subsequent decision to hike out to December 9th. Does the majority of the 12-member Committee believe higher rates are required? It appears so.

The bigger story is that the long end may no longer be the Fed's to set. 10-yr JGBs and 30-yr Gilts are at their highest levels since the 1990s.

The new fiscal year begins next month with the prospect of $2 trillion Treasury deficits, which is a ton of supply to absorb. Meanwhile, IG has sold $700B of net-new supply this year with record gross issuance of $1.9T (E), as $1.2T of this is for terming-out maturing debt into longer dated debt. Another $1T of IG net-new supply is expected in 2027. The marginal buyer of all this paper will demand compensation for the supply and its longer duration.

Atlanta Fed GDPNow estimates Q3 real GDP at 4.7%, which is the equivalent of 8% nominal growth given 3.3% inflation.

Payrolls added 162,000 last month and the prior two months were revised up by 55,000.
One and done and this market rallies. Any message that more hikes are coming, and the markets may take issue. The more important issue is inflation, which I believe will trend below 3%, towards 2% over time.

For credit investors this is among the most attractive environments in years, though structure and security selection will decide who captures it. Get paid to take duration selectively: high-quality credit, floating rate structures, shorter maturities, spreads that genuinely compensate.

5% on UST is usually a buy. Is this time different, that is the question for today!

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Creditor... Rights?

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Our take:

Lenders are winning arguments, however, not money. Pushback jumped in the second quarter, and buyouts got hit hardest, but investors still lost on pricing. CLOs need paper badly enough that nobody can push spread, so lenders take protection instead. The fights are, of course, over what sponsors can move out the back door, and the complexity of future restructurings. The coming buyout wave will ultimately concede terms rather than price.