Finance

Why a $1.5 trillion source of corporate financing is choking on higher rates

Published

2 years ago

July 5, 2023

Why a .5 trillion source of corporate financing is choking on higher rates

CLO issuance down 41% in H1 vs same time last year
Funding lifeline for junk-rated borrowers shrinking
Investors demand higher premium

LONDON, July 5 (Reuters) – A financial stream that helped fund the world’s riskiest companies and grew into a market estimated at $1.5 trillion in the low interest rate years is drying up, as aggressive rate hikes bring tougher borrowing conditions and uncertainty.

The pace of issuance of so-called collateralised loan obligations (CLOs), which bundle loans of the weakest corporates and repackage them as bonds, has stalled.

Specialist asset managers minted CLOs worth more than half a trillion dollars in 2021, a year of heavy post-pandemic monetary stimulus. Almost $69 billion worth were launched or refinanced during the first half of this year, down 41% on the same period in 2022, JP Morgan data shows.

These vehicles, popular with hedge funds, insurers and asset managers when borrowing costs are low and investors hunt for yield, account for up to 60% of demand for the junk loans rated single B or below, according to S&P Global Ratings.

But the market has sputtered just as companies whose debt is considered a speculative investment face a mountain of refinancing needs in coming years.

The sharpest rise in global interest rates in decades, an anticipated global recession and fewer new CLOs to support junk rated borrowers potentially create a toxic cocktail of corporate distress.

“There haven’t been large credit losses yet, but the expectation is that bankruptcy rates [for corporate loans] will go up,” said Rob Shrekgast, a director at KopenTech, an electronic trading and analytics platform for CLOs.

STORM CLOUDS

CLOs have grown into a market worth about $1.5 trillion, KopenTech said.

Looking ahead, demand for the bonds issued by these vehicles will “decline meaningfully,” Bank of America (BofA) credit strategist Neha Khoda noted, with potential for higher default rates.

While low now, debt defaults are rising. A restructuring at French retailer Casino (CASP.PA) and the bankruptcy of U.S. retailer Bed Bath & Beyond expose cracks in business models that were previously insulated by abundant money supply and low rates, analysts said.

S&P Global estimates that more than one in 25 U.S. businesses and almost one in 25 European companies will default by March 2024.

It’s going to be a slow burn of rising distress, said Marta Stojanova, leveraged finance director at S&P, of junk-rated borrowers.

A “downside risk,” she said, would be “the lack of funding at an affordable level,” for weak cashflow borrowers whose existing loans are due for refinancing.

Weak cashflow companies, whose debt is considered junk, are already paying the highest average interest rate on floating rate debts in 13 years, S&P added.

U.S. companies with speculative credit ratings, who dominate global CLO loan pools, need to refinance around $354 billion of debts by end-2024, then a further $813 billion in 2025 to 2026, S&P estimates.

OBSTACLES

The CLO market has slowed because investors want higher payouts as compensation for the risk of lending to weaker borrowers.

“You’ve got more risk now and you want to be compensated for that risk,” said Aza Teeuwen, portfolio manager at fixed income specialist asset manager TwentyFour.

When forming CLOs, the managers of these vehicles use the loans as backing for bonds with varying prices and different degrees of safety. Investors in the tranches considered safest get the lowest returns, while those in the riskiest equity portion receive excess cashflows after other investors are paid out.

Now, fund managers who buy the highest rated tranches are demanding higher yields. That has squeezed equity returns, and without equity investors, CLOs cannot be put together.

S&P calculates that while CLO equity investors were able to get a 15% annual return before 2022, deals priced now would offer about 7%.

“You can no longer put together a (new) portfolio,” said Laila Kollmorgen, a managing director and CLO specialist at PineBridge Investments.

Kollmorgen said she was still finding good opportunities in highly rated CLO tranches sold in the secondary market.

“We know there will be (loan) defaults at some stage,” said Teeuwen. “The (CLO) equity doesn’t make enough money to justify buying it.”

