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Credit Suisse AT1 write-off is just the latest event in a paradigm shift

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Hedgeweek exclusive: In the past 14 months, there has been a paradigm shift to a market environment not seen since before the Global Financial Crisis, writes David Nazar (pictured), managing partner, Ironshield Capital Management…

  • Defaults, distress, and dispersion are driving a multi-year opening in credit markets
  • Recent volatility in the banking sector has further tightened financial conditions
  • Ironshield is preparing a new €300m fund that will target less liquid opportunities

By David Nazar
Managing partner, Ironshield Capital Management

In the past 14 months, there has been a paradigm shift to a market environment not seen since before the Global Financial Crisis.

Back in January 2022, the European Central Bank had base rates at -0.50%, single B rated credits had an average yield of just 3.7%, and the distress ratio of credits trading with a price of below 80% of par stood at a record low of just 0.6%. Fast forward to March 2023 and the ECB rate was up to 3%, single B rated credit had an average yield of 8.5%, and the distress ratio has risen sharply to stand at over 20% and higher than the post covid peak in 2020. 

For over a decade, many new participants have entered the High Yield market only able to fund their cost of debt because of the low-risk free rates given low margins. A return to normality of risk-free rates and spreads, is likely to lead to a return to normality on the default side which is closer to 3-5% per annum and thus creates a pipeline of opportunity in credit markets for participants willing to put in the fundamental analysis on individual credits. 

You are likely to see opportunities in safer credits with good interest coverage and unlevered cash generation that tap the market to push out liquidity profiles but coming with 12-15% yields. Essentially, money-good paper that is paying a premium to be able to get deals away in the market but can cover the cost. And it’s already happening on select issuers in European high yield.

Volatility from financials

This environment will also create opportunities because there will be value to be found amidst defaults and restructures, for those companies that will be able to emerge from the other side – the key will be selectivity now credit risk becomes a more material part of credit analysis compared to the previous decade.

The recent volatility from financials – in particular, the high-profile write-off of $17 billion of value from Credit Suisse AT1s and subsequent take over by UBS – has unsurprisingly created opportunities in the financials space, but perhaps more importantly will lead to additional tightening of financial conditions that are squeezing corporate liquidity lines. In particular, there is an increase in less liquid bank loans that are trading at stressed and distressed levels – syndicated troubled or defaulted loans to small and medium sized corporates that may only trade a couple of times, but the banks want to offload from their own balance sheets.

It is this kind of less liquid, under-evaluated opportunity that Ironshield is looking to target with its Ironshield Credit Opportunities Fund, a new 25% IRR drawdown vehicle aiming to take advantage of the multi-year opening in the European credit market.

David Nazar, Ironshield Capital Management David Nazar is managing partner at Ironshield Capital Management, a London-based European credit hedge fund manager. He is also team leader of the Ironshield Credit Opportunities Fund, a new vehicle targeting €300m and an initial close in summer 2023.

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