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UK leisure sector chill takes bite out of private lenders

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Private debt funds that lent to UK high street companies including Debenhams and Casual Dining Group have endured losses after the pandemic sent tremors through the leisure and retail sectors.

Firms such as Alcentra, KKR and Pemberton, which specialise in making loans to private companies, have taken a hit on lending to British retailers and restaurant chains this year, as nationwide lockdowns have punished a sector that had already been struggling before the spread of coronavirus. 

The strain shows that while central banks have propped up public debt markets, helping larger companies borrow their way out of trouble, smaller businesses reliant on direct lenders have faced more difficulties.

“Restructurings have been a bit of a mess because lenders are trying to catch a rapidly falling knife,” said Leo Fletcher-Smith, head of European private credit strategy at advisory firm Aksia. “Where it’s been more fundamental, and there has been lender enforcement, value erosion has often been quite significant.”

Investors have in recent years poured money into private credit funds that make their own loans, typically to medium-sized businesses — a practice sometimes called “direct lending”. These lenders usually charge far higher borrowing costs than on publicly issued bonds, while offering flexibility to companies that may not receive favourable terms from banks. 

A string of insolvencies on the high street has been particularly painful for private credit funds, which typically can recover only pennies on the pound when retailers go bust.

Debt fund manager Alcentra is expected to take a loss on its investment in Debenhams, the 242-year-old department store that is on course to be liquidated in the new year. The London-based subsidiary of BNY Mellon was one of the retailer’s lenders that took control of the business through a debt restructuring last year.

Alcentra has also this year participated in so-called debt-for-equity swaps, in which a borrower’s loans are converted into shares, at struggling clothing retailers Fat Face and New Look. This marked the second restructuring for New Look in as many years.

Coffee chain Caffè Nero — another high-street business Alcentra lent to — is going through a company voluntary arrangement (CVA), an insolvency process that allows struggling businesses to renegotiate debts with creditors.

Alcentra declined to comment on specific investments, but said: “Similar to other asset classes during the Covid-19 pandemic, some sectors supported by direct lending capital have been impacted more than others”.

Bar chart of Number of deals showing Pandemic pauses deal flow for many private lenders

New lending from private credit funds slowed significantly in the first half of the year, as these investors tried to help their existing borrowers cope with the disruption stemming from national lockdowns.

“A lot of companies are really suffering and as a result direct lenders are struggling,” said one private debt investor. “They are dealing with significant impairments or private equity firms are having to put more money into these businesses.”

Many high street chains were already struggling with substantial debts before the pandemic, but the imposition of coronavirus-related restrictions tipped many bricks-and-mortar businesses over the brink. 

Casual Dining Group, which runs the Bella Italia and Las Iguanas restaurants, collapsed into administration this year, resulting in losses for the lending division of US private equity firm KKR and UK private debt specialist Pemberton. Private equity firm Epiris agreed to take over the restaurant group in July but secured creditors are expected to recover only £13m of the £126m in outstanding debt, according to documents filed at Companies House.

KKR and Pemberton were also shareholders in the group as a result of a 2018 debt-for-equity swap. Both firms declined to comment.

Pemberton is a lender as well to the holiday agent Travel Counsellors, which operates in the struggling leisure sector. British travel association Abta expects booking numbers from October to the end of the year to plummet 93 per cent compared to the same period last year. 

Permira Debt Managers (PDM), the credit arm of the private equity house, has funded several UK travel companies too, lending to letting agency Travel Chapter, travel agent Loveholidays and holiday park operator Away Resorts.

The investment firm also provided a £350m loan to private members club Soho House, which operates a number of restaurants in London. PDM, which in 2017 described this loan as its “largest ever direct lending investment”, declined to comment. 

Anthony Forshaw, managing director at investment bank Houlihan Lokey, said some mid-market loans had not been well-drafted to cope with the sudden loss of earnings seen this year.

“Deals with documents not structured for downsides are those that can struggle,” he said. “And [that’s] where we see lenders being much more difficult and ultimately taking over businesses.”

Despite the turmoil, some credit funds that previously took over high street chains through debt-for-equity swaps have managed to sell the businesses this year, although they may not have recouped their original investments. 

Real estate company Cain International acquired Prezzo last week, from lenders including hedge fund CQS and Swiss private asset manager Partners Group that took over the Italian restaurant group in 2018. Muzinich Private Debt sold Busaba Eathai to TnuiCapital in July, after the US credit investor took control of the London Thai restaurant chain last year.