CLOs have a reinvestment period of up to five years, after which they cannot buy new loans. According to BoFA, 38% of CLOs in existence will reach that expiry date by end-2023.

That’s another source of shrinking demand for junk debt, and a factor BofA’s Khoda defines as “a red-flag for issuers with near-term maturities.”

PineBridge’s Kollmorgen sees uncertain times for high- risk borrowers ahead.

“Increases in interest rates will have an impact on companies and their balance sheets, its just simply a question of when this actually comes through.”

Reporting by Naomi Rovnick and Chiara Elisei; Editing by Dhara Ranasinghe and Alexandra Hudson

Our Standards: The Thomson Reuters Trust Principles.

Chiara Elisei

Thomson Reuters

Chiara reports on the European credit markets, spanning different countries, sectors and asset classes from investment grade bonds all the way to distressed debt. She previously worked at Debtwire as Managing Editor, heading up a team of reporters and analysts specialized on sub-investment grade debt. Chiara holds a PhD in Classics from Scuola Normale Superiore di Pisa, Italy.
Contact:+447944118552

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Finance

Fed independence faces a ‘showdown’ between Trump & the market

Published

1 day ago

July 16, 2025

Press Room

Fed independence faces a ‘showdown’ between Trump & the market

00:00 Speaker A

I also want to ask about what’s going on with economic data and the Federal Reserve, guys. Um, Ed, what are you hearing there in D.C.? Right? There is now some reporting out there that Kevin Hassett is kind of the front-runner to potentially take Jay Powell’s place at the Federal Reserve. What are you hearing and what’s the kind of vibe in Washington around this decision?

00:43 Ed

So, Julie, the way I’d view this is that President Trump always loves competition. You know, he came to some of his most recent national prominence by having the Apprentice show. And so, my expectation is that President Trump is going to keep multiple people in the running. Kevin Hassett certainly is in there. Kevin Warsh is in there. I’d put Christopher Waller, who’s already on the Fed board, as well as Treasury Secretary Bessant. I’m watching to see if there’s an opening on the Fed. If a governor steps down, like Michael Barr, now that he’s no longer vice chair for supervision, does one of these individuals get onto the board? I’m also watching for Waller as there are rate decisions here in July and September. Is there going to be a dissent? You generally don’t see dissents among Fed governors, but as you’re auditioning for that role, showing that you would be much more dovish is something that President Trump is going to be looking for and could move him up the list of potential Fed chairs come May of next year.

02:26 Speaker A

Yeah, I think the Apprentice Federal Reserve edition is something that no one asked for, uh, guys. I don’t know, Dory, like, in terms of market reaction to all of this, um, you know, we’ve seen rates kind of remain range-bound here as we get numbers like CPI yesterday and PPI today. But do you think at some point that this competition is going to start to really come to bear in the bond market?

03:25 Dory

Uh, yeah, I think we have a showdown coming. Uh, most people in the marketplace want to preserve the independence of the Fed, and when I say that, I mean that both ways, not just from Trump’s standpoint, but from the Fed’s standpoint. I’ve always said the Fed is, in my mind, Powell being a little political in some of his rate cuts early last year. Having said that, the market has always anticipated for the last couple of years anyway, uh, more rate cuts than actually should have happened or did happen. And I think we’re falling into that trap, and so is Trump as well. I’m kind of a wait-and-see kind of guy right now. I do think the next Fed chair is going to be one of those type of interviews, hey, I’m Donald Trump and I believe this, and if you believe this, I’d like to have you as Fed chair. That points to Hassett being the, uh, being, being there. And, uh, I think that’s going to get some criticism from the market. I think we need that independence. We need good independent valuation. Uh, and, and, you know, I think cutting too soon, soon could be, uh, extremely dangerous when we all know that our deficit is out of control, our debt is out of control, and we don’t want to become a Venezuela.

