How tighter lending could spell the end for ‘zombie’ commodities producers

For stressed commodity companies whose cost of production exceeds current pricing, the advent of a risk-off environment in the corporate debt markets could pose a serious challenge. This is particularly the case within the US high yield energy sector, which we saw was running into difficulties as it moved into the fourth quarter because of oil hedges rolling off, but more importantly because of revolving credit facilities being renegotiated at much tighter conditions.

This, we believe, is still an ongoing concern and will lead to a significant pick-up in defaults by small US energy companies that will now find it more difficult to get financing.

We would argue that for too long cheap money has led to an explosion of capacity, not just directly, but also by saving inefficient (zombie) businesses from default. In our view this could be about to change.

Paul Brain – Newton, a BNY Mellon company

For stressed commodity companies whose cost of production exceeds current pricing, the advent of a risk-off environment in the corporate debt markets could pose a serious challenge. This is particularly the case within the US high yield energy sector, which we saw was running into difficulties as it moved into the fourth quarter because of oil hedges rolling off, but … read more

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Are Millennials finally fleeing the nest?

We believe new and existing home sales appear positioned for a sustained, moderate – but jagged – multi-year recovery that should persist for years, supported by a plethora of demographic, cyclical and financial factors.

For the past decade, the percentage of young adults living at home has surged to record highs, but this trend may be about to reverse, placing US household formations at a significant inflection point. As Millennials enter the prime household-forming age range, we could see the release of pent-up housing demand over the next three to five years. This could be spurred by improved job prospects, accumulated savings from living at home — and parents’ growing desire to be home alone.

Michael Arends – The Boston Company Asset Management, a BNY Mellon company

We believe new and existing home sales appear positioned for a sustained, moderate – but jagged – multi-year recovery that should persist for years, supported by a plethora of demographic, cyclical and financial factors. For the past decade, the percentage of young adults living at home has surged to record highs, but this trend may be about to reverse, placing … read more

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Debt mountain behind surge in car sales

Around 80% of new cars in the UK are bought on finance and the US figure is not far behind at two-thirds of its market. We believe the car industry has become similar to the housing sector before the financial crisis and is an example of the financial market driving the underlying economy. Institutions are desperate to earn the fee of these packaged loan products, which drives the supply. Meanwhile, the perspective of whether it makes sense for a certain consumer to have a loan in the first place is skewed.

When you borrow money you are doing so to buy something you cannot afford. In effect you are bringing forward demand from the future. Ultimately the debt burden will affect growth and productivity. For this reason we prefer to invest in companies focused upon robust business models with structural drivers rather than those dependent on artificially supported levels of demand or cyclical recovery.

Nick Clay – Newton, a BNY Mellon company

Around 80% of new cars in the UK are bought on finance and the US figure is not far behind at two-thirds of its market. We believe the car industry has become similar to the housing sector before the financial crisis and is an example of the financial market driving the underlying economy. Institutions are desperate to earn the fee … read more

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“Why oil won’t breach US$70 for the next five years”

Before 2015, the cost of exploration, developing and extracting oil added up to some US$30 per barrel but there are other extras that also need to be factored into the price, such as required margins and transportation costs. All in, the breakeven point for oil production companies pre-2015 was around US$47. This means at US$70 a barrel companies were able to earn a 15% return and still have a cash margin of US$2.15.

Today, post company cutbacks and lower transportation costs (a result of more pipelines), different assumptions must be made to work out the breakeven cost per barrel for oil companies. A more realistic figure today is closer to US$35 per barrel. So even with oil as low as US$52 a barrel, companies are able to generate the same returns and thus grow supply. Given these estimates the industry is likely to continue to be able to absorb lower oil prices, supported by deflationary cost pressures, and as a result they could remain under a US$70 ceiling for some time to come, if not indefinitely.

Robin Wehbé – The Boston Company Asset Management, a BNY Mellon company

Before 2015, the cost of exploration, developing and extracting oil added up to some US$30 per barrel but there are other extras that also need to be factored into the price, such as required margins and transportation costs. All in, the breakeven point for oil production companies pre-2015 was around US$47. This means at US$70 a barrel companies were able … read more

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