Daily Update: August 5, 2022

Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy.

A Window Into Private Debt Markets

Business development companies are funds that invest in developing and financially distressed middle-market firms. Because business development companies, or BDCs, are publicly traded and primarily provide direct lending to firms, rather than participating in broadly syndicated loan markets, their public disclosures can provide insight into private debt markets.

While S&P Global has demonstrated that private debt markets have grown in recent years due to a low interest rate environment and the comparatively higher yield of private debt versus broadly syndicated loans, these markets can lack transparency. 

Direct lending to middle-market firms can be lucrative, but it is also fairly illiquid. Private debt tends to be held to maturity, which can incentivize borrowers and lenders to show flexibility in tough environments. The current conditions of rising interest rates and inflation are an example of this kind of credit environment, even if these conditions are yet to have an obvious effect on private debt markets.

S&P Global Ratings Research, under Global Head of Thought Leadership Ruth Yang, recently analyzed 70 BDC filings from the third quarter of 2021 through the first quarter of 2022. The result provides a snapshot of how this obscure corner of finance is performing under current macroeconomic pressures.

Over the analyzed period, BDC portfolios saw a 12% increase in investments and an 8% increase in borrowers. While the loans in these portfolios tend to have nearer-term maturity dates compared with the broadly syndicated market — 50% of direct loans mature by 2026, a full year earlier than broadly syndicated markets — S&P Global Ratings did not feel this maturity wall would put significant pressure on private debt markets. The costs for borrowers seem likely to increase over time, but it isn’t clear how bad the effects will be.

“Whether or not the intensifying economic headwinds pose an imminent threat to the private debt markets isn't yet clear — and that's a problem in itself,” Yang wrote in the analysis. “A lack of transparency and potential illiquidity are key risks of the growing private debt market; by definition, less information is available on private debt than on public debt.”

With private debt markets growing faster than syndicated loans, according to some estimates, using BDCs to observe these shadowy markets is more important than ever.

Today is Friday, August 5, 2022, and here is today’s essential intelligence.

Written by Nathan Hunt.

Economy

Darkening Economic Clouds And Rising Rates Shroud The Outlook For Private Debt

Economic headwinds in the U.S. are blowing hard this year, steadily increasing the risk of a recession. This naturally raises concerns about credit quality in S&P Global Ratings' portfolio of borrowers. For now, credit quality in its rated universe is proving resilient, whether looking at ratings actions, the net ratings bias, or defaults, which remain low. But signs of degradation in credit quality are rising.

—Read the report from S&P Global Ratings

Access more insights on the global economy >

Capital Markets

Market Swings Could Signal Contribution Volatility For U.S. State Pensions And OPEBs

State retirement plans enjoyed unprecedented asset returns from soaring investment markets in fiscal 2021, substantially improving the metrics reported within S&P Global Ratings' annual survey of state retirement liabilities. S&P Global Ratings expects this upswing to be short-lived, however, given poor market returns in fiscal 2022 that it believes will erase much of the gains reported in this year's survey. Furthermore, it anticipates market volatility will spur contribution volatility in future years for some state budgets given complex funding formulas that incorporate plan investment performance.

—Read the article from S&P Global Ratings

Access more insights on capital markets >

Global Trade

Stronger Export Margin, Slow Domestic Demand Support China's Aug Gasoil Outflow Jump

Stronger gasoil export margin, and slower than expected domestic demand recovery, is likely support China to increase outflow of the barrel to over 1 million mt (240,000 b/d) in August, which can be a one-year high, refinery sources with knowledge about the matter and analysts said on Aug. 4. At the same time, Chinese refineries are likely to cut gasoline exports to as low as 400,000 mt this month from an average of about 930,000 mt in the first half of the year, while jet fuel outflows as the usual levels of below 1 million mt as to optimize usage of the precious oil product export quotas, the sources added.

—Read the article from S&P Global Ratings

Access more insights on global trade >

ESG

Scope 3 Reporting Mandate A Source Of Angst As SEC Readies Climate Risk Rule

While some of the nation's largest banks and corporations support the U.S. Securities and Exchange Commission's proposed climate risk disclosure rule, many businesses remain concerned over the agency's plan to require some publicly traded firms to report Scope 3 emissions. Scope 3 greenhouse gas emissions arise indirectly along a company's value chain and include emissions tied to end-users. Many critics of the SEC's proposed rule disagree with the idea that Scope 3 emissions are material to a company's business and should be disclosed.

—Read the article from S&P Global Market Intelligence

Access more insights on ESG >

Energy & Commodities

Insight Conversation: Trent Mell, Electra Battery Materials

Battery metals refining is a part of the battery supply chain that does not get as much attention in the west, with most battery metal refineries located in China. But companies have started venturing into this crucial part of the electric vehicle industry, including Electra Battery Materials in North America. Electra CEO Trent Mell recently spoke with Jacqueline Holman, S&P Global Commodity Insights' EMEA metals news lead, about the projects on the company's plate as well as what's on the road ahead.

—Read the article from S&P Global Commodity Insights

Access more insights on energy and commodities >

Technology & Media

Semiconductor M&A Activity Challenged Amid Regulatory Pressures

Global demand for high-end computing chips is leading to more focused deals and partnerships in the semiconductor industry. Several attempts at blockbuster deals failed in recent years due to regulatory concerns regarding competition and national security. With major consolidation off the table, analysts say smaller transactions will become the norm, alongside increased industry collaboration.

—Read the article from S&P Global Market Intelligence

Access more insights on technology and media >