By Chiara Elisei
LONDON (Reuters) – Corporates’ access to capital deteriorated after turmoil in the banks sector in March while cash flow and earnings are under increasing pressure from potential recession, asset manager Janus Henderson Investors said in a report on Tuesday.
Indicators such as debt loads, access to capital markets, cash flow and earnings continued to flash red in the first quarter, Janus Henderson, which had around $287 billion in assets as of December, said in its latest global credit risk monitor.
While lending conditions have tightened for the past nine months, the banking turmoil in March accelerated the trend, bringing forward a likely recession, its report noted.
Rate-sensitive parts of the economy, such as real estate and banking, would be most vulnerable, it said, adding it expected further volatility in credit spreads and a rise in corporate defaults.
The scale of the defaults will depend on whether economies enter a hard or soft landing, with the latter scenario suggesting defaults will peak in the next six months before rolling over.
The risk premium on euro investment-grade corporate bonds rose by around 50 basis points (bps) to 195 bps following Credit Suisse’s rescue last month. The premium has since fallen to 155 bps but remains above pre-March levels.
The cost of insuring exposure to junk debt peaked in mid-March at 515 bps. It stood at 444 bps on Tuesday, versus lows of around 379 bps in early February, according to S&P Global Market Intelligence.
Janus Henderson noted that for the companies it tracks, earnings continued to be revised down, with no or negative earnings growth in 2023 across developed and emerging economies except for the euro zone, China and Japan.
“The ramifications of tightening monetary policy were inevitably going to cause parts of the financial system to bend or break and the first casualty was the weakest parts of the banking system,” said Jim Cielinski, global head of fixed income at Janus Henderson Investors.
“The signposts we are looking for to become more positive are core inflation to be meaningfully below 4-5%, broad money to start to bottom and pick up and China and EM (emerging markets) easing, providing a tailwind for global growth.”
(Reporting by Chiara Elisei; editing by Dhara Ranasinghe and Jason Neely)
