Since SVB went under, there has been basically no HY issuance, IG issuance, or IPO activity, see chart below. And completed M&A activity since Friday, March 10 reflects long-time planned M&A rather than new risk-taking. The longer capital markets are closed, and the longer funding spreads for banks remain elevated, the more negative the impact will be on the broader economy.
Listen to Chief Economist Dr. Torsten Slok and Co-Head of Global Performing Credit business Jim Vanek discuss the state of private credit markets, current opportunities, and the outlook for the asset class.
Disclaimer:
This podcast was recorded on March 10, 2023.
Apollo Global Management, Inc. (together with its subsidiaries, “Apollo”) makes no representation or warranty, expressed or implied, with respect to the accuracy, reasonableness, or completeness of any of the statements made during this podcast, including, but not limited to, statements obtained from third parties. Opinions, estimates and projections constitute the current judgment of the speaker as of the date indicated. They do not necessarily reflect the views and opinions of Apollo and are subject to change at any time without notice. Apollo does not have any responsibility to update this podcast to account for such changes. There can be no assurance that any trends discussed during this podcast will continue.
Statements made throughout this podcast are not intended to provide, and should not be relied upon for, accounting, legal or tax advice and do not constitute an investment recommendation or investment advice. Investors should make an independent investigation of the information discussed during this podcast, including consulting their tax, legal, accounting or other advisors about such information. Apollo does not act for you and is not responsible for providing you with the protections afforded to its clients. This podcast does not constitute an offer to sell, or the solicitation of an offer to buy, any security, product or service, including interest in any investment product or fund or account managed or advised by Apollo.
Certain statements made throughout this podcast may be “forward-looking” in nature. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking information. As such, undue reliance should not be placed on such statements. Forward-looking statements may be identified by the use of terminology including, but not limited to, “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology.
The University of Michigan asks consumers about credit conditions, and the chart below shows that even before the SVB situation, credit conditions had tightened to levels last seen in 2008, see chart below.
SVB is likely to have a more negative impact on the economy than Orange County, LTCM, and the UK LDI episode because what happened with SVB will change the behavior of regional banks.
Most importantly, the costs of capital have increased, and underwriting standards have tightened.
Our updated outlook for credit markets is available here.
Since the Fed began to raise interest rates a year ago, the amount of money in money market funds has increased by roughly $400bn, and the inflows increased by more than $100bn last week, see chart below.
On Wednesday, the Federal Reserve will meet to discuss what to do with interest rates. There’s a debate as to whether the Fed will focus more on inflation (which still remains elevated at 6%—far above their 2% target) and raise rates, or will they instead prioritize the current pressures in the financial system and not raise rates? Given the impacts from recent events and the increasing risks to financial stability, we expect that the Fed will opt to keep rates where they are for the time being.
This presentation may not be distributed, transmitted or otherwise communicated to others in whole or in part without the express consent of Apollo Global Management, Inc. (together with its subsidiaries, “Apollo”).
Apollo makes no representation or warranty, expressed or implied, with respect to the accuracy, reasonableness, or completeness of any of the statements made during this presentation, including, but not limited to, statements obtained from third parties. Opinions, estimates and projections constitute the current judgment of the speaker as of the date indicated. They do not necessarily reflect the views and opinions of Apollo and are subject to change at any time without notice. Apollo does not have any responsibility to update this presentation to account for such changes. There can be no assurance that any trends discussed during this presentation will continue.
Statements made throughout this presentation are not intended to provide, and should not be relied upon for, accounting, legal or tax advice and do not constitute an investment recommendation or investment advice. Investors should make an independent investigation of the information discussed during this presentation, including consulting their tax, legal, accounting or other advisors about such information. Apollo does not act for you and is not responsible for providing you with the protections afforded to its clients. This presentation does not constitute an offer to sell, or the solicitation of an offer to buy, any security, product or service, including interest in any investment product or fund or account managed or advised by Apollo.
Certain statements made throughout this presentation may be “forward-looking” in nature. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking information. As such, undue reliance should not be placed on such statements. Forward-looking statements may be identified by the use of terminology including, but not limited to, “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology.
Regional banks are impacted by higher funding costs, deposit risks, regulatory pressures, and asset declines, including future credit losses from the lagged effects of Fed hikes, and these forces combined are likely to result in tighter credit conditions. Our weekly banking sector chart book is available here, key charts inserted below.
Quantifying the impact of tighter financial conditions plus tighter lending standards, we estimate that the events this past week correspond to a 1.5% increase in the Fed funds rate. In other words, over the past week, monetary conditions have tightened to a degree where the risks of a sharper slowdown in the economy have increased.
The Worker Adjustment and Retraining Notification (WARN) Act gives 60 to 90 days advance notice in cases of plant closings and mass layoffs. Looking at WARN notices for CA, FL, NY, OH, PA, and TX shows upside risks to jobless claims over the coming weeks, see chart below.
Looking ahead, investors will need to monitor what is going on in regional banks with deposits and lending to consumers and lending to corporates. Once a week, when the Fed data for the banking sector is out, we will update and send out a chart book to monitor the situation.
