Third quarter commentaries are now live!
This quarter, Jeff Hyrich discusses a disturbing trend he’s seeing more frequently among investors today, while Tracey Chen talks about a common investor mistake – overcomplicating the process of managing risk.
This week in charts
U.S. equity market concentration
Market concentration and 10-year returns
Distribution of 10-year returns
Yield gaps
Underinvestment in U.S. manufacturing
Re-shoring
Construction spending
Labour force participation
Early retirement
Labour force growth
Fed cuts
Payment-in-kind (PIK)
Corporate debts mount as credit funds let borrowers defer payments
A growing list of cash-strapped companies have turned to their lenders at private credit funds for relief in recent months, seeking to conserve capital by delaying payments on their debt.
The rate at which companies are opting to increase their principal balance instead of paying cash, known as “payment-in-kind” or PIK, edged higher during the second quarter, according to a recent report from rating agency Moody’s. These types of loans have a catch: while they provide temporary relief, they often come with a higher interest rate on a mounting debt load as the deferred payments pile up.
The publicly traded private credit funds that the rating agency keeps tabs on reported the highest levels of PIK income since it began tracking the data in 2020 — though the income is paper profit and it is not clear how much of the gains will actually be realised.
The growth in these types of loans is one signal of stress in corporate America even as the broader economy expands, particularly for businesses that were leveraged to the hilt by their private equity owners and are now struggling with those interest burdens.
While the Federal Reserve’s move to cut interest rates in September is the first step in alleviating pressure on borrowers, rates are expected to remain far higher than the rock-bottom level they hit in the immediate aftermath of the Covid-19 pandemic, when private equity firms went on a debt-fuelled buyout binge.
The shift to PIK borrowing is just one risk being borne by the burgeoning private credit industry, where asset managers lend directly to businesses.
This week’s fun finds
What to Look for (and Avoid) When Selecting a Pumpkin
Whether you're a practical person who fishes their pumpkins out of a big crate at the grocery store or the sentimental type who values a stroll through a pumpkin patch, the general principles of picking out a good pumpkin are the same. Depending on what you want to use your pumpkins for—carving or eating—you may want to look for slightly different things. Here's your guide to pumpkin picking.
