The quality of corporate credit issuance is weaker than the market is currently pricing in, according to the latest analysis from Janus Henderson Investors. Quarter-on -quarter metrics show a broad, albeit shallow deterioration, suggesting defaults could pick up in the second half of the year, even if the pace of defaults is slower than in previous cycles.
A seasonal lull in primary issuance could support markets near term but the research suggests that tighter lending standards, higher refinancing costs and a slowing economy will gradually take their toll on credit quality.
Janus Henderson Investors’ latest Credit Risk Monitortracks corporate fundamental and macroeconomic indicators on a traffic light system to indicate where we are in the credit cycle and how to position portfolios accordingly. The key indicators tracked (‘Cashflow and Earnings’, ‘Debt Loads and Servicing’, and ‘Access to Capital Markets’) all remain red for the fourth quarter in a row.
Janus Henderson Credit Risk Monitor
|Q2 2022||Q3 2022||Q4 2022||Q1 2023||Q2 2023|
|Debt Loads and Servicing||Red||Red||Red||Red||Red|
|Access to Capital Markets||Red||Red||Red||Red||Red|
Jim Cielinski, Global Head of Fixed Income at Janus Henderson Investors, said: “There was something for everyone in the last quarter. Bears could point to weakness in lead economic indicators, stubborn core inflation and credit metrics deteriorating; Bulls could counter with strong labour markets, declining headline inflation and a robust consumer. As recession fears scaled back, markets have been pricing in a more muted credit default cycle. Our view is more circumspect, as we expect more “trouble credits” to emerge as the lagged impact of tighter policy takes effect. That said, the timeline could be protracted, given many companies will not refinance for the next one to four years, on average.”