Finance

Fulton Financial’s (NASDAQ:FULT) Q2: Strong Sales

Published

2 days ago

July 15, 2025

Press Room

Fulton Financial’s (NASDAQ:FULT) Q2: Strong Sales

Regional banking company Fulton Financial (NASDAQ:FULT) reported Q2 CY2025 results topping the market’s revenue expectations , but sales fell by 1.9% year on year to $328.4 million. Its GAAP profit of $0.53 per share was 24.7% above analysts’ consensus estimates.

Is now the time to buy Fulton Financial? Find out in our full research report.

Net Interest Income: $254.9 million vs analyst estimates of $255.1 million (5.5% year-on-year growth, in line)
Net Interest Margin: 3.5% vs analyst estimates of 3.4% (6.2 basis point beat)
Revenue: $328.4 million vs analyst estimates of $318 million (1.9% year-on-year decline, 3.3% beat)
Efficiency Ratio: 57.1% vs analyst estimates of 61% (3.9 percentage point beat)
EPS (GAAP): $0.53 vs analyst estimates of $0.43 (24.7% beat)
Market Capitalization: $3.56 billion

“I’m proud that our team has delivered a new company record, with operating net income of $100.6 million, or $0.55 per diluted share, this past quarter,” said Curt Myers, Chairman and CEO of Fulton.

Tracing its roots back to 1882 in the heart of Pennsylvania, Fulton Financial (NASDAQ:FULT) is a financial holding company that provides banking, lending, and wealth management services to consumers and businesses across five Mid-Atlantic states.

In general, banks make money from two primary sources. The first is net interest income, which is interest earned on loans, mortgages, and investments in securities minus interest paid out on deposits. The second source is non-interest income, which can come from bank account, credit card, wealth management, investing banking, and trading fees.

Over the last five years, Fulton Financial grew its revenue at a solid 8.4% compounded annual growth rate. Its growth beat the average bank company and shows its offerings resonate with customers.

Fulton Financial Quarterly Revenue

We at StockStory place the most emphasis on long-term growth, but within financials, a half-decade historical view may miss recent interest rate changes, market returns, and industry trends. Fulton Financial’s annualized revenue growth of 8.3% over the last two years aligns with its five-year trend, suggesting its demand was predictably strong.

Fulton Financial Year-On-Year Revenue Growth

Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.

This quarter, Fulton Financial’s revenue fell by 1.9% year on year to $328.4 million but beat Wall Street’s estimates by 3.3%.

Net interest income made up 76.1% of the company’s total revenue during the last five years, meaning lending operations are Fulton Financial’s largest source of revenue.

Fulton Financial Quarterly Net Interest Income as % of Revenue

Our experience and research show the market cares primarily about a bank’s net interest income growth as non-interest income is considered a lower-quality and non-recurring revenue source.

Here at StockStory, we certainly understand the potential of thematic investing. Diverse winners from Microsoft (MSFT) to Alphabet (GOOG), Coca-Cola (KO) to Monster Beverage (MNST) could all have been identified as promising growth stories with a megatrend driving the growth. So, in that spirit, we’ve identified a relatively under-the-radar profitable growth stock benefiting from the rise of AI, available to you FREE via this link.

Fulton Financial’s net interest income has grown at a 10.1% annualized rate over the last five years, a step above the broader bank industry and faster than its total revenue.

When analyzing Fulton Financial’s net interest income over the last two years, we can see that growth decelerated to 8.2% annually.

Fulton Financial Quarterly Net Interest Income

In Q2, Fulton Financial produced $254.9 million of net interest income, up 5.5% year on year and in line with Wall Street Consensus estimates. Net interest margin was 3.5%, beating sell-side expectations by 1.8%.

Looking ahead, sell-side analysts expect net interest income to grow 1.9% over the next 12 months, a deceleration versus the last two years.

We were impressed by how Fulton Financial blew past analysts’ revenue, net interest margin, efficiency ratio, and EPS expectations this quarter. Zooming out, we think this was a solid print. The stock remained flat at $19.11 immediately after reporting.

Sure, Fulton Financial had a solid quarter, but if we look at the bigger picture, is this stock a buy? What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock. We cover that in our actionable full research report which you can read here, it’s free.

