| | | | | | | Presented By Crexi | | | | Axios Markets | | By Emily Peck and Matt Phillips · May 17, 2022 | | 🌅 Good morning! Big day ahead — the House of Representatives is holding a hearing on UFOs, retail sales numbers will be out shortly, and we check in on the bond market. 🐦 Musk: Twitter deal "cannot move forward" unless spam questions are answered. (Axios) Today's newsletter, edited by Kate Marino, is 1,151 words, 4.5 minutes. | | | | | | 1 big thing: Where borrowing plunged |  Data: Leveraged Commentary & Data; Chart: Erin Davis/Axios Visuals It's been five months since the Federal Reserve started hinting it was about to raise interest rates, and two since its first hike — so it's a good time to check in on how the shift in monetary policy is changing corporate America's borrowing habits, Axios' Kate Marino writes. Why it matters: The Fed is on a mission to make money more expensive — and that's supposed to constrain borrowing and slow the economy. How it's going: Well, large companies with strong finances — i.e. piles of cash and manageable debt loads — basically haven't skipped a beat. These "high grade" companies borrowed nearly as much so far this year as they did over the same period last year — and that was a record. - Even though borrowing money in the high grade bond market now costs about 2 percentage points more than it did late last year, big companies with good balance sheets can absorb that extra cost fairly easily, says Chris Forshner, head of high grade finance at BNP Paribas.
- As a result, high grade companies haven't really slowed down when it comes to refinancing — or to M&A, much of which gets funded with debt. (For example, Discovery bought WarnerMedia with the help of borrowing $30 billion in the bond market.)
Yes, but: It's a different story altogether for "high yield" companies, or the companies with heavy debt loads and lower credit ratings. Borrowing activity for these companies has basically fallen off a cliff. - These companies had a much higher cost of capital, to begin with, and have less capacity to absorb extra costs. (The average high yield bond is now yielding about 7.5%, compared to 4.5% at the beginning of January.)
- Most high yield companies refinanced their debts last year when money was cheap — so refi needs are low.
- And now, volatile trading in both equity and debt markets has cooled leveraged buyout activity, typically a steady source of high yield bond placements.
In short, high yield companies are only tapping the bond market now if they absolutely need to, says Chris Blum, BNP's head of leveraged finance. - Worth noting: Despite the constraints, the default rate — a key indicator of overall corporate health and capital availability — remains historically low.
What to watch: If the Fed doesn't stop at the expected 2 percentage points or so in rate hikes this year. In that scenario, the borrowing slowdown could spread to high grade companies, Forshner says. - A deceleration in M&A and other debt-fueled projects would likely follow, as higher borrowing costs mean some projects make less economic sense, he says.
The bottom line: "At some point, the cost of capital is going to have an impact on their investment decisions," he adds. |     | | | | | | 2. Catch up quick | | 🏦🛢 Berkshire Hathaway buys stakes in Citigroup, oil companies. (FT) ✈️ Ryanair CEO lets loose expletive-laden attack on Boeing management. (CNN) 🍼 Nestlé flies baby formula to the U.S. from Europe. (Reuters) | | | | | | | | 3. Food protectionism is rising |  Data: Chicago Board of Trade, FactSet; Chart: Simran Parwani/Axios Bread is one of the more crucial ingredients in maintaining world stability — and it's getting dangerously expensive, Emily writes. - Wheat prices surged to near record-high levels yesterday after India said it would ban exports as it deals with an extended, climate-change-driven heat wave.
Why it matters: As food prices rise around the world due to the war, extreme weather and inflation, more countries are putting these kinds of export controls in place — but that only exacerbates the issue. - At least 43 such protectionist measures have been implemented since the Russian invasion, according to data cited by the New York Times earlier this month.
- These include restrictions put in place by Russia and its ally, Belarus, along with Indonesia's ban on palm oil exports and China's prohibition on fertilizer exports.
What they're saying: "These measures threaten to further tighten global supplies, and will create price pressure on food as we head further into 2022," Kelly Goughary, a senior research analyst at Gro Intelligence, tells Axios. - Goughary hasn't seen this level of export controls in her 15 years in the industry.
State of play: Russia's invasion of Ukraine cut off exports from that region — responsible for more than a quarter of the world's supply — and sent buyers scrambling to find other source countries, like India. - India is the ninth-largest wheat exporter in the world, according to USDA stats.
- Initially, Indian officials said the country would increase wheat production, before reversing course on Saturday.
Zoom out: There are few commodities more important than wheat, as Matt wrote in March. Rising prices for bread have led to social unrest throughout history from the French and Russian revolutions to the Arab spring. What to watch: More headwinds in the wheat market are coming, Goughary said. There are issues with drought in France that could drive up prices, while production in the U.S. is down. - The U.S. is not a big exporter of wheat because it's too costly to ship overseas, but it's a supplier of "last resort," she added.
| | | | | | | | A message from Crexi | | Get the CRE data you need | | |  | | | | Crexi is transforming CRE by improving access to key data for real estate professionals. Here's how: With Intelligence, property buyers and sellers can quickly access 13M+ nationwide sales comps and market data to make decisions with confidence. Learn more about Intelligence. | | | | | | 4. China's latest economic report card |  Data: FactSet; Chart: Thomas Oide/Axios China's lockdowns continue to punish the world's second-largest economy, with a fresh round of data suggesting a worsening outlook for growth, Matt writes. Why it matters: China is the single largest contributor to global growth, so its slowdown will ripple out in the form of lower economic activity and corporate profits worldwide. Driving the news: New data out yesterday showed retail sales activity collapsed in April, with unemployment rising and both exports and industrial production slowing sharply. - Retail sales fell 11.1% in April, compared to the prior year, with considerable declines in major categories like restaurant spending and auto sales (a total of zero vehicles were sold in Shanghai).
- China's surveyed unemployment rate rose to 6.1%, just shy of the high of 6.2% reported during the early days of the COVID outbreak in 2020.
- Industrial and export activity decelerated to 4% and 3.9%, as lockdowns in key industrial hubs such as the Yangtze River delta — home to Shanghai — took their toll.
The bottom line: "The April activity data shows that the temporary disruption from the zero-COVID policy is more severe than expected, raising significant downside risk," JPMorgan analysts wrote in a research note. | | | | |  | | | | If you like this newsletter, your friends may, too! Refer your friends and get free Axios swag when they sign up. | | | | | | | | 5. Sports betting's $125 billion haul |  Data: Legal Sports Report; Table: Thomas Oide/Axios Meme stocks and cryptocurrencies may have tapped into Americans' inclination toward speculation — but good old-fashioned betting has been having a moment, too. - Americans have wagered a whopping $125 billion on legal sports bets since a 2018 Supreme Court decision that paved the way for legal gambling in all 50 states, Axios' Jeff Tracy writes.
State of play: 30 states plus Washington, D.C., have live, legal sports betting markets. - Five more have legalized it but are not yet operational.
Of note: The chart above only includes 25 states, plus D.C. The handle — or the amount of money wagered — and revenue numbers are not yet publicly available for New Mexico, Washington, North Dakota, Wisconsin and North Carolina. | | | | | | | | A message from Crexi | | This data hub helps you make better CRE decisions | | |  | | | | Intelligence, a robust data hub developed by CRE leader Crexi, is a comprehensive database subscription with unlimited access to over 13 million nationwide sales comps, map overlays and a data center. Learn more. | | |  | It's called Smart Brevity®. Over 200 orgs use it — in a tool called Axios HQ — to drive productivity with clearer workplace communications. | | | | | | Axios thanks our partners for supporting our newsletters. If you're interested in advertising, learn more here.
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