Aitor Elustondo: “Next year will be an exercise in MARF and high yield debt” | markets

With more than 25 years of experience in the origination, structuring and distribution of financing products, Aitor Elustondo joined Bestinver a year and a half ago. As director of debt advice, he is responsible for seeking financing alternatives at a time when the rise in interest rates and the instability experienced by the market after the outbreak of the war in Ukraine has resulted in a drop in activity. The difficulty of setting prices and the rise in financing costs are leading companies to rethink their investment strategies.

With banks in the process of monetary normalization, the market has tightened. Have you noticed pressure on prices?

They have risen as is logical, even in investment grade. The good companies that were financing themselves at negative short-term rates today are already at positive rates and that makes much more sense to the investor. There has been a price increase in the short term, but it is not substantial. In the long term, the problem is that there have been no issues and there will not be until late summer or early 2023. Throughout the year in the Alternative Fixed Income Market (MARF) there has only been one securitization of debt to long term. For its part, in high yield debt (high yield) there has been nothing in Spain and in Europe in the last two months only 11 operations have been registered. Next year is going to be a year for issues on the MARF and for high yield debt.

Is there to worry?

This situation is a bit dramatic because yields and credit spreads have widened a lot. At current prices, the market is discounting a brutal recession and very high defaults. With high yield trading between 7 and 10%, what you are saying is that 10% of companies are going to fail. But that’s not going to happen. Delinquency is going to increase, that is obvious, but it will not do so as much as in other crises.

How different can the possible recession be compared to the previous ones?

We come with the lesson learned. Banks are much more capitalized and have tightened credit quite a bit. Companies are also not as leveraged and we are not coming from a real estate boom. It is obvious that defaults will increase and more in the last quarter. The bankruptcy moratorium has ended and now companies have two months to present bankruptcy. The courts in August are closed so from September and October there will be companies that will go to bankruptcy and defaults will rise. You also have to keep in mind that banking is one of the winning sectors because rates are going up. In addition, this time the leverage ratios rather than debt have been driven by the drop in activity. The base is more robust.

With the recession knocking at the door and a shortage of issues in the primary market, is there still appetite from investors?

In investment grade there is still a lot of underwriting because investors have started to see value in credit. In high school it is very difficult to build a portfolio. For its part, the high yield universe is dry and we have to look for other alternatives and in other niches.

After years in which conservative investors have been penalized by negative returns, is debt already becoming attractive?

Although money continues to flow out of high yield funds, there is no doubt that fixed income has a lot of value. As a macro view at a good time to invest in fixed income.

Which sectors are the most attractive in terms of emissions?

The most attractive sectors are real estate, highways and renewables. Within the latter, the problem is that forecasts have slowed down a bit due to the delay in orders. The administration is collapsed and environmental permits take a long time. Added to this is the increase in raw materials and problems in the supply chain. All this has caused many financing projects that were on the table to be delayed or even dropped.

In addition to the problems in the renewable emitters segment, have many more operations fallen?

In the face of the paralysis of the economy and instability, many investment decisions have stalled. We have companies that want to make acquisitions, but we can’t find the financing formula. The banks are not going to support them, the MARF is closed and we have no collateral. This year is a transition year after the explosion of 2021. With the capital market closed, we are left with project financing and collateral financing.

What kind of operations do they have on the table?

We try to be selective. On the table we have mandates with a highway and in the real estate market. We are going to launch our first socimi at the end of the year. For this month we hope to close the first operation of the startup Alter5 and in the remainder of the year we intend to repeat the experience.

Taking into account the most recent operations, what terms are the ones that are registering a better reception?

In what we see there are certain sectors such as real estate in which the terms have been shortened. Seven-year operations are now carried out at five. This process is natural whenever there is volatility and uncertainty. Investors want to go short. In promissory notes we have carried out operations at one and three months. Now a six-month promissory note investors don’t want them. They prefer to renew in a month because they expect prices to continue to rise.

What differentiates them from traditional installers?

We seek to provide alternatives because banking is focusing on companies with an investment grade rating and below that grade it is turning off the tap a bit. The natural alternative is the capital market, but since it is closed, what we do is look for more sophisticated innovative solutions. We can do that because of the experience that the team has. What can be done is to securitize a contract. We are looking for a twist to achieve the financing that companies are looking for.

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