Corporate Credit Monthly Update (July 2022)

Persistent concerns about a deteriorating growth outlook, record inflation and the future availability of natural gas weighed on markets, sending investors fleeing to less risky assets.


2022.07.14. Publication of ratingsThe Eurozone is currently struggling with high inflation, a weakening economy and the ongoing Russian-Ukrainian crisis. The latest data show that economic growth deteriorated sharply in June. Manufacturing PMIs reported the first decline since 2020 in industrial production and new orders in the zone, reflecting a sharp drop in demand. The economic situation in Europe looks more fragile than in the United States, in particular, the risk of a complete stoppage of Russian gas is growing.
regarding Germany, as well as the membership of Sweden and Finland in NATO, which increases tensions in relations with Russia. The ECB is trying to deal with inflationary pressures, but it must also ensure that sovereign credit spreads in peripheral countries do not explode to the point of triggering another European sovereign bond crisis. Therefore, its room for maneuver is relatively limited.

Persistent concerns about a deteriorating growth outlook, record inflation and the future availability of natural gas weighed on markets, sending investors fleeing to less risky assets. The yield on the 10-year German Bund retreated from a high of 1.926% reached in mid-June and ended the month at 1.33%, up 21 basis points from the previous month. Corporate credit spreads have widened significantly, particularly for riskier bond assets such as High Yield. In this context, the return of the European corporate index ended with a sharp increase in the month by 189 basis points, at the level of 7.34%.


In the US, concerns about a slowing economy, largely due to aggressive monetary policy tightening, continue to dominate market sentiment. The inevitability of a recession that will result from the Fed’s choice to focus more on inflationary risks than on economic growth is of great concern. Rising food and fuel prices have begun to weigh on the outlook for US consumers. Their morale is at its lowest level in decades. Bond markets, like equity markets, had a rough month. Interest rate volatility has been a major theme in bond markets this year, and June saw the highest levels of volatility. On June 15, the Fed raised rates by 75 basis points. However, the yield on the 10-year Treasury fell about 40 basis points over the next two weeks on growing fears of a recession. Finally, it ended the month at 3.01%, up 17 basis points from the end of May.

Corporate bonds underperformed government bonds, in part due to a worsening outlook for earnings. High-yield credit spreads increased by 150 basis points and trailed European spreads by only about 50 basis points. Volumes of new issues in the primary market fell sharply compared to 2021 and remain low. The fact that now companies do not have an urgent need to borrow from the market remains a positive point in this difficult situation. Many companies have indeed taken the opportunity in 2021 to pre-finance and/or refinance. Liquidity is generally good and interest expenses in terms of interest coverage ratios (ICRs) remain low at this stage. The return of the US corporate index closed
month to 8.16%.

Emerging markets

In developing countries, fears of a global recession continue to dominate markets. The fight against inflation also remains a global concern, with the prospect of higher-than-expected rate hikes. However, manufacturing PMIs improved in China, Colombia, Mexico and Hungary and remained stable in most other developing countries, in contrast to the United States and Europe. Unlike other countries, especially developed ones, China intends to continue easing its monetary policy. The authorities are really keen to counter the economic downturn and stabilize the real estate sector.

Credit spreads remained under pressure in developing countries in June. Investors’ search for quality and growing concern have caused high yield credit spreads to widen, which can be considered disproportionate. However, lending fundamentals remain strong despite the potential impact of inflation on earnings. Capital flows in emerging markets were negative during the month at the level of -4 billion dollars. They were, however, favorable for debt (+$6.6 billion), against -$10.5 billion for
shares The yield of the developing corporate index at the end of the month was 12.34%.

Presented companies

Cheplafarm (EU)

Cheplapharm, a pharmaceutical company specializing in the commercialization of off-patent or niche drugs, reported strong results for the first quarter of 2022. Reported sales increased by 16.4% year-on-year to €289 million and EBITDA increased by 7.4%, driven in particular by acquisitions. Cash flow generation was solid and net leverage was 4.7x. The company had planned an IPO in the first quarter of 2022, but was forced to postpone it due to stock market volatility due to macroeconomic and political uncertainty. Cheplapharm sought to raise 750 million euros through this transaction. The company will continue to consider an IPO on the Frankfurt Stock Exchange as well as M&A growth opportunities.

Belden (USA)

Belden, an American manufacturer of signal cables and connectors, held its investor day in June. For the following years (2022-2025), Belden’s management confirmed its goal to improve the EBITDA margin by 30% and maintain a low net debt ratio (maximum 1.5x). On the revenue side, Belden expects to generate organic growth in excess of GDP during the period, driven by trends such as digitalization, automation and sustainability. The company also reiterated its earnings forecasts for
2022 fiscal year. The company has finally released its first ESG data set. It detailed its targets to reduce greenhouse gas emissions (scope 1 and 2) by 25% by 2025 compared to the 2019 base year, and redistribute 90% by weight of its waste from landfill to production and distribution sites.

Energo-Pro (EM)

Energo-Pro, one of the leading producers and distributors of hydroelectric power in Bulgaria, Georgia and Turkey, recorded record results in the 1st quarter of 2022. In the first three months of the year, the company’s revenue was 400 million euros (up 83% compared to last year) and EBITDA was 60 million euros (+55%). These two indicators were affected by the rise in energy prices and the volume effect. The total net debt/EBITDA ratio reached 3.1x at the end of March. After refinancing its 2022 4% senior unsecured notes in January this year, Energo-Pro no longer has any debt to repay in 2022 and 2023.

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