In recent weeks I have been noticing an increasing amount of articles and comments on issues that could indicate a change, for the worse, in the corporate credit environment.Some examples are

• Macro: the continuing negotiations over the Greek sovereign debt and concerns about economic performance in some Emerging Markets
• Austerity: In the UK local authorities and other public services are facing a squeeze on their budgets, which will have an adverse affect on spending and local economic activity
• Bank regulation: US Federal Reserve announcement of restraints for the 8 largest US banks, with the potential impact that banks may choose to deleverage with a potentially adversely affect  on corporate credit availability
• Currencies: continuing weakness in the € and some Emerging Market currencies
• Commodities: continuing weakness in the oil price, and the ongoing impact of lower commodity prices on economies which are substantially dependent on strong commodity prices
• Interest rates: indications that interest rates in the US and the UK might start to rise
• Asset prices: strong increases in valuation of real estate, both Commercial and Residential, in some major markets  combined with increased Real Estate debt exposures. Quantitative Easing  is continuing to lead investors to seek enhanced yields on investments
• Equities: Down turn in Chinese stock prices following a period of exceptionally strong growth and attempts to stabilise the market
• Leveraged Finance: In a recent Fitch report it was stated that ” …Fitch Ratings is upping its 2015 U.S. high yield default rate projection to 2.5%–3.0% from the initial forecast of 1.5%–2.0% published in early December, largely due to the energy, metals/mining sectors. If commodity prices do not recover, the default rate in 2016 is likely to be above that of 2015…..”
• Unemployment: Whilst three months’ statistics are not a trend, in  a recent report it was stated that ” …Unemployment Rate in the United Kingdom increased to 5.60 percent in the three months to May of 2015 from 5.50 percent in the previous period. It is the first increase in more than two years…”. http://www.tradingeconomics.com/united-kingdom/unemployment-rate
• Corporate Accounting irregularities and financial performance: Two major companies have announced investigations into accounting irregularities which are alleged to have boosted earnings. Also there are some  examples of major companies producing revenue growth below expectations. Whilst general  conclusions cannot be made based on a limited number of companies, accounting irregularities and weaker revenue growth than expected are an indication of a more demanding business environment

Each economy and company will, of course, have their own dynamics, but perhaps the above and some other indicators suggest that increased attention to corporate credit risk is now due.

There are many indicators of corporate credit deterioration, but the document that I have prepared that can be accessed in this link on “Red Flags” may be of interest. Please let me know if it is. Red flags, 07.2015

Regardless of which season of corporate credit risk we are in, every season has positive and negative elements and I wish you an enjoyable Summer and loads of positive experiences in every season, both personally and professionally.

With best wishes

Malcolm Sullivan