CQS was also heavily invested in New Look’s debt, while Partners Group is a lender to Caffè Nero. CQS, Partners Group and Muzinich declined to comment. 

Additional reporting by Kaye Wiggins



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Copper hits record high with demand expected to rise sharply

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Copper prices hit a record high on Friday in the latest leg of a broad rally across commodity markets sparked by the reopening of major economies and booming demand for minerals needed for the green energy transition.

Copper, used in everything from electric vehicles to washing machines, rose as much as 1.2 per cent to $10,232 a tonne, surpassing its previous peak set in 2011 at the height of a previous commodities boom.

The price has more than doubled from its pandemic lows in March last year due to voracious demand from China, the biggest consumer of the metal, and also investors looking to bet on a big uptick in the global economy and protect their portfolios against potential for rising inflation.

Government stimulus packages and the shift towards electrification to meet the goals of the Paris agreement on climate change are expected to fuel further demand for the metal, which analysts and industry executives believe could hit $15,000 a tonne by 2025.

“Capacity utilisation rates of our customers are the highest in a decade and that’s before stimulus money both in Europe and the US has started to flow,” said Kostas Bintas, head of copper trading at Trafigura, one of the world’s biggest independent commodity traders. “That will be significant.”

The US and Europe were becoming significant factors in the consumption of copper for the first time in decades, he added. “Before, it’s effectively been a China-only story. That is changing fast.”

Concerns about the long-term supply of copper due to lack of investment by large miners has also pushed up prices. There are only a few large projects in a development, while most of the world’s easily produced copper has already been mined.

“The current pipeline of projects likely to start producing in the next few years represents only 2.3 per cent of forecast mine supply,” said Daniel Haynes, analyst at banking group ANZ. “This is well down on previous cycles, including 2010-13 when it reached 12 per cent.”

The upward march of other raw materials is showing no signs of abating. Steelmaking ingredient iron ore traded above $200 a tonne for the first time as China returned to work after the Labour Day holidays in early May. 

In spite of production cuts in Tangshan and Handan, two key steelmaking cities in China, analysts expect output to remain solid over the next couple of quarters. 

“Recent production cuts in Tangshan have boosted demand for higher-quality ore and prompted mills to build iron ore inventories as their margins are on the rise with steel supply being restricted,” said Erik Hedborg, a principal analyst at CRU Group.

“Iron ore producers are enjoying exceptionally high margins as around two-thirds of seaborne supply only require prices of $50 a tonne to break even.”

Elsewhere, tin on Thursday rose above $30,000 a tonne for the first time in a decade before easing. Tin is used to make solder — the substance that binds circuit boards and wiring — and is benefiting from strong demand from the electronics industry, which has been lifted by growing numbers of stay-at-home workers.

US wood prices continued to race higher ahead of the peak in the US homebuilding season in the summer with lumber futures rising to a record high above $1,600 per 1,000 board feet length, up from $330 this time last year.

Agricultural commodities also continued to rally as a result of a particularly dry season in Brazil, concerns about drought in the US and Chinese demand. Strong increases in food prices have started to affect global consumers. Corn rose to a more than eight-year high of $7.68 this week, while coffee has risen almost 10 per cent since the start of month, hitting a four-year high of $1.54 a pound this week.



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Wall Street stocks waver as investors await US jobs data

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Wall Street stock markets wavered, with tech losses dragging down some indices, but remained close to record highs ahead of US jobs data on Friday that could pile pressure on the Federal Reserve to rethink its ultra-supportive monetary policies.

The S&P 500 was up 0.2 per cent in the afternoon in New York, hovering slightly below its all-time high achieved late last month. The peak was reached following a long rally supported by the Fed and other central banks unleashing trillions of dollars into financial markets in pandemic emergency spending programmes.

The technology-heavy Nasdaq Composite, however, which is stacked with growth companies sensitive to changing interest rate expectations, was down 0.5 per cent by the afternoon in New York, the fifth straight losing session for the index.

The divergence of the two indices followed patterns from earlier this year, when investors sold out of growth companies over fears of rising rates and poured into more cyclical plays. That trade has been more muted recently but could be coming back, said Nick Frelinghuysen, a portfolio manager at Chilton Trust.

