As rising petrol prices limit spending and the credit card default rate rises to its highest level in more than a decade, the US consumer is beginning to crumble. And that’s before October, when student loan payments resume.
In September, a gauge of consumer confidence hit a four-month low as Americans struggled under rising prices and a dimming economic outlook. That’s a setback considering that individual spending accounts for almost two-thirds of the US economy and that, after accounting for inflation, the vast majority of Americans today have lower savings than they did before to the pandemic.
In a study this week, Moody’s Investors Service said that “consumer debt quality is declining, signalling potential risks in certain credit market areas.” Along with that, “many consumer product companies were highly leveraged following a debt splurge in recent years, leaving them vulnerable.”
Consumer pressure can lead to credit issues for businesses with high debt loads. There will be a division between businesses that can develop quickly enough to keep up with growing borrowing prices and those that can’t, according to investors like Mike Carruthers of Blackstone Inc.
According to Bloomberg Intelligence credit analyst Mike Campellone, high-yield merchants are among those that may be hampered by pressures on sales and profitability that increase their risk of downgrades.
Helena Helmersson, chief executive officer of Hennes & Mauritz AB, told analysts this week that households’ purchasing power had already decreased as a result of a decline in discretionary spending at major stores like Target Corp.
In an interview with Bloomberg TV this week, Alpine Saxon Woods partner Sarah Hunt stated that “there is some real concern about weakness in the consumer.” Particularly higher petrol costs signal “a real spending issue coming up and I think that’s going to impact earnings,” according to the economist.
Up to this point, consumers have shown some resilience, helped along by a robust labour market. However, youth and lower-income households are showing signs of weakness. According to a statement published this month by S&P Global Ratings, this contributed to the subprime auto loan 60-day plus delinquency rate reaching its highest level ever in July.
Cristian DeRitis, deputy chief economist at Moody’s Analytics, said: “It’s not a crisis at this point, but clearly the delinquency rates are rising and they’re doing so at a time when unemployment is reasonably low. “Going to just put more pressure” on those rates is a slight increase in the number of unemployed people.
It is a part of a larger realisation among market participants that when the effects of increasing borrowing costs gradually permeate the system, we might be in for a protracted, drawn-out default cycle.
Credit analysts at Citigroup Inc., including Michael Anderson, stated in a note this week that they anticipate high-yield and loan default rates to rise to 4.6% and 5.3%, from 3.2% and 4.9%, respectively, by the third quarter of next year.
As tighter monetary policy and expanded fiscal policy combine to create “a tough environment for refinancing the substantial maturity wall coming due in the coming year,” they concluded, “we anticipate stubbornly high rates.”
Hui Ka Yan, the company’s wealthy founder and chairman, is being held by the authorities on suspicion of committing unspecified crimes, nearly two years after China’s Evergrande defaulted on its debt.
The developer’s future is now further clouded by the company’s mainland unit’s admission that it failed to repay an onshore bond as a restructuring agreement with its offshore creditors teeters.
Companies are increasingly turning to private credit funds for high-cost lending that allows them to defer interest payments in order to repay hundreds of billions of dollars’ worth of floating-rate loans that date back to the cheap-money period.
According to BlackRock Inc., insurance executives in charge of $29 trillion want to increase investment in private debt and credit strategies while decreasing spending on real estate and private equity.
As much as €4 billion ($4.2 billion) in loans is being offered by investment banks and direct lending funds to finance a prospective takeover of the European ads company Adevinta ASA.
Iris Software, a company based in the UK, may be acquired for up to £1.25 billion ($1.5 billion) via direct lending funds.
As the selling process gets underway, bankers and private credit funds are negotiating a financing arrangement worth roughly €1 billion ($1.05 billion) to support a prospective takeover of French insurance broker Kereis.
Over $10 billion is what Blackstone Inc. hopes to raise across two private lending vehicles in the US and Europe.
Värde Partners, a private credit lender, has raised about $1.5 billion for asset-based lending.
Centerbridge Partners and Wells Fargo & Co. are collaborating on a direct-lending fund.
According to PitchBook, private credit funds with more than $5 billion in assets under management received the majority of the money raised by the asset class in the first half of 2023.
In Motion
Joel Kent, a former employee of Credit Suisse Group AG, has joined Banco Santander SA as head of trading in leveraged finance.
Toni McDermott and Zachary Vaughan have joined Arrow Global Group Ltd as chief investment officers for credit and direct lending and head of real estate, respectively.
Sumitomo Life is sending current employees to the US for multi-year training in the expanding alternative asset sector rather than hiring bankers with private credit knowledge and hefty wages.
A new advising division for middle-market company restructuring and turnarounds has been established by Sherwood Partners.