Finance

Reeves hails ‘instant impact’ for aspiring homeowners as red tape is cut

Published

3 days ago

July 14, 2025

Press Room

Reeves hails ‘instant impact’ for aspiring homeowners as red tape is cut

First-time buyers are set to see an “instant impact” from the drive to kickstart economic growth, Chancellor Rachel Reeves is expected to say.

More mortgages will be available at more than 4.5 times a buyer’s income following recent Bank of England recommendations that some lenders can offer more high loan-to-income mortgages if they choose to.

This will create up to 36,000 additional mortgages for first-time buyers over the first year, the Government said.

Britain’s biggest building society – Nationwide – announced last week that it is aiming to increase its high loan-to-income lending limit.

From Wednesday, eligible first-time buyers can apply for Nationwide’s Helping Hand mortgage with a £30,000 salary, down from £35,000, and joint applicants with a £50,000 combined salary – down from £55,000.

It is estimated this will support an additional 10,000 first-time buyers each year.

The changes will sit alongside the creation of a permanent mortgage guarantee scheme, delivering on a manifesto commitment, and a review of Financial Conduct Authority (FCA) lending rules that could allow prospective buyers’ records of paying rent on time to be used to show they can afford mortgage repayments.

Reforms will be outlined in Leeds ahead of Ms Reeves’s Mansion House speech on Tuesday evening.

Speaking in the City of London, the Chancellor is expected to say: “I welcome the recent changes the (Bank of England) Financial Policy Committee has announced to the loan-to-income limit on mortgage lending, which the PRA (Prudential Regulation Authority) and FCA are implementing immediately.

“With an instant impact for consumers, such as Nationwide offering its Helping Hand mortgage to more first-time buyers – supporting an additional 10,000 each year.”

Ms Reeves is expected to add: “Today, I have placed financial services at the heart of the Government’s growth mission.

“Recognising that Britain cannot succeed and meet its growth ambitions without a financial services sector that is fighting fit and thriving.

“And I have been clear on the benefits that that will drive.

“With a ripple effect that will drive investment in all sectors of our economy and put pounds in the pockets of working people.”

Nicholas Mendes, mortgage technical manager at broker John Charcol, said: “The decision to widen access to Nationwide’s Helping Hand mortgage by lowering the income thresholds will offer an immediate and practical benefit to a group of people who have often found themselves just on the wrong side of affordability criteria.

“For someone earning £30,000 on their own, or couples on a combined income of £50,000, this change could be the difference between continuing to rent and finally being able to move into a home of their own.

“It acknowledges the gap between headline figures and real life, and it shows a willingness to make the system better reflect the pressures people are actually under.

“It will also bring particular value to those in stable, lower-paid roles that are so essential to society but are often overlooked by traditional lending models.

“People working in care, education, retail, and public service are typically in long-term employment and manage their finances carefully, yet they are the very people who have found the doors to homeownership closed to them.

“This reform suggests that financial discipline is being recognised more broadly than by salary alone, and that is a very welcome shift.

“Equally, the recognition that a person’s history of paying rent should be considered when assessing their ability to repay a mortgage is something many in the industry have been calling for over many years.

“If someone has shown, consistently and over time, that they can manage rental payments at a level equal to or even above the mortgage they are applying for, then it stands to reason that this should be considered a reliable indicator of affordability.”

Paula Higgins, chief executive of the HomeOwners Alliance, said the Government should “turn its attention to fixing the Lifetime Isa (Lisa)”.

She said: “Right now, anyone forced to withdraw their savings early faces an unfair penalty.”

Ms Higgins added: “And the £450,000 property price cap hasn’t moved since Lisas launched in 2017, despite soaring house prices, particularly in the South East.

“Reforming Lisas would make a real, practical difference to those trying to get on the ladder.”

Henry Jordan, Nationwide’s director of home said: “Our changes mean more people, particularly those on lower incomes, could become eligible for a mortgage.

“We also hope our commitment to further lending provides a boost to the UK’s housebuilding ambitions as well as encouraging other lenders to increase support for those looking for a home of their own.”