Aug 18, 2022
The private debt market experienced exponential growth over the last decade. The market expanded from less than $400bn worth of assets at the end of 2008 to $1.2tn at the end of 2021, albeit one-fifth of the private equity market. Private lending has been evolving rapidly, especially post the financial crisis of 2008 and the ensuing low-interest rate environment. The stringent regulations marginalise traditional lenders from engaging in riskier loan businesses, thereby allowing private lenders to fulfil the liquidity needs of small- and mid-sized companies. As private loans bear relatively higher interest rates, they become attractive for yield-craving investors in an otherwise ultra-low interest rate environment, which makes traditional fixed-income instruments less compelling. Private debt lenders also provide amendments and capital infusions that help borrowers to avoid bankruptcy, often in exchange for equity in times of distress, making the market even more lucrative for credit investors. On top of it, private debt has the highest number of ESG commitments of any asset class, with 49% of its asset under management committed to ESG.
With looming recessionary pressure, banks might again become hesitant to deal with small companies. This may further provide opportunities for direct or private debt lenders because they can quickly execute the deals considering the bilateral relationship between the borrower and the lender as compared to the syndicated loan market. Moreover, given the steady track record of private credit performance over the last decade with annual returns averaging around 10% since 2008, this asset class could look compelling amongst investors even during the potential economic slowdown ahead. Private credits have ideally a shorter duration and remain favourable in a rising interest rate environment and falling private equity valuations. Furthermore, capital commitments in the private debt market have reached new levels, with an unallocated capital (dry powder) standing at $405.4bn as of March 2022, setting the stage for the market to expand further. However, investors should note that the private debt market is characterised by the presence of highly leveraged borrowers, illiquidity and less transparency.
Aug 01, 2022
Are default rates set to rise ahead of the potential recessionary pressure?
Assessing deeper into the corporate sector’s financial health, both positives and negatives appear to be playing a balancing act for the credits. On a positive note, it would be safe to assume that several vulnerable and inefficient sub-investment corporate firms were washed out during the uncertain covid times while only the stronger firms have weathered the storm. The debt maturity walls, generally a harbinger for default rates, may not prove to be a useful predictor as several corporate firms have piled up massive debt taking the near-zero interest rate to their advantage. Several firms were seen elongating their maturity profile through refinancing and more so in the sub-investment grade segment. Consequently, the default rates have remained at historically low levels. Looking ahead, with prospects of a slowdown and a potential recession the defaults are set to rise but should remain limited compared to previous recessions at least through 2024.
Notably, the investment grade corporate balance sheets now look healthy as net leverage has already peaked and the current elevated cash flows, albeit declining lately, offer a significant cushion. That said, in the current scenario, defensive positioning would be the theme amidst slowing economic growth. Investors should focus on Utilities, Telecommunication, and Consumer Staples businesses and avoid sectors that are highly sensitive to interest rates such as Real Estate and Technologies as the companies from these sectors are highly likely to witness earnings downgrades.
Jul 20, 2022
As per International Energy Agency’s (IEA) report on India’s Energy Outlook, India is the world’s third-largest energy-consuming country and will soon become the world’s most populous country in coming years, thereby increasing its energy demand further. Energy use in India has already doubled since 2000, and ~75-80% of estimated energy demand is still fulfilled from Coal, Oil and Natural gas. India would like to increase the share of renewable energy going ahead to reduce its carbon footprints and move towards sustainable energy solutions especially as its energy demand is expected to increase due to the growing population and its increasing needs.
Based on the Stated Policies Scenario (STEPS) provided by IEA which assumes current policy settings and constraints and the assumption that the spread of Covid-19 is majorly brought under control in 2021, we believe that primary energy demand would increase from an estimated 950 Mtoe in 2020 to 1,235 Mtoe in 2030 and eventually 1,573 Mtoe in 2040 (chief drivers being urbanisation and industrialization). But the demand will still be met majorly by coal and oil, although their share is expected to reduce from an estimated ~70% in 2020 to 60% in 2040. Below is the summary of the expected progression of the primary energy demand in India over the decades.
Incremental demand to be met from renewable energy:
In the last decade (2010-20), the incremental energy demand of 250 Mtoe was primarily met by coal and oil. Over the next decade (2020-30), although the majority of the incremental energy demand would still be met by coal, oil and natural gas, we expect that there would be a gradual and evident shift towards renewable energy sources in that decade. We expect the major shift towards reliance on renewable energy to happen in the 2030-40 decade when renewable energy would be the primary source through which the incremental energy demands in the decade are met. Below is the estimated summary of incremental energy demand in India:
Jun 27, 2022
Climate change is defined as the long-term variation of temperature or climate patterns in a particular region (increase in average temperature, torrential rain, and severe droughts). While natural causes of climate change include variations in the Earth's orbit, changes in the sun and volcanic emissions, the causative agent of climate change is the concentration of carbon dioxide (CO2) emissions in the atmosphere as a result of anthropogenic actions. The increasing capacity of the atmosphere to absorb heat, known as the "greenhouse effect," causes global warming.
Effects of climate change in the UK
Climate change has become a reality in the UK, and a number of research reports predict that until we take collaborative action to prevent it, things will only get nastier. According to the UK State of the Climate report (out in July 2021), 2020 was the third hottest summer year in the UK since 1884. Moreover, all of the years in the top ten have occurred since 2002. 2020 was also the fifth wettest year on record in the UK, and six out of the top 10 wettest years have occurred since 1998. Furthermore, the UK has warmed by 0.9°C and gotten 6% wetter in the last 30 years.
