Weak and challenged corporate profitability, disruptive threats across industries, above-average debt burdens and poor loan underwriting since 2016 will in combination lead to a surge of downgrades and negative price actions.
- Pretium’s baseline credit outlook is that we are in the early stages of a fundamentally driven credit cycle downturn.
- The economy is late cycle, companies have well above-average leverage, and business models across industries are being impacted by technological disruption and changing consumer preferences.
- We believe this cycle will resemble the early 1990s and 2000s, where credit markets saw above-average levels of defaults impacting multiple industries over a multiyear period.
- We believe the first sign of a downturn is fundamental distress in the loan market, evidenced by rising defaults and downgrade ratios, an increasing share of loans trading below $80 and $90, and widening dispersion among industries and issue.
- According to S&P the number of U.S. issuers that have their credit ratings at ‘B-‘ or below with ratings on a negative outlook /CreditWatch is the highest since September 2009.
- According to the Credit Suisse Leveraged Loan Index, $90bn of loans are trading under $90 comprising 7.4% of the index. In 4Q 2019, these figures averaged $110bn and 9.1%, respectively, before the recent rally across financial markets.