“It’s been a bit more ambiguous . . . in terms of what regime is leading this market higher, is it quality and growth or is it value and cyclicals?” Frelinghuysen said. “We’re in a little bit of a wait-and-see mode right now.”

The 10-year Treasury yield, which rose rapidly earlier this year amid inflation fears, declined 0.05 percentage points to 1.56 per cent on Thursday.

In Europe, the Stoxx 600 closed down 0.2 per cent, hovering just below its record high reached in mid-April.

With the US economy close to recovering losses incurred during coronavirus shutdowns, economists expect the US government to report on Friday that the nation’s employers created 1m new jobs in April. Investors will scrutinise the non-farm payrolls report for clues about possible next moves by the Fed, which has said it will continue with its $120bn a month of bond purchases until the labour market recovers.

Up to 1.5m jobs would “not be enough for the Fed to shift”, analysts at Standard Chartered said. “Between 1.5m and 2m, there is likely to be uncertainty on Fed perceptions.”

Central bankers worldwide had a strong “communications challenge” around the eventual withdrawal of emergency monetary support measures, said Roger Lee, head of UK equity strategy at Investec.

“If it is orderly, then you can expect a gentle continuation of this year’s stock market rotation” from lockdown beneficiaries such as technology shares into economically sensitive businesses such as oil producers and banks, Lee said. “If it is disorderly, it will be a case of ‘sell what you can’.”

On Thursday the Bank of England upgraded its growth forecasts for the UK economy but stopped short of following Canada in scaling back its asset purchases.

The BoE maintained the size of its quantitative easing programme at £895bn, while also keeping its main interest rate on hold at a record low of 0.1 per cent. The British central bank added that while its asset purchases “could now be slowed somewhat” after it became the dominant buyer of UK government debt last year, “this operational decision should not be interpreted as a change in the stance of monetary policy”.

Sterling slipped 0.1 per cent against the dollar to $1.389.

The dollar, as measured against a basket of trading partners’ currencies, weakened 0.4 per cent. The euro gained 0.4 per cent to $1.206.

Brent crude fell 1.1 per cent to $68.17 a barrel.



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Gensler raises concern about market influence of Citadel Securities

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Gary Gensler, new chair of the Securities and Exchange Commission, has expressed concern about the prominent role Citadel Securities and other big trading firms are playing in US equity markets, warning that “healthy competition” could be at risk.

In testimony released ahead of his appearance before the House financial services committee on Thursday, Gensler said he had directed his staff to look into whether policies were needed to deal with the small number of market makers that are taking a growing share of retail trading volume.

“One firm, Citadel Securities, has publicly stated that it executes about 47 per cent of all retail volume. In January, two firms executed more volume than all but one exchange, Nasdaq,” Gensler said.

“History and economics tell us that when markets are concentrated, those firms with the greatest market share tend to have the ability to profit from that concentration,” he said. “Market concentration can also lead to fragility, deter healthy competition, and limit innovation.”

Gensler is scheduled to appear at the third hearing into the explosive trading in GameStop and other so-called meme stocks in January.

Trading volumes in the US surged that month as retail investors flocked into markets, prompting brokers such as Robinhood to introduce trading restrictions that angered investors and drew the attention of lawmakers.

The market activity galvanised policymakers in Washington and investors. Lawmakers have focused much of their attention on “payment for order flow”, in which brokers such as Robinhood are paid to route orders to market makers like Citadel Securities and Virtu.

That practice has been a boon for brokers. It generated nearly $1bn for Robinhood, Charles Schwab and ETrade in the first quarter, according to Piper Sandler.

Gensler noted that other countries, including the UK and Canada, do not allow payment for order flow.

“Higher volumes of trades generate more payments for order flow,” he said. “This brings to mind a number of questions: do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict?”

Gensler also said he had directed his staff to consider recommendations for greater disclosure on total return swaps, the derivatives used by the family office Archegos. The vehicle, run by the trader Bill Hwang, collapsed in March after several concentrated bets moved against the group, and banks have sustained more than $10bn of losses as a result.

Market watchdogs have expressed concerns that regulators had little or no view of the huge trades being made by Archegos.

“Whenever there are major market events, it’s a good idea to consider what risks they might have placed on the entire financial system, even when the system holds,” Gensler said.

“Issues of concentration, whether among market makers or brokers at the clearinghouse, may increase potential system-wide risks, should any single incumbent with significant size or market share fail.”



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