The UK climate in 2050
It is predicted that if no action is taken to combat climate change, all areas of the UK will experience drastic changes in climate and weather trends. The third Climate Change Risk Assessment (CCRA3) Technical Report identifies 61 climate risks that affect multiple sectors of society. The report recognises an eclectic range of unaffordable climate change impacts, including those on health and productivity, which will affect many of our families, businesses, and public services. The report cited that, unless we take further action, annual flooding damages for non-residential properties in the UK are expected to rise by 27% by 2050 and 40% by 2080 under a 2°C by 2100 warming scenario. Considering 4°C change, this rise is expected to be 44% and 75%, respectively.
Following a series of climate change protests in the UK, the government introduced the Climate Change Act to formalise the country's approach to addressing the issue. For many years, the UK has also had the Climate Change Levy (CCL), a government-imposed tax to encourage the reduction of greenhouse gases and higher efficiency of energy used for business or non-domestic purposes.
Jun 13, 2022
Every nation in the world is experiencing an increase in the size and proportion of older people in the population as people are living longer. Population ageing began in high-income countries due to high standards of living. It is now shifting to low- and middle-income countries. The UK is no exception, as people are living longer than ever before. In 2019, one in every five people in the UK was 65 or older, accounting for ~19% of the population of 12.3mn people. Between 2009 and 2019, the population of this age group increased by 23%, compared to a 7% increase in the overall population.
According to Office for National Statistics, the number of people aged 85 and over is expected to nearly double to 3.1mn by 2045 (4.3% of the UK population), from an estimated population of 1.7mn in 2020 (2.5% of the UK population). There are expected to be many more people in their later years by 2045, owing in part to the fact that the baby boomers of the 1960s are now approaching the age of 80, as well as an overall rise in life expectancy.
All English residents have access to free public health care through the National Health Service (NHS). This includes hospitalisation, physician care, and mental health treatment. The National Health Service budget is supported by general taxation. The number of working-age people and children is projected to remain around mid-2030 levels by mid-2045. During the same time period, the number of people of pensionable age will rise to 15.2mn (28% jump compared to the 2020 level). This increase in the ageing population can put pressure on the NHS’s spending as they are likely to avail of the benefit and not contribute much through tax. However, the ageing population can continue to make an increasing contribution to society if they remain healthy, mould themselves to changing working conditions in the workplace, and access the training to adapt to evolving labour market. Nevertheless, employers must also step up and adapt to an ageing workforce.
What do you think? Are you ready to recruit ageing employees?
Apr 18, 2022
Starting April 6th, it has become mandatory by law for 1300 of the largest UK-registered companies and financial institutions to disclose climate-related financial information, making the UK the first G20 country to enact ESG disclosure laws aligned with the TCFD (Taskforce on Climate-Related Financial Disclosures). The TCFD, launched in 2015 at the Paris COP21 by the Financial Stability Board (FSB) can be used by companies, banks, and insurers to provide consistent and transparent climate-related risk disclosures to relevant stakeholders.
The law came into effect for UK’s largest traded companies, banks, insurers, and private companies with at least £500 million in turnover and over 500 employees, thereby enabling investors and businesses to align their long-term strategies with UK’s net-zero commitments. Companies will have to start collecting ESG data beginning April 6th and disclose them in annual reports.
The UK Energy and Climate Change Minister Greg Hands said that if the UK was to meet its ambitious net-zero commitments by 2050, the financial system including the largest businesses and investors will have to put climate change at the heart of their activities and decision making.
The companies will have to disclose four key areas: Governance, Plans & Strategies, Risk Management, and Metrics & Targets. Companies will also have to provide data on their Scope 1, 2, and 3 GHG emissions with targets and plans to reduce these GHG emissions.
Is your country next?
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The private debt market experienced exponential growth over the last decade. The market expanded from less than $400bn worth of assets at the end of 2008 to $1.2tn at the end of 2021, albeit one-fifth of the private equity market. Private lending has been evolving rapidly, especially post the financial crisis of 2008 and the ensuing low-interest rate environment. The stringent regulations marginalise traditional lenders from engaging in riskier loan businesses, thereby allowing private lenders to fulfil the liquidity needs of small- and mid-sized companies. As private loans bear relatively higher interest rates, they become attractive for yield-craving investors in an otherwise ultra-low interest rate environment, which makes traditional fixed-income instruments less compelling. Private debt lenders also provide amendments and capital infusions that help borrowers to avoid bankruptcy, often in exchange for equity in times of distress, making the market even more lucrative for credit investors. On top of it, private debt has the highest number of ESG commitments of any asset class, with 49% of its asset under management committed to ESG.
With looming recessionary pressure, banks might again become hesitant to deal with small companies. This may further provide opportunities for direct or private debt lenders because they can quickly execute the deals considering the bilateral relationship between the borrower and the lender as compared to the syndicated loan market. Moreover, given the steady track record of private credit performance over the last decade with annual returns averaging around 10% since 2008, this asset class could look compelling amongst investors even during the potential economic slowdown ahead. Private credits have ideally a shorter duration and remain favourable in a rising interest rate environment and falling private equity valuations. Furthermore, capital commitments in the private debt market have reached new levels, with an unallocated capital (dry powder) standing at $405.4bn as of March 2022, setting the stage for the market to expand further. However, investors should note that the private debt market is characterised by the presence of highly leveraged borrowers, illiquidity and less